Stewart L. and Patricia A. Welch - Page 5




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          Petitioners purchased the 1995 Ford Bronco for Mr. Ruth in 1995,            
          making a $1,500 cash down payment.                                          
               Mr. Ruth received a $19,452 settlement payment in 1990.                
          Petitioners used this payment mainly (if not entirely) for their            
          business.  In or about January 1990, Mr. Welch deposited $30,000            
          of his $46,284 settlement into his brokerage account and                    
          immediately thereafter started to withdraw and spend those funds.           
          By 1991, an insignificant amount of the $30,000 remained in the             
          account.                                                                    
                                       OPINION                                        
          1.  Unreported income                                                       
               During respondent’s examination of the subject years,                  
          respondent applied the cash expenditures method to determine that           
          the business’ gross receipts should be increased by $33,599,                
          $37,317, and $51,955, respectively.  Petitioners bear the burden            
          of proving this determination wrong.3  Rule 142(a); Welch v.                
          Helvering, 290 U.S. 111, 115 (1933).  The right of respondent to            
          use the cash expenditures method to recompute income is well                
          settled.  United States v. Johnson, 319 U.S. 503, 517 (1943);               


               3 The notice of deficiency was issued on Apr. 6, 1998.                 
          Where, as here, respondent’s examination was commenced before               
          July 23, 1998, sec. 7491(a) does not operate to shift the burden            
          of proof to the Commissioner regarding the deficiencies, nor does           
          sec. 7491(c) place on the Commissioner the burden of production             
          respecting the penalties.  Internal Revenue Service Restructuring           
          and Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat.               
          726.                                                                        





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