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engaged in the bail bond business in that State. During 1988,
petitioner operated his bail bond business at five different
locations in California: Redwood City, San Jose, Oakland,
Hayward, and Vallejo. On petitioners' 1988 Federal income tax
return, petitioner reported income from his bail bond business on
four Schedules C.
From the beginning of his bail bond business, petitioner's
primary surety company has been Associated Bond & Insurance
Agency (Associated), and, during 1988, petitioner executed bail
bonds as an agent of Associated. The terms of petitioner's
agency for the period from October 1, 1981, through the time of
trial are set out in a written agreement with Associated
(agreement). In prior years, petitioner had a similar agreement
with Associated.
A bail bond is a performance bond requiring the appearance
of a criminal defendant at judicial proceedings. The principal
on the bond is the defendant; the obligee is California, which
requires the defendant's appearance; and the surety is the
insurance company writing the bond, which guarantees performance.
As a bail bond agent, petitioner is permitted to solicit,
negotiate, and execute bail bonds on behalf of a surety company
(an insurance company) with which he is affiliated and which he
represents when he executes a bond. Petitioner functions as the
agent of the surety company, executing bonds, collecting
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