Samuel T. Seawright and Carol A. Seawright - Page 19




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          petitioners purchased and set out in their scrap yard for the               
          purpose of attracting wild cats to deter snakes and rats.                   
          Cost of Goods Sold                                                          
               Petitioners contend that in 1995 Columbia had cost of goods            
          sold of $18,742, computed as follows:                                       
                         Opening Inventory        $1,500                              
                         Add:  Purchases          18,742                              
                         Less: Closing Inventory    1,500                             
                         Cost of Goods Sold       $18,742                             
               On brief, respondent concedes that petitioners have                    
          substantiated purchases in the amount of $18,742 but contends               
          that petitioners have not established the value of their opening            
          or ending inventory, and thus are not entitled to reduce                    
          Columbia’s gross receipts for cost of goods sold.  We agree with            
          respondent.                                                                 
               In a manufacturing, merchandising, or mining business, gross           
          income means total sales less the cost of goods sold.  Sec. 1.61-           
          3(a), Income Tax. Regs.  Cost of goods sold is computed by                  
          subtracting the value of ending inventory (goods still on hand at           
          the end of the year) from the sum of the opening inventory and              
          purchases during the year.  Primo Pants Co. v. Commissioner, 78             
          T.C. 705, 723 (1982).                                                       
               On their 1995 Federal income tax return, petitioners claimed           
          to have used the lower of cost or market as the basis for valuing           
          their inventory.  Under this approach, “the market value of each            





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