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issue. Thus, petitioner’s gross profit should be reduced by
$12,500 in each of the years in issue.
In the notice of deficiency, respondent applied the
percentage markup to petitioner’s entire cost of purchases during
the years in issue. However, petitioner testified that he
suffered theft losses of between $1,000 and $4,000 during 1993.
We accept petitioner’s testimony, which was corroborated by some
documentary evidence, and find that petitioner suffered losses
from theft in the amount of $3,000 for tires and other parts
during 1993. Thus, petitioner’s cost of purchases to which the
22.8-percent markup is applied should be reduced by $3,000 in
1993.
In addition, we find that petitioner is entitled to a theft
loss deduction in the amount of $3,000 during 1993. In general,
in the case of theft of inventory, a taxpayer may either account
for the loss as a reduction to closing inventory and a
corresponding increase to cost of goods sold, or claim a
deduction under section 165 and make a corresponding decrease to
opening inventory or purchases. See generally National Home
Prods., Inc. v. Commissioner, 71 T.C. 501, 528 (1979); B.C. Cook
& Sons, Inc. v. Commissioner, 59 T.C. 516, 522-523 (1972)
(Tannenwald, J., concurring); sec. 1.165-8(e), Income Tax Regs.;
IRS Pub. 538, Accounting Periods and Methods (1993). In this
case, petitioner’s purchases have been decreased by the amount of
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