- 10 -
year, increased for nondeductible expenses such as living
expenses, and decreased for items attributable to nontaxable
sources such as gifts and loans. The resulting figure may be
considered to represent taxable income, provided: (1) The
Commissioner establishes the taxpayer’s opening net worth with
reasonable certainty; and (2) the Commissioner either shows a
likely source of unreported income or negates possible nontaxable
sources. See United States v. Massei, 355 U.S. 595, 595-596
(1958); Holland v. United States, supra at 132-138; Brooks v.
Commissioner, 82 T.C. 413, 431-432 (1984), affd. without
published opinion 772 F.2d 910 (9th Cir. 1985).
The use of the net worth method requires “the exercise of
great care and restraint” to prevent a taxpayer from being
“ensnared in a system” which is hard for the taxpayer to refute.
Holland v. United States, supra at 129. The taxpayer’s opening
net worth is of critical importance. “The importance of accuracy
in this figure is immediately apparent, as the correctness of the
result depends entirely upon the inclusion in this sum of all
assets on hand at the outset.” Id. at 134. “If the opening
statement is not substantially reliable, the whole intricate
house of cards falls.” Estate of Phillips v. Commissioner, 246
F.2d 209, 213 (5th Cir. 1957). Respondent must establish the
opening net worth with reasonable certainty. See London v.
Commissioner, T.C. Memo. 1998-346; Campfield v. Commissioner,
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Next
Last modified: May 25, 2011