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assets relating to 2001 and 2002. In addition, Ms. Miller used a
bank deposits analysis to determine petitioners’ unreported
income.
On December 6, 2004, respondent issued petitioners a notice
of deficiency relating to 2001 and 2002. In the notice of
deficiency, respondent determined that petitioners were not
entitled to portions of the deductions claimed on their returns,
had failed to report gross receipts income, had improperly
calculated cost of goods sold, and were liable for section
6662(a) accuracy-related penalties.
On March 11, 2005, petitioners, while residing in Colorado,
filed their petition with the Court.
OPINION
Petitioners contend that they are entitled to the Schedule C
deductions relating to 2001 and 2002 for Don Osborne Enterprises.
Section 162(a) allows as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Petitioners must maintain
sufficient records to substantiate the deductions. See sec.
6001; sec. 1.6001-1(a), Income Tax Regs.
At trial, petitioners produced canceled checks, credit card
statements, insurance records, and other documentary evidence
that respondent had previously taken into account in the
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