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On July 14, 1992, both petitioners met with and were
interviewed by two special agents from the IRS. During this
interview, Mr. Bacon told the agents that petitioners and their
children had received extensive cash gifts from Mr. Bacon’s
grandfather in $10,000 cash increments. According to Mr. Bacon,
he received a $10,000 cash gift each year since his 18th
birthday, his wife received an annual $10,000 cash gift since
they have been married, and their children each received an
annual $10,000 cash gift since their birth. Mr. Bacon told
respondent’s agents that the gifts were from his grandfather and
were received through a brother-in-law and that neither
petitioners nor their children had ever met their grandfather.
Mr. Bacon told the agents that he was told never to tell anyone
about the gifts and never to put the money in a bank. Mr. Bacon
told the special agents that he may have had as much as $650,000
cash on hand at the beginning of 1988. At trial, petitioners
stipulated that at the beginning of 1988, they had approximately
$35,000 cash on hand. During the years in issue, petitioners did
not receive any gifts, inheritances, legacies, or devises.
OPINION
I. Unreported Income
Respondent determined deficiencies for the years in issue by
using the bank deposit method. Bank deposits are prima facie
evidence of income. See DiLeo v. Commissioner, 96 T.C. 858, 869
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