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establish that the expenses were ordinary and necessary.
Respondent argues on brief that petitioners have never
established that these costs were not claimed on the 2001
Schedule C as labor costs under cost of goods sold.
In support of their benefits and payroll tax deductions,
petitioners detailed amounts paid to Kaiser for medical insurance
invoices and amounts paid to the payroll company for disability
insurance. From the evidence presented, it appears that payments
were made for medical and disability benefits; however, these
proofs of payment in no way address nor negate respondent’s
argument that those items may already be included in petitioner’s
Schedule C as labor costs under cost of goods sold. We sustain
respondent’s determination on this issue.
B. Outside Services
Respondent’s notice of deficiency disallowed the amount
petitioner claimed on his Schedule C for “Outside services”,
$104,592. Respondent claims that petitioners did not provide
information to support the deductions and that petitioners did
not establish that the expenses were ordinary and necessary. In
support of their outside services deduction, petitioners explain
on brief that the amount represents legal and engineering fees.
Perez tried to substantiate the expenses for “outside
services” with a list that included several payments to
“Operating Engineers”. Perez claimed Operating Engineers
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Last modified: November 10, 2007