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their gross receipts, respondent reasonably and justifiably
determined the deficiencies at issue using Department of Commerce
gross margin statistics as the basis for the deficiency
determinations. In doing so, respondent employed a form of the
percentage markup method. Under the percentage markup method,
gross sales are determined by adding a predetermined percentage
of cost of goods sold. Bernstein v. Commissioner, 267 F.2d 879,
880 (5th Cir. 1959), affg. T.C. Memo. 1956-260. The courts have
consistently approved the use of the percentage markup method as
an acceptable means of computing a taxpayer's income. Webb v.
Commissioner, supra at 377; Bollella v. Commissioner, 374 F.2d 96
(6th Cir. 1967), affg. T.C. Memo. 1965-162.
Respondent's use of generalized statistics from Government
reports is also permissible. There are longstanding acceptable
methods of computing income that involve application of an
objectively determined average that relates to the income-
producing activity. See Avery v. Commissioner, 574 F.2d 467 (9th
Cir. 1978) (approving the Commissioner's projection of taxpayer's
income on the basis of isolated drug sales), affg. T.C. Memo.
1976-129; Cannon v. Commissioner, 533 F.2d 959 (5th Cir. 1976)
(approving the Commissioner's assertion of deficiencies based
upon an equal division of gambling proceeds between two gamblers
when the contradictory testimony of each was unworthy of belief),
affg. T.C. Memo. 1974-219; Bishoff v. Commissioner, 27 F.2d 91,
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