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The computation of income of a Schedule C business takes
into account returns and allowances, cost of goods sold, and
various business expenses. An adjustment to gross receipts for
returns and allowances is made before an adjustment for cost of
goods sold and is essentially the same as where goods are sold at
a trade discount. Pittsburgh Milk Co. v. Commissioner, 26 T.C.
707, 716 (1956). Cost of goods sold is an offset subtracted from
gross receipts in determining gross income. Sec. 1.61-3(a),
Income Tax Regs. Accordingly, returns and allowances and cost of
goods sold 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 returns and allowances or cost of
goods sold must be substantiated, and taxpayers are required to
maintain records sufficient for this purpose. Sec. 6001; Wright
v. Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a), Income Tax
Regs.
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving the entitlement to any
deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). A taxpayer is required to maintain records sufficient to
5(...continued)
examination was commenced prior to July 22, 1998.
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