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organized. Furthermore, the records were not complete.
The auditor was unable to find journal tapes and the cash
register tapes for the 3 sample months that she initially
chose, and was forced to select different months. The
report of the sales tax audit states that “the accounting
records flow through to the financials without a hitch.
However, the bar business is mostly cash and income is
easily hidden from normal view.” The auditor found that
the deposit slips for the business show that deposits
consisted mostly of checks. She found that to be unusual
because bars are typically high cash businesses. The
auditor noted in the audit report that “The taxpayer did
not use due care in reporting all sales and deliberately
hid income.”
On the basis of the foregoing, we find that respondent
was justified in using an indirect method of reconstructing
income. The percentage or unit markup method is an
acceptable method of reconstructing a taxpayer’s income.
See Langworthy v. Commissioner, T.C. Memo. 1998-218;
Stewart v. Commissioner, T.C. Memo. 1990-264 (citing
Tunningley v. Commissioner, 22 T.C. 1108 (1954); Stone
v. Commissioner, 22 T.C. 893 (1954)).
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