- 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, malicious
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011