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general contracting business. Petitioners did not report in
Schedule C, or elsewhere, in their return for that year income
from any business other than Charles Harp Construction.
Petitioners did not include as income in their returns for
1989 and 1990 any portion of K & H's and Ms. Velilla's funds that
petitioner deposited into petitioners' accounts during those
years. Nor did they include in their returns for those years any
income in connection with the Kabeiseman loans.
The Examination of Petitioners' 1989 and
1990 Returns and the Notice of Deficiency
In June 1993, respondent assigned a revenue agent to examine
petitioners' returns for 1989 and 1990. During the course of
that examination, the revenue agent did not have sufficient books
or records relating to petitioner's sole proprietorship or
petitioners' other financial activities during the years at issue
in order to determine whether petitioners had reported in those
returns all of their income for those years, nor did petitioners
attempt during the course of that examination to re-create any of
the books or records relating to their financial activities dur-
ing the years at issue that they claim were accidentally dis-
carded during 1991. Consequently, in order to reconstruct peti-
tioners' income for the years at issue, the revenue agent used
the bank deposits method under which that agent examined the
deposits that were made during those years into petitioners'
accounts at various financial institutions. Based on certain
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