Pac. Vegetable Oil Corp. v. Comm'r of Internal Revenue

• Decision Date: 05 April 1956
• Docket Number: Docket No. 50344.
• Citation: 26 T.C. 1
• Parties: PACIFIC VEGETABLE OIL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

26 T.C. 1

PACIFIC VEGETABLE OIL CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 50344.

Tax Court of the United States.

Filed April 5, 1956.

Dudley F. Miller, Esq., for the petitioner.

Edward H. Boyle, Esq., for the respondent.

1. Held, the revision effected by petitioner in 1949 to reflect contract sales accounts under which 95 per cent payments had been made in 1949 and for which contingent adjustments might be made in 1950 upon the determination in 1950 of certain facts constituted a change in its accrual method of accounting for which prior consent of the Commissioner was required. Held, further, that respondent's action in rejecting the change and his requirement that the method of accounting employed by petitioner prior to 1949 be continued, is not proven to be arbitrary or an abuse of the Commissioner's discretion.

2. Petitioner owned 2,094 shares of common stock, out of 5,182 shares, the only class of issued stock of Western Vegetable Oils Co. In 1949, Western acquired for cash 1,346 shares of stock owned by petitioner, and, also, all of the stock owned by some stockholders. All of the stock acquired was canceled and retired by Western. Held, the distribution of Western in cancellation of stock held by petitioner was not essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g) of the 1939 Code but was taxable as provided in section 115(c).

The Commissioner determined a deficiency in income tax for the year 1959 in the amount of $148,867.81. The petitioner concedes that some of the Commissioner's adjustments are correct so that there is a deficiency of about $35,907.31. The remaining deficiency of $112,960.50 is in dispute. There are two issues to be decided, as follows:

(1) Whether the petitioner's adoption, in 1949, of a new system of accounting for sales of copra which were in transit at the end of the year so as to include in gross income only 95 per cent of the contract price and to carry in a reserve for future, contingent adjustments in contract price 5 per cent, constituted a change in petitioner's accrual method of accounting which required prior consent of the Commissioner.

(2) Whether a cash distribution in 1949 to petitioner by another corporation in cancellation and redemption of part of the stock held by petitioner is essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g) of the 1939 Code, or was a distribution in partial liquidation taxable as provided in section 115(c).

FINDINGS OF FACT.

The petitioner filed its return for 1949 with the collector of internal revenue for the first district of California in San Francisco.

Issue 1.

Petitioner is a California corporation having its principal place of business in San Francisco. It keeps its books and makes its income tax returns on an accrual method of accounting and on the basis of a calendar year.

Petitioner is engaged in the business of manufacturing, processing, handling, and dealing in vegetable oil raw materials and vegetable oils in the United States and elsewhere in the world. One raw material in which it deals is copra, the meat of coconuts, from which coconut oil is manufactured. As part of its business operations, petitioner purchases copra rather extensively. Some of the copra which petitioner buys, it imports into the United States for the purpose of crushing into oil. The issue in this proceeding does not relate to such purchases. Petitioner purchases a large quantity of copra in the Philippine Islands and sells and ships such purchases to purchasers in Europe, Latin America, and elsewhere. Those purchases do not enter the United States. The issue to be decided relates to these purchases and sales of copra.

Prior to shipment, in the producing areas in the Philippine Islands, copra, the raw material, is removed from the coconut shell and is either sun dried, smoke dried, or kiln dried. During shipment there is usually loss of moisture and a resulting loss of weight of the copra, but sometimes there is a taking on of moisture if there is sweating and condensation of moisture in the hold of a ship, or there may be but a slight change in the weight of the bulk copra during transit to the point of delivery. This condition has given rise to a practice in the trade of comparing the weight of bulk copra at the time of unloading at the destination of the shipment with the weight at the time of loading at the point from which copra is shipped. The weight of copra at the point of destination is called the landed weight or outturn weight.

During 1949, and in prior years, petitioner sold and shipped large quantities of copra from the Philippines to buyers in Europe, Latin America, and other places outside the United States. The following contract is typical of the form of contract which petitioner and its customers used during 1949 and prior years:

COPRA SALES CONTRACT

CLAUSE PARAMOUNT: This contract is subject to the published Trading Rules of the National Institute of Oilseed Products adopted and now in force, which rules are hereby made a part hereof to the same extent as if set forth in full herein, except insofar as such Rules conflict with any of the following terms of this Contract, in which event the said following terms shall govern. Any dispute arising under or resulting from this contract or under modification thereof shall be settled by Arbitration in accordance with the Rules of the National Institute of Oilseed Products in effect at the contract date.

