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Commissioner, 65 T.C. 422, 428 (1975), affd. per curiam 584 F.2d
53 (5th Cir. 1978). Taxpayers, generally, bear the burden of
proof regarding the proper amount of their cost-of-goods sold.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Winer
v. Commissioner, 371 F.2d 684, 687 n.5 (1st Cir. 1967), affg.
T.C. Memo. 1966-99; Goldsmith v. Commissioner, 31 T.C. 56, 62
(1958).
Taxpayers are expected to maintain adequate records to
substantiate claimed cost-of-goods sold. Sec. 6001; sec. 1.6001-
1(a), Income Tax Regs. Where taxpayers do not have adequate
records, but where the record suggests that they clearly incurred
an offset to gross income, courts may estimate the offset based
on the evidence. Cohan v. Commissioner, 39 F.2d 540, 544 (2d
Cir. 1930).
Respondent argues that Lyell Metal failed to substantiate
adequately its purchases of scrap metal by cash because Lyell
Metal did not maintain records of specific purchases of scrap
metal by cash nor records that identified the specific customers
from whom Lyell Metal purchased scrap metal by cash.
Petitioners argue that Lyell Metal’s records (namely, for
1989, 1990, and 1991, the canceled checks made payable to cash
that were used daily to replenish Lyell Metal’s front office with
the amount of cash paid out the prior day to purchase scrap
metal, and for 1992, copies of the retained receipts, cash
register tapes, and the canceled checks made payable to cash)
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