A taxpayer had unreported business income from online sales of coins. Nevertheless, the Tax Court allowed the Cohan rule to estimate the taxpayer’s cost of goods sold (COGS) and deductible postage and packing expenses.
The taxpayer bought and sold coins and related items in online eBay auctions. These payments were reflected on Form 1099-K, Payment Card and Third Party Network Transactions. The taxpayer reported none of that income on his Form 1040.
Comment. There was no question regarding the fact that the taxpayer had gross income of $37,000 from his online selling. Although the taxpayer did not file a Schedule C for that business, the court allowed evidence of offsetting costs and expenses.
The Cohan rule, 2 ustc ¶489, generally allows for the reasonable approximation of offset items. Applying this rule, the court found from the taxpayer’s testimony and the evidence as a whole that the taxpayer was entitled to deductions of $600 for postage and $100 for packaging costs. The taxpayer also was entitled to a cost of goods sold of $12,000.
However, the taxpayer did not report any of his gross receipts on his return and he did not maintain accurate records of his expenses and cost of goods sold. The court agreed with the IRS’s imposition of a gross negligence penalty under Code Sec. 6662, provided final computations showed an understatement of income tax that was the greater of $5,000 or 10 percent of the tax required to be shown on the return.
Huzella, TC Memo. 2017-210