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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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