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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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