David E. and Rebecca Newman - Page 5

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            petitioner’s portion of the profit that was made on the purchase                           
            and resale of the computer chips.                                                          
                  In the notice of deficiency issued to petitioners,                                   
            respondent disallowed the Schedule C cost of goods sold for the                            
            1991 and 1992 tax years and determined penalties for negligence.                           
                  We must decide whether petitioners (1) are entitled to claim                         
            cost of goods sold in the amounts of $250,000 and $140,000 on                              
            their Schedules C for the 1991 and 1992 tax years, respectively,                           
            and (2) are liable for the accuracy-related penalty under section                          
            6662(a) for the 1991 and 1992 tax years.                                                   
                  The cost of goods purchased for resale in a taxpayer’s                               
            business is subtracted from gross receipts to compute gross                                
            income.  See sec. 1.61-3(a), Income Tax Regs.  This Court has                              
            consistently held that the cost of goods sold is not a deduction                           
            (within the meaning of section 162(a)), but is subtracted from                             
            gross receipts in the determination of 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); secs. 1.162-1(a),                              
            Income Tax Regs.  Taxpayers must show their entitlement to the                             
            amount of cost of goods sold claimed.  See Rule 142(a).                                    
            Taxpayers must also keep sufficient records to substantiate the                            
            cost of goods sold.  See sec. 6001; Wright v. Commissioner, T.C.                           
            Memo. 1993-27.                                                                             

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