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amended income tax returns for 2000,5 2001, and 2002, deleting
the income and expenses of Chuck’s Place from his schedule C and
including them (to the extent that they were landlord expenses)
on his schedule E. Monk’s 2003 tax return listed the rent from
Chuck’s Place on Schedule E when originally filed.6
The Commissioner rejected the change in characterization and
determined that Chuck’s Place was underreporting income from what
she was convinced was a check-cashing business. She used two
different indirect analytic methods to quantify the resulting
deficiencies. One was the well-known modified-bank-deposits
method. See Fry v. Commissioner, T.C. Memo. 1991-51, affd.,
without published opinion, 8 F.3d 26 (9th Cir. 1993). The other
--the check-cashing-fee method--was custom designed by the
revenue agent for this case and tried to determine unreported
check-cashing income by figuring out the cash on hand at the bar.
For the years in this case--1999 and 2000--the agent calculated
the deficiency using both methods and went with the one that
generated the highest tax due. This led her to use the modified-
bank-deposits method for 1999, but to use the check-cashing-fee
method for 2000.
5 The amended 2000 tax return was filed with the IRS as part
of the audit.
6 Monk hadn’t reported the rent he received from Maney on
the older returns, though he also wasn’t deducting it as an
expense on the Schedules C.
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Last modified: March 27, 2008