Max Sobel Wholesale Liquors v. Commissioner of Internal Revenue

Max Sobel Wholesale Liquors (taxpayer) secretly transferred, as an added consideration for sales, extra liquor to some of its customers in fiscal 1973 and 1974 in violation of California law providing for minimum prices. The Commissioner of Internal Revenue (Commissioner) asserted that I.R.C. § 162(c)(2) disallowed the inclusion of the value of the extra liquor in taxpayer’s cost of goods sold; such disallowance would have increased taxpayer’s gross and taxable income. The Tax Court rejected the Commissioner’s assertion. 69 T.C. 477 (1977). We affirm.

I. Exclusion vs. Deduction

For good or ill, tax law distinguishes between exclusions from gross income (“above the line” items) and deductions from gross income (“below the line” items). See generally B. C. Cook & Sons v. Commissioner, 65 T.C. 422 (1975), aff’d, 584 F.2d 53 (5th Cir. 1978). “Gross income,” I.R.C. § 61, is determined by subtracting all “above the line” items from gross receipts. See Reg. § 1.61-3(a). The very definition of “gross income” has been thought to mandate the exclusion of certain amounts (e. g., the cost of goods sold) from that figure, even in the absence of specific statutory authority for such…