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Apparently because of the reported business loss and the absence
of other reported income, petitioner did not claim any itemized or
standard deductions on his 1987 Federal income tax return as filed.
The record herein does not indicate specifically the source and
nature of the income that petitioner included in the gross receipts
and business interest income figures that were reported on his 1987
and 1988 Federal income tax returns. Thus, we do not know
specifically how, if at all, petitioner treated on his 1987 and 1988
Federal income tax returns the various funds that petitioner received
from 2618 Inc, from Payne & Potter, and from other sources.
On his 1988 Federal income tax return, petitioner did not report
any income relating to the stock of 2618 Inc that he received in
payment of outstanding legal fees, and he did not report any income
relating to relief from his liability as guarantor of the $705,000
TexCommBk loan.
As indicated, on audit, because of the inadequacy of
petitioner’s books and records, respondent reconstructed petitioner's
taxable income for 1987 and 1988 using the specific item and the bank
deposits methods of proof. Respondent disallowed many claimed
business and itemized deductions, and respondent asserted the fraud
and substantial understatement additions to tax.
With regard to the income adjustments, respondent determined
that petitioner for 1987 and 1988 had additional unreported business
income relating to his law practice of $154,667 and $2,114,700,
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