Hans C. Sherrer - Page 18




                                        -18-                                          
          the years 1989-92.  Respondent, however, has not allowed                    
          petitioner any deduction for those years, on account of business            
          expenses paid in cash.                                                      
               Mr. Sager testified that respondent's determination of                 
          petitioner's net business income as 17 percent of gross receipts            
          for 1989 was reasonable.  He also testified, however, that                  
          respondent's determination of net business income for each of the           
          years 1990-92 was unreasonable and that a profit in excess of 20            
          percent of gross receipts would be extraordinary.  We note that             
          respondent has determined petitioner's net business income to be            
          equal to 41 percent, 43 percent, and 56 percent of gross                    
          receipts, for 1990, 1991, and 1992, respectively.                           
               We do not intend to relieve petitioner (or any taxpayer) of            
          the obligation to keep accurate records.  However, the evidence             
          (including the stipulated facts concerning petitioner's gross               
          receipts, noncash expenses, and unreported net business income)             
          has convinced us that respondent has overstated petitioner's net            
          business income for, and that petitioner must have paid some                
          business expenses in cash during, each of the years 1990-92.                
               For this reason, it is appropriate for us to estimate (and             
          allow) at least some amount of cash business expense deductions             
          for each of the years 1990-92, under the rule set forth in                  
          Cohan v. Commissioner, supra, as we applied it in Lollis v.                 
          Commissioner, T.C. Memo. 1976-15, affd. 595 F.2d 1189 (9th Cir.             
          1979) (on the basis of accountant's testimony concerning industry           
          financial ratios and the taxpayer's income for several years                



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