- 6 -
such an enterprise is generally computed on Schedule C, Profit or
Loss From Business, by subtracting cost of goods sold and
ordinary and necessary business expenses from the gross receipts
of the venture. For the years at issue, respondent calculated
petitioner’s net income from Bicycle Sport through a combination
of accepting in whole or in part figures reported on petitioner’s
late-filed returns and of employing indirect methods to supply
missing or additional data.
Taxpayers are required to maintain records sufficient to
establish the existence and amount of all items reported on the
tax return, including both income and deductions therefrom. Sec.
6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd.
540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
In absence of books and records adequate to determine a
taxpayer’s proper tax liability, the Commissioner is authorized
to reconstruct income by any reasonable method which will clearly
reflect income. Sec. 446(b); Commissioner v. Hansen, 360 U.S.
446, 467 (1959); Palmer v. IRS, 116 F.3d 1309, 1312 (9th Cir.
1997); Petzoldt v. Commissioner, 92 T.C. 661, 686-687 (1989).
As a general rule, the Commissioner’s determinations are
presumed correct, and the taxpayer bears the burden of proving
error therein. Rule 142(a); cf. sec. 7491 (generally effective
with respect to examinations commencing after July 22, 1998).
However, the Court of Appeals for the Ninth Circuit, to which
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011