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petitioners’ tax returns. Respondent’s agent determined,
however, based on a review that ultimately entailed use of a net
worth analysis, that petitioners had understated their 1993 net
income by overstating cost of goods sold. Having determined that
the 1993 records were untrustworthy, respondent’s agent concluded
that there was no point in going through petitioners’ 1994 and
1995 records, because they were the same as the 1993 records.
Rather, the examining agent reconstructed petitioners’ 1994 and
1995 income using the net worth analysis.
Petitioners placed their financial records into evidence in
an incomprehensible state. The records consist, in the main, of
some 28 manila envelopes bearing handwritten notations on the
outside and stuffed with invoices, computer printouts, and such.
The records include a large and unsorted wad of receipts
(introduced as a single exhibit) and an undifferentiated stack of
more than 80 file folders (also introduced as a single exhibit)
putatively documenting bad debts and repossessions of used cars.
There appears to be no general ledger. After attempting,
unsuccessfully, to relate petitioners’ exhibits to the amounts
shown on their tax returns for the years in issue, we appreciate
the task faced by respondent’s agent in examining these records.
Even if we were to assume–-consistent with the conclusion of
respondent’s agent with respect to the 1993 taxable year--that
petitioners’ books and records are more or less consistent with
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