- 36 -
charged with the income or to an account controlled by the party
charged with the income. Tokarski v. Commissioner, 87 T.C. 74,
77 (1986). The premise underlying the bank deposits method of
income reconstruction is that, absent some explanation, a
taxpayer’s bank deposits represent income subject to tax. DiLeo
v. Commissioner, 96 T.C. at 868. The use of the bank deposits
method of income reconstruction has long been sanctioned by the
courts. Id.; Tokarski v. Commissioner, 87 T.C. at 77; Estate of
Mason v. Commissioner, 64 T.C. 651, 656 (1975) (and cases therein
cited), affd. 566 F.2d 2 (6th Cir. 1977). When this method is
used, respondent must take into account any nontaxable deposits
or deductible expenses of which respondent has knowledge. DiLeo
v. Commissioner, 96 T.C. at 868.
We have held that, where respondent has the burden of proof
in a bank deposits case, e.g., where respondent has determined
that a taxpayer has committed tax fraud, then--
Respondent can satisfy * * * [the] burden of proving
the first prong of the fraud test, i.e., an underpayment,
when the allegations of fraud are intertwined with
unreported and indirectly reconstructed income in one of two
ways. Parks v. Commissioner, 94 T.C. at 661. Respondent
may prove an underpayment by proving a likely source of the
unreported income. Holland v. United States, 348 U.S. 121
(1954); Parks v. Commissioner, supra at 661; Nicholas v.
Commissioner, 70 T.C. [1057,]* * * 1066 [(1978)].
Alternatively, where the taxpayer alleges a nontaxable
source, respondent may satisfy * * * [the] burden by
disproving the nontaxable source so alleged. United States
v. Massei, 355 U.S. 595 (1958); Parks v. Commissioner, supra
at 661. [DiLeo v. Commissioner, 96 T.C. at 873.]
The parties have stipulated that total deposits to Kenmore’s
Account amounted to $1,433,985.73 in Kenmore’s fiscal 1981 and
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