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Hence, although the parties’ statements pertaining to this
adjustment are less than a model of clarity, the circumstances
underlying, as well as the parties’ arguments with respect to,
the payable to Arizona Natural Resources would appear not to be
materially distinguishable from those concerning the payments to
Boss Day Planners discussed above. Petitioners contested a
portion of the charges asserted by Arizona Natural Resources and
paid only after resolution of the dispute. In this connection,
the Court takes judicial notice of litigation filed in 1999 by
Arizona Natural Resources against Mayor, KareMor, and petitioners
individually, which culminated in a judgment in favor of Arizona
Natural Resources for $333,258.13, inclusive of interest,
attorney’s fees, and costs, on October 8, 2003. Ariz. Natural
Res., Inc. v. Mayor Pharm. Labs., Inc., No. CV1999-070010 (Ariz.
Super. Ct., Oct. 8, 2003).
Cost of goods sold operates as a reduction in gross income,
rather than as a deduction from gross income. See sec. 1.61-
3(a), Income Tax Regs. Nonetheless, the test for determining
whether an accrual method taxpayer is entitled to include an
amount in cost of goods sold is the same as that for determining
the appropriateness of a deduction. Id.; sec. 1.446-1(c)(1)(ii),
Income Tax Regs. In other words, an amount may be included in
cost of goods sold “in the taxable year in which all the events
have occurred that establish the fact of the liability, the
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