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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.
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Last modified: March 27, 2008