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13(...continued)
discussion of the use of statistical methods in legal cases to
extrapolate estimates from known samples, see United States v.
Shonubi, 895 F. Supp. 460 (E.D. N.Y. 1995) (approving use of
statistical methods to determine, based on a sample of four of
the 103 balloons swallowed by defendant, that all 103 balloons
contained heroin), revd. on other grounds 103 F.3d 1085 (2d Cir.
1997).
In the tax context, the Court of Appeals for the Ninth
Circuit rejected the use of statistical methods to assess
deficiencies against a restaurant for failing to withhold and pay
sufficient employment taxes on its employees’ tip income. Fior
D’Italia, Inc. v. United States, 242 F.3d 844 (9th Cir. 2001),
cert. granted 122 S. Ct. 865 (2002). However, the Court of
Appeals distinguished the case before it from the presumption
that would apply to the use of statistical methods to estimate
the unreported tip income received by the employees themselves.
The Court of Appeals cited with approval and distinguished the
Tax Court’s opinion in McQuatters v. Commissioner, T.C. Memo.
1973-240, which upheld the use of statistical methods to recreate
the tip income received by waiters who failed to keep proper
records:
Because the employees should have maintained records of
their income but failed to do so, it was deemed
entirely appropriate to put the burden on them to prove
that the IRS’s estimate overstated their taxable
income. * * *
* * * the taxpayer in our case did not fail to satisfy
a legal duty imposed on it by the Internal Revenue
Code, and thus did not give the IRS just cause for
resorting to an estimate in constructing its
assessment. [Fior D’Italia, Inc. v. United States,
supra at 848.]
In view of the complexity of using statistical methods to
estimate unreported cash income that cannot be traced, we
understand respondent’s decision to focus on traceable deposits.
However, respondent might well have required petitioner to
explain the source of the remaining bank deposits, inasmuch as
respondent would have been required to do no more than include
the unexplained deposits in his determination, on the ground that
the deposits were unexplained and similar to the other taxable
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