- 7 - right to tax the income he earned from work with CLN, that income was properly subject to self-employment tax in the United States. While petitioners have unused foreign tax credits because of the income taxes that Mr. Rusten paid in Canada, those credits cannot be used to offset petitioners’ self-employment tax liability. Under section 901(a), foreign tax credits are only allowed against the regular tax liability imposed by chapter 1 of subtitle A of the Code. See secs. 26(b), 27(a). However, petitioners’ tax liability arises from self-employment taxes imposed by chapter 2 of subtitle A of the Code, and therefore may not be offset by foreign tax credits. See sec. 1401. The second issue that we must decide is whether in determining petitioners’ gross income respondent should have allowed a cost of goods sold greater than$5,518. Section 61 defines gross income as all income from whatever source derived. However, in determining gross income taxpayers may offset gross receipts by the cost of goods sold. Sec. 1.61-3(a), Income Tax Regs. Section 6001 and the regulations thereunder require taxpayers to maintain adequate books and records of their income and expenses. When taxpayers fail to meet their record-keeping obligations, the Commissioner is forced to reconstruct the taxpayers’ income and expenses through indirect methods. Indirect methods of income reconstruction have long been accepted, so long as any method employed is reasonably reliable.Page: Previous 1 2 3 4 5 6 7 8 9 10 NextLast modified: March 27, 2008