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Fried in reviewing the voluminous documents and information
supplied by petitioners.
After Mr. Fried and Ms. Tyers reviewed the documents and met
with petitioners' counsel several more times, respondent agreed
to offset the embezzlement income by the amounts repaid to some
of Phillip's victims. The resulting embezzlement income
adjustments, as reflected in the March 20, 2000, settlement, were
$248,842 for 1992, $147,445 for 1993, and $32,450 for 1994.
On the issue of the omitted income from Phillip's fraudulent
Ponzi scheme, we conclude that respondent's position was
substantially justified.
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving entitlement to any deduction claimed.
See Deputy v. du Pont, 308 U.S. 488, 493 (1940); Hradesky v.
Commissioner, 540 F.2d 821 (5th Cir. 1976), affg. 65 T.C. 87
(1975). It is well settled that a taxpayer is required to keep
permanent books of account and records to substantiate the income
and expenses reported on his income tax return. See sec. 6001;
sec. 1.6001-1(a), Income Tax Regs. Generally, when a taxpayer
does not produce substantiation of claimed deductions,
disallowance is proper. See Roberts v. Commissioner, 62 T.C.
834, 836-837 (1974); Amann v. Commissioner, T.C. Memo. 1993-542;
Schnelten v. Commissioner, T.C. Memo. 1993-264. It is reasonable
for respondent not to concede the adjustments until he has
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