Gen. Tire & Rubber Co. v. Comm'r of Internal Revenue, Docket No. 51537.
| Decision Date | 27 February 1958 |
| Docket Number | Docket No. 51537. |
| Citation | 29 T.C. 975 |
| Parties | GENERAL TIRE & RUBBER COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard W. Wilson, Esq., and Gustave Simons, Esq., for the petitioner.
Robert E. Johnson, Esq., for the respondent.
Petitioner, a manufacturer of coated fabrics, engaged in a program of research resulting in the development of a resin coating known as Tolex. Held, a portion of the income resulting from the sale of Tolex constitutes net abnormal income resulting from research and development within the meaning of section 721(a)(2)(C), I.R.C. 1939, and is allocable to the years during which the research and development program was in operation, pursuant to section 721(b), I.R.C. 1939.
The respondent denied taxpayer's claims for refund of excess profits taxes under section 721 of the Internal Revenue Code of 1939 for the years 1942 through 1945.
The sole issue presented for our decision is the question whether taxpayer derived net abnormal income of a class specified by section 721(a)(2)(C) of the 1939 Code during 1942, 1943, 1944, and 1945, attributable to prior years so as to entitle taxpayer to the relief accorded by that section.
The petition herein was filed by the Textileather Corporation. Subsequent to the filing of the petition and answer, Textileather Corporation was merged with the General Tire & Rubber Company. Consequently, upon motion for substitution made at the trial, the caption of the proceeding was changed to indicate the substitution of General Tire & Rubber Company as petitioner.
Some of the facts have been stipulated and are found accordingly.
Textileather (sometimes hereinafter referred to as taxpayer) is a corporation organized under the laws of the State of Delaware in 1927 with its principal place of business located at Toledo, Ohio. It filed its corporation income and declared value excess-profits tax returns and excess profits tax returns for 1942, 1943, 1944, and 1945 with the collector of internal revenue for the tenth district of Ohio.
Taxpayer filed claims for refund under section 721 of the 1939 Code for the years and in the amounts as follows:
+-------------------------+
¦Year ¦Amount of claim ¦
+------+------------------¦
¦1942 ¦$39,119.01 ¦
+------+------------------¦
¦1943 ¦365,408.09 ¦
+------+------------------¦
¦1944 ¦380,523.66 ¦
+------+------------------¦
¦1945 ¦156,629.87 ¦
+-------------------------+
Amended claims for refund under section 721 were filed by Textileather for the years and in the amounts as follows:
+-------------------------+
¦Year ¦Amount of claim ¦
+------+------------------¦
¦1942 ¦$14,274.96 ¦
+------+------------------¦
¦1943 ¦56,983.99 ¦
+------+------------------¦
¦1944 ¦102,128.99 ¦
+-------------------------+
The foregoing claims and amended claims were disallowed in full by the respondent.
The taxpayer here contends that its net abnormal income due to research and development and attributable to prior years is $25,498.55 for 1943, $585,145.16 for 1943, $568,913.81 for 1944, and $261,989.13 for 1945.
Beginning in 1927, Textileather was engaged in the manufacture and sale of rubber-coated fabrics and pyroxylin-coated fabrics, and in the dyeing and finishing of cotton cloth. It did not manufacture finished products, i.e., luggage upholstery, etc., but only coated fabrics, the end uses of which were in competition with leather. Textileather abandoned its rubber department in 1936 or 1937, but added duck impregnation and vinyl-coated fabrics during the period 1942 to 1945.
During the 1920's a strong demand arose, originating principally in the automotive, furniture, and luggage industries, for a new and different product superior to the then known pyroxylin-coated materials. Pyroxylin is a nitrocellulose compound which when pigmented and plasticized into a semifluid form can be spread by a coater.
The uses of pyroxylin are restricted because of its resistance to flexing, stretching, and folding, its tendency to crack at low temperatures, its unsatisfactory resistance to abrasion, and its high degree of inflammability.
In 1930, Textileather moved its operations from Newark, New Jersey, to Toledo, Ohio, where a new plant was built which was equipped with a research laboratory. Beginning in 1931, taxpayer began an intensive program of research and development for the purpose of creating and perfecting a new and different product that would meet the needs and demands of industry for a leatherlike material without the inherent weaknesses of pyroxylin which could be used in the numerous field to which pyroxylin-coated fabrics were unsuited. The foregoing program of research, exploration, and development was conducted without interruption until the end of 1940. Additional impetus was given the research and development work in 1932 and 1933 by the adoption of fixed specifications by certain members of the automotive industry, including Chrysler Corporation, Ford Motor Company, and Fisher Bodies, requiring a degree of endurance not then found in any existing product.
