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At the time the answer was filed, respondent’s position was
substantially justified because petitioner failed to substantiate
claimed deductions and to disclose the source of unreported
income. Deductions are a matter of legislative grace, and
taxpayers must substantiate their entitlement to a deduction.
See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Moreover, section 6001 imposes on taxpayers a duty to maintain
books and records sufficient to support items reported on their
returns.
On this record, we are not convinced that respondent
received the documents in question with respect to the 1992
return on November 30, 1995. Respondent’s records do not contain
an entry that indicates that respondent received the documents.
Moreover, respondent generally provides a receipt to taxpayers
upon delivery of documents, and in the exercise of prudence a
business person delivering important documents would obtain a
receipt or other proof of delivery. In this case, the record
does not contain any such receipt or credible proof of delivery.
Even if we were to assume that petitioner delivered the
documents on November 30, 1995, we find that the documents fail
to substantiate petitioner’s tax return positions. In his
answer, respondent took the position that petitioner failed to
report income of $175,984. The letter that petitioner supposedly
sent to respondent on November 30, 1995, does not provide an
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