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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
check.
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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