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Petitioner's business provided drafting services, and
nothing in the record indicates that K & A was engaged in
manufacturing or merchandising. Therefore, we consider the cost
of goods sold in question to be claims for business expense
deductions under section 162.
Section 162(a) provides that there shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business. Section 6001 requires that a taxpayer liable for any
tax shall maintain such records, render such statements, make
such returns, and comply with such regulations as the Secretary
may from time to time prescribe. To be entitled to a deduction
under section 162(a), therefore, a taxpayer is required to
substantiate the deduction through the maintenance of books and
records.
In the event that a taxpayer establishes that he or she has
incurred a deductible expense, but is unable to substantiate the
precise amount of the expense, we may estimate the amount of the
deductible expense. Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). We cannot estimate deductible expenses, however,
unless the taxpayer presents evidence sufficient to provide some
rational basis upon which estimates may be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
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