You have been just retained by Nick L. Nockdown in connection with the examination of his return. Nick runs a tavern with reported gross sales of $250,000. Nick has met with the IRS on numerous occasions. You attend the first conference with the examiner and he runs a preliminary "T-account" to attempt to verify gross receipts. Because Nick is not with you at the conference, there is no information available as to his "cash on hand." The examiner also does not have much information regarding personal expenses (other than the listed itemized deductions), but a reasonable estimate is $10,000. The preliminary T-account reflects a potential understatement of gross receipts of $50,000.

You return to your office and discuss the potential understatement with the taxpayer. Nick explains that his wife has worked as a restroom custodian at the Big Bucks Hotel for the past 25 years. She receives nominal wages and "cash tips". She has always been able to save a substantial portion of her cash tips. When they were putting an addition on the tavern, Nick's wife took her money out of the mason jars in the basement and paid the contractor for the addition. The amount paid was approximately $50,000, and Nick explains that this is where the understatement must be coming from.

(A) If you are representing Nick, how do you deal with the information that he has given you regarding the explanation of the understatement?

(B) If this story is presented to the examiner, will the statement of the taxpayer given under oath be sufficient or must other evidence be submitted to back it up?

(C) Who will bear the burden of proof on the reliability of the explanation?

(D) Can a cash-hoard explanation like this be used in court as a defense to an assessment by the IRS?