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OPINION
A. Deficiencies
Taxpayers must maintain sufficient records to determine
their correct tax liabilities. Sec. 6001. The Commissioner may
reconstruct income using any method that is reasonable in light
of all facts and circumstances if a taxpayer does not keep
sufficient records. Sec 446; Petzoldt v. Commissioner, 92 T.C.
661, 686-687 (1989); Harbin v. Commissioner, 40 T.C. 373, 376
(1963).
This Court has approved the Commissioner's use of the source
and application of funds method to reconstruct income. Vassallo
v. Commissioner, 23 T.C. 656, 661-662 (1955). This method is
based on the assumption that the amount by which the taxpayer's
application of funds exceeds his or her known sources of income
is taxable income, unless the taxpayer shows that he or she had a
nontaxable source. See Taglianetti v. United States, 398 F.2d
558, 562 (1st Cir. 1968).
Petitioner did not have adequate records. Respondent used
the source and application of funds method to reconstruct
petitioner's income for the years in issue and to determine the
deficiencies and additions to tax in this case. At trial,
respondent's agent explained the basis for each source and
application that she used to reconstruct petitioner's income in
this case. Respondent's agent interviewed petitioner and his
representative and obtained documents from third parties to
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Last modified: May 25, 2011