BUYER: H. M. F. FAURE & Co., LTD., London, E. C. 3 ENGLAND.

SELLER: PACIFIC VEGETABLE OIL CORPORATION, San Francisco, California.

COMMODITY: Philippine Copra.

QUANTITY: Five hundred and fifty (550) long tons of 2,240-lbs. per ton; 5% more or less.

QUALITY: Rule 100. The clause pertaining to moisture does not apply.

PACKING: In bulk.

SHIPMENT: August/September, 1951. Seller's vessel.

WEIGHTS ANALYSIS & SAMPLING: Certified landed weights. Sellers reserve the right to have their representatives present at time of discharge. Cost of weighing for buyer's account. Analysis by an independent Cebu or Manila laboratory of official samples taken at time of loading shall be final. Cost of sampling and analysis to be borne by seller. Rules 40, and 102 of the National Institute of Oilseed Products do not apply.

INSURANCE: Marine, usual W.A. 3% terms, warehouse to warehouse, for 110% of invoice value based upon ship weights, to be arranged and paid for by Seller. War Risk Insurance in excess of one-half percent for buyerS account.

PRICE: Two hundred and fourteen dollars ($214.00) U.S. Dollars per ton of 2,240-lbs., C. I. F. ROTTERDAM.

PAYMENT: By Sight Draft against first presentation of shipping documents, for 95% of invoice value. Final settlement to be made when outturn weights established. Bank collecting charges for seller's account.

TAXES: Any tax or other governmental charge hereafter imposed by any governmental authority upon the production, sale and/or shipment of goods sold hereunder shall be for buyer's account.

FORCE MAJEURE: Per Rule 56 of the Rules of the National Institute of Oilseed Products.

SPECIAL CONDITIONS: Buyer guarantees that Import Permits are in hand. This contract shall be deemed to be made and performed in California and is to be governed by the laws thereof.

Both buyer and seller hereby certify that they are familiar with and have access to copies of the published Trading Rules of the National Institute of Oilseed Products adopted and now in force.

H. M. F. FAURE & Co., LTD., PACIFIC VEGETABLE OIL CORPORATION

(Buyer) (Seller)

Thru: Zimmerman Alderson Carr Co., SF SFZ-3888.

Under a copra sales contract, such as the one set forth above, the quantity covered by the contract is the number of tons specified in the contract (550 long tons, in the above contract), ‘5% more or less,‘ which latter clause constitutes the provision for determining the landed, or outturn, weight; and the invoice value is the amount of the contract weight times the stated price per ton. For example, under the above contract, the invoice value was $117,700. The contract-invoice weight is called the shipped weight. Also, under the copra sales contract which petitioner used, the initial payment of the buyer was 95 per cent of the invoice value, which amount was paid under a sight draft before the shipment reached its destination, and the final settlement was made after the unloading of the shipment and the determination of the of the outturn, or landed weight. Under the above contract, the initial 95 per cent payment amounted to $111,815, and after the unloading of the shipment, if the outturn weight was more than 95 percent of the shipped weight, i.e., weight at the time of shipment, the buyer would then pay petitioner the balance of the amount due over and above the initial 95 per cent payment. Or, if the outturn weight proved to be less than 95 per cent of the shipped weight, petitioner would make a refund to the buyer of the part of the initial payment which proved to be excessive. This custom of adjusting the final payment for a shipment on the basis of the outturn, or landed, weight gives rise to the description, ‘selling on a landed weight basis.’ Since the determination of the landed weight cannot be made until transit is completed, the final payment by the buyer is not made until about 60 days after the date of shipment.

Another way of describing the custom of selling on a landed weight basis is that the invoice price, which is computed at the time of the shipment, is adjusted at the end of transit, upon delivery, to the landed weight value, at which time the seller either collects an additional payment from, or makes a refund out of the initial payment to, the buyer.

The initial payments to petitioner under its executed sales contracts were brought about in the following way: Soon after shipment, the bill of lading, the invoice, and other...