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During the years 1989 through 1994, petitioner and Mrs.
Bodwell resided in the State of California. They did not file
income tax returns for the years 1989 through 1994. During these
years, Mrs. Bodwell did not exercise any management or control
over petitioner's business.
OPINION
Issue 1. Unreported Income From Painting Services
A. Burden of Proof
By order dated March 4, 1998, we ruled that respondent’s
determinations of petitioners’ income were arbitrary because
respondent had not offered any evidence or other basis to support
the determination that petitioners received income. Thus, we
held that respondent may not rely on the presumption that the
determination is correct. See Palmer v. IRS, 116 F.3d 1309, 1312
(9th Cir. 1997); Weimerskirch v. Commissioner, 596 F.2d 358, 360-
361 (9th Cir. 1979), revg. 67 T.C. 672 (1977). Accordingly, we
ruled that respondent bears the burden of proving the amount of
petitioners’ income for the years in issue.
B. Amount of Unreported Income
Respondent presented evidence at trial that petitioner,
d.b.a. PAINT-SER LTD., performed painting services during the
years 1989 through 1994 for Shell and Town and Country.
The manager of Federal income tax audits at Shell, Bruce
Charles Fay (Mr. Fay), stated that petitioner's tax
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