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characterize the method used to determine the deficiencies,
simply stating that certain expenditures from the Pieces of Eight
account were determined to be nondeductible and were presumed to
represent income to petitioner. Although we may infer that
deposits in amounts equal to the amount of the checks were made
into the Pieces of Eight account, we shall treat respondent as
having utilized the cash expenditures method of reconstructing
income for those years.
The cash expenditures method is a variant of the net worth
method that is designed to reconstruct the income of a taxpayer
who consumes his income during the year and does not invest it.
Petzoldt v. Commissioner, 92 T.C. 661, 694 (1989). The method is
well accepted by the courts. United States v. Johnson, 319 U.S.
503, 517-518 (1943); DeVenney v. Commissioner, 85 T.C. 927, 930
(1985). It is based on the assumption that the amount by which a
taxpayer’s expenditures during a taxable year exceed his reported
income has taxable origins unless the taxpayer can show that the
expenditures were made from some nontaxable source. DeVenney v.
Commissioner, supra at 930-931. Income is reconstructed pursuant
to the cash expenditures method in the following manner:
after taking into account the amount of resources that
a taxpayer had on hand at the beginning of a period,
the income received by the taxpayer for the same period
is compared with his expenditures that are not
attributable to his resources on hand or non-taxable
receipts during the period. A substantial excess of
expenditures over the combination of reported income,
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