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petitioners purchased and set out in their scrap yard for the
purpose of attracting wild cats to deter snakes and rats.
Cost of Goods Sold
Petitioners contend that in 1995 Columbia had cost of goods
sold of $18,742, computed as follows:
Opening Inventory $1,500
Add: Purchases 18,742
Less: Closing Inventory 1,500
Cost of Goods Sold $18,742
On brief, respondent concedes that petitioners have
substantiated purchases in the amount of $18,742 but contends
that petitioners have not established the value of their opening
or ending inventory, and thus are not entitled to reduce
Columbia’s gross receipts for cost of goods sold. We agree with
respondent.
In a manufacturing, merchandising, or mining business, gross
income means total sales less the cost of goods sold. Sec. 1.61-
3(a), Income Tax. Regs. Cost of goods sold is computed by
subtracting the value of ending inventory (goods still on hand at
the end of the year) from the sum of the opening inventory and
purchases during the year. Primo Pants Co. v. Commissioner, 78
T.C. 705, 723 (1982).
On their 1995 Federal income tax return, petitioners claimed
to have used the lower of cost or market as the basis for valuing
their inventory. Under this approach, “the market value of each
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