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OPINION
Taxpayers are required to keep adequate books or records
from which their correct tax liability can be determined. See
sec. 6001. In the absence of adequate books and records, the
Commissioner may reconstruct a taxpayer’s taxable income by any
reasonable method. See Holland v. United States, 348 U.S. 121,
131 (1954). The courts have long recognized the net worth method
as a reasonable method. See id.; Manzoli v. Commissioner, 904
F.2d 101 (1st Cir. 1990), affg. T.C. Memo. 1989-94 and T.C. Memo.
1988-299; United States v. Sorrentino, 726 F.2d 876 (1st Cir.
1984); Estate of Mazzoni v. Commissioner, 451 F.2d 197 (3d Cir.
1971), affg. T.C. Memo. 1970-144 and T.C. Memo. 1970-37.
Under the net worth method, taxable income is computed by
reference to the change in the taxpayer’s net worth during a
4(...continued)
Particulars 12/31/90
Understatement of income $77,372
Total assets $82,791
Less: Total liabilities ( 6,100)
Net worth 76,691
Less: Prior years net worth ( 4,845)
Increases in net worth 71,846
Plus: Expenditures 18,591
Less: Income reported on (13,006)
return
Understatement of income 77,372
(Increase in net worth plus ======
expenditures less income
reported on return)
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Last modified: May 25, 2011