*318 Decision will be entered for the respondent.
1. Limitations -- Sec. 275 (c), I. R. C. -- The taxpayer improperly included items in cost of goods sold with result that an amount in excess of 25 per cent of gross income stated on the return was omitted. Held, the 5-year statute of limitations provided for in section 275 (c) is applicable.
2. Deductions. -- The respondent disallowed claimed deductions and made other adjustments for the years 1945, 1946, 1947, and 1948 for lack of substantiation. Held, the respondent's action is approved for the reason the taxpayer has failed to carry his burden of proof.
*443 The Commissioner determined the following deficiencies in income tax:
| 5% | |||
| Year | Deficiency | Negligence | Total |
| penalty | |||
| 1945 | $ 8,380.85 | $ 419.04 | $ 8,799.89 |
| 1946 | 2,830.88 | 141.54 | 2,972.42 |
| 1947 | 3,498.61 | 174.93 | 3,673.54 |
| 1948 | 971.88 | 48.59 | 1,020.47 |
Two questions are presented for decision: (1) Did the taxpayer omit from gross income for 1945 an amount properly includible therein in excess of 25 per cent of the*319 amount of gross income stated in the return so as to make section 275 (c) of the Internal Revenue Code applicable; and (2) did the respondent properly disallow certain claimed deductions for lack of substantiation?
FINDINGS OF FACT.
The taxpayer, J. W. Gibbs, Sr., died in October 1949. Before his death he resided in Union, South Carolina, and his income tax returns *444 for 1945, 1946, 1947, and 1948 were filed with the collector of internal revenue for the district of South Carolina.
J. F. Walker, Sr., and W. J. Little were appointed executors of the estate of J. W. Gibbs, Sr.
During the taxable years the taxpayer operated a retail liquor store. His place of business was very small and he employed no one to assist him.
For 1945 the income tax return of the taxpayer was filed on March 15, 1946. A notice of deficiency for 1945, 1946, 1947, and 1948 was mailed to the taxpayer in care of the executors on December 20, 1951.
By a consent filed by J. F. Walker, Sr., on January 24, 1951, and accepted by the Commissioner, the period of limitation upon assessment of income tax for the year 1945 was extended to September 30, 1951. By a consent filed on May 12, 1951, by J. F. Walker, *320 Sr., and accepted by the Commissioner, the period of limitation upon assessment of income tax for 1945 was extended to December 31, 1951.
On the taxpayer's return for 1945, in Schedule C, "Profit (or Loss) From Business or Profession," amounts of $ 5,684 and $ 8,544.37 for "Labor" and "Material and supplies" were included within the category "Cost of Goods Sold" and "Gross profit" was reduced by the total of these items. The gross profit was reported on the return as $ 13,504.20. The two items referred to were improperly included in cost of goods sold. The treatment accorded these two items by the taxpayer had the effect of reducing the gross income reported on his 1945 return by the amount of $ 14,228.37. This amount was in excess of 25 per cent of the gross income stated on the 1945 tax return of the taxpayer.
For the year 1945 the Commissioner made the following adjustments to the taxpayer's income:
(a) On the taxpayer's income tax return deductions were made for the following business expenses:
| Labor | $ 5,684.00 |
| Material and supplies | 8,544.37 |
| Interest | 750.00 |
| $ 14,978.37 |
Due to the failure of the taxpayer to furnish records in substantiation of these business expenses, *321 the Commissioner made an allowance of $ 300 as a reasonable amount for material and supplies and restored to income the balance of $ 14,678.37.
A deduction for contributions was made on the taxpayer's income tax return in the amount of $ 1,550. Due to failure to furnish records in substantiation of the deduction, an allowance of $ 250 was made as a reasonable amount and the balance of $ 1,300 was disallowed.
*445 A deduction for interest "on Private Loans" also was made on the taxpayer's income tax return in the amount of $ 500. The Commissioner allowed the payment of $ 15.40, and disallowed the balance of $ 484.60 for lack of records to substantiate the deduction as claimed.
