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to reconstruct Mr. Paterson’s income using 4 days of wagering
records seized in the search. The wagering records show an
average daily bet of over $96,000, and the profit factor method
suggests net income of approximately $350,000 and $270,000 for
the respective years at issue, while Mr. Paterson reported gross
income of only approximately $45,000 for each year at issue.
This is a vast disparity. Petitioners make several arguments why
the profit factor method is inappropriate and does not accurately
reflect Mr. Paterson’s income for the years at issue.
First, petitioners argue that Mr. Paterson’s sons were
involved in the gambling enterprise with him and should be
allocated some of the income. Petitioners have introduced no
evidence, however, regarding how the resulting income from the
wagering activity was allocated between Mr. Paterson and his
sons. Mr. Paterson’s sons did not testify at the trial, nor was
any evidence introduced to document what amount, if any, was
attributable to the sons or reported on their returns. We
conclude that petitioners have failed to prove that respondent
erroneously allocated all of the gambling income to Mr. Paterson.
Second, petitioners argue that the small sample of 4 days of
wagering cannot be extrapolated to reflect accurately Mr.
Paterson’s overall wagering activity for 2 years. Petitioners
argue that the profit factor method is inappropriate because it
is based on such a small sample of wagering activity, relying on
Clayton v. Commissioner, 102 T.C. 632, 644 (1994). We held in
Clayton that the profit factor method was inappropriate because
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