Cassandra Tucker and Edward Brodie v. Comm., T.C. Memo 2023-87

Cassandra Tucker operated a fashion activity out of her home for many years. During 2015 and 2017 the activity generated gross sales of $1,542 and $1,498, respectively. Claimed cost of goods sold for each of the years were $6,510 and $8,086. To substantiate these amounts, Tucker provided a spreadsheet showing purchases in 2015 of fabric, packaging materials, including “bags, tissue, ribbon and boxes” along with other items. For 2017, the COGS spreadsheet showed purchases of “lifestyle flooring” and “lifestyle closet” totaling $9,003.

Through a detailed legal analysis, the court concluded that cost of goods sold can only be claimed when there are actual goods sold. Further, the COGS must bear proximity to the sales. Mere purchases are not allowable as a deduction, they must be accounted for as part of the inventory of the taxpayer following the capitalization rules of §263A and inventory rules of §471. “COGS is not a deduction within the meaning of §162(a) but is subtracted from gross receipts to compute gross business income” quoting Richmond Patients Grp, T.C. Memo 2020-52. COGS cannot be claimed unless the taxpayer has gross receipts or sales of goods in the taxable year for which the COGS is claimed. BRC Operating Co.,T.C. Memo 2021-59.

Without any significant reasoning, the court allowed COGS for 2015 in an amount equal to gross sales – $1,542. The balance of the amount for purchases for 2015 was to be capitalized as inventory and held for future deduction. For 2017 when there were sales of $1,498, but the 2017 purchases related to “lifestyle flooring” and “lifestyle closet”, the court did not allow any COGS. The court also determined that the purchases were not of the type that were part of the business as described by the taxpayer so there was no current deduction, and no amount should be capitalized to be deducted in the future.