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Nanny’s, all of those amounts are taxable to petitioners as
constructive dividends.
Nanny’s realized taxable income in 1986, 1987, and 1988 of
$2,436, $18,659, and $31,529, respectively, and recognized all of
these amounts on its Federal income tax returns. Its retained
earnings at the ends of those years were $2,070, $18,077, and
$32,306, respectively. Its retained earnings at the end of 1988
were net of a $12,500 dividend that it paid to petitioners during
that year. Nanny’s realized ordinary income of $48,006 in 1989,
all of which petitioners recognized for that year.
OPINION
We decide first whether petitioners are liable for the
deficiencies determined by respondent. Respondent used the net
worth method to determine petitioners’ income for the subject
years. When a taxpayer fails to keep adequate books and records,
section 446(b) authorizes the Commissioner to compute the
taxpayer's income by any method that clearly reflects income.
Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965). The net
worth method has been accepted by the Courts as satisfying this
legislative mandate. E.g., Holland v. United States, 348 U.S.
121 (1954). The Commissioner's determination of tax liability,
when calculated under the net worth method, is presumptively
correct and places upon the taxpayer the burden of proving it
wrong. Helvering v. Taylor, 293 U.S. 507 (1935); Kearns v.
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