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Petitioner ran the day-to-day operations of Taxman. Mr. Garaas
and Mr. and Mrs. Jondahl were not involved in Taxman’s day-to-day
operations.
Taxman’s business consisted of preparing Federal and State
tax returns, providing tax advice, and keeping financial books
and records. Taxman employed several people at any one time
whose duties included preparation of tax returns, accounting
work, maintenance of accounts receivable and payable, making bank
deposits, signing checks, and receptionist tasks. Taxman
maintained bank accounts in its name, kept corporate records, and
filed corporate tax returns for the years in issue.
In July 1985, petitioner was sued individually and as sole
proprietor of his tax preparation business. Two of JFS’s clients
sued petitioner in connection with a tax shelter investment. In
September 1986, a settlement was reached in which petitioner
initially agreed to pay each couple $6,000. In connection with
the 1986 lawsuit against him, petitioner was deposed in July
1987. During the deposition, petitioner stated that Taxman was
organized to take over the assets and liabilities of JFS.
Petitioner testified in the deposition that he had transferred
office equipment worth approximately $10,000, accounts receivable
worth $3,000, and two bank loans totaling approximately $31,000
to Taxman. Petitioner also stated that no written agreement
existed evidencing the takeover of JFS by Taxman. After the 1987
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