Sheila Mae Howard - Page 16

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          $46,277, and $42,443, respectively.  During the same years,                 
          petitioner reported Schedule F losses from the horse breeding               
          activity of $9,136, $23,533, and $12,697, respectively.                     
          Petitioner used these losses to reduce her gross income by                  
          approximately 21 percent for 1996, 51 percent for 1997, and 30              
          percent for 1998.  These reductions led to substantial tax                  
          savings for petitioner.                                                     
               Considering all the facts and circumstances, we find that              
          petitioner’s horse breeding activity was not engaged in for                 
          profit within the meaning of section 183(c).  Respondent’s                  
          determination is therefore sustained.                                       
               C.  Petitioner’s Unreported Income                                     
               As previously noted, taxpayers are required to maintain                
          records sufficient to show whether they are liable for Federal              
          income taxes.  Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.           
          If a taxpayer fails to keep adequate records, the Commissioner              
          may reconstruct the taxpayer’s income by any method that is                 
          reasonable under the circumstances.  See Petzoldt v.                        
          Commissioner, 92 T.C. 661, 687 (1989).                                      
               The bank deposits and cash expenditures method is recognized           
          as a reasonable method of reconstructing income.  See Parks v.              
          Commissioner, 94 T.C. 654, 658 (1990); Nicholas v. Commissioner,            
          70 T.C. 1057, 1065 (1978).  This method is premised on the                  
          assumption that the taxpayer has disposed of unreported income by           






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