- 9 -
It is well settled that the Commissioner may use the net
worth method to reconstruct income, if only as a means of testing
the accuracy and trustworthiness of the taxpayer’s books and
records. See Holland v. United States, 348 U.S. 121, 131 (1954);
Conti v. Commissioner, supra; Foster v. Commissioner, 487 F.2d
902, 903 (6th Cir. 1973), affg. T.C. Memo. 1972-188; Gleis v.
Commissioner, 24 T.C. 941, 949 (1955), affd. 245 F.2d 237 (6th
Cir. 1957); Hurley v. Commissioner, 22 T.C. 1256, 1261 (1954),
affd. 233 F.2d 177 (6th Cir. 1956).
Petitioners contend that respondent was not entitled to use
the net worth method to reconstruct their income, because
respondent’s examining agent failed to review their business
records for 1994 and 1995. Citing Holland v. United States,
supra at 132, petitioners argue that the failure of respondent’s
agent to review and examine these records makes the net worth
analysis “arbitrary and without merit.” We disagree.
Respondent’s examining agent testified that she initially
reviewed petitioners’ 1993 records and found that the information
therein was fairly consistent with net income reported on
5(...continued)
after the issuance of the notice of deficiency: (1) A reduction
of notes receivable for the period ending Dec. 31, 1995; and (2)
a reduction of petitioners’ personal living expenses for each
year in issue. The effect of these two adjustments is to
decrease petitioners’ indicated taxable incomes and thus the
deficiencies determined by respondent.
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