Karen Ann Keegan - Page 11

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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                           
                  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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Last modified: May 25, 2011