- 38 -
any resulting net operating loss attributable to) any losses
associated with the $460,000 letter of credit payment because:
(1) Petitioners failed to substantiate the deduction; and (2) the
claimed loss arose from a contingent liability that was not
determined until 1992, when the litigation between Towers
Construction and Key West Polo was concluded.
Cost of goods sold is not a deduction within the meaning of
section 162(a) but instead is subtracted from gross receipts in
determining a taxpayer’s gross income. See Max Sobel Wholesale
Liquors v. Commissioner, 69 T.C. 477 (1977), affd. 630 F.2d 670
(9th Cir. 1980); sec. 1.162-1(a), Income Tax Regs. Taxpayers
must show their entitlement to amounts claimed as cost of goods
sold, see Rule 142(a), and must keep sufficient records to
substantiate the cost of goods sold, see sec. 6001; Newman v.
Commissioner, T.C. Memo. 2000-345.
Petitioners have failed to document Towers Construction’s
gross sales or to substantiate any expenses or costs relating to
any gross sales. Accordingly, petitioners have failed to
establish that Towers Construction is entitled to claim cost of
goods sold or, if it is, what the proper amount of cost of goods
sold might be.
Petitioners have also failed to establish that the amount in
dispute is allowable as an ordinary and necessary business
expense under section 162(a). Pursuant to the letter of credit,
Page: Previous 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 NextLast modified: May 25, 2011