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receipts on the daily sales summaries. In an interview with a
revenue agent, petitioner estimated that he could have
understated the gross receipts for Gene’s by as much as $15,000
per month. As of the time of trial, petitioner was not able to
produce most of the cash register tapes for Gene’s, and no
records of cash balances, cash receipts, cash expenditures, or
inventories were maintained except for a few invoices for cash
purchases of inventory. Because the records for Gene’s could not
be reconciled with petitioners’ income tax returns, respondent
reconstructed the gross receipts of Gene’s by means of the bank
deposits method coupled with the cash expenditures method.
The bank deposits and cash expenditures methods are
acknowledged methods of reconstructing income. See Parks v.
Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057, 1065
(1978). Respondent’s bank deposits analysis reflects that
petitioners had substantial unreported income from Gene’s
business operations during 1991 and 1992. Gene’s was
petitioners’ only source of business income. Respondent’s agent
examined petitioners’ records and also performed an analysis of
bank deposits for the years in issue. The bank deposits analysis
was accomplished by totaling the deposits made to petitioners’
5(...continued)
percentage markup method of reconstruction is one whereby an
established base, such as cost of goods sold, is marked up to
reconstruct gross sales or gross receipts.
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