Eddie Lee Williams - Page 6

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               Taxpayers are required to maintain records sufficient to               
          establish the amounts of income, deductions, and other items                
          which underlie their Federal income tax liabilities.  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.  Petzoldt v. Commissioner, 92 T.C. 661, 687                  
          (1989); see also United States v. Fior D’Italia, Inc., 536 U.S.             
          238, 243 (2002) (stating that the assessment authority of the IRS           
          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”).  The reconstruction need not be exact, so               
          long as it is reasonable and substantially correct.  Petzoldt v.            
          Commissioner, supra at 693; Meneguzzo v. Commissioner, 43 T.C.              
          824 (1965).  The bank deposit and cash expenditure method is                
          recognized as a reasonable method of reconstructing income.                 
          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 depositing part of it into bank accounts and by making            
          cash expenditures of the other part.                                        

          164(f)(1) self-employment income tax deduction was not applicable           
          in 1989.  Social Security Amendments of 1983, Pub. L. 98-21, sec.           
          124(d)(2), 97 Stat. 91.                                                     

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