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three bank accounts. Respondent then added petitioners’
identified cash expenditures for personal and business purposes
to the total bank deposits. The total of the bank deposits and
expenditures was next reduced by the total amount of nontaxable
deposits to arrive at petitioners’ annual income from Gene’s.
Finally, the annual income was reduced by the income reported on
petitioners’ returns to arrive at respondent’s determination of
petitioners’ unreported income of $223,673 and $161,789 for 1991
and 1992, respectively.
The items included in respondent’s reduction for nontaxable
items included deposits from the deposit account to the operating
account, transfers from other accounts, gifts, and loans made to
the business or petitioners. The cash for Gene’s check cashing
came from business operations. Some of the cash was from cash
sales of groceries, and some was obtained from the deposit
account.
Respondent did not attempt to separately determine the
amount of gross receipts from cash sales of groceries. In
addition, respondent considered the entire amount of cash
withdrawn from the deposit account to be nontaxable.
Accordingly, respondent’s approach to reconstructing petitioners’
income was conservative, allowing petitioners the benefit of the
doubt. In addition, some of the cash from cash grocery sales was
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