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OPINION
Unreported Flowthrough Income
As a general rule, a taxpayer challenging the
Commissioner’s determinations in a notice of deficiency bears
the burden of proof. Rule 142(a). That burden may shift to the
Commissioner if the taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer’s tax liability. Sec. 7491(a)(1). However, section
7491(a)(1) applies with respect to an issue only if the taxpayer
has complied with the requirements under the Code to
substantiate any item, has maintained all records required by
the Code, and has cooperated with reasonable requests by the
Commissioner for witnesses, information, documents, meetings,
and interviews. Sec. 7491(a)(2)(A) and (B). Petitioners have
not satisfied the conditions for shifting the burden of proof to
respondent. In any event, the evidence establishes
overstatement of cost of goods sold resulting in understated
income and understated tax liability.
In calculating gross income, taxpayers may offset gross
receipts by the cost of goods sold. Metra Chem Corp. v.
Commissioner, 88 T.C. 654, 661 (1987); sec. 1.61-3(a), Income
Tax Regs. In order to substantiate claimed cost of goods sold,
taxpayers are expected to maintain adequate records. Sec. 6001;
sec. 1.6001-1(a), Income Tax Regs.
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Last modified: November 10, 2007