Kin L. Velinsky - Page 12

                                        -  -12                                           
          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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