- 16 - Schedule C Gross Receipts Respondent determined that petitioners did not keep adequate records from which their taxable income could accurately be calculated. The only records of income and expense that peti- tioners maintained with respect to Mr. Owens’ painting business and the Toledo rental property were their bank statements, the checks written on their joint bank accounts (the National City joint account until May 18, 1993, and thereafter the Peoples joint account), and petitioners’ monthly summaries that they prepared from those bank statements and checks. We agree with respondent that petitioners did not maintain adequate tax rec- ords. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. In the absence of adequate records, respondent reconstructed petitioners’ income on the basis of the source and application of funds method and determined that petitioners have unreported Schedule C gross receipts. The source and application of funds method of reconstructing income is based on the assumption that, absent some explanation, the amount by which a taxpayer’s expen- ditures during a taxable year exceed the taxpayer’s known sources of income is taxable income. See Erickson v. Commissioner, 937 F.2d 1548, 1553 (10th Cir. 1991); Petzoldt v. Commissioner, 92 T.C. 661, 694 (1989). Petitioners contend that respondent’s indirect method of income reconstruction was “conducted in a careless, maliciousPage: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Next
Last modified: May 25, 2011