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expenses, and evidence showing that petitioners had acquired
assets and made substantial expenditures, Agent McCarter decided
to use an indirect method of proof to reconstruct Mr. Black’s
income for 1991 and 1992. Agent McCarter ultimately determined
that the net worth method would be the most appropriate method to
use. Agent McCarter prepared a revenue agent’s report setting
forth the results of her examination of petitioners’ returns for
the taxable years 1991 and 1992.
On June 9, 2004, respondent issued a statutory notice of
deficiency to petitioners for taxable years 1991 and 1992. In
the notice of deficiency, respondent determined petitioners’
taxable income for 1991 and 1992 using the net worth method of
proof. Respondent determined that petitioners made nondeductible
expenditures during taxable years 1991 and 1992 of $108,768.01
and $188,219.01, respectively.
Mr. Black applied for a $250,000 life insurance policy.
Mr. Black’s business wrote check No. 1908 dated 12/10/92 to First
Colony Life Insurance Co. of $318.24 for a $50,000 life insurance
policy on Mr. Black.
Respondent’s net worth computations treat certain payments
made by Mr. Black’s businesses during 1991 and 1992 for medical
expenses as nondeductible personal expenditures made by
petitioners.
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Last modified: March 27, 2008