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business. Taxpayers are required to maintain books and records
that are sufficient to enable the Commissioner to determine their
correct tax liability. Sec. 1.6001-1(a), Income Tax Regs.
The Commissioner may use the bank deposits method to compute
taxpayers’ income in the absence of substantiating business
records. Estate of Mason v. Commissioner, 64 T.C. 651, 656
(1975), affd. 566 F.2d 2 (6th Cir. 1977). Bank deposits are
prima facie evidence of income. Id. The bank deposits method of
reconstruction assumes that all of the money deposited into a
taxpayer’s account is taxable income unless the taxpayer can show
that the deposits are not taxable. DiLeo v. Commissioner, 96
T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir. 1992). The
Commissioner, however, must take into account any nontaxable
items or deductible expenses of which the Commissioner has
knowledge. Id.
In the instant case, section 7491(a) does not shift the
burden of proof to respondent because petitioners failed to
maintain records or comply with substantiation requirements as
required under section 7491(a)(2)(A) and (B). Consequently,
petitioners bear the burden of proving that respondent’s
determination of income based on the bank deposits method is
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
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Last modified: May 25, 2011