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defines gross income for purposes of calculating taxable income
as “all income from whatever source derived”. This broad
definition includes income obtained from illegal sources. James
v. United States, 366 U.S. 213, 218 (1961); sec. 1.61-14(a),
Income Tax Regs. Respondent has determined that Ms. Kaufman
received unreported income through embezzlement of funds from her
employer.
As a general rule, the taxpayer bears the burden of proving
error in the Commissioner’s determinations. Rule 142(a).
Although section 7491 may shift the burden to the Commissioner in
certain circumstances, the section is applicable only to court
proceedings that arise in connection with examinations commencing
after July 22, 1998. Internal Revenue Service Restructuring &
Reform Act of 1998, Pub. L. 105-206, sec. 3001(c)(2), 112 Stat.
727. It is apparent from the record in this case that the
examination commenced prior to July 22, 1998, and, therefore,
section 7491 has no application.
Courts have recognized a limited exception to the general
rule where the notice of deficiency determines that the taxpayer
failed to report income, particularly income derived from illegal
activities. Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir.
1981), affg. in part and revg. in part 74 T.C. 260 (1980);
Weimerskirch v. Commissioner, 596 F.2d 358, 360-362 (9th Cir.
1979), revg. 67 T.C. 672 (1977); Petzoldt v. Commissioner, 92
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