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illegal receipts for the first 8 months of 1988 as being 8 times
this amount.6
If a taxpayer keeps inadequate records, the Commissioner may
compute the taxpayer’s income by any indirect method that is
reasonable in light of all the facts and circumstances. See United
States v. Walton, 909 F.2d 915, 918 (6th Cir. 1990); see also United
States v. Fior D’Italia, Inc., 536 U.S. 238, 243 (2002) (stating
that IRS assessment authority under section 6201(a) is not exceeded
“when the IRS estimates an individual’s tax liability–-as long as
the method used to make the estimate is a ‘reasonable’ one”). If
necessary, the Commissioner may reconstruct a taxpayer’s income,
provided the result is reasonable and substantially correct.
Mendelson v. Commissioner, 305 F.2d 519, 521-522 (7th Cir. 1962),
affg. T.C. Memo. 1961-319; Cebollero v. Commissioner, T.C. Memo.
1990-618, affd. 967 F.2d 986 (4th Cir. 1992). The Commissioner’s
income reconstruction need not be exact, but it must be “reasonable
in light of all surrounding facts and circumstances.” Schroeder v.
Commissioner, 40 T.C. 30, 33 (1963).
Respondent reconstructed petitioner’s alleged illegal income
using the projection method, which “has received widespread judicial
approval.” Jackson v. Commissioner, 73 T.C. 394, 403 (1979). In
general, the projection method entails extrapolating income for a
6 In the notice of deficiency, respondent also allowed
petitioner a $423,013 deduction for cost of goods sold relative
to the alleged illegal income.
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