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Petitioners claim that respondent's position was
unreasonable because: (1) Petitioners were not given an
opportunity to participate in an audit examination or Appeals
conference prior to the mailing of the notice of deficiency and
(2) the notice reflected neither a credit for the withheld
Federal tax nor a deduction for the withheld State tax and excess
Social Security tax shown on the Form W-2 from EP Management
Services, Inc. Petitioners also claim that respondent used the
cost of litigation as a tool to extract from petitioners an other
than equitable ending to this case.
We are not persuaded by petitioners' arguments that
respondent's position was unreasonable. Indeed, the record
points to the opposite conclusion. Respondent's position was
premised primarily on petitioners' failure to substantiate items
claimed on their returns as business expenses. Deductions are a
matter of legislative grace, and petitioners must prove their
entitlement to a deduction. New Colonial Ice Co. v. Helvering,
292 U.S. 435, 440 (1934). Section 6001 also imposes on
petitioners an affirmative duty to maintain books and records
sufficient to support items reported on their returns. With this
well-established law in mind, we believe that it was reasonable
for respondent to make the adjustments shown in the notice of
deficiency and to refuse to concede any of these adjustments
until she received and verified petitioners' substantiation for
these amounts. Harrison v. Commissioner, 854 F.2d 263, 265
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