- 7 -
they exceeded her gross receipts.5
Further, using the bank deposits and cash expenditures
method of income reconstruction, respondent determined that
petitioner had unreported income in 1996 and 1997 of $45,719 and
$29,130, respectively. Respondent now concedes that petitioner
received an additional $36,863 from nontaxable sources in 1996
and an additional $20,500 from nontaxable sources in 1997.
Respondent therefore now contends that petitioner had unreported
income in 1996 and 1997 of $8,856 and $23,767, respectively.6
In addition, respondent disallowed petitioner’s claimed
dependency exemption for Carl for 1998.
Finally, respondent determined that petitioner was liable
for accuracy-related penalties under section 6662(a) for 1996 and
1997 due to a substantial understatement of income tax.
Discussion
In general, the determinations of the Commissioner in a
notice of deficiency are presumed correct, and the burden is on
5 Respondent allowed petitioner deductions on Schedules A,
Itemized Deductions, for interest and taxes without regard to
income from the horse breeding activity. Respondent allowed
petitioner miscellaneous itemized deductions on Schedules A for
the remaining expenses related to the horse breeding activity.
Respondent reclassified petitioner’s Schedules F gross income as
other income.
6 At trial, respondent asserted that petitioner’s deposits
for 1997 were erroneously understated in the notice of deficiency
and should be increased by $15,137. However, due to respondent’s
concession of additional nontaxable sources in 1997, respondent
does not seek an increased deficiency.
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