- 7 -
Taylor, 293 U.S. 507 (1935); Welch v. Helvering, 290 U.S. 111
(1933).2 Where, however, the Commissioner’s determination
concerns unreported illegal income, the Commissioner must offer
some substantive evidence connecting the taxpayer to the income-
producing activity before the Commissioner’s determination is
afforded a presumption of correctness. Erickson v. Commissioner,
937 F.2d 1548, 1551 (10th Cir. 1991), affg. T.C. Memo. 1989-552;
MacCracken v. Commissioner, T.C. Memo. 1993-376.
In this case, respondent has amply demonstrated that
petitioner possessed liquid assets, expended funds, and/or made
substantial deposits in various bank accounts. This was shown by
means of checks, issued in petitioner’s name or to cash, that
were negotiated by petitioner and by corporate checks used to pay
petitioner’s living expenses. In addition, petitioner stipulated
that he was engaged in an income-producing activity.
The Commissioner is entitled to reconstruct a taxpayer’s
income by a reasonable method where the taxpayer fails to
maintain adequate books and records. Sec. 446(b); Erickson v.
Commissioner, supra at 1553; Parks v. Commissioner, 94 T.C. 654,
658 (1990). Petitioner has not shown or adequately argued that
respondent’s method of reconstruction was unreasonable or in any
2 The audit of petitioner’s 1992 and 1993 income taxes
commenced prior to July 22, 1998, the effective date of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, 112 Stat. 685. Therefore, sec. 7491 is
inapplicable to this proceeding.
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