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Respondent disagrees with petitioners' assertion, claiming
instead that the 1995 audit focused merely on purchases made
during 1995 and made no determination with respect to the 1995
beginning inventory reported by petitioners.
Petitioners have failed to prove that, during the audit of
their 1995 Federal income tax return, respondent audited and made
determinations with respect to the beginning inventory reported
in connection with Spanky's. However, on this record, the Court
is satisfied that petitioners did have goods on hand when they
sold Spanky's and, therefore, are entitled to reduce their 1997
gross receipts from Spanky's by some amount for cost of goods
sold, even though petitioners failed to substantiate the exact
amount claimed on their 1997 return. Therefore, pursuant to the
so-called Cohan rule and the evidence submitted in this case, the
Court holds that petitioners are entitled to reduce their
Spanky's gross receipts by a cost of goods sold of $2,500 for
1997.
The second issue is whether petitioners are entitled to a
deduction for car and truck expenses of $275 in connection with
Spanky's. Petitioners claimed these expenses for mileage during
5(...continued)
goods sold of $6,945. During the audit of petitioners' 1995 tax
year, respondent disallowed the claimed $6,945 cost of goods
sold. Petitioners agreed with this adjustment in the settlement
with the Appeals Office.
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