Luis Acle, Jr. - Page 10

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               A.  Unreported Income                                                  
               Gross income generally includes “income from whatever source           
          derived”, unless specifically excluded by statute.  Sec. 61(a).             
          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           
          books and 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--so 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 use of bank             
          deposits is recognized as a reasonable method of reconstructing             
          income.  Parks v. Commissioner, 94 T.C. 654, 658 (1990); Tokarski           
          v. Commissioner, 87 T.C. 74, 77 (1986); Nicholas v. Commissioner,           
          70 T.C. 1057, 1065 (1978).  This method is premised on the                  
          assumption that the deposits into a taxpayer’s account consist of           
          income from taxable sources.  See sec. 61(a).                               







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