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burden of proof as to any underlying deficiency. See Rule
142(a).
A. Respondent's Indirect Method of Proof
When a taxpayer fails to keep sufficient records to enable
respondent to determine his correct tax liability, respondent may
compute the taxpayer's income by any method that clearly reflects
income. See secs. 446(b), 6001; Sutherland v. Commissioner, 32
T.C. 862 (1959).
Respondent used the cash method to indirectly prove that
petitioner had unreported income for the years in issue. The
Court of Appeals for the Seventh Circuit has held that the cash
method is an acceptable method for calculating a taxpayer's
unreported income. See United States v. Hogan, 886 F.2d 1497,
1509 (7th Cir. 1989). In United States v. Hogan, supra at 1508-
1509, the Court of Appeals stated:
[The cash method] is a variation on the "cash
expenditures" method * * *. The cash expenditures
method determines the amount of unreported income by
"establishing the amount of [defendant's] purchases and
services which are not attributable to the resources at
hand at the beginning of the year or to non-taxable
receipts during the year." If the amount of purchases
and services exceeds defendant's reported income,
resources on hand, and nontaxable receipts, the jury
may infer that the defendant underreported income.
Like the cash expenditures method, the cash method
focuses on the taxpayer's sources and uses of income.
Unlike the cash expenditures method, however, the tax
expert considers only coin and currency when using the
cash method, ignoring assets and purchases that do not
generate cash.12 * * * Sources for cash include cash
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