Marie Key and David Glen Key - Page 8




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          income.  Sec. 446(b); Holland v. United States, 348 U.S. 121                
          (1954); Webb v. Commissioner, 394 F.2d 366, 371-372 (5th Cir.               
          1968), affg. T.C. Memo. 1966-81.  The reconstruction of income              
          need only be reasonable in light of all surrounding facts and               
          circumstances.  Giddio v. Commissioner, 54 T.C. 1530, 1533                  
          (1970).  The Commissioner is given latitude in determining which            
          method of reconstruction to apply when a taxpayer fails to                  
          maintain records.  Petzoldt v. Commissioner, 92 T.C. 661, 693               
          (1989).                                                                     
               The Commissioner's determinations generally are presumed               
          correct, and the taxpayer bears the burden of proving that those            
          determinations are erroneous.7  Rule 142(a); Welch v. Helvering,            
          290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548,            
          550 (9th Cir. 1995).  The U.S. Court of Appeals for the Ninth               
          Circuit, to which an appeal of this case would lie, has held that           
          in order for the presumption of correctness to attach to the                
          notice of deficiency in unreported income cases,8 the                       

               7  Petitioners argue that, pursuant to sec. 7491(b),                   
          respondent bears the burden of proof because respondent used                
          statistical methods to reconstruct petitioners’ income.  Sec.               
          7491(b) was enacted as part of the Internal Revenue Service                 
          Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,           
          sec. 3001(c), 112 Stat. 685, 726, and is effective for                      
          examinations commenced on or after July 22, 1998.  See Higbee v.            
          Commissioner, 116 T.C. ___, ___ (2001) (slip op. at 5); RRA 1998            
          sec. 3001(c), 112 Stat. 685, 727.  The examination in this case             
          commenced prior to July 22, 1998.  Accordingly, sec. 7491 is                
          inapplicable.                                                               
               8  Although Weimerskirch v. Commissioner, 596 F.2d 358 (9th            
                                                             (continued...)           




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