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competitor to bring a lawsuit. In general, the competition was
such that petitioners' competitors could expect profits of
between $.10 and $1 per carton. Competitors who were some miles
away from the Illinois border marked up their cigarettes by 10 to
15 percent.
Petitioners' Federal income tax returns for the years in
issue were prepared by professional accountants, based upon
information furnished them. The accountants did not conduct an
audit of petitioners' business activities, nor did they establish
other inventory or cash controls.
For the years in issue, petitioners' Federal income tax
returns reported gross sales from Nick's Liquors ranging between
$8,535,458 and $9,054,086 per year. These returns reported
taxable income from operations of $500,698 for 1990, $543,245 for
1991, and $531,549 for 1992. In each instance, the amounts
reported represented gross margins on sales of approximately 6
percent. Respondent determined that petitioners had understated
their taxable income. Respondent accordingly redetermined
petitioners' income for the years in issue by utilizing the
"percentage markup method". Respondent's method results in
application of gross profit margins of approximately 26.8 percent
for the years in issue. Respondent based that redetermination on
margins in a report entitled, "Estimated Gross Margin as Percent
of Sales, by Kinds of Business", printed in the Combined Annual
and Revised Monthly Retail Trade reports issued by the U.S.
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