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Second, petitioners contend that respondent could only
resort to an indirect method of reconstruction (i.e., the gross
profit percentage method) if the direct methods of reconstruction
(e.g., bank deposit method, net worth method, etc.) were
infeasible. Contrary to petitioners' assertion, respondent may
use the gross profit percentage method as long as such method is
reasonably implemented. See Schroeder v. Commissioner, 40 T.C.
30, 33 (1963) (stating that respondent is not limited to any
particular method of reconstruction and may use any method that
is reasonable in light of the surrounding facts and
circumstances); Bollella v. Commissioner, T.C. Memo. 1965-162,
affd. 374 F.2d 96 (6th Cir. 1967). Respondent's use of the gross
profit percentage method was both appropriate and reasonable in
light of the information that petitioners provided (e.g.,
petitioners' letter to respondent).
Third, petitioners contend that respondent's determination
was arbitrary because respondent had no authority or factual
basis to adjust cost of goods sold or to change petitioners'
method of accounting. Respondent may change a taxpayer's method
of accounting whenever the taxpayer's method of accounting does
not clearly reflect income. Sec. 446(b); Thor Power Tool Co. v.
Commissioner, 439 U.S. 522 (1979). For 1990, 1991, and 1992,
petitioners kept virtually no records, yet they reported their
income on the accrual method--a method that demands strict
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