Greg McIntosh and Sheila R. McIntosh - Page 14

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                    Reasonable Basis in Fact                                          
               Petitioners do not suggest that respondent applied the wrong           
          legal standard in taking positions on their documentation of cost           
          of goods sold for 1995, capitalized costs from 1994, legal and              
          professional expenses for 1996, and utilities expenses for 1996.            
          Petitioners argue that respondent's positions on those                      
          adjustments were not reasonable in fact based on the evidence               
          they presented.                                                             
               As to that argument, respondent asserts that it was                    
          incumbent upon petitioners to substantiate the amounts and                  
          purposes of the items claimed.  It is reasonable, according to              
          respondent, not to concede adjustments until he has received and            
          verified adequate substantiation for the items in question.  He             
          therefore concludes that as to the four stated adjustments, his             
          position was reasonable when taken and appropriately conceded               
          when substantiation was provided to Appeals.  The Court agrees.             
               Taxpayers are required to maintain books and records in                
          accordance with rules and regulations prescribed by the                     
          Secretary.  See sec. 6001.  Generally, taxpayers must "keep such            
          permanent books of account or records, including inventories"               
          sufficient to establish gross income, deductions,  or other                 
          matters required to be shown on the return.  Sec. 1.6001-1(a),              
          Income Tax Regs.  Accounting records include the taxpayer's                 
          regular books and other records and data necessary to support               
          entries on books and returns.  See sec. 1.446-1(a)(4), Income Tax           

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