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Petitioner’s returns for the years in issue also gave rise
to a criminal tax investigation conducted by Special Agent Dan
Wardlaw. Petitioner told Special Agent Wardlaw that he had
approximately $140,000 in cash in his safe at the beginning of
1993, but only $5,000 to $10,000 at the end of 1995.
Discussion
A taxpayer has a duty to maintain adequate records to show
whether or not the taxpayer is liable for Federal income tax.
Sec. 6001. If a taxpayer fails to maintain or produce such
records, the Commissioner may compute a taxpayer’s income and
income tax liability by a variety of indirect methods, including
the net worth method as used by respondent in this case. See,
e.g., Holland v. Commissioner, 348 U.S. 121 (1954); Petzoldt v.
Commissioner, 92 T.C. 661 (1989).
Petitioner’s records for Grand Video consist of the business
account and a cash journal. The cash journal does not record
income, and by comparing the annual business account deposits to
the gross income reported on Grand Video’s Schedule C it is clear
that not all of the income from Grand Video was deposited into
the business account. Furthermore, although there was a cash
register in Grand Video’s store, it was not used to record rental
and sales transactions. Because petitioner’s records do not
adequately demonstrate the amount of income he earned each year,
it was appropriate for respondent to use an indirect method to
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