The deduction for medical and dental expenses claimed by the taxpayer was disallowed by the Commissioner since the payments of $ 665 were not in excess of 5 per cent of the adjusted gross income as recomputed by the Commissioner.
Based upon the foregoing adjustments, the Commissioner determined that the net income of the taxpayer for 1945 was $ 25,413.05.
For the year 1946 the Commissioner made the following adjustments to the taxpayer's net income:
(a) The business income was increased by $ 1,763 for *322 the amount of South Carolina Case Tax which was included in purchases and also included in the total of business taxes.
(b) In the absence of records to substantiate business expenses, the following amounts were restored to income:
| Repairs on rental property | $ 1,540.00 | |
| Amount allowed | None | $ 1,540.00 |
| Advertising expense claimed | 7,500.00 | |
| Amount allowed | 500.00 | 7,000.00 |
| Coal and fuel expense claimed | 250.00 | |
| Amount allowed | 50.00 | 200.00 |
| $ 8,740.00 |
| (c) Total adjustments were: | |
| $ 1,763.00 | |
| 8,740.00 | |
| $ 10,503.00 |
For the year 1947 the Commissioner made the following adjustments to the taxpayer's net income:
(a) The taxpayer's business income was increased by the Commissioner for the following duplications of deductions:
| Case tax included in purchases and claimed as business tax | $ 1,679.00 |
| Loss deducted as business expense was also reflected in purchases | |
| for year and in inventory | 1,761.65 |
| Carried forward | $ 3,440.65 |
In the absence of records to substantiate business expenses, the following amounts were restored to income by the Commissioner: *446
| Deductions claimed for taxes and licenses | $ 8,428.45 | ||
| Less: Amounts substantiated -- | |||
| Gross profits tax | $ 2,706.95 | ||
| Case tax | 1,679.00 | ||
| Federal & state licenses | 527.50 | 4,913.45 | 3,515.00 |
| Advertising expense | 3,072.50 | ||
| Entertainment expense | 2,025.00 | ||
| Travel expense | 875.00 | ||
| Deducted in miscellaneous expense | 5,972.50 | ||
| Amount allowed as reasonable | 750.00 | 5,222.50 | |
| Interest expense | 975.86 | ||
| Amount allowed from payments per bank records | [sic] 422.71 | 533.15 | |
| Business expenses restored to income | $ 12,711.30 |
*323 For the year 1948 the Commissioner made the following adjustments to the taxpayer's net income:
| Purchases per return | $ 77,473.38 | |
| Less: Errors in addition -- cost of goods sold | 6,000.00 | |
| $ 71,473.38 | ||
| Purchases allowed from reports to S. C.Tax Commission | ||
| for year 1948 | 69,039.53 | $ 2,433.85 |
In the absence of records to substantiate business expenses, the following amounts have been restored to income by the Commissioner:
| Deduction claimed for taxes and licenses | $ 7,799.14 | ||
| Less: Amounts substantiated -- | |||
| Gross profits tax | $ 4,882.82 | ||
| Case tax | 1,396.00 | ||
| Federal & state licenses | 527.50 | ||
| 6,806.32 | 992.82 | ||
| Advertising expense | $ 1,227.10 | ||
| Entertainment expense | 1,000.00 | ||
| Deducted in miscellaneous expense | $ 2,227.10 | ||
| Amount allowed as reasonable | 750.00 | 1,477.10 | |
| Interest expense | 600.00 | ||
| Amount allowed from payments per bank records | 259.90 | 340.10 | |
| Business expenses restored to income | $ 5,243.87 |
For each of the years in question the Commissioner determined that the taxpayer had failed to keep adequate records and the Commissioner therefore determined a 5 per cent liability for negligence penalty pursuant to section 293 (a) of the *324 Internal Revenue Code. Also, for each of the taxable years 1946, 1947, and 1948, the Commissioner allowed the standard deduction of $ 500.
