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introduce evidence regarding reasonable cause, substantial
authority, or similar provisions.” Higbee v. Commissioner, supra
at 446. Rather, “it is the taxpayer’s responsibility to raise
those issues.” Id. Because, as will be more fully detailed
infra, respondent here has introduced sufficient evidence to
render the section 6662(a) penalty at least facially applicable,
the burden rests on petitioners to show their entitlement to an
exception therefrom.
II. Adjustments to Income
Computation of the income of a Schedule C business takes
into account both cost of goods sold and other business expenses.
Cost of goods sold is an offset subtracted from gross receipts in
determining gross income. Sec. 1.61-3(a), Income Tax Regs.
Accordingly, such costs are not treated as deductions and are not
subject to the limitations on deductions contained in sections
162 and 274. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661
(1987). However, any amount claimed as cost of goods sold must
be substantiated, and taxpayers are required to maintain records
sufficient for this purpose. Sec. 6001; Newman v. Commissioner,
T.C. Memo. 2000-345; Wright v. Commissioner, T.C. Memo. 1993-27;
sec. 1.6001-1(a), Income Tax Regs.
Once the gross income of a business has been calculated,
business expense deductions are subtracted in determining net
income. Section 162(a) allows a deduction for “all the ordinary
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