Income Tax—Capital Expenditure v. Business Expenditure

The tax treatment of company funds expended in the solicitation of business supply sources arose in the case of Van Iderstine Co. v. Commissioner of Internal Revenue. Petitioner company rendered lard, tallow, and other by-products from fat and bones which it collected from butcher shops, restaurants, hotels, slaughter houses, and chain stores. Petitioner during the year 1950 paid $25,000 to Food Fair Stores chain in consideration for agreements giving petitioner the right for an indeterminate period to purchase all raw materials becoming available at their stores at the current market price to be determined from time to time. The agreements were subject to being discontinued at any time by either party; no express promise existed on the part of either party. Petitioner in filing its 1950 tax return treated the expenditure as a deductible business expense, but the Tax Court held it to be a capital expenditure. On appeal, the Tax Court decision was reversed by the Court of Appeals for the Second Circuit. Four alternative methods appear for accounting for the expenditure