UNITED STATES TAX COURT



        JOHN D. AND KAREN BEATTY, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent.



Docket No. 8273-94.               Filed April 17, 1996.



     P, an Indiana county sheriff, was required by State
statute to provide meals to the prisoners incarcerated in
the county jail. The costs of providing the meals were
borne by P. P received a meal allowance from the county on
a per meal basis at a specified rate established by the
State. P claims that he provided the meals to the county
prisoners as an independent contractor, and reported the
meal allowances received and costs incurred on a Schedule C.
R contends that P provided the meals to the county prisoners
as an employee of the county and must deduct such costs on a
Schedule A as employee business expenses. Held: The costs
of the meals constitute costs of goods sold and are taken
into account in the determination of P's gross income.
Consequently, under the circumstances of this case, it makes
no difference for Federal income tax purposes, whether P
provided the meals to the prisoners as an independent
contractor or county employee.


Stephen E. Arthur and Ronald M. Soskin, for petitioners.

Ronald T. Jordan, for respondent.
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     DAWSON, Judge:   This case was assigned to Special Trial

Judge Lewis R. Carluzzo pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1   The Court agrees with

and adopts the Special Trial Judge's opinion, which is set forth

below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     CARLUZZO, Special Trial Judge:    Respondent determined a

deficiency in petitioners' 1991 Federal income tax in the amount

of $3,627.   All of the issues that result from adjustments made

in the notice of deficiency have been resolved by the parties.

The issues that remain in dispute were raised in two amendments

to answer filed by respondent in connection with her claim for an

increased deficiency in the amount of $15,062.   The primary issue

argued by the parties is whether petitioner John D. Beatty, as

the elected sheriff of Howard County, Indiana, provided certain

services to the county as an employee of the county or as an

independent contractor.   This issue will sometimes be referred to

as the classification issue.   The alternative issue, raised by

petitioner, is whether the costs of the meals constitute costs of

goods sold and are taken into account in determining petitioner's

gross income.




       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.    During the year in issue,

petitioners were husband and wife and filed a joint Federal

income tax return.   At the time the petition was filed,

petitioners resided in Greentown, Indiana.    References to

petitioner are to John D. Beatty.

     In 1986, petitioner was elected for a 4-year term, to

commence in 1987, to the position of county sheriff for Howard

County, Indiana.   In 1990, petitioner was reelected to a second

4-year term which commenced in 1991.    Prior to being elected

county sheriff, petitioner had been employed by Howard County in

various positions, including deputy sheriff, since 1971.

     In addition to other responsibilities, a county sheriff in

the State of Indiana is required to take care of the county jail

and the prisoners incarcerated there.    Ind. Code Ann. section 36-

2-13-5(a)(7) (Burns 1989).2   Included in this statutory

obligation is the sheriff's duty to feed the county prisoners,

which a county sheriff is required to do at his or her expense.

In return for feeding the county prisoners, a county sheriff is

entitled to receive a meal allowance from the county at a rate

not to exceed a statutory maximum amount per meal.    Ind. Code

Ann. section 36-8-10-7 (Burns 1989).    The specific allowance per



       References to Indiana statutes are to the versions in
effect for the year in issue.
                               - 4 -

meal is determined on an annual basis by the State Examiner of

the Indiana State Board of Accounts.     

year 1991,

this amount was $1.05 per meal.

     Beginning in 1987, petitioner assumed responsibility for a

prisoner meal program (the program) that had been established by

one of his predecessors several years earlier.     Petitioner

continued to operate the program as it had been operated in the

past, making no substantive changes to the administration of the

program.   The program was managed by a kitchen supervisor/cook

who was an employee of, and paid by, Howard County.     The kitchen

supervisor/cook was responsible for preparing menus, ordering

food and supplies from vendors, receiving and inspecting

deliveries of food and supplies, cooking meals, serving meals to

prisoners, and keeping account of the number of meals served to

prisoners.

     The number and the nutritional quality of meals served to

county prisoners were governed by standards established by the

Indiana Department of Corrections.     The sanitary quality of the

kitchen facilities, food preparation techniques, and the food

provided to county prisoners were subject to standards imposed by

the Howard County Department of Health.    Petitioner's duties in

connection with the program included approving menus, paying

vendors, and signing the required claim forms necessary to

receive payment of the meal allowances.

     In order to receive the meal allowances, petitioner, on a

monthly basis, provided the county auditor with a statement
                                 - 5 -

listing the names of prisoners incarcerated in the jail and the

number of meals served to each prisoner.     Once the statements

were certified as correct by the county auditor, the governing

Board of Commissioners authorized payment to be made to

petitioner.     Because he was not required to do so, petitioner did

not provide the county auditor with substantiation or

verification of the actual costs incurred in feeding county

prisoners.     Pursuant to the Indiana statutory scheme in effect

during the year in issue, petitioner was entitled to retain the

difference between the meal allowances he received from the

county for feeding the county prisoners and the costs he incurred

to do so.

     In 1991, as county sheriff, petitioner received a $30,566

salary that was appropriately reported as wages on petitioners'

1991 Federal income tax return.3    In addition to his salary,

petitioner also received $109,952 as meal allowances from Howard

County for providing meals to the prisoners incarcerated in the

county jail.

