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To summarize, we find that the September 15, 1993, event was
not a sale, and therefore we hold that petitioners are not entitled
to a loss in connection therewith for either 1993 or 1994.
Issue 2. Unreported Income for 1992-94
Having found that petitioners owned Stanton Mexicatessen after
September 15, 1993, we proceed to decide the amount of income from
the restaurant petitioners should have reported both before and
after that date.
According to IRS Revenue Agent Julia Chang who conducted
petitioners' examination, petitioners were unable to produce any
books or records to substantiate the income and expenses for
Stanton Mexicatessen for the years in issue, and none were
introduced into evidence at trial. Revenue Agent Chang testified
that because of the large number of cash transactions, a bank
deposits analysis was considered inappropriate. Consequently,
Revenue Agent Chang reconstructed petitioners' income from the
restaurant by analyzing industry standards. She utilized the RMA
Annual Statement Studies 1994 for the relevant time period, which
indicated that the industry standard for net profits before tax for
restaurants with gross receipts of less than $500,000 was 3 percent
of gross receipts. Therefore, she reconstructed petitioners' net
income for the restaurant based on the product of 3 percent of
petitioners' reported gross receipts for 1992 and 1993. For 1994,
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