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Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). The burden of proof may shift to the
Commissioner under section 7491 in certain circumstances.
Petitioners do not contend and have not established that section
7491(a) applies in this case. Accordingly, petitioners must show
their entitlement to the claimed deductions. See Rule 142(a).
The taxpayer’s method of tax accounting determines the
taxable year for which deductions are proper. Sec. 461(a).
National elected the accrual method of accounting, which is a
permitted tax accounting method. Sec. 446(c)(2). Generally, an
accrual method taxpayer is entitled to a deduction in “the
taxable year in which all the events have occurred that establish
the fact of the liability, the amount of the liability can be
determined with reasonable accuracy, and economic performance has
occurred with respect to the liability.” Secs. 1.446-
1(c)(1)(ii)(A), 1.461-1(a)(2)(i), Income Tax Regs.; see sec.
461(h)(1), (4); Weaver v. Commissioner, 121 T.C. 273, 276 (2003).
In their briefs, the parties denominated the disputed
$2,500,000 a “deduction”, in spite of National’s treatment of the
item as “cost of goods sold”. Cost of goods sold, however, is
used to reduce sales receipts to arrive at gross income; it is
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Last modified: May 25, 2011