Metra Chem Corp. v. Comm'r of Internal Revenue
| Decision Date | 23 March 1987 |
| Docket Number | 23224-82,23225-82.,Docket Nos. 23223-82 |
| Citation | 88 T.C. 654,88 T.C. No. 36 |
| Parties | METRA CHEM CORP., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, a wholesaler of industrial chemicals, established a promotional program under which customers or their employees were given premiums such as televisions, citizen band radios, and prime meats. P purchased such items and made them available to its outside salesmen, who selected the recipients and generally delivered the gifts. The salesmen were charged the cost for the premiums plus a small markup. However, there was no markup on the gifts of prime meat, and they were sent directly from the packer to the recipients. P did not maintain records with respect to the disposition of the premiums.
HELD: (1) The transfers of the premiums constituted sales by P to its salesmen; as to P, the cost of such items represented cost of goods sold.
(2) P is not liable for the addition to tax for negligence for the treatment on its returns of the cost of the premiums.
(3) The individual Ps are liable for the addition to tax for negligence for failing to report dividends received by them in 1977. Edward DeFranceschi, Joan Apkin, and Lucien P. Gauthier, for the petitioners.
Pamela V. Gibson, for the respondent.
The Commissioner determined deficiencies in, and additions to, petitioner Metra Chem Corp.'s Federal income taxes as follows:
+--------------------------------------------------------+
¦ ¦ ¦Addition to tax ¦
+------------+----------+--------------------------------¦
¦TYE Mar. 31—¦Deficiency¦tax sec. 6653(a), I.R.C. 19542 ¦
+------------+----------+--------------------------------¦
¦1976 ¦