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on use of the bank deposits method to reconstruct petitioners’
income. See supra table 2.
It is well established that bank deposits are evidence of
income where the deposits were made by the party charged with the
income or to an account controlled by the party charged with the
income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
The premise underlying the bank deposits method of income
reconstruction is that, absent some explanation, a taxpayer’s
bank deposits represent income subject to tax. See DiLeo v.
Commissioner, 96 T.C. at 868. The use of the bank deposits
method of income reconstruction has long been sanctioned by the
courts. See id.; Tokarski v. Commissioner, 87 T.C. at 77; Estate
of Mason v. Commissioner, 64 T.C. 651, 656 (1975)(and cases cited
therein), affd. 566 F.2d 2 (6th Cir. 1977). When this method is
used, respondent must take into account any nontaxable deposits
or deductible expenses of which respondent has knowledge. See
DiLeo v. Commissioner, 96 T.C. at 868.
We have held that, where respondent has the burden of proof
in a bank deposits case, e.g., where respondent has determined
that a taxpayer has committed tax fraud, then--
Respondent can satisfy * * * [the] burden of proving
the first prong of the fraud test, i.e., an underpayment,
when the allegations of fraud are intertwined with
unreported and indirectly reconstructed income in one of two
ways. Parks v. Commissioner, 94 T.C. at 661. Respondent
may prove an underpayment by proving a likely source of the
unreported income. Holland v. United States, 348 U.S. 121
(1954); Parks v. Commissioner, supra at 661; Nicholas v.
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