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petitioner’s portion of the profit that was made on the purchase
and resale of the computer chips.
In the notice of deficiency issued to petitioners,
respondent disallowed the Schedule C cost of goods sold for the
1991 and 1992 tax years and determined penalties for negligence.
OPINION
We must decide whether petitioners (1) are entitled to claim
cost of goods sold in the amounts of $250,000 and $140,000 on
their Schedules C for the 1991 and 1992 tax years, respectively,
and (2) are liable for the accuracy-related penalty under section
6662(a) for the 1991 and 1992 tax years.
The cost of goods purchased for resale in a taxpayer’s
business is subtracted from gross receipts to compute gross
income. See sec. 1.61-3(a), Income Tax Regs. This Court has
consistently held that the cost of goods sold is not a deduction
(within the meaning of section 162(a)), but is subtracted from
gross receipts in the determination of a taxpayer’s gross income.
See Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477
(1977), affd. 630 F.2d 670 (9th Cir. 1980); secs. 1.162-1(a),
Income Tax Regs. Taxpayers must show their entitlement to the
amount of cost of goods sold claimed. See Rule 142(a).
Taxpayers must also keep sufficient records to substantiate the
cost of goods sold. See sec. 6001; Wright v. Commissioner, T.C.
Memo. 1993-27.
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