10 T.C. 191 (1948), 9963, Frank H. Fleer Corp. v. C.I.R.

Docket Nº:9963.
Citation:10 T.C. 191
Opinion Judge:MURDOCK, Judge:
Attorney:Charles S. Jacobs, Esq., for the petitioner. Karl W. Windhorst, Esq., for the respondent.
Case Date:January 30, 1948
Court:United States Tax Court

Page 191

10 T.C. 191 (1948)




No. 9963.

United States Tax Court.

January 30, 1948

1. ABNORMALITY— CLASS— SECTION 711(b)(1)(J)(i), I.R.C.— Excise taxes on chewing gum imposed during part of base period but not during taxable year, held not an abnormal class of deduction.

2. Id.— A bad debt which resulted, not from transactions with customers of from advances for goods, but from a transaction not directly connected with the business, held abnormal as to class.

3. ABNORMALITY— AMOUNT— SECTION 711(b)(1)(J)(ii).— Sales promotion expenses held not separable in this case from other sales expenses for the purpose of section 711(b)(1)(J)(ii).

Charles S. Jacobs, Esq., for the petitioner.

Karl W. Windhorst, Esq., for the respondent.

The Commissioner determined a deficiency of $28,363.64 in excess profits tax for the calendar year 1942. A carry-over from 1941 is claimed. The issues for decision are whether the petitioner is entitled to have the following deductions for the base period years disallowed: (1) Excise taxes on chewing gum for the base period years 1936, 1937, and 1938; (2) an amount charged off for 1939 as a worthless debt due from the Alexander Corporation; and (3) so-called sales promotion expense for the years 1937, 1938, and 1939. The first two are claimed to be abnormal in class under section 711(b)(1)(J)(i), while the last is claimed to be abnormal in amount under section 711(b)(1)(J)(ii),


The petitioner, a corporation, filed its tax return for 1942 with the collector of internal revenue for the first district of Pennsylvania.

It is engaged in the manufacture and sale of chewing gum. It keeps its books and files its returns upon an accrual method of accounting.

The Revenue Act of 1932 imposed a tax upon chewing gum, or substitutes therefor, equivalent to 2 per cent of the price for which sold by the manufacturer. That tax was repealed by the Revenue Act of

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1938, effective June 30, 1938. The petitioner paid and bore the burden of excise taxes as follows while the law was in effect:

1932 $5,701.04

1933 13,251.27

1934 18,578.50

1935 17,973.12

1936 20,628.70

1937 27,147.56

1938 12,281.45

No excise taxes of this kind were paid by the petitioner thereafter through 1942. The petitioner claimed in its excess profits tax return for 1942 that the excise taxes for the three base years should be disallowed as abnormal deductions under the provisions of section 711(b)(1)(J) of the Internal Revenue Code. The Commissioner, in determining the deficiency, refused to disallow those deductions. The excise taxes paid by the petitioner during the base years 1936 through 1938 were not of a class abnormal for the petitioner. The Alexander Corporation was engaged in the production of advertising novelties. The petitioner was interested in those novelties in connection with its own advertising and placed several small orders in 1939 with the Alexander Corporation for ash trays bearing the Fleet trade-mark. It also advanced $12,008.98 to the Alexander Corporation as a separate transaction during the last three months of 1939. Those advances were not against orders. They were discontinued in the latter part of 1939 because it then appeared that the Alexander Corporation would not be successful. The petitioner also determined at that time that the advances to the Alexander Corporation would not be repaid and charged off the total amount thereof as a bad debt in 1939. The Commissioner allowed the deduction for 1939. The petitioner, in its return for 1942, claimed that the deduction just referred to should be disallowed as abnormal in the year 1939 under the provisions of section 711(b)(1)(J). The Commissioner, in determining the deficiency, refused to disallow the deduction. The deduction for the amount due from the Alexander Corporation was of a class different from deductions claimed and allowed during the base period years and also during the years and also during the years 1940 through 1942 for bad debts on accounts due from customers in the ordinary course of the petitioner's business and from a deduction of $6,000 claimed and allowed on the petitioner's return for 1942 representing part of an advance on an order for goods. The loss through a worthless debt due form the Alexander Corporation was a deduction of a class abnormal for the petitioner. It was not the consequence of an increase in the gross income or a decrease in the amount of any other deduction of the petitioner in its base Page 193 period, and it was not a consequence of a change at any time in the type, manner of operation, size, or condition of the business of the petitioner. The petitioner made up an informal annual budget of expenditures to promote sales for a number of years up to 1938, after which it used a written budget prepared each fall for the ensuing year. The amount to be expended on a particular plan was determined more or less arbitrarily by the management, in accordance with what it felt would be needed and would prove advantageous. Sales promotion is important in the business of the petitioner and considerable advertising is necessary, particularly to overcome the prejudices of parents and school teachers to the chewing of gum. The principal product of the petitioner during the years 1932 until manufacture was terminated on account of the war in the latter part of 1942 was a penny juvenile chewing gum sold under the name ‘ Dubble Bubble.‘ It also made several other gum and candy products to be sold for a penny. The principal consumers of those products were children between the ages of 5 and 14. The petitioner engaged in a number of different advertising activities in order to keep its products before its changing group of consumers. Those activities were influenced by the facts that many of the consumers could not read well, and many were readily impressed by novelty advertising. The petitioner distributed its products through commission brokers, who sold to wholesalers. The wholesalers sold to retailers, who sold to the consumers. Chain stores buying from brokers sold directly to the consumers. The commission brokers usually handled other products in addition to those of the petitioner. The following schedule shows a new classification of accounts adopted by the petitioner in January 1938, together with a compilation of earlier expenditures reclassified to correspond to the new accounts:

