Rene D. and Rosemary S. Valdes - Page 5

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          that he had her account numbers.  He further testified that his             
          mother would sell her stocks and bonds and that “she would always           
          go to the bank and draw it out in cash.”  There was no mention of           
          the alleged amounts paid to petitioner’s mortgage company by                
          cashier’s checks drawn on his mother’s accounts.                            
          Unreported Income                                                           
               A taxpayer is required to maintain records sufficient to               
          establish the amount of his or her income and deductions.  Sec.             
          6001; sec. 1.6001-1(a), (e), Income Tax Regs.  If the taxpayer              
          does not, the Commissioner is authorized by section 446 to                  
          reconstruct the taxpayer’s income.  Petzoldt v. Commissioner, 92            
          T.C. 661, 693 (1989).  The source and application of funds method           
          (also referred to as the cash expenditures method) is an accepted           
          method to reconstruct income.  United States v. Johnson, 319 U.S.           
          503, 517-518 (1943).                                                        
               The cash expenditures method is based on the assumption that           
          the amount by which a taxpayer’s expenditures during a taxable              
          period exceed his reported income has taxable origins, absent               
          some explanation by the taxpayer.  Burgo v. Commissioner, 69 T.C.           
          729, 742 (1978).  To prevail, petitioner must establish that                
          either someone else made the expenditures or that the funds used            
          for the expenditures were obtained from nontaxable sources, such            
          as loans, gifts, inheritances, or assets available at the                   

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