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Reasonable Basis in Fact
Petitioners do not suggest that respondent applied the wrong
legal standard in taking positions on their documentation of cost
of goods sold for 1995, capitalized costs from 1994, legal and
professional expenses for 1996, and utilities expenses for 1996.
Petitioners argue that respondent's positions on those
adjustments were not reasonable in fact based on the evidence
they presented.
As to that argument, respondent asserts that it was
incumbent upon petitioners to substantiate the amounts and
purposes of the items claimed. It is reasonable, according to
respondent, not to concede adjustments until he has received and
verified adequate substantiation for the items in question. He
therefore concludes that as to the four stated adjustments, his
position was reasonable when taken and appropriately conceded
when substantiation was provided to Appeals. The Court agrees.
Taxpayers are required to maintain books and records in
accordance with rules and regulations prescribed by the
Secretary. See sec. 6001. Generally, taxpayers must "keep such
permanent books of account or records, including inventories"
sufficient to establish gross income, deductions, or other
matters required to be shown on the return. Sec. 1.6001-1(a),
Income Tax Regs. Accounting records include the taxpayer's
regular books and other records and data necessary to support
entries on books and returns. See sec. 1.446-1(a)(4), Income Tax
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