Joseph D. & Elizabeth M. Dunne - Page 12

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          Schedule K-1 was incorrect because Mr. Dunne still owned 50                 
          percent of FRC.                                                             
               On August 14, 2001, petitioners jointly filed a Form 1040              
          for 1999.  This return was due on April 15, 2000.                           
          The Transfer of Legal Title                                                 
               On October 30, 2000, Mr. Dunne, Mr. Marcus, and FRC entered            
          into an agreement and release of claims to settle all disputes              
          between them.  Pursuant to the agreement, Mr. Dunne endorsed and            
          delivered his FRC stock certificates to Mr. Marcus, and Mr.                 
          Marcus and FRC paid Mr. Dunne the balance of the funds due to him           
          under the arbitration award.                                                
          Respondent’s Examination                                                    
               In mid-2001 the Internal Revenue Service (IRS) began                   
          examining petitioners’ 1997, 1998, and 1999 Federal income tax              
          returns.  Petitioners provided the examining agent with a large             
          number of documents.  Petitioners also gave the examining agent a           
          summary of their position, which concluded that Mr. Dunne                   
          transferred beneficial ownership of his FRC shares on May 8,                
          1997.  In her April 15, 2002, examination report the examining              
          agent concluded that petitioners had deficiencies of $822,298 and           
          $2,566 for 1997 and 1999, respectively.  The examining agent also           
          concluded on the basis of the arbitration award that the                    
          settlement date for the stock sale was June 22, 1998; thus                  
          petitioners were required to include all of the amounts reported            

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