Court Opinion

ID: 4483435
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:06.143433+00
Date Added: 2024-06-11T14:53:38.936717
License: Public Domain

Drennen, J., dissenting: I do not disagree with the principles expressed in the majority opinion; nevertheless, I would reach the opposite conclusion in this case for a reason not discussed in the majority opinion. Stated briefly, I would reduce the cost of goods sold by the cost to the taxpayer of the “credit” merchandise which I conclude was not sold by the taxpayer. A “sale” was defined by the Supreme Court in Commissioner v. Brown, 380 U.S. 563 (1965), to be “a transfer of property for a fixed monetary price or its equivalent.” As I understand the facts in this case, Sobel sold wine and liquor to its preferred customers at list prices and entered the full amount of the list prices in sales. It then noted a credit in favor of the preferred customers in its “black book.” Subsequently, according to the majority opinion, the customers were delivered additional merchandise “at no additional charge, in satisfaction of the credits recorded in the ‘black book’ ” from its inventory and the cost of such merchandise to Sobel was charged to cost of goods sold.1 Presumably no further sale was recorded in Sobel’s books. In my opinion this subsequent transaction did not constitute a sale of the credit merchandise under the above definition of “sale.” There is no specific provision in the Code that allows a reduction in, or deduction from, income for cost of goods sold. The Commissioner of Internal Revenue and the courts have simply recognized that no more than gross income can be subjected to income tax and that the cost of goods sold must be deducted from gross receipts in order to arrive at gross income, the starting point for an income tax. Sullenger v. Commissiomr, 11 T.C. 1076 (1948); Hofferbert v. Anderson Oldsmobile, 197 F.2d 504 (4th Cir. 1952).2 But surely the cost of merchandise that is not sold but is in fact given away, under whatever scheme may be devised, should not enter into the computation of profit or gross income from the disposition of merchandise in a transaction that produces no gross receipts. Illustrative of this principle are the cases that have held that a merchant who withdraws goods from his stock in trade for his own use may not include the cost of those goods in cost of goods sold. See Appeal of P. P. Sweeten v. Commissioner, 3 B.T.A. 37 (1925); Demor, Inc. v. Commissioner, T.C. Memo. 1968-279 (1968). See also City Ice Delivery Co. v. United States, 176 F.2d 347 (4th Cir. 1949), wherein it was held that an ice dealer could not include in cost of goods sold payments made to its supplier not to make ice in order to keep the retail price of ice up because it had not made an actual sale. It may be that the cost of the “credit” merchandise is a cost of doing business to petitioner but it must prove its deductibility in some way other than including it in cost of goods sold. I doubt that the majority would allow this credit as a deduction under section 162(c)(2). Since petitioner included in sales the entire list price of the merchandise actually sold I do not believe the principle espoused in Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), should be involved. Fay, Dawson, and Wiles, JJ., agree with this dissenting opinion.  it is not clear whether the charge to cost of goods sold was made at the time of the sale or at the time the credit merchandise was delivered. This would make a difference only if the two events occurred in different taxable years.   These and similar cases denied the exclusion from cost of goods sold of payments for goods in excess of amounts allowed by law. Here, of course, we are not concerned with illegal payments made by Sobel. The cases do, however, establish the principle for which they are cited.