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A. Underpayment of Tax
An underpayment will exist where unreported gross receipts
are not exceeded by costs of goods sold and deductible expenses.
In establishing the requisite underpayment, the Commissioner may
not simply rely on the taxpayer’s failure to prove error in the
deficiency determination. DiLeo v. Commissioner, supra at 873;
Parks v. Commissioner, supra at 660-661; Otsuki v. Commissioner,
53 T.C. 96, 106 (1969). However, upon clear proof of unreported
receipts, the burden of coming forward with offsetting costs or
expenses shifts to the taxpayer. Siravo v. United States, 377
F.2d 469, 473-474 (1st Cir. 1967); Elwert v. United States, 231
F.2d 928, 933 (9th Cir. 1956); United States v. Bender, 218 F.2d
869, 871-872 (7th Cir. 1955); United States v. Stayback, 212 F.2d
313, 317 (3d Cir. 1954).
Here, respondent used the net worth method of proving
income, which the Supreme Court has approved as a reasonable and
logical means of reconstructing unreported income in a fraud
case. Holland v. United States, 348 U.S. at 125; United States
v. Johnson, 319 U.S. 503, 517 (1943).
The Commissioner may prove that the taxpayer underpaid tax
by proving that the taxpayer had a likely source of the
unreported income, Holland v. United States, supra; Parks v.
Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057
(1978), or, where the taxpayer alleges a nontaxable source, by
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