David E. and Rebecca Newman - Page 8

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            Commissioner, 39 F.2d 540 (2d Cir. 1930).  Under Cohan, in the                             
            event that a taxpayer establishes that he or she has incurred a                            
            deductible expense but is unable to substantiate the precise                               
            amount of the expense, we may estimate the amount of the                                   
            deductible expense.  We cannot, however, estimate deductible                               
            expenses unless the taxpayer presents evidence sufficient to                               
            provide some rational basis upon which estimates may be made.                              
            See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).                                      
                  Petitioner kept no documentation regarding any expenses or                           
            costs relating to the computer chip sales.  Likewise, petitioner                           
            has no documentation regarding gross sales of the computer                                 
            chips.3  As a result, petitioners ask us to back into a cost of                            
            sales number based on petitioner’s testimony that Lee’s return on                          
            the computer chip sales was approximately double the return to                             
            petitioner.  Thus, to quote petitioners, “Since * * * [petitioner                          
            had] a 6% return, Lee’s return would be about 12%, effectively                             
            translating into a cost of sales of 72%.”  This information                                
            simply does not provide us with the detail needed to make an                               
            estimate.  Accordingly, even if we were to conclude that                                   
            petitioners could claim cost of goods sold, we would be unable to                          
            determine the proper amount.                                                               

                  3 During trial, petitioner testified that he requested his                           
            assistant to keep records of every deal with Lee, but later                                
            discovered that whatever records were kept were discarded by the                           
            assistant when he was caught stealing trade secrets from                                   
            petitioner in regard to another venture.                                                   

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