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Regs. Such books and records should properly classify
expenditures as between capital and expense. See sec. 1.446-
1(a)(4)(ii), Income Tax Regs.
Petitioners did not maintain a set of books and failed to
provide an accounting of the expenses associated with their home-
building activity. Although petitioners presented some folders
containing receipts and canceled checks related to the building
of the Vallecito property, they were intermingled with those from
the construction of a personal home on Montana Avenue, Shasta
Lake, California. In an attempt to verify the amounts shown on
petitioners' returns, respondent's agent had to reconstruct the
costs incurred in acquiring and constructing the Vallecito
property.
Cost of Goods Sold
Any amount claimed as cost of goods sold must be
substantiated. See sec. 6001; Ranciato v. Commissioner, T.C.
Memo. 1993-536. Among the items in the folders presented by
petitioners during the examination was a canceled check in the
amount of $11,104.67 payable to the "US Bank". It was not
readily apparent that the US Bank check represented an amount
associated with the cost of acquiring or constructing the
Vallecito property. It was only after the notice of deficiency
was issued on July 21, 1999, that petitioners supplied on
September 2, 1999, a copy of an escrow statement indicating that
petitioners had made a deposit for an unnamed property in the
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