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I. Unreported Schedule C Gross Receipts
Section 6001 requires a taxpayer to maintain sufficient
records to allow for the determination of the taxpayer’s correct
tax liability. Petzoldt v. Commissioner, 92 T.C. 661, 686
(1989). If a taxpayer fails to maintain or does not produce
adequate books and records, the Commissioner is authorized to
reconstruct the taxpayer’s income. See sec. 446; Petzoldt v.
Commissioner, supra at 686-687. Indirect methods may be used for
this purpose. Holland v. United States, 348 U.S. 121 (1954).
The Commissioner’s reconstruction need only be reasonable in
light of all the surrounding facts and circumstances. Petzoldt
v. Commissioner, supra at 687; Giddio v. Commissioner, 54 T.C.
1530, 1533 (1970).
The evidence shows that petitioner failed to provide
adequate records to account for the gross receipts from her flea
market sales. Therefore, it was reasonable for TCO Martin to use
the cash T analysis, an indirect method, to reconstruct
petitioner’s income for 2002.
The cash T analysis is performed by setting up a table with
income items (debits) on the left side of the “T” account and
expenses (credits) on the right side of the “T” account. See,
e.g., Owens v. Commissioner, T.C. Memo. 2001-143. Its purpose is
“to measure a taxpayer’s reported income against personal
expenditures to determine whether more was spent than was
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Last modified: May 25, 2011