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1990, section 6664(a) defines “underpayment” as “the amount by
which any tax imposed by this title exceeds the excess of (1) the
sum of (A) the amount shown as the tax by the taxpayer on his
return, plus (B) amounts not so shown previously assessed (or
collected without assessment), over (2) the amount of rebates
made.” Thus, for purposes of this case, the term “deficiency” as
defined by section 6211 has the same meaning as the term
“underpayment” as defined by section 6664(a). Respondent used
the source and application of funds method of reconstructing
income in determining that Frank and Katherine had underreported
their income for the years in issue and that unreported income
resulted in deficiencies in tax for each year in issue.
Taxpayers are required to keep adequate records with which
respondent may determine their correct tax liability. See sec.
6001; see also Petzoldt v. Commissioner, supra at 687; sec.
1.6001-1(a), (d), Income Tax Regs. When a taxpayer keeps no
books, or keeps books that are inadequate, section 446(b)
authorizes the Commissioner to compute the taxpayer’s income by
any method that clearly reflects income. See, e.g., Petzoldt v.
Commissioner, supra; see also Cebollero v. Commissioner, 967 F.2d
986, 989 (4th Cir. 1992), affg. T.C. Memo. 1990-618. For that
purpose, respondent may use indirect methods to reconstruct
income as long as they are reasonable in light of all surrounding
facts and circumstances. See Holland v. United States, 348 U.S.
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