treated as so fleeting and momentary that it should be disregarded. Respondent acknowledges provisions of the restructure agreement that place some limitations on assignment of Mexican Government debt, but respondent notes that none of these provisions applies to a transfer or assignment of the debt, nor to the transfer or assignment of a participation therein, by a bank domiciled in the United States. Respondent also notes that under New York case law any prohibition on assignment must be express. The vague limitations on transferability of Mexican Government debt on which petitioner relies are largely meaningless in this case. Under the debt participation and capitalization agreement and the restructure agreement, the Mexican Government expressly consented to the transfer of its US$1,200,000 debt, or of a "participation" therein, to petitioner. The Mexican Government thereby is to be regarded as having waived whatever restrictions generally would have applied to such a transfer of Mexican Government debt to petitioner. Arguments as to petitioner's alleged lack of an ownership interest in the debt are clearly erroneous and are rejected. Similarly, the argument must be rejected that any ownership interest or participation of petitioner in the debt occurred for such a momentary period of time that such interest or participation should be disregarded. It was petitioner's provision of the US$600,000 that caused the NMB Bank to relinquish the US$1,200,000 Mexican Government debt-hardly an economic fact that we can ignore. It does appear that another New York-based bank did act as a mere agent in the debt-equity-swap transaction before us. That bank's mere agency role has been ignored for purposes of the substance of the transaction. Petitioner's substantial economic role in the transaction, however, will not be disregarded. Capital Contribution of Alleged Excess Value Petitioner and the amici curiae argue that any value petitioner may have realized over its US$634,000 hard dollar cost of participating in the transaction (referred to by petitioner as "excess value") should be treated, under section 118, as a nontaxable capital contribution by the Mexican Government to petitioner or to Procesos. Petitioner's argument oversimplifies and neglects important facts relating to the nature of this transaction and to the consideration paid and received by petitioner, on the one hand, and by the Mexican Government, on the other. Petitioner did not transfer US$600,000 to the Mexican Government. Rather, petitioner provided those U.S. dollars to a commercial bank in exchange for U.S.-dollar-denominated debt of the Mexican Government with a face amount of US$1,200,000. Petitioner then exchanged not the US$600,000 in cash but the US$1,200,000 Mexican Government debt for Mex$1,736,694,000. As a further, significant element of the transaction, petitioner was also given Mexican Governmental permission to construct a lambskin processing plant in Mexico, and petitioner was provided pesos at a very favorable exchange rate. The Mexican Government was relieved of its US$1,200,000 debt without using its limited supply of U.S. dollars, and it obtained a commitment that the Mexican pesos it provided would stay in Mexico. On these facts, it is clear that the Mexican Government, as a result of and in return for its participation in this transaction and for the "excess value" it provided, received direct, specific, and significant economic benefits that related primarily to its perilous foreign exchange position. As we said in Federated Dept. Stores v. Commissioner, 51 T.C. 500, 519 (1968), affd. 426 F.2d 417 (6th Cir. 1970), taxfree capital contribution treatment under section 118 is available where the "only benefit" anticipated and received by the governmental entity making the "contribution" constitutes an indirect civic benefit such as anticipated increased business. In Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), contributions or payments by a governmental entity to assist a taxpayer in financing construction of a factory were not made in exchange for, nor accompanied by, extinguishment of the governmental entity's million-dollar-debt obligation. Perhaps, if the Mexican Government merely had transferred the Mexican pesos to Procesos in exchange for petitioner's commitment to use the pesos to construct a plant in Mexico, receipt of the pesos would qualify under section 118 as a tax-free contribution of capital. The Mexican Government, however, in the transaction before us, did not provide the pesos merely in exchange for a commitment to construct a plant in Mexico. It also received cancellation of its US$1,200,000 debt obligation without using any U.S. dollars, and the pesos that it provided remained in Mexico. The surrender of the debt constitutes a quid pro quo that taints what otherwise might have qualified under section 118 as a tax-free contribution of capital. Petitioner and the amici curiae argue that the Court misapplies the step transaction doctrine. Petitioner cites J.E. Seagram Corp. v. Commissioner, 104 T.C. 75 (1995). To the contrary, we believe we have followed the reasoning of that case by taking into account the "overall" transaction at issue. Id. at 94. As we understand it, the overriding function of the step transaction doctrine is to combine individually meaningless or unnecessary steps into a single transaction. See Tandy Corp. v. Commissioner, 92 T.C. 1165, 1172 (1989); Esmark, Inc. v. Commissioner, 90 T.C. 171, 195 (1988), affd. without published opinion 886 F.2d 1318 (7th Cir. 1989). However, a step in a series of transactions or in an overall transaction that has a discrete business purpose and a discrete economic significance, and that appropriately triggers an incident of Federal taxation, is not to be disregarded. Further, the simultaneous nature of a number of steps does not require all but the first and the last (or "the start and finish") to be ignored for Federal income tax purposes. Tandy Corp. v. Commissioner, supra at 1172 (“step transaction doctrine is not appropriate in every transaction that takes place in one or more steps"); Rev. Rul. 79-250, 1979-2 C.B. 156, 157 ("the substance of each of a series of steps will be recognized *** if each such step demonstrates independent economic significance, is not subject to attack as a sham, and was undertaken for valid business purposes"); 11 Mertens, Law of Federal Income Taxation, secs. 43.254-43.255 (1990 rev.). Under the facts of this case, the step transaction doctrine does not require the Court to disregard the gain realized by petitioner upon receipt of the pesos. Petitioner and the amici curiae make a number of additional arguments. We find them to be without merit. Also, the amici curiae seek to raise a number of new issues not raised in the petition in this case. We decline to address issues not raised in the pleadings and not properly before us. For the reasons stated, we decline to alter the result reached in our opinion reported at 103 T.C. 59. Decision will be entered under Rule 155. JOHN D. AND KAREN BEATTY, PETITIONERS V. 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 he 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 cost 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. 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 1 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. 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 cost of goods sold and are taken into account in determining petitioner's gross income. 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. sec. 362-13-5(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. sec. 36-8-10-7 (Burns 1989). The specific allowance per meal is determined on an annual basis by the State 2 References to Indiana statutes are to the versions in effect for the year in issue. |