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occasions, petitioner gave cash to Paas, who was responsible for
approving his bids and recommending him for bonuses from Thyssen
Steel. Petitioners kept substantial cash hoards in their home
safe and in safe-deposit boxes. Petitioner made a $101,000
personal loan to Phillips in December 1998, for which he then
wrote checks made payable to Phillips out of T.J. Construction’s
account and had Phillips endorse them back to petitioner, who
then deposited them in his personal accounts. Those checks were
deducted as a business expense of T.J. Construction on its
Form 1120S for that year.
One of the checks that was endorsed back to petitioner for
$450,000 is related to a $450,000 wire transfer from T.J.
Construction to Phillips. Petitioner’s accountants treated as
cost of goods sold both the wire transfer amount and the endorsed
back check made payable to Phillips, which supposedly represented
Phillips’s indebtedness for receipt of the wired funds, and thus
resulted in the $450,000 amount’s being subtracted twice from
gross receipts as cost of goods sold. Both the wire transfer and
the matching endorsed back check occurred on October 3, 1997.
Petitioners have conceded the $450,000 duplication of cost of
good sold related to the wire transfer in 1997, and they have
also conceded that additional wire transfers totaling $1 million
were treated similarly in 1996, resulting in $1 million of costs
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