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A. Underpayment of Tax
1. Metro’s Omitted Income
Respondent determined the amount of Metro’s omitted income
by compiling checks written by Poor Richards to Metro and Village
Sanitation. See sec. 446(b) (authorizing the Commissioner to
reconstruct a taxpayer’s income where the taxpayer fails to
maintain adequate records). Petitioners contend that the
worksheets used to bill Poor Richards, as summarized by McGraw,
more accurately reflect income to Metro.
The worksheets were incomplete and not compiled
contemporaneously with Butler’s receipt of the diverted funds.
Accordingly, we sustain respondent’s determinations relating to
the amounts of income omitted from Metro’s returns.
2. Metro’s Alleged Deductions
Petitioners concede that Metro underreported subcontract
income during the years in issue, Metro overstated its
subcontract expense in 1988 and 1989, and all of the funds
related to the underreporting and overstatement were diverted to
Butler. Petitioners contend, without supplying any
contemporaneous documentary evidence or third-party testimony,
that all funds diverted to Butler were used to pay Metro’s
ordinary and necessary business expenses (e.g., cash payments for
lower dumping fees, black-market truck parts, compensation to
Butler and other Metro employees, etc.). See Franklin v.
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