The research and experimental work conducted by Textileather included the testing of certain types of resins, such as alkyd resins and resyl resins, but none was found adequate for the purpose. In 1938 or 1939, Bakelite Corporation, a division of Union Carbide and Carbon Corporation, developed and began the commercial production of a high molecular weight vinyl resin. This was a new product, previously unobtainable, and proved to be a satisfactory base for the material petitioner was seeking to produce. With the vinyl resin as a base, it was then necessary to develop the remaining constituents of the desired compound, i.e., the plasticizers, lubricants, stabilizers, and pigments, that could be combined with the resin base to develop a coating which was resistant to all kinds of weather and to many different chemicals and that possessed many of the characteristics of leather. By the end of 1940, a satisfactory produce was developed which was thereafter named and registered ‘Tolex.’ The final testing of Tolex, in the form of trial runs, was done on equipment belonging to the National Carbon Company of Cleveland, Ohio, during the closing months of 1940 and January 1941. Tolex was an entirely new and unique product in the field of leatherlike, plastic-coated fabrics, possessing qualities far superior to the pyroxylin-coated materials then used, such as flexing, folding, and resistance to heat, fire, cold, and to various chemicals. In addition to its adaptability to end uses in products adaptable to items for which leather, rubber, and pyroxylins could not be used.
A low molecular weight vinyl resin was also produced by Union Carbide and Carbon Corporation, beginning in 1938. Low molecular weight vinyl resins are closely related to high molecular weight vinyl resins, and are produced for similar end uses. During World War II, low molecular weight vinyl resins were sometimes used as substitutes for high molecular weight vinyl resins.
During the latter part of 1940, Textileather placed an order with Farrell-Birmingham Company for machinery and equipment necessary to manufacture Tolex. Delivery thereon was delayed for more than a year. The actual commercial production of Tolex did not begin until May 1942.
The research, experimental, and developmental expenses paid or incurred by the taxpayer in the development of Tolex for the years 1931 to 1940, inclusive, were as follows:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1931 ¦$11,993.85 ¦
+------+-----------¦
¦1932 ¦7,691.97 ¦
+------+-----------¦
¦1933 ¦5,321.78 ¦
+------+-----------¦
¦1934 ¦7,575.84 ¦
+------+-----------¦
¦1935 ¦7,203.11 ¦
+------+-----------¦
¦1936 ¦10,567.86 ¦
+------+-----------¦
¦1937 ¦13,615.31 ¦
+------+-----------¦
¦1938 ¦10,884.51 ¦
+------+-----------¦
¦1939 ¦19,915.29 ¦
+------+-----------¦
¦1940 ¦29,062.42 ¦
+------+-----------¦
¦Total ¦123,831.94 ¦
+------------------+
Although the development of Tolex was a peacetime project for the purpose of supplying various industries, including the automotive and luggage industries, with a normal commercial product, the United States had entered World War II shortly prior to the first production of Tolex and, consequently, during the years 1942 through 1945, the entire output of this product was utilized for military and defense purposes. During World War II, certain restrictions were imposed upon the production of Tolex. Because of the allocation of raw materials and the system of priority ratings then in effect, the supply of resins, textiles, and other materials necessary for the production of Tolex was inadequate to meet the existing demand. Tolex was sold under price restrictions. During the years 1942, 1943, 1944, and 1945, taxpayer was the sole producer of Tolex, and, during 1942 and 1943, it was without active competition in the production of marketable high molecular weight vinyl fabrics.
During World War II, Tolex was utilized in the production of aircraft, tanks, life rafts, gun mount covers, surgical hospital sheeting, life jackets, bedding, navy bags, and numerous other military items.
At the conclusion of World War II, no plant reconversion was necessary to enable Textileather to commence civilian production. However, certain new equipment was purchased in order to meet the normal industrial demand for different styling. Textileather operated at full capacity in the production of Tolex during the war years and has continued to operate at full capacity thereafter.
The industrial demand for a product possessing the qualities of Tolex was felt at the close of World War II. Tolex was sold for use in the automotive, furniture, luggage, leather goods, shoe, upholstery, pharmaceutical, bicycle, and saddle industries, as well as for use in the production of...
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