B was a self-employed contractor and subcontractor in construction. He hired workers and purchased materials as needed. He deducted his contract labor expenses and the cost of goods sold on his Sched. C. When the IRS denied most of the deductions for inadequate or nonexistent records, B went to court.
Held: Mostly for the taxpayer. The taxpayer had kept poor records, but he did produce some pay statements and check copies as proof of payments to workers. He also produced a statement from one person who said he worked for B as both a contract laborer and as an agent to hire additional workers for him. The statement included amounts B had paid him during the years at issue. The court found this document sufficient to establish most of the labor expenses, but denied a portion because the taxpayer could not produce checks or other documents in support.
The court allowed deductions for those supplies and materials the taxpayer could supply receipts for, but denied the rest of the cost of goods sold for lack of substantiation.
[Bowerman v. Commissioner, T.C. Summ. Op. 2014-26]