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relating to the years in issue. Petitioner pleaded guilty to
illegal gambling. Thus, respondent has linked petitioner with
the income-producing activity. See Berlin v. Commissioner, 42
T.C. 355, 357 (1964). As a result, petitioners must prove, by a
preponderance of the evidence, that respondent’s deficiency
determinations are arbitrary or unreasonable. Id.
On brief, respondent contends that he used the specific item
method of proof for purposes of determining petitioners’
unreported income. At trial, however, Agent Robin Britton, the
agent who conducted the audit, stated that she “did not do a
specific items” analysis and “basically [used Agent Gannaway’s
calculations] from the plea agreement”. In response to the
Court’s inquiry regarding why she did not use an indirect method
of proof (e.g., the net worth method), she stated that
petitioners failed to provide her with the necessary records to
utilize such a method. The Court then asked Agent Britton if she
had requested such records from petitioners, and she admitted
that she had not. Agent Britton also admitted that she failed to
verify Agent Gannaway’s report relating to the Ruritan Club by
comparing his calculations with the Ruritan Club’s deposit slips.
With respect to JVFD and Handicaps Unlimited, she did not review
the charities’ financial reports or deposit slips for purposes of
determining the accuracy of Agent Gannaway’s report. Thus, for
purposes of determining the amount of income petitioner and Hood
received, respondent relied solely on Agent Gannaway’s
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Last modified: May 25, 2011