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We also note that section 7491(a) is inapplicable here in
that we do not find that petitioners maintained adequate records
or satisfied applicable substantiation requirements. See Prince
v. Commissioner, supra. We hold that the burden of proof remains
with petitioners.
II. Understatement of Income
The deficiency determination made by respondent enjoys the
presumption of correctness, and the burden of proving otherwise
rests with petitioners. Rule 142(a); Rapp v. Commissioner, 774
F.2d 932, 935 (9th Cir. 1985). However, in the case of
underreported income, the usual presumption in favor of
respondent arises only if respondent’s allegations are supported
by a minimal factual foundation linking the taxpayer with an
income-producing activity. Palmer v. United States, 116 F.3d
1309, 1313 (9th Cir. 1997).
Here, respondent has established that petitioners, in 1998,
(1) had been engaged in an income-producing activity, to wit,
their ownership and operation of the billiard hall and (2) had
accumulated net deposits in the amount of $266,186, which is
greater than the amount reported by them as taxable income by
$137,221. Petitioners do not contest either the fact that they
had owned and operated Playa Azul, or the fact that their bank
deposits are in excess of their taxable income by the amount
claimed by respondent.
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