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therefore, not subject to the limitations on deductions found in
section 162, any amount allowed as cost of goods sold must be
substantiated. Sec. 6001; Ranciato v. Commissioner, T.C. Memo.
1993-536; sec. 1.6001-1(a), Income Tax Regs.
In order to reflect taxable income correctly, inventories
at the beginning and end of each taxable year are necessary in
every case in which the sale of merchandise is an income-
producing factor. Cheesman v. Commissioner, T.C. Memo. 1994-509;
sec. 1.471-1, Income Tax Regs. At trial, petitioner offered
numerous canceled checks and invoices to substantiate inventory
purchased during each year. However, petitioner did not offer
any evidence to substantiate either the amount or value of her
beginning and ending inventory in 1993 and 1994. At the
beginning of 1993, petitioner reported an inventory balance of
$2,450. During 1993 and 1994, petitioner substantiated purchases
of inventory in the amount of $6,313.4 By the end of 1994,
petitioner's Schedule C for her wholesale activity indicated that
her inventory was only $150. However, in relation to her
wholesale activity, petitioner reported only $2,000 of gross
receipts in 1993 and zero gross receipts in 1994. Assuming
petitioner sold her inventory at cost during 1993 and 1994, she
would have in excess of $6,000 of inventory at the end of 1994,
4Petitioner purchased inventory in 1993 and 1994 in the
amounts of $4,700 and $1,613, respectively.
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