Comm'r of Internal Revenue

Tax Court of the United States.Apr 7, 1950
14 T.C. 566 (U.S.T.C. 1950)

Docket Nos. 21086 21087.



Monroe J. Winsten, Esq., for the petitioners. Michael Waris, Jr., Esq., for the respondent.

CAPITAL CONTRIBUTIONS OR COST OF GOODS SOLD.— Amounts paid by a stockholder-customer to a corporation were capital contributions bythe stockholder, not a part of the cost of goods purchased by him from the corporation, and not ordinary and necessary expenses. Monroe J. Winsten, Esq., for the petitioners. Michael Waris, Jr., Esq., for the respondent.

The Commissioner determined deficiencies in income tax for 1945 of $849.34 against Harry Sackstein and $849.34 against Louis Zlobin. The only issue for decision is whether $7,100 which the Commissioner added to the reported income of a partnership of which the petitioners were members was added erroneously either because it was deductible as an ordinary expense or was to be subtracted as cost of goods sold.


The individual income tax returns of the petitioners for 1945 were filed with the collector of internal revenue for the first district of New York.

The petitioners were equal partners in the retail kosher meat business in New York City. They had difficulty getting enough meat at O.P.A. ceiling prices to carry on their business. They could get only about one-third of their needs from their regular suppliers and that was insufficient to permit profitable operation of the business. They tried during 1945 to get as much meat as they could from all sources at O.P.A. ceiling prices.

Isidore Present came to Sackstein in February, 1945, to tell him that his firm could get additional meat at O.P.A. ceiling prices if it would purchase stock in a corporation then being organized, ‘United Meat Company, Inc.‘ (hereinafter called United). Present further explained that the corporation was being organized for the convenience of the stockholders rather than for profits and the stockholders would be called upon to make further contributions in proportion to meat purchased to meet operating losses which United would probably sustain. The petitioners bought stock in United. The payments for the stock were made as follows during 1945:

+---------------------------------+ ¦Feb. 20¦ ¦$2,000¦ +-------+------------------+------¦ ¦Feb. 20¦(“initiation fee”)¦200 ¦ +-------+------------------+------¦ ¦Apr. 12¦ ¦500 ¦ +-------+------------------+------¦ ¦Apr. 24¦ ¦500 ¦ +-------+------------------+------¦ ¦May 4 ¦ ¦1,000 ¦ +---------------------------------+

The petitioners began to buy meat from United immediately after February 20, 1945, when they made their first payment on the stock. United delivered meat to the petitioners' shop several times a week thereafter, and during 1945 delivered 87,514 pounds out of a total of 168,538 pounds received by the shop from all sources during that year.

Representatives of United notified the petitioners from time to time during 1945 of their share of the losses of United, based upon meat purchased from United, and received payments as follows during 1945:

+------------------+ ¦June 4 ¦$1,000.00 ¦ +-------+----------¦ ¦July 2 ¦2,000.00 ¦ +-------+----------¦ ¦July 17¦500.00 ¦ +-------+----------¦ ¦July 26¦1,000.00 ¦ +-------+----------¦ ¦Oct. 19¦1,200.00 ¦ +-------+----------¦ ¦Nov. 8 ¦300.00 ¦ +-------+----------¦ ¦Nov. 28¦900.00 ¦ +-------+----------¦ ¦Dec. 4 ¦319.09 ¦ +-------+----------¦ ¦Total ¦7,219.09 ¦ +------------------+

The partnership reported as part of its 1945 cost of goods sold $7,419.09, representing contributions to United.

The Commissioner, in determining each deficiency, increased the reported income from the partnership by $3,550 and explained, ‘The deduction of $7,100.00 claimed in the year 1945 by the partnership of Sackstein & Zlobin for alleged purchases has been disallowed under the provisions of Section 23(a)(1)(A) of the Internal Revenue Code.‘

The amounts paid United during 1945 do not represent cost of goods sold or ordinary and necessary expenses paid or incurred in the operation of the business of the petitioners.



There is no adequate explanation in the record for the different amounts, $7,419.09, $7,219.09, and $7,100, shown in the findings, all of which relate to the same thing.

Usually contributions by stockholders to their corporation are regarded for tax purposes and other purposes as capital contributions increasing the cost of the stock, which cost will then be compared with the amount realized when the stock is ultimately disposed of to determine gain or loss. Harry E. Lutz, 2 B.T.A. 484; John G. Paxton, 7 B.T.A. 92. Counsel for the Commissioner stated at the beginning of the hearing that the payments here in question were regarded as capital contributions of that character. The evidence fails to show that they were not.

Counsel for the petitioners, without actually stating that the petitioners were guilty of any wrongdoing, suggests that the payments in question might be regarded as a part of the total cost of meat purchased from United. These payments were in addition to the top price permitted by the O.P.A. laws and regulations which the partnership paid United for each pound of meat which it bought. If they are to be added as a part of the cost of the meat, then the total cost was in excess of a lawful price and it would be difficult to distinguish the transaction from a ‘black market‘ purchase. If that were true, then United really represented a scheme devised to avoid the letter of the law while at the same time violating its spirit. Improper motives and illegal acts should not be lightly imputed, especially where another more logical interpretation of the testimony can be made.

Sackstein's testimony indicates that the payments were contributions of additional capital to make up for that lost by United in its operations. The dates of payment might indicate that the original capital sufficed for a while, after which contributions to capital became necessary. The contributions may have been used for the same purpose for which the original capital was used. Sackstein was told by Present that he could expect calls for additional capital contributions in proportion to meat purchased, but whether the actual payments were in proportion to meat purchased from United is not at all clear. However, capital contributions need not be in proportion to stockholdings. Cambridge Apartment Building Corporation, 44 B.T.A. 617. The record as a whole does not show how the amounts paid were determined to be due, how they were recorded on its books by United, or how they were used by United. A finding that these payments were ordinary and necessary expenses paid or incurred in carrying on the business during 1945 can not be made from the evidence.

The record does not justify any change in the determination of the Commissioner.

Decisions will be entered for the respondent.