Thomas Y. Wallace - Page 8




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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                
          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 Holland v. United States, supra at 132-138; United            
          States v. Massei, 355 U.S. 595, 595-596 (1958); Brooks v.                   








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