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As concerns the nature of annual reports in general, such
reports are derived from the representations of management. And,
while financial statements are often verified through audit, to a
lesser or greater extent, we have no information as to what, if
any, steps were taken to check the proprietorship’s claimed
inactivity in 1992 or even as to what exactly was meant by use of
the term “inactive” within the context of the annual report.
We next turn to the implications of respondent’s bank
deposits analysis. In the course of her examination of
petitioners’ 1993 return, Ms. Nierich performed a bank deposits
analysis in an attempt to verify petitioners’ gross receipts and
income. Bank deposits are considered prima facie evidence of
income, and a bank deposits analysis typically encompasses the
following: (1) A totaling of bank deposits; (2) the elimination
from such total of any amounts derived from duplicative transfers
or nontaxable sources of which the Commissioner has knowledge;
and (3) the further reduction of the adjusted total by any
deductible or offsetting expenditures of which the Commissioner
is aware. Clayton v. Commissioner, 102 T.C. 632, 645-646 (1994);
DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16
(2d Cir. 1992). The burden rests on the taxpayer to prove
additional nontaxable sources for deposits and to substantiate
greater allowable expenditures. Rule 142(a); Clayton v.
Commissioner, supra at 645.
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