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In this case, petitioners’ unreported income for each year
in issue was determined by use of the cash transactions method,
commonly referred to as a “cash T analysis”, which includes a
table with income items (debits) on the left side of the “T”
account and expenses (credits) on the right side of the “T”
account. See, e.g., Owens v. Commissioner, T.C. Memo. 2001-143.
This method in some ways resembles the source and application of
funds method. Balken v. Commissioner, T.C. Memo. 1994-375, affd.
without published opinion 72 F.3d 133 (8th Cir. 1995). Its
purpose is “to measure a taxpayer’s reported income against
expenditures to determine whether more was spent than was
reported.” Rifkin v. Commissioner, T.C. Memo 1998-180, affd.
without published opinion 225 F.3d 663 (9th Cir. 2000). The
suggestion is, of course, that the excess of expenditures over
reported income represents unreported income. Id.
According to respondent’s long-ago-published training
materials, the cash T-account analysis is used as a preliminary
to one of the more commonly used and more sophisticated indirect
methods of reconstructing a taxpayer’s income, such as the net
worth method, bank deposits method, source and application of
funds method, or specific item method. See, e.g., Rifkin v.
Commissioner, supra; 60 Stand. Fed. Tax Rept. (CCH) (1973).
In this case, petitioners’ failure to maintain adequate
books and records justified the use of an indirect method to
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