David Villa and Juana M. Villa, T.C. 2023-155, filed 12/28/23, are fencing with Cohan, both as to Section 162 ordinary-and-necessaries and COGS (Cost of Goods Sold). David built fences in Texas, Cole Porter’s and David Fletcher’s 1934 hit to the contrary notwithstanding. David included only his 1099-MISC subcontracting income in his 1040 MFJ, and left out his direct fence-building checks and cash.

IRS didn’t, and gave him a SNOD.

Dave’s trusty attorneys claim COGS should be used to reduce gross income, not as a deduction. Judge Elizabeth A. (“Tex”) Copeland is down with that.

“Deductions from gross income—such as for ‘ordinary and necessary’ business expenses, see I.R.C. § 162(a)—are a matter of legislative grace and are allowed only to the extent provided by statute. By contrast, the reduction of gross receipts by cost of goods sold is mandatory (i.e., not a matter of legislative grace), as only income is taxable under the Sixteenth Amendment.” T. C. Memo. 2023-=155, at p. 6. (Citations omitted).

Trouble is, David deposited the checks he got for his direct fencing, and took out cash, wherewith to pay business and personal expenses, but couldn’t provide breakdowns. He could provide numbers from one recent job, and Judge Tex Copeland buys the extrapolated ratio of COGS to gross. But David’s inexactitude gives him a major hit, and the “other expenses” on his Sched C, though allowed by IRS, might lead to double-counting. See T. C. Memo. 2023-155, at pp. 6-7, to see how that works out.

And David gets the Section 6662 negligence chop, as his story that he thought he didn’t need to report or pay taxes on whatever he didn’t a 1099-MISC for is “too good to be true.”