Westpac Pacific Food Save Mart Supermarkets, Inc., Tax Matters Partner v. Commissioner of Internal Revenue

We must decide whether cash paid in advance by a wholesaler to a retailer, in exchange for a volume commitment, is “gross income” under 26 U.S.C. § 61 . In the grocery trade, these are called “advance trade discounts.”

It is hard to think of a way to make money by buying things. A child may think buying things is how one makes money: he sees his father give a clerk a single piece of paper money, and receive in exchange the goods purchased, several pieces of paper money, and a number of coins. And a person may jokingly say to a spouse “I made $100 today” after buying something on sale for $100 off. But everyone knows these are merely amusing remarks, not real ways to make money.

The facts outlined below sound more complicated than they are, so imagine a simple hypothetical. Harry Homeowner goes to the furniture store, spots just the right dining room chairs for $500 each, and says “I’ll take four, if you give me a discount.” Negotiating a 25% discount, he pays only $1,500 for the chairs. He has not made $500, he has spent $1,500. Now suppose Harry Homeowner is short on cash, and negotiates a deal where the furniture store gives him a 20% discount as a cash advance instead of the…