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had on hand. During the course of the examination, the revenue
agent was not informed of the prior real estate transactions. In
addition, petitioners did not come forward with the explanation
that some of the unexplained deposits were due to cash on hand.
In the preparation of his report, the revenue agent assumed
that the unexplained deposits were unreported income, and the
unreported income was attributable to petitioner's contracting
business. Respondent asserts (after concessions) that
petitioners had unreported income as shown by unexplained bank
deposits in the amounts of $15,687 and $18,714 during 1993 and
1994, respectively.
Discussion
1. Unreported Income
Gross income includes all income from whatever source
derived. See sec. 61(a). Section 6001 requires all taxpayers to
maintain adequate books and records of taxable income. In the
absence of adequate records, the Commissioner is authorized to
reconstruct a taxpayer's income by any reasonable method that
clearly reflects the taxpayer's income. See sec. 446(b); see
also Holland v. United States, 348 U.S. 121, 130-132 (1954);
Williams v. Commissioner, 999 F.2d 760 (4th Cir. 1993), affg.
T.C. Memo. 1992-153; Parks v. Commissioner, 94 T.C. 654, 658
(1990); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965). One
of these methods, the bank deposits and cash expenditure method,
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