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Cir. 1990); see also Falsetti v. Commissioner, 85 T.C. 332, 356
(1985).
A. Diverted Corporate Funds
Respondent argues that petitioner received and failed to
report constructive dividends from the corporation of $149,747,
$84,315, and $100,890 in 1988, 1989, and 1990, respectively.
Respondent contends that petitioner obtained these constructive
dividends by (1) diverting checks issued to the corporation for
personal use, and (2) appropriating the proceeds from checks
issued by the corporation for fictitious expenses. Although
petitioner admits to receiving these funds from the corporation,
he argues that he used the funds to pay (1) the corporation’s
employees in cash, (2) the expenses of the horse racing business,
and (3) the expenses of the beauty salon.
Petitioner has failed to provide documentation that supports
his contention that the corporation maintained a large cash
payroll. To support his claim that the corporation paid a number
of employees in cash, petitioner relies on the testimony of
William McGugan, a construction superintendent. While Mr.
McGugan testified that he often picked up the payroll for
employees who worked on his projects, he further testified that
he did not know whether the payroll envelopes contained any cash.
Petitioner contends that he cannot substantiate the cash
payroll because Ms. McNamara stole the corporation’s books and
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