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With respect to the Bullocks, respondent disallowed the van
pool losses (1) for lack of substantiation of the expenses, and (2)
on the basis of respondent’s determination that the Bullocks lacked
a profit objective for the activity. The Bullocks did not appear
at trial, and there was no evidence offered to substantiate any of
the expenses deducted on their returns with respect to the van pool
activity.
OPINION
Issue 1: Reconstruction of Petitioners' Income
The underlying dispute presented herein relates to
respondent's reconstruction of income purportedly generated by the
bingo operations conducted at Buckroe, and respondent’s allocation
of that reconstructed income to Messrs. Fields, Bullock, Sharpe,
and Peacock. Petitioners adamantly maintain that all proceeds, net
of rent and administrative expenses incurred in connection with the
operation of the bingo games, went to the three sponsoring
organizations, and not to them or to 4 Leaf Corp.
The methodology used by respondent in reconstructing the
purported bingo income–-the percentage markup method–-is a time-
honored, judicially accepted method of reconstructing income. See
Bernstein v. Commissioner, 267 F.2d 879 (5th Cir. 1959), affg. T.C.
Memo. 1956-260; Stone v. Commissioner, 22 T.C. 893 (1954);
Cebollero v. Commissioner, T.C. Memo. 1990-618, affd. 967 F.2d 986
(4th Cir. 1992). Although in theory respondent’s methodology was
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