OPINION.
Murdock, Judge:The Commissioner determined deficiencies in income tax for fiscal years ended June 30 as follows:
The parties have entered into a stipulation which leaves for decision only the question of whether the Commissioner erred in failing to subtract from gross receipts, as cost of goods sold, the excess over the O. P. A. price paid by J. H. Sullenger for meat which he then sold through his business conducted under the name of Select Meat Co. The stipulation of facts is adopted as the findings of fact.
The petitioners are husband and wife. They reside in Texas, and they filed their returns for the years here in question with the collector of internal revenue for the first district of Texas. The husband will hereinafter be referred to as the petitioner.
The petitioner purchased a business known as Select Meat Co. in 1942. He has since operated it as a sole proprietorship. He keeps his accounts upon an accrual basis, using a fiscal year ending June 30.
The petitioner paid to wholesale meat packing firms during the taxable years, for meats purchased from them, amounts in excess of the O. P. A. prices in effect at the time of the purchases. The petitioner then sold the meat and the income from those sales is being taxed. The Commissioner, in determining the deficiencies, failed to recognize the excess over O. P. A. prices as cost of goods sold.
The respondent argues that the amounts paid in excess of the O. P. A. prices were “not truly a part of cost of goods sold” but were “in reality nothing but a ‘bribe’ to the various packing firms or amounts paid to them illegally to induce them to sell the goods to petitioner at the ceiling price.” He then argues that the amounts must be considered from the standpoint of deductions, deductions are a matter of grace and not of right, to allow these amounts as deductions would be contrary to public policy, and, therefore, the determination of the Commissioner must be affirmed.
The trouble with his argument is that its major premise is unsound. The amounts in question were actually, as the stipulation shows, a part of the cost of goods sold and are not being claimed by this petitioner as a deduction under section 23. Section 23 makes no provision for the cost of goods sold, but the Commissioner has always recognized, as indeed he must to stay within the Constitution, that the cost of goods sold must be deducted from.gross receipts in order to arrive at gross income. No more than gross income can be subjected to income tax upon any theory. The income from a business which is wholly illegal was held subject to income tax in United States v. Sullivan, 274 U. S. 259. Nevertheless, it was necessary to determine what that income was, and the cost of an illegal purchase of liquor was subtracted from proceeds of the illegal sale of the liquor in order to arrive at the gain from the illegal transactions which were subjected to income tax in that case. This is not a case of penalties provided for violation of the O. P. A. regulations. See the Emergency Price Control Act of 1942 (Title 50, App. U. S. C. A., sec. 901 et seq.). No authority has been cited for denying to this taxpayer the cost of goods sold in computing his profit, which profit alone is gross income for income tax purposes. It is unnecessary to discuss cases involving deductions, since this case does not involve any deduction. The point in controversy is decided for the petitioners.
Keviewed by the Court.
Decisions will be entered under Rule 50.