Robert A. & Gerri M. Smith - Page 8

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          determined gross receipts by applying a 37-percent "weighted                
          gross profit percentage", which was based on his analysis of 1992           
          and 1993 gross profit percentages, to the total cost of goods               
          sold for 1990 and 1991.                                                     
               On December 26, 1996, respondent issued a notice of                    
          deficiency to petitioners for their 1990 through 1993 tax years.            
          On February 6, 1997, petitioners filed their petition, and on               
          February 19, 1997, they submitted a second amended return for               
          1992.                                                                       
                                       OPINION                                        
          I.  Respondent's Presumption of Correctness                                 
               We must first ascertain whether respondent's determinations            
          are presumed correct.  Anastasato v. Commissioner, 794 F.2d 884,            
          886 (3d Cir. 1986), vacating and remanding T.C. Memo. 1985-101;             
          see Welch v. Helvering, 290 U.S. 111, 115 (1933).  For the                  
          presumption to attach respondent must link petitioners to a tax-            
          generating activity.  Anastasato v. Commissioner, supra at 887.             
          Respondent has linked petitioners to two tax-generating                     
          activities--Guns & Goodies and National Distributors.                       
          Petitioners contend, however, that respondent's determinations              
          were arbitrary.                                                             
               First, petitioners contend that they kept adequate records             
          and, therefore, respondent did not have the authority to                    
          reconstruct gross receipts.  To support their contention,                   





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