     Petitioner reported the $109,952 as gross receipts on a

Schedule C included with petitioners' 1991 Federal income tax

return.   The Schedule C reflected that petitioner incurred cost

of goods sold in the amount of $68,540.    It appears from the

Schedule C that the entire amount of the cost of goods sold was

composed of purchases made during the year, a conclusion that is



       There is no dispute that the salary paid to petitioner as
county sheriff was paid to him as an employee of Howard County.
                               - 6 -

also supported by reasonable inferences drawn from petitioner's

testimony.   After reducing the gross receipts by the cost of

goods sold, petitioner computed his gross profit and gross income

from the prisoner meal program to be $41,412 and reported that

amount on the appropriate lines of the Schedule C.   Because no

expense deductions were claimed on the Schedule C, $41,412 was

also reported as net profit. Petitioners included this $41,412

amount in the amount reported as business income on line 12 of

Form 1040 of their 1991 Federal income tax return.

                              OPINION

     In her amendments to answer respondent has taken the

position that petitioner improperly reported the meal allowances

as income from a trade or business separate and apart from his

employment as Howard County sheriff.    According to respondent, by

providing meals to the county prisoners, petitioner was

discharging a duty imposed upon him as a county employee, not as

the proprietor of a separate trade or business.   Consequently,

respondent contends that the $109,952 received by petitioner as

meal allowances should be considered additional compensation paid

to petitioner as an employee of Howard County, and includable in

his income as such.   Respondent further contends that any costs

incurred by petitioner in connection with the program should be

considered employee business expenses, deductible only as

miscellaneous itemized deductions on petitioners' Schedule A.

Respondent goes on to argue that if the meal allowances are

considered additional employee compensation, and the costs
                               - 7 -

petitioner incurred in connection with the program are deductible

as employee business expenses, the provisions of section 67 (2-

percent floor on miscellaneous itemized deductions) and section

55 (alternative minimum tax) result in the increased deficiency

now claimed by respondent.

     Petitioner maintains that he did not receive the meal

allowances in return for services provided to Howard County as an

employee, but rather as an independent contractor.   According to

petitioners, the income and costs attributable to the program are

properly reportable, and were properly reported, on a Schedule C.

As an alternative, petitioners also argue that even if the meal

allowances were received by petitioner "in an employee capacity,

only the net profit earned * * * constituted gross income."

     Although the parties paid some attention to the alternative

position advanced by petitioners, almost the entire record and

major portions of the briefs relate to the classification issue.

In their respective briefs, the parties discussed at length the

relevant factors that are usually considered in resolving such

issues.   Judging from the way that the issues were framed and the

arguments presented, it is clear that the parties expect that the

classification issue must first be resolved before petitioners

correct 1991 Federal income tax liability can be determined.4


       In her opening brief, respondent framed the classification
issue as follows:

     Whether petitioner, John D. Beatty, as Sheriff of Howard
     County, Indiana, was an employee for purposes of I.R.C.
     sections 62 and 67, thereby subjecting his trade or business
     expenses for 1991 to the two percent floor for miscellaneous
                               - 8 -

     The parties have proceeded in this case upon the apparent

assumption that the costs petitioner incurred in connection with

the program constitute, within the meaning of sections 62 and

162(a), either trade or business expenses (if the classification

issue were resolved in petitioners' favor), or employee business

expenses (if the classification issue were resolved in

respondent's favor).   After carefully considering their arguments

in the context of the record, it would appear that the parties'

views of the forest have been blocked by the trees.

     Both parties have ignored the simple fact that petitioner

did not claim any section 162(a) deductions with respect to the

program.   Petitioner did report cost of goods sold on the

Schedule C.   However, the elements included in a computation of a

taxpayer's cost of goods sold do not fall within the category of

expenses deductible pursuant to section 162(a).5


     itemized deductions or, as contended by petitioner, he was
     self-employed with respect to the services he performed as
     Sheriff of Howard County related to the prisoner meal
     program. If petitioner was self-employed his expenses
     associated with the prisoner meal program are deductible on
     Schedule C.

Although petitioners did not expressly recite specific issues in
their opening brief, see Rule 151(e)(2), it is clear from a
review of their brief that petitioners agree with respondent's
statement.

       We do not rely exclusively on petitioner's Schedule C to
establish the amount of the cost of goods sold incurred by
petitioner in connection with the program. As a general rule we
regard the treatment of an item on a return as little more than
the taxpayer's claim with respect to the item. See Roberts v.
Commissioner, 

, 837 (1974); Seaboard Commercial Corp.
v. Commissioner, 

, 1051 (1957). In this case the
parties have stipulated that petitioner incurred costs in the
amount reported as costs of goods sold, and respondent has
                              - 9 -

     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, 

(1977), affd. 

(9th Cir.

1980); Sullenger v. Commissioner, 

, 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.
                               - 10 -

difference in this case whether petitioner reports the income

from the program as an independent contractor or as an employee

of Howard County.   Consequently, we decline to address the

question whether petitioner acted as an employee or independent

contractor of Howard County with respect to the program.    Under

the circumstances of this case, such a distinction gives rise to

no Federal income tax consequences.

     As we view the case, the determination of petitioner's 1991

gross income from the program is all that is necessary to resolve

the controversy between the parties, and that income is easily

determined.    It is $41,412, computed by subtracting cost of goods

sold from the gross receipts petitioner received with respect to

the program.   That was the amount petitioner was required to

report, and did report, on his 1991 Federal income tax return.

To reflect the foregoing and the settled issues,



                                      Decision will be entered

                                under Rule 155.