Modesto Dry Yard, Inc. v. Comm'r of Internal Revenue
| Decision Date | 09 March 1950 |
| Docket Number | Docket No. 14374. |
| Citation | 14 T.C. 374 |
| Parties | MODESTO DRY YARD, INC., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Contracts to purchase packed dried raisins to be delivered in the latter part of the year f.o.b. dock, entered into as a speculation by taxpayer in may, 1937, long prior to the maturity and harvest of grapes, such contracts not being sold until the succeeding year, held, to be capital assets.
2. Held, that the loss sustained on the sales of such contracts in June, 1938, is excludable under section 711(b)(1)(B), I.R.C., in computing excess profits net income. Edward R. Taylor, Esq., and Charles L. Barnard, Esq., for the petitioner.
Gerald W. Brooks, Esq., for the respondent.
The Commissioner determined deficiencies as follows:
+------------------------------------------------------+
¦Tax ¦1943 ¦1944 ¦
+---------------------------------+---------+----------¦
¦Declared value excess profits tax¦$939.38 ¦ ¦
+---------------------------------+---------+----------¦
¦Excess profits tax ¦43,621.55¦ ¦
+---------------------------------+---------+----------¦
¦Excess profits tax ¦ ¦$31,202.86¦
+------------------------------------------------------+
The question to be determined is whether certain losses sustained by the petitioner in 1937 and 1938 are disallowable under section 711(b)(1)(B) or section 711(b)(1)(J) of the Internal Revenue Code.
Other issues raised by the pleadings were stipulated, to which stipulation effect will be given on recomputation under Rule 50. The respondent affirmatively alleged that, if the Court determines that such losses were abnormal within the provisions of section 711(b)(1)(J), then it will permit the petitioner to maintain an inconsistent position with respect to such losses entitling the respondent to an adjustment under section 734 in the taxable years. On brief, the respondent concedes that his position with respect to the application of section 734 to the alleged abnormal losses was not well taken (sec. 734-1(d), Regulations 112). He accordingly withdrew from his position and concedes the issue so raised.
The case was submitted upon a stipulation of facts, exhibits, and oral testimony. The facts stipulated are so found. Other facts are found from the evidence.
The petitioner was incorporated under the laws of California on December 30, 1931. Its principal office is located at Modesto, California. Its returns for the years involved herein were filed with the collector for the first district of California.
Since its incorporation the petitioner has been engaged in the dried fruit business. The petitioner's business activities, except for transactions hereinafter described, consisted of the purchasing of fresh fruits, drying or dehydrating them, and selling them unpacked to packers. It occasionally bought dried fruit from farmers which it sold in the same manner. Petitioner in its plant dried the fruits, which when dry were placed in either picking boxes or sweat boxes. The picking boxes with dried fruit in them weighed from 40 to 55 pounds and the sweat boxes with dried fruit in them weighed from 60 to 75 pounds, depending on the type and size of the fruit. Peaches were dried in about two to three weeks. It took about 36 to 40 hours to dehydrate grapes. Prior to 1942 the grapes, from which petitioner made golden bleached raisins, were not stemmed. They were dried on trays, from which they were transferred to picking or sweat boxes. Petitioner usually disposed of all its dried fruits by the end of the year.
The packers, to whom petitioner sold its unpacked dried fruits, in turn processed the fruits, i.e., washed, cleaned, and resulphured them, and then packed them as directed by the ultimate purchaser in 25, 30, or 50-pound fiber boxes or in 12 1/2 kilo (27 1/2 pounds) boxes or cartons.
In 1942 petitioner started to use, and has ever since used, raisin stemmers, machines which remove the stems from raisings and clean and wash them. When the process was completed the raisins were packed in fibre cases and sold as packed and processed raisins. Petitioner in 1943 and 1944 sold raisins so processed and packed in its own plant.
Prior to 1937 the petitioner had occasionally bought peaches and apricots on trees. In such transactions the petitioner took all the responsibility for the crop maturing, harvesting it, and bringing it to its plant for drying. In 1937 it bought from several farmers apricots on a substantial acreage of trees, from which it expected to harvest around 2,500 to 3,000 tons of apricots. This was a larger amount of fruit than it had ever purchased on trees before. This transaction further differed from previous transactions in that the apricots suited for that purpose were intended for sale to canneries, because petitioner thought it would realize a greater profit in so doing. However, due to an unusual heat wave, most of the apricots were ruined and became unmerchantable. The petitioner picked a small part of the apricots and left the remainder on the trees. As a result of a compromise with respect to payments for the apricots, the loss to petitioner on the transaction was considerably less than expected. Thereafter petitioner never again purchased fruit on trees.
