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Careswell performed the following steps in his bank deposits
analysis for petitioners' 1990 taxable year: He calculated total
deposits of $4,898,961 from four different accounts, including
Colorado National Bank, Bank of Boulder, Santa Barbara Savings
and Loan, and Merrill Lynch. From that amount he subtracted
nontaxable deposits of $1,148,549 and income reported by
petitioners of $594,374, and he added cash and other income items
of $34,646, to arrive at unexplained deposits not reported of
$3,190,684. Careswell then made a further reduction of
$2,571,129, representing the transfers from petitioners to M&L,
thereby arriving at $619,555 of unreported income for 1990.
Careswell did a similar analysis for 1989 and determined
unreported income of $106,104.
OPINION
Respondent, by means of a bank deposits analysis,
reconstructed petitioners' 1990 income. Petitioners do not
disagree with respondent's bank deposits mathematics. Instead,
petitioners question respondent's use of the bank deposits
analysis over the check spread analysis. In addition,
petitioners argue whether they should have to recognize the
portions of the bank deposits attributable to the check exchange
scheme with M&L. Petitioners assert that they were not entitled
to any portion of the income attributable to the check exchanges
until the resolution of the bankruptcy proceedings in 1993.
Accordingly, we must consider whether respondent's use of the
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