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allowed for, among other things, traveling expenses,
entertainment expenses, meal expenses, and expenses with respect
to listed property (as defined in section 280F(d)(4) and
including passenger automobiles) “unless the taxpayer
substantiates by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement”: (1) The amount of
the expenditure or use; (2) the time and place of the expenditure
or use; (3) the business purpose of the expenditure or use; and
(4) in the case of entertainment, the business relationship to
the taxpayer of the persons entertained. Sec. 274(d).
Applying the foregoing principles to the costs and
expenditures reported on petitioners’ 1996 return, we consider
whether petitioners are entitled to amounts in excess of those
allowed by respondent.
A. Cost of Goods Sold
Petitioners claimed cost of goods sold totaling $274,109, of
which $50,925 was designated as cost of labor and $223,184 was
labeled as “Other costs”. In support of these amounts,
petitioners provided respondent with payroll invoices and with a
collection of receipts and invoices that seem to relate primarily
to purchases of thread. Respondent aggregated all of
petitioners’ substantiated compensation-related expenses as
deductible wages, discussed further below, and additionally
allowed petitioners cost of goods sold in the amount of $137,055,
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Last modified: May 25, 2011