The following schedule shows the tons of fruit dried by petitioner in the years 1934 to 1944, inclusive:
+--------------------------------------------------------+
¦ ¦ ¦ ¦Peaches ¦ ¦ ¦
+----+---------+--------+----------------+-------+-------¦
¦Year¦Total ¦Apricots¦ ¦Black ¦ ¦
+----+---------+--------+----------------+-------+-------¦
¦ ¦ ¦ ¦ ¦ ¦raisins¦Raisins¦
+----+---------+--------+---------+------+-------+-------¦
¦ ¦ ¦ ¦Freestone¦Cling ¦ ¦ ¦
+----+---------+--------+---------+------+-------+-------¦
¦ ¦Tons ¦Tons ¦Tons ¦Tons ¦Tons ¦Tons ¦
+----+---------+--------+---------+------+-------+-------¦
¦1934¦ ¦ ¦ ¦140 ¦ ¦1,055 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1935¦1,971 ¦117 ¦76 ¦185 ¦ ¦1,593 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1936¦1,642 ¦315 ¦131 ¦290 ¦ ¦906 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1937¦2,008 ¦110 ¦102 ¦98 ¦ ¦1,698 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1938¦2,164 ¦128 ¦207 ¦34 ¦ ¦1,795 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1939¦2,158 ¦240 ¦216 ¦2 ¦ ¦1,700 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1940¦640 ¦12 ¦137 ¦41 ¦ ¦450 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1941¦1,061 ¦20 ¦108 ¦43 ¦110 ¦780 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1942¦1,653 ¦45 ¦312 ¦46 ¦ ¦1,250 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1943¦2,003 1/2¦ ¦51 ¦2 1/2 ¦ ¦1,950 ¦
+----+---------+--------+---------+------+-------+-------¦
¦1944¦1,597 ¦118 ¦199 ¦ ¦ ¦1,280 ¦
+--------------------------------------------------------+
The following schedule shows the petitioner's sales in dollars by products in the years 1936 to 1944, inclusive:
+---------------------------------------------------------------+
¦Year¦Apricots ¦Raisins ¦Peaches ¦Miscellaneous¦Total ¦
+----+----------+----------+----------+-------------+-----------¦
¦1936¦$93,088.70¦$25,726.49¦$55,396.45¦$34,441.37 ¦$208,653.01¦
+----+----------+----------+----------+-------------+-----------¦
¦1937¦46,102.93 ¦197,398.17¦22,484.25 ¦26,274.01 ¦292,259.36 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1938¦35,572.17 ¦82,932.41 ¦23,122.62 ¦2,686.23 ¦144,313.43 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1939¦47,366.71 ¦105,021.89¦31,337.35 ¦15,500.86 ¦199,226.81 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1940¦3,988.60 ¦31,430.98 ¦21,517.89 ¦14,263.40 ¦71,200.87 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1941¦12,811.96 ¦59,729.61 ¦21,089.54 ¦41,786.82 ¦135,417.93 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1942¦19,324.38 ¦239,433.38¦65,242.77 ¦2,630.14 ¦326,630.67 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1943¦ ¦445,311.51¦26,548.09 ¦70,923.39 ¦542,782.99 ¦
+----+----------+----------+----------+-------------+-----------¦
¦1944¦38,008.70 ¦328,659.67¦97,016.58 ¦4,854.09 ¦468,539.04 ¦
+---------------------------------------------------------------+
The respective amounts of petitioner's net income and adjusted net income shown on its income tax returns for the taxable years 1936, 1937, 1938, and 1939 were as follows:
+----------------+
¦1936¦$738.50 ¦
+----+-----------¦
¦1937¦(8,187.37) ¦
+----+-----------¦
¦1938¦(413.08) ¦
+----+-----------¦
¦1939¦2,530.97 ¦
+----------------+
The actual respective amounts of petitioner's net income and adjusted net income for the taxable years 1936, 1937, 1938, and 1939 are as follows:
+-----------------+
¦1936¦$831.58 ¦
+----+------------¦
¦1937¦(14,817.91) ¦
+----+------------¦
¦1938¦5,628.99 ¦
+----+------------¦
¦1939¦2,738.99 ¦
+-----------------+
The net increases in adjusting net income for such taxable years result from adjustments (A) to (O), inclusive, inconsistent with their treatment for prior years' income taxes as follows:
+---------------------------------------------------------------------------+
¦1936¦(A)¦Purchases of fruit overstated and deducted in 1936, ¦ ¦...To continue reading
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