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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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Last modified: May 25, 2011