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petitioners' check exchange involvement with M&L. Careswell was
unable to reconcile petitioners' deposits with their records and
found that the records were inadequate. Therefore, Careswell
turned to a bank deposits analysis to reconstruct petitioners'
income from all sources, including the involvement with M&L and
the jewelry business.
Using the bank deposits analysis, Careswell calculated total
deposits of $4,898,961 and subtracted nontaxable deposits of
$1,148,549 and the income reported by petitioners of $594,374.
To that amount he added cash and other income items of $34,646 to
arrive at taxable deposits not reported of $3,190,684. Careswell
then made a further reduction of $2,571,129, representing
petitioners' payments and transfers to M&L under the check kiting
scheme. This resulted in net unexplained bank deposits of
$619,555 for 1990.
The $2,571,129 amount by which Careswell reduced the
unexplained bank deposits was determined from his check spread
analysis of check exchanges with M&L. Careswell's analysis
reflects $3,263,124 remitted by M&L to petitioners and $2,571,129
remitted by petitioners to M&L for a net excess to petitioners of
$691,995 for 1990. Petitioners argue that their unreported
taxable income should be determined using the net difference from
the check spread analysis reduced for certain adjustments
asserted by petitioners.
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