Dennis J. and Carol R. Kraus - Page 14

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          petitioner is a common law employee of IBC.  As a common law                
          employee, petitioner is not entitled to be classified as a                  
          statutory employee as that term is described in section                     
          C.  Whether Petitioner Is Entitled to a Deduction in Arriving at            
          Gross Income for Returned Merchandise                                       
               In arriving at gross receipts on his Schedule C, petitioner            
          reduced gross receipts by $6,170 and $6,012, for 1997 and 1998,             
          respectively, as “cost of goods sold”.  Petitioner relies on                
          section 458 and the case of Hachette USA, Inc. v. Commissioner,             
          105 T.C. 234 (1995), as support for his claimed reductions to               
          gross receipts.                                                             
               Section 458 is an elective provision that permits the                  
          exclusion from gross income of amounts refunded by the taxpayer             
          upon the return of specified merchandise, i.e., a magazine,                 
          paperback, or record, if the taxpayer is on the accrual basis of            
          accounting and in the business of selling such goods.  Respondent           
          contends that petitioner is not entitled to use section 458                 
          because petitioner:  (1) Was not in the business of distributing            
          or selling magazines, paperbacks, or records, (2) was not on the            
          accrual method of accounting, (3) did not own the products                  
          delivered, and (4) did not maintain inventories.                            
               We agree with respondent and hold that petitioner is not               
          entitled to any cost of goods sold adjustment for 1997 or 1998.             
          The union agreement expressly provides that petitioner had no               

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