[Note: The following table/form is too wide to be printed on a single page. For meaningful review of its contents the table must be assembled with part numbers in ascending order from left to right. Row numbers, which are not part of the original data, have been added in the margins and can be used to align rows across the parts.] *********************************************************************** ************** This is piece: 1 ***********************************************************************

1 Account No. 1932 1933 1934 1935 1936 1937 1938 1939 1940

2 51 Selling Expenses:

3 5114 Bonus to Jobbers' Salesmen $8,711.72 $2,560.51 $96.53 $1,479.25 $350.57 $649.05 $474.10

4 512 Premiums for Sales Contests $1,142.07 $222.77 101.10 1,301.05 9,549.39

5 517 Salesmens' Samples 1,500.00 780.18 704.38 684.05

6 53 Advertising— General:

7 531 Advertising Department 2,175.99 3,545.40 2,385.39

8 532 Fieldmen 34,801.94 26,779.95 39,045.24 14,878.43 13,889.56 5,695.21 2,764.36 2,714.57 6,112.78

9 533 Surveys and Market Analyses 18.50 192.91 1.63 1,775.04

10 534 Misc. Agency Charges 12,000.00 8,150.00 3,410.00 161.00 96.84 1,196.50 1,402.00 65.60

11 535 Trade Assoc. Dues and Expenses 542.17

12 54 Premiums, Supplies, etc.:

13 540 Self Liquidating Premiums (234.32)

14 541 Premiums in Deals— Fleer 32,781.11 24,996.34 25,462.94 16,502.01

15 542 Premiums in Deals— Other 5,245.10 36,809.08 14,935.13 16,041.57 43,886.65 21,183.41 22,745.39 28,349.40

16 543 Premiums to Jobbers 20,709.87 34,566.21 8,075.86 4,704.06

17 544 Premiums to Consumers 166.67 313.61 806.36 2,811.39

18 545 Free Goods 12.40

19 546 Samples— Trade 22.50 151.31 3,008.77 1,123.09 1,208.25 1,519.35

20 547 Samples— Consumers 3,817.23 4,237.91 7,471.59 24,015.60 2,455.73 2,231.22 1,239.00

21 548 Novelty Advertising 21,307.72 40,697.94 15,368.85 10,359.68 2,260.61 1,068.21 725.78 3,394.45 1,654.32

22 549 Premium Samples Purchased (20.06) 8.97 2.06

23 55 Sales Promotion:

24 552 Controlled Outlets 2,463.12 7,294.58 593.30

25 553 Pamphlets & Printed Matter 1,455.23 3,071.42 263.49

26 554 Dealer and Jobber Helps 7,982.54 8,978.26 11,461.98 20,349.97 17,052.57 1,925.90 3,971.90 8,289.33 7,007.00

27 555 Package Inserts 6,417.99 5,198.53 7,553.19 1,273.02 6,572.60 4,802.27 1,152.53 387.61

28 556 Coupons 9,413.80 14,350.67 1,856.42 26,91

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