- 10 -
provided that the reconstruction is reasonable in light of all
the surrounding facts and circumstances, id.; Giddio v. Commis-
sioner, 54 T.C. 1530, 1533 (1970).
Respondent reconstructed petitioner's income for 1986 by
using the cash expenditures method. That method is based on the
assumption that the amount by which a taxpayer's expenditures
during a taxable year exceeds his or her reported income for that
year is taxable, absent some explanation by the taxpayer.
Petzoldt v. Commissioner, supra at 694; DeVenney v. Commissioner,
85 T.C. 927, 930 (1985); Burgo v. Commissioner, 69 T.C. 729, 742
(1978). To overcome that assumption, a taxpayer must show either
that someone else made the expenditures or that the funds
expended were obtained from nontaxable sources such as loans,
gifts, inheritances, or assets on hand at the beginning of the
taxable period in question. Petzoldt v. Commissioner, supra at
695; DeVenney v. Commissioner, supra at 931.
Petitioner does not dispute that during 1986 he spent at
least $26,911 for personal living expenses and that he trans-
ferred $100,000 to C & I to purchase 50 percent of its stock.7
However, petitioner claims that he obtained the funds that he
transferred to C & I during 1986 from nontaxable sources, i.e.,
7 Nor does petitioner dispute (1) that during 1986 over
$100,000 was paid by a third party on behalf of C & I in order to
purchase inventory for Linea Pitti, (2) that during January 1987
petitioner and Ihsan Dura transferred in excess of $50,000 to C &
I, and (3) that, as of Mar. 31, 1987, they had transferred in
excess of $70,000 in additional funds to that company, at least
$25,365.21 of which was transferred by petitioner.
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