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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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