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This Court has consistently held that the cost of goods sold
is not a deduction (within the meaning of section 162(a)), but is
subtracted from gross receipts in the determination of a
taxpayer's gross income. Max Sobel Wholesale Liquors v.
Commissioner, 69 T.C. 477 (1977), affd. 630 F.2d 670 (9th Cir.
1980); Sullenger v. Commissioner, 11 T.C. 1076, 1077 (1948); see
sec. 1.61-3(a), Income Tax Regs. With respect to the
determination of petitioners' 1991 Federal income tax liability,
the critical question is not how petitioner must treat deductions
allowable under section 162(a) after the classification issue has
been resolved, but rather what petitioner's gross income from the
program was in the first instance.6
Limiting our inquiry in this manner, the parties' arguments
with respect to the classification issue and treatment of the
related section 162(a) deductions simply have no application
because no such deductions were claimed. Because section 162(a)
deductions are not involved, and because the parties agree that
the tax imposed by section 1401 (additional tax imposed upon
earnings from self-employment) is not applicable, it makes no
offered neither evidence nor argument that petitioner has
improperly included such costs in the computation of the reported
cost of goods sold.
Petitioners touched upon this concept in their alternative
argument. However, their position that only the net profit
petitioner earned from the program is includable in their gross
income, as a general proposition of law, is simply incorrect.
Furthermore, their argument was not based upon the proper
treatment of cost of goods sold, but rather upon case authority
that, for the reasons contained in respondent's reply brief, does
not support the argument.
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