Tax Court - Cigarette tax stamp included in gross receipts; taxpayer ineligible for UNICAP “small retailer exception” 

November 19:  The U.S. Tax Court today issued an opinion finding that the taxpayer had failed to prove its eligibility for the “small retailer exception” under the UNICAP rules of section 263A (i.e., average annual gross receipts of less than $10 million for the testing periods) when the IRS included the New York cigarette tax in the taxpayer’s gross receipts, given that the tax stamp was part of the sales price of the cigarettes. City Line Candy & Tobacco Corp. v. Commissioner, 141 T.C. No. 13 (November 19, 2013)

Thus, cigarette tax stamp costs relating to the taxpayer’s wholesale tobacco business were indirect costs that must be capitalized, the court concluded.

Read the court’s opinion in City Line Candy & Tobacco [PDF 147 KB]


The taxpayer corporation was engaged in the wholesale trading of tobacco products, and was a licensed cigarette stamping agent for New York (i.e., the taxpayer purchased cigarettes packs and affixed the New York cigarette tax stamp to the packs, and then sold the stamped packs to subjobbers and retailers in New York).

The taxpayer computed its gross receipts from cigarette sales for financial purposes as the total of gross sales prices of cigarettes sold during the year. For income tax purposes, however, the taxpayer adjusted its gross receipts by subtracting the cigarette tax stamps purchased during the year.

The taxpayer asserted that its average annual gross receipts for the three-year testing period did not exceed $10 million and that it therefore qualified for the “small retailer exception” under section 263A. The taxpayer claimed that it was not required to comply with the uniform capitalization (UNICAP) rules with respect to the cigarettes acquired for resale.

The IRS, however, reclassified the cigarette tax stamp costs as general and administrative costs, and determined that the taxpayer had additional section 263A capitalizable costs and had failed to satisfy the requirements for the small retailer exception.

Tax Court opinion

The Tax Court today held that the taxpayer failed to satisfy its burden in proving that the IRS’s determinations were incorrect. Thus, the court held that the IRS had correctly determined the taxpayer’s gross receipts included the entire sales price of the cigarettes sold—including the sale price attributable to the cost of the cigarette tax stamps.

Accordingly, the taxpayer was subject to the UNICAP rules under section 263A because it failed to prove that it had satisfied the three tax-year-period threshold of not exceeding $10 million.

The Tax Court concluded that the cigarette tax stamp costs were indirect costs that must be capitalized under the UNICAP rules and also were handling costs that were properly allocated to the taxpayer’s ending inventory using the simplified resale method.

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