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Mr. Hamilton was found guilty on all counts and was
consequently sentenced to 27 months of imprisonment. Mrs.
Hamilton was convicted of willfully filing a false Federal tax
return for 1987 but was acquitted of these charges relating to
1988, the year at issue. She was sentenced to 6 months of home
detention and 2 years’ probation.
Respondent issued to petitioners a notice of deficiency for
1988 determining that petitioners failed to include $515,993 in
income and determining that petitioners were liable for fraud and
substantial understatement additions to tax. Petitioners timely
filed their petition with this Court contesting the notice of
deficiency.
OPINION
A. Whether Petitioners Understated Their Income for 1988
Taxpayers are required to maintain sufficient records to
allow a determination of their correct tax liabilities. Sec.
6001. Where a taxpayer fails to keep the required records, or if
the records he or she maintains do not clearly reflect income,
then the Commissioner may reconstruct the taxpayer’s income in
accordance with a method that clearly reflects the full amount of
income received. See sec. 446; Parks v. Commissioner, 94 T.C.
654, 658 (1990); Petzoldt v. Commissioner, 92 T.C. 661, 687
(1989). The reconstruction need only be reasonable in light of
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