Page 477
69 T.C. 477 (1977)
MAX SOBEL WHOLESALE LIQUORS, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
No. 5665-76.
United States Tax Court
December 15, 1977
Petitioner was a wholesale liquor dealer. In violation of State law, petitioner made sales to selected customers at posted prices with the understanding that such customers would be entitled to credit to be used for the purchase of additional liquors, or to an additional bottle for each case purchased. When deliveries were made of the additional liquors, the cost thereof was charged to the cost of sales and deducted in arriving at petitioner's gross income: Held, the cost of such additional liquors is deductible from gross income as part of the cost of goods sold and is not, therefore, a deduction which may be disallowed under sec. 162(c)(2). Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), followed.
Charles R. Breyer and Jeffry A. Bernstein, for the petitioner.
Vernon R. Balmes and Edward B. Simpson, for the respondent.
QUEALY, Judge:
This proceeding involves the redetermination of deficiencies in income taxes of petitioner as follows:
As a result of concessions by the parties, the sole question for
Page 478 decision is whether the petitioner is precluded from charging as a cost or deducting under section 162(c)(2)
[1] the cost of liquor and wine transferred to selected customers in violation of the laws of the State of California. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Max Sobel Wholesale Liquors (hereinafter referred to as petitioner) is a California corporation with its principal place of business in San Francisco, Calif. At all times material herein, petitioner was engaged in the distribution and sale, at wholesale, of liquor, wine, and other alcoholic beverages in and around the Bay area of San Francisco. Its Federal income tax returns for the fiscal years ended January 31, 1973 to 1975, inclusive, were filed with the Internal Revenue Service, Fresno, Calif. The petitioner's books and records were maintained on the accrual basis of accounting, and petitioner reported its income for Federal income tax purposes on that basis. In computing its costs of sales, purchases of liquor and wine were carried in inventory at petitioner's cost. Delivery of liquor and wine to its customers were made out of such inventory, thereby reflecting the cost of such deliveries as a part of the cost of sales. The business of distributing and selling liquor at wholesale was regulated under California law. The enforcement of such laws was delegated to the Department of Alcoholic Beverage Control of the State of California (hereinafter referred to as ABC). Section 24756 of the California Business & Professions Code (West 1964), in force during the years involved in this proceeding, provided as follows:
Price lists; filing; contents; compliance . Every distilled spirits manufacturer, brandy manufacturer, rectifier, and wholesaler shall file and maintain with the department a price list showing the prices at which distilled spirits are sold to retailers by the licensee. Sales of distilled spirits to retailers by each distilled spirits manufacturer, brandy manufacturer, rectifier, and wholesaler shall be made in compliance with the price list of the licensee on file with the department.
Page 479 Section 24862 of the California Business & Professions Code provides for a similar procedure with respect to wine manufacturers and wholesalers. As a wholesaler of liquor and wine, the petitioner was required to file or to post each month the selling prices for the liquor and wine to be sold by it in accordance with sections 24756 and 24862 of the California Business & Professions Code. Such price list became effective for sales made during the ensuing month. The prices posted by petitioner and its competitors, in most cases, were determined in the first instance by the producers or importers of such spirits. The producers or importers of liquor and wine supplied ‘ suggested’ monthly price lists to the petitioner in order that such prices might be posted with the ABC. If the petitioner did not conform to the suggested prices, there was a risk that the supplier would terminate petitioner's right to distribute the brands of liquor and wine which the petitioner obtained from that source. During the period involved in this proceeding, the petitioner evolved a procedure whereby certain selected customers might purchase liquor and wine from the petitioner on a basis more favorable than the selling prices for such liquor and wine posted by the petitioner with the ABC. An agreement was entered into with such customers pursuant to which, with each purchase of liquor or wine, the customer would be entitled to a credit of a stated percent of the total purchase, which amount would be available to be used by such customer in the purchase of additional quantities of liquor or wine. In other instances, the agreement provided that with the purchase of a case of certain liquors or wines, the purchaser would be entitled to receive an additional bottle of that liquor or wine. The petitioner maintained a ‘ black book’ setting forth the name of the customer, the purchases by such customer, and the credit to which the customer was entitled. Periodically, such credits would be availed of by the customer to purchase additional liquor or wine or the customer would be supplied with the additional bottles to which the customer became entitled under the agreement of purchase. When the petitioner received a regular order from its customers, the order was filled and delivered by the petitioner out of inventory. As a part of petitioner's accounting and billing system, a sales invoice was prepared with respect to each sales
Page 480 transaction which listed thereon the brand and quantity of the spirits sold and the sales price, along with any posted discount. The billing price for liquor and wine listed on such sales invoice conformed to the prices posted with the ABC as required by California law. When the petitioner received an order for use of the ‘ credit’ from one of the selected customers to whom the petitioner had agreed to give such credit, a document was prepared identifying the retailer, the type of spirits, brand name, quantity, and amount. A copy of this document, referred to as a ‘ drop tag,’ was transmitted to the employee in charge of maintaining the inventory records in order that he might remove the designated quantity from inventory. Another copy of the ‘ drop tag’ was sent to the warehouse in order that the goods would be released for pickup by...
