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In the statutory notice of deficiency, respondent disallowed in
full the cost of goods sold and the business expense deductions
because petitioner did not establish that each was “paid or
incurred during the taxable year and that the expense was
ordinary and necessary” to his business.1
Expenses which are ordinary and necessary in carrying on a
trade or business generally may be deducted in the year in which
they are paid. Sec. 162(a). The cost of goods sold is
subtracted from gross receipts in determining a taxpayer’s gross
income. Sullenger v. Commissioner, 11 T.C. 1076 (1948).
A taxpayer generally must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. See sec. 6001; sec. 1.6001-1(a), (e), Income Tax
Regs. However, in the event that a taxpayer establishes that a
deductible expense has been paid but is unable to substantiate
the precise amount, we generally may estimate the amount of the
deductible expense bearing heavily against the taxpayer whose
inexactitude in substantiating the amount of the expense is of
his own making. See Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). We cannot estimate a deductible expense,
however, unless the taxpayer presents evidence sufficient to
1The other adjustments made in the notice of deficiency were
to the itemized deductions; these adjustments are computational
and will be resolved by the Court’s holding on the issue in this
case.
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Last modified: May 25, 2011