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When the Commissioner uses the net worth method to determine
whether a taxpayer has underreported income, she must (1)
establish with reasonable certainty the taxpayer's beginning net
worth, and (2) either establish a likely source of unreported
taxable income or conduct a reasonable investigation of leads
negating possible sources of nontaxable receipts. United States
v. Massei, 355 U.S. 595 (1958); Holland v. United States, supra
at 132-138; Conti v. Commissioner, 39 F.3d 658, 663 (6th Cir.
1994), affg. in part and remanding in part 99 T.C. 370 (1992);
Smith v. Commissioner, 91 T.C. 1049, 1059 (1988), affd. 926 F.2d
1470 (6th Cir. 1991).
A. Beginning Net Worth
The taxpayer's net worth at the beginning of the taxable
year is a key element in a net worth case. Fuller v.
Commissioner, 313 F.2d 73, 77 (6th Cir. 1963), affg. in part and
modifying in part T.C. Memo. 1961-262. The validity of the
Commissioner's net worth calculations depends on the accuracy of
the beginning net worth figure. Estate of Phillips v.
Commissioner, 246 F.2d 209, 213 (5th Cir. 1957), revg. T.C. Memo.
1955-139.
For petitioner's 1984 taxable year, respondent determined
that petitioner's beginning net worth was $276,648.70, which
included $25,000 of cash on hand. Petitioner contends that the
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