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Section 6001 requires taxpayers to maintain adequate records
to determine their correct tax liabilities. Absent adequate
records, or if the records that are kept do not accurately reflect
income, the Commissioner may determine the existence and amount of
a taxpayer's income by using any method that clearly reflects
income.5 Sec. 446(b); United States v. Johnson, 319 U.S. 503
(1943); Burka v. Commissioner, 179 F.2d 483 (4th Cir. 1950).
Petitioners bear the burden to prove that respondent's method does
not clearly reflect income. Rule 142(a); see sec. 446.
The indirect method used to calculate income must be
reasonable. See, e.g., Holland v. United States, 348 U.S. 121
(1954). The percentage markup method is well recognized as a
reasonable means of reconstructing income, see Bollella v.
Commissioner, 374 F.2d 96 (6th Cir. 1967), affg. T.C. Memo. 1965-
162, particularly when cash businesses are involved, see Webb v.
Commissioner, 394 F.2d 366 (5th Cir. 1968), affg. T.C. Memo. 1966-
81; Edgmon v. Commissioner, T.C. Memo. 1993-486. Pursuant to this
method, gross sales are determined by adding a predetermined
percentage to cost of goods sold. See, e.g., Cebollero v.
Commissioner, 967 F.2d 986 (4th Cir. 1992), affg. T.C. Memo. 1990-
5 Even if a taxpayer's books and records appear adequate,
the Commissioner may test the adequacy of the information
contained therein by any reasonable method which properly
reflects the taxpayer's income. See, e.g., Michas v.
Commissioner, T.C. Memo. 1992-161.
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Last modified: May 25, 2011