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The Court of Appeals for the Ninth Circuit, the court to
which an appeal of this case would normally lie, has made clear
that if respondent introduces evidence that the taxpayer received
unreported income, as respondent did here, the burden generally
is on the taxpayer to show by a preponderance of the evidence
that the deficiency was arbitrary and erroneous. Hardy v.
Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C.
Memo. 1997-97; see also Palmer v. United States, 116 F.3d. 1309,
1312 (9th Cir. 1997)(“The Commissioner’s deficiency
determinations and assessments for unpaid taxes are normally
entitled to a presumption of correctness so long as they are
supported by a minimal factual foundation.” (Emphasis added.));
Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982)
(“[T]he Commissioner’s assertion of deficiencies are
presumptively correct once some substantive evidence is
introduced demonstrating that the taxpayer received unreported
income.”).
However, section 7491 may shift the burden to respondent in
specified circumstances, for example, where the taxpayer produces
“credible evidence” and meets other requirements. Sec.
7491(a)(1). The legislative history of section 7491 clarifies
the meaning of “credible evidence”:
Credible evidence is the quality of evidence which,
after critical analysis, the court would find
sufficient upon which to base a decision on the issue
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