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In deciding whether the Commissioner's determination is
reasonable, courts focus on the reasonableness of the result and
not on the details of the methodology used. Bausch & Lomb, Inc.
v. Commissioner, 92 T.C. 525 (1989); see also Eli Lilly & Co. v.
United States, 178 Ct. Cl. at 676, 372 F.2d at 997. In the
instant cases, we hold that respondent's determinations are
unreasonable because of the lack of reasonableness in the
results. That is, we conclude that (1) as to INC’s taxable years
ended June 30, 1985 and 1986, the allocation of the sum of three
bank accounts as income to INC is arbitrary, and (2) as to INC’s
taxable years ended June 30, 1987, 1988, and 1989, the allocation
of the remaining amount of LTD’s net income to INC (thereby
effecting an allocation, when added to the amount of service fees
already paid by LTD to INC, of all of LTD’s net income to INC) is
arbitrary. See Achiro v. Commissioner, 77 T.C. at 990. We reach
this conclusion because respondent, in the notices of deficiency,
failed to trace which activities of INC earned what revenue and
failed to distinguish income earned by LTD from income earned by
INC.
Nonetheless, once petitioners prove that the deficiencies
set forth in the notice of deficiency are arbitrary, capricious,
or unreasonable, they still have the burden of proving that their
own allocation satisfies the arm's length standard. If they fail
to carry the latter burden, the court must determine the proper
allocation of items based upon the record. See Eli Lilly & Co.
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