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establish the extent to which expenditures during those years
could have been accounted for by cash on hand at the beginning of
each of those years. Respondent has thus failed to identify and
quantify sources of available funds, which is required to
establish an underpayment of tax pursuant to the cash
expenditures method. Petzoldt v. Commissioner, supra at 695. In
fact, the total amount of unreported income determined for 1988
and 1989, namely, $96,468, is only slightly larger than the
amount of unreported income determined for 1987 to have been
deposited in that account; namely, $92,466.13 Therefore, the
extent to which resources on hand at the beginning of 1988 and
1989 could have contributed to the expenditures during those
years is unclear. Had respondent placed in evidence the
statements for the account or other records showing the activity
for the account for those years, we might have been able to infer
that the expenditures in issue were made from currently taxable
income.
Respondent’s approach to establishing that underpayments of
tax occurred for 1988 and 1989 is summed up by the following
12 (...continued)
afford a reliable basis for an inference as to the balance of the
account at the end of that year.
13
Although we do not conclude that this amount necessarily was
on deposit in Pieces of Eight's account at the close of 1987, the
unreported income indicates the availability of resources that
could have funded at least a portion of the expenditures in
question and that respondent failed to take into account.
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