*447 OPINION.
With reference to the taxable year 1945 the taxpayer contests assessment on the ground that the period prescribed by the statute of limitations had expired. The return for that year was filed on March 15, 1946.
In January 1951, more than 3 years but less than 5 years from the date the return was filed, the taxpayer's executor filed a consent extending the period of limitation. Within the period specified in the first consent a second consent was filed, and on December 20, 1951, before the end of the consent period, the notice of deficiency was mailed.
The timeliness of the notice of deficiency for 1945 depends upon whether or not the period for making assessment was extended to 5 years by section 275 (c), Internal Revenue Code. The Commissioner contends the period was so extended because the taxpayer omitted an amount from gross income in excess of 25 per cent of the gross income reported on his return. The burden of proving that the ordinary statutory 3-year period of limitations has not barred the assessment and that the*325 5-year period provided in section 275 (c) is applicable is on the Commissioner. Lois Seltzer, 21 T.C. 398">21 T. C. 398. The Commissioner called no witnesses. He relies on a stipulation made at the hearing pursuant to which it was agreed that the items of $ 5,684 and $ 8,544.37 shown on the 1945 return as "Labor" and "Material and supplies" on Schedule C were improperly included in cost of goods sold and that the taxpayer's gross income was accordingly increased. This stipulation was assented to by the taxpayer's counsel with the reservation that it was not admitted the items "were not a cost of operation" or that they were "not expense items." At the same time, however, the taxpayer's counsel stated, "We are not in a position to prove the items," and no evidence directed to establishing what the items might have been was introduced. In this situation we think that the Commissioner has at least shifted to the taxpayer the burden of going forward with proof as to the true character of the items, and that since the state of the evidence leaves the items unexplained except to the extent that they are not part of the cost of goods sold we must sustain the Commissioner*326 on the statute of limitations issue. In computing business income involving the sale of goods gross income is gross sales less cost of goods sold. Joe W. Scales, 18 T.C. 1263">18 T. C. 1263. Cf. Ray Edenfield, 19 T. C. 13. In our view, the net effect of the record on this issue is that the taxpayer's gross income for 1945 was understated by at least $ 14,228.37, the sum of the two items which admittedly were improperly included in cost of goods sold on the return. This amount was in excess of 25 per cent of the gross income stated on the return and the 5-year limitation was properly applied. We are not unaware *448 of the decision of the Court of Appeals for the Third Circuit in Uptegrove Lumber Co. v. Commissioner, 204 F. 2d 570, reversing a Memorandum Opinion of this Court, but believe the result we have reached here is correct.
On the other question for decision, i. e., the Commissioner's disallowance of claimed deductions for lack of substantiation, we wish to note that we are reluctant to decide cases on the basis of burden of proof. Nevertheless, in the interest of the orderly presentation*327 and disposition of cases, rules relating to the burden of proof have been formulated and of necessity must be followed. On this issue, the taxpayer's allegation of facts is as follows:
The assets of the decedent coming into our hands shortly after the death of Mr. Gibbs only amounted to $ 5,860.49, and obviously on account of him being ignorant but conservative man with inexpensive tastes, he could not have had the earnings attributed to him in the tax years involved.
Along the line indicated by this allegation, the taxpayer's only evidence has been directed to proving that the taxpayer died leaving a paucity of assets, that he lived frugally during the taxable years; ergo, he did not receive taxable income during those years in the amounts ascribed to him by the Commissioner. The burden was squarely on the taxpayer to overturn or meet the presumption of correctness which attached to the Commissioner's determination. The proof in this proceeding was of the most general nature, it was not specifically pointed at any adjustment made by the Commissioner, and falls far short of that necessary for carrying this burden.
The negligence penalties were not contested.
Decision will*328 be entered for the respondent.