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Respondent issued a notice of deficiency to petitioners on
March 19, 1999. For each year in issue, respondent: (1)
Increased petitioners’ income by the unreported income amount
listed above; (2) reduced depreciation deductions claimed on the
Schedule C and Schedule E; (3) made statutory adjustments to
petitioners’ self-employment tax, self-employment tax deduction,
and itemized deductions; (4) imposed an addition to tax for
petitioners’ failure to file a timely return; and (5) imposed an
accuracy-related penalty for negligence or disregard of rules or
regulations.
Discussion
Section 6001 requires a taxpayer to maintain sufficient
records to allow for the determination of the taxpayer’s correct
tax liability. Petzoldt v. Commissioner, 92 T.C. 661, 686
(1989). If a taxpayer fails to maintain or does not produce
adequate books and records, the Commissioner is authorized to
reconstruct the taxpayer’s income, sec. 446(b); Petzoldt v.
Commissioner, supra at 686-687, and it is well settled that
indirect methods may be used to do so, Holland v. United States,
348 U.S. 121 (1954). The Commissioner’s reconstruction need only
be reasonable in light of all the surrounding facts and
circumstances. Petzoldt v. Commissioner, supra at 687; Giddio v.
Commissioner, 54 T.C. 1530, 1533 (1970); Schroeder v.
Commissioner, 40 T.C. 30, 33 (1963).
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