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adequately establish and substantiate its purchases of scrap
metal by cash. Petitioners also argue that the accuracy of Lyell
Metal’s reported cost-of-goods sold is supported by the average
gross profit margins within the scrap metal industry.
The evidence in this case supports the basic accuracy of
Lyell Metal's reported scrap metal purchases and reported cost-
of-goods sold. For all the years in issue, Lyell Metal retained
its canceled checks made payable to cash and its general
inventory records. For 1992, Lyell Metal also retained copies of
its receipts and its cash register tapes reflecting cash
purchases of scrap metal, which records corroborate the basic
accuracy of using, in this case, Lyell Metal's canceled checks
made payable to cash to compute the total cash purchases of scrap
metal for 1992 and thereby for the earlier years as well.
For 1989 through 1991, Lyell Metal’s reported gross profit
margins exceeded the average gross profit margins of similarly
sized companies within the scrap metal industry.
If respondent’s determinations for 1989 through 1991 were
sustained, Lyell Metal would be taxed on the basis of gross
profit margins that would be twice the industry average.
Although the evidence indicates that Lyell Metal was a profitable
company, it does not indicate that Lyell Metal was that much more
profitable than other scrap metal companies, and it does not
indicate that petitioners realized anywhere near the income
charged to them by respondent.
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