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assembled and sold some computers at cost during the 2000 taxable
year, although he failed to provide substantiation. Notably,
petitioner’s 2000 Federal tax return did not report any gross
receipts from the alleged sales.
The regulations promulgated under section 162 clearly
provide that CGS is deductible from “gross sales”. Petitioner
did not report any “gross sales” from his computer assembly
business. Petitioner failed to substantiate the cost of
materials and supplies allegedly used in his computer assembly
business. Further, petitioner’s testimony established that he
purchased items he believed were CGS, such as the Palm Pilot, for
use, not for resale. Petitioner has failed to substantiate the
CGS disallowed by respondent. Accordingly, the Court sustains
respondent on this issue. Petitioner is entitled to $2,664 in
CGS for taxable year 2000.
G. Legal Fees
Generally, legal fees are deductible on a Schedule C only if
the matter with respect to which the fees were incurred
originated in the taxpayer’s trade or business and only if the
claim is sufficiently connected to that business. Test v.
Commissioner, T.C. Memo. 2000-362 (citing United States v.
Gilmore, 372 U.S. 39 (1963)), affd. 49 Fed. Appx. 96 (9th Cir.
2002). Expenses not incurred in a trade or business activity but
in the production or collection of income are deductible only as
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