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would be about $4.3 million. Mr. Dunne also requested that FRC
continue its practice of depositing Mr. Dunne’s estimated tax
liability directly with respondent. He did not believe that this
would be a problem because FRC had over $3 million in cash. Mr.
Dunne signed this letter as “Co-Owner and Chairman of the Board”
of FRC.
On September 21, 1998, FRC filed a Form 1120S for 1997 and
attached Schedules K-1 for Mr. Dunne and Mr. Marcus. The
Schedules K-1 reported Mr. Dunne’s and Mr. Marcus’s shareholder
percentages for 1997 to be 50 percent each and reported their pro
rata shares of FRC’s income and loss as $2,116,600 of ordinary
income, $27,504 of interest income, and $1,953 of capital loss.
FRC sent Mr. Dunne a Schedule K-1 for 1997 identical to the
Schedule K-1 it submitted to respondent.
The Arbitration Award
In October of 1997, Mr. Marcus offered to pay Mr. Dunne $2.2
million in full satisfaction of all payments required by the
settlement agreement. Mr. Dunne responded with a $2.6 million
counteroffer, which he withdrew. Mr. Dunne decided to let the
arbitrator decide on the award because he thought he was entitled
to receive about $4.9 million under the settlement agreement.
The arbitrator entered an arbitration award (the arbitration
award) on June 8, 1998. The arbitrator determined that Mr.
Dunne’s share of the halon contract was $511,267.54, which was
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