Richard M. Downing - Page 3

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               On June 26, 1996, respondent received petitioner’s                     
          application for an extension of time to file his 1995 income tax            
          return.  Petitioner sought, and respondent granted, an extension            
          until January 30, 1997, on the ground that his tax home was in a            
          foreign country and he expected to qualify for special tax                  
          treatment.  Although petitioner represented on the application,             
          under penalties of perjury, that he was including a $39,500                 
          income tax payment, he actually included only $25,000 (the                  
          $25,000 payment).                                                           
               Respondent initially posted the $25,000 payment to                     
          petitioner’s 1995 individual account.  According to respondent’s            
          records, however, petitioner still had not filed his 1995 return            
          as of September 29, 1997, when petitioner and Astrid Downing                
          filed their 1996 joint return, which reflected an underpayment.             
          Respondent transferred the $25,000 payment to petitioner’s and              
          Astrid Downing’s 1996 joint account, used a portion of it to                
          cover the 1996 underpayment, and refunded the $21,612 balance to            
          petitioner and Astrid Downing, who both endorsed the refund                 
               In the meantime, petitioner’s accountants, Ernst & Young               
          L.L.P. (Ernst & Young), had prepared for petitioner various                 
          versions of his 1995 tax return.  One version was a married                 
          filing separate return, which showed total tax of $77,017 for               
          petitioner individually, with $13,635 owed after giving effect to           

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