Dennis C. Gandy - Page 41

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          and indirectly reconstructed income, respondent can satisfy the             
          burden of proving an underpayment in one of two ways, i.e., by              
          proving a likely source of the underreported income or by                   
          disproving an alleged nontaxable source.  See DiLeo v.                      
          Commissioner, 96 T.C. 858, 873-874 (1991), affd. 959 F.2d 16 (2d            
          Cir. 1992); Parks v. Commissioner, 94 T.C. 654, 661 (1990).                 
               In these cases, petitioners have admitted that they had                
          unreported income from nursery receipts and from interest.                  
          Respondent reconstructed the income for the first 3 years by                
          reference to petitioners’ invoices and ledgers and for the last             
          2 years by reference to bank deposits.  Respondent’s agents’                
          actions were reasonable in view of the state of petitioners’                
          records and the evidence of the manner in which petitioners’ tax            
          returns were prepared.  Respondent is not required to prove the             
          exact amount of the underpayment.  See Webb v. Commissioner, 394            
          F.2d 366, 373, 379 (5th Cir. 1968), affg. T.C. Memo. 1966-81;               
          DiLeo v. Commissioner, supra at 868, 873; Smith v. Commissioner,            
          T.C. Memo. 1976-114.                                                        
               Petitioners contend that, notwithstanding their admission of           
          unreported income, they had additional deductions for expenses              
          paid by cash that offset or substantially reduce the amount of              
          unreported income.  They further contend that they believed that            
          they did not owe additional tax because the unreported amounts              
          were reinvested in the business.  However, over the years that              

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