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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.
Taxpayers generally bear the burden of proving entitlement
to costs and deductions claimed. Bennett Paper Corp. & Subs. v.
Commissioner, 699 F.2d 450, 453 (8th Cir. 1983), affg. 78 T.C.
458 (1982).4 However, this Court may estimate costs and
allowable deductions under certain circumstances where a taxpayer
establishes entitlement to an allowable cost or deduction but
does not establish the amount of the cost or deduction. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Any such
estimate, however, must have a reasonable evidentiary basis.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without
4 The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added
sec. 7491, which, under certain circumstances, places the burden
of production on the Secretary with respect to a taxpayer’s
liability for taxes, penalties, and additions to tax in court
proceedings arising in connection with examinations commencing
after July 22, 1998. The record is unclear as to whether the
examination of petitioners' return commenced before or after July
22, 1998. Nevertheless, the burden of proof with respect to the
items of deficiency did not shift to respondent, because
petitioners did not provide substantiation and credible evidence
in connection therewith. Higbee v. Commissioner, 116 T.C. 438
(2001). Moreover, respondent has satisfied the burden of
production with respect to the accuracy-related penalty under
sec. 6662(a).
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