Robert Louis Rusten and Suzan Veronica Rusten, Deceased, Kelly Farrier, Personal Representative - Page 8




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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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