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deductions. In the notice of deficiency, respondent allowed
$27,657 of claimed cost of goods sold of petitioner's business as
cost of goods sold, which indicates that respondent considered at
least a portion of petitioner's claimed cost of goods sold to be
properly claimed. The indication from the record is that the
disallowed portion of claimed cost of goods sold was either not
properly substantiated or amounts paid in 1991, a year not before
us. Since in the notice of deficiency respondent allowed a
portion of the claimed cost of goods sold, in effect she
determined that the claim was for cost of goods sold to be
subtracted from gross receipts.
Also, our reading of the relevant cases on the issue of
omission from gross income indicates that the determination of
whether to treat an item as a deduction or an omission from
income item is governed by whether the amount is disallowed as
improperly claimed cost of goods sold or an improperly claimed
deduction. In both LaBelle v. Commissioner, supra, and Lawson v.
Commissioner, supra, we determined that items claimed as cost of
goods sold had been disallowed as such thereby causing an
omission from gross income. It was because the disallowance
increased the reported gross income that we held that the
disallowance resulted in an omission from gross income. In Lilly
v. Internal Revenue Service, supra, the Court of Appeals stated:
historically and presently, the * * * [cost of goods
sold] has been taken into account in computing business
gross income. * * * The regulations under * * * the
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