Wayne Payne and Dorene J. Payne - Page 7

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          less gross receipts than HRDC’s original return and claimed                 
          approximately $9,000 more in taxes and licenses paid.  Mr.                  
          Campion testified that he amended the return to deal with payroll           
          tax issues only.                                                            
               Because petitioners’ tax return preparers were provided only           
          bank deposit records to calculate HRDC’s income, HRDC did not               
          report income from the extras for each year in issue.                       
          Petitioners reported flowthrough income derived from HRDC’s                 
          reported income on their individual returns.  For 1994,                     
          petitioners reported rental income from HRDC of $23,241 but HRDC            
          did not report a corresponding expense.                                     
               In 1997, Mr. Payne met with respondent’s revenue agent in              
          connection with an audit of petitioners’ and HRDC’s 1993, 1994,             
          and 1995 returns.  When asked about the money earned from extras,           
          Mr. Payne first told the revenue agent that 100 percent of the              
          payment for each extra was kept by the employee performing the              
          work.  Mr. Payne also told the revenue agent that he did not know           
          that any of HRDC’s checks were cashed at the Money Exchange and             
          that his employees must have stolen the checks from HRDC.                   
               In 2001, Mr. Payne pleaded guilty to filing a false tax                
          return under section 7206(1) for his 1994 individual Federal                
          income tax return.  On April 17, 2003, respondent issued a notice           
          of deficiency to petitioners, determining deficiencies and civil            
          fraud penalties under section 6663 for 1993, 1994, and 1995.  The           

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