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States, 348 U.S. 121 (1954), and their progeny, as establishing
the legal standard for the net worth method, and both parties
make the same legal analysis of fraud and the badges of fraud
under section 6653(b) and the decided cases. The parties dispute
how those standards apply to the facts in this case.
2. Whether Respondent Had a Basis in Law for Determining
That the Decedent and Mrs. Spear Had No Cash on Hand on
January 1, 1975
Petitioners contend that respondent had no basis in law for
determining that the decedent and Mrs. Spear had no cash on hand
on January 1, 1975, because respondent improperly used the net
worth method. We disagree.
Respondent's basis in law is clear. The Commissioner may
use the net worth method to compute a taxpayer's income if the
taxpayer has inadequate records. Paschal v. Commissioner, 76
AFTR 2d 95-7975, at 95-7977, 96-1 USTC par. 50,013, at 83,047 (3d
Cir. 1995), affg. without published opinion T.C. Memo. 1994-380;
sec. 1.446-1(b), Income Tax Regs.; e.g., Holland v. United
States, supra at 130-132. Petitioners do not dispute that this
is the applicable legal standard.
Under the net worth method, a taxpayer's income is equal to
the increase in net worth during the taxable year, plus
nondeductible disbursements, minus nontaxable receipts. Holland
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