- 5 -
purchases of $48,257.92 from adjusting journal entry 18. The
amount of purchases before the effect of adjusting journal entry
18 is $366,574.08.
Discussion
This dispute centers on the proper treatment of petitioners’
cost of goods sold for the 2000 tax year. Petitioners maintain
that their business suffered shrinkage of inventory in the amount
of $48,257.92 and as a result the total cost of goods sold for
2000 is $429,224. Respondent concedes that petitioners are
permitted to adjust cost of goods sold by the amount of shrinkage
suffered.3 However, respondent maintains that petitioners are
double-counting the adjustment to cost of goods sold by including
the $48,257.92 in the line 36 purchases at the same time as
reducing the line 41 year end inventory by $48,257.92. Thus,
according to respondent, petitioners’ product purchases should be
$366,574 and petitioners’ cost of goods sold should be $380,966.
In order to compute the gross income of a business, gross
receipts are subtracted by the cost of goods sold. Sec. 1.61-
3(a), Income Tax Regs. Cost of goods sold, in turn, is computed
by subtracting the value of ending inventory for a year from the
sum of beginning inventory and purchases during that year. See
3 While not at issue here, we note that sec. 471(b) permits
estimates of inventory shrinkage that are confirmed by a physical
count after the close of the taxable year.
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011