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C. Unreported Schedule C Income
Every taxpayer is required to maintain adequate records of
taxable income. See sec. 6001. When respondent audited
petitioner’s 1987, 1988, 1989, and 1990 income tax returns,
petitioner failed to provide sufficient records from which a
determination could be made of petitioner’s gross receipts. In
the absence of adequate records, respondent performed a bank
deposits analysis, under which he determined that petitioner had
made deposits in excess of the reported gross receipts.
In cases where taxpayers have not maintained business
records or where their business records are inadequate, the
courts have authorized the Commissioner to reconstruct income by
any method that, in the Commissioner’s opinion, clearly reflects
income. See sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658
(1990). The Commissioner’s method need not be exact but must be
reasonable. See Holland v. United States, 348 U.S. 121 (1954).
The bank deposits method for computing unreported income has
long been sanctioned by the courts. See Factor v. Commissioner,
281 F.2d 100, 116 (9th Cir. 1960), affg. T.C. Memo. 1958-94;
DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16
(2d Cir. 1992). Bank deposits are prima facie evidence of
income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
Where the taxpayer has failed to maintain adequate records as to
the amount and source of his or her income and the Commissioner
has determined that the deposits are income, the taxpayer must
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