- 7 -
assumed to be taxable income, DiLeo v. Commissioner, 96 T.C. 858,
868 (1991), affd. 959 F.2d 16 (2d Cir. 1992). Respondent used
the specific items method to reconstruct petitioner's income for
1990. This method requires proof of specific items of income
that were omitted from the taxpayer's return. United States v.
Merrick, 464 F.2d 1087, 1092 (10th Cir. 1972).
Petitioner acknowledges that he received, but did not
report, monthly payments of $1,000 which petitioner used to lease
a Cadillac. He also acknowledges that he received finder's fees
of varying amounts but has not offered any explanation for his
failure to report these funds. Petitioner contends that the
remaining unreported funds are, pursuant to the open transaction
doctrine, a return of principal.
The open transaction doctrine, which applies in rare and
extraordinary circumstances, see McShain v. Commissioner, 71 T.C.
998, 1004 (1979), permits an investor to recover capital prior to
recognizing gain. The Supreme Court in Burnet v. Logan, 283 U.S.
404, 413 (1931), established that this doctrine applies to
deferred payment transactions where the realization of income is
uncertain or contingent. The doctrine has also been applied to
the purchase of notes at a discount where, at the time of
acquisition, the investor was not reasonably certain that he
would recover his cost and a major portion of the discount.
Underhill v. Commissioner, 45 T.C. 489, 495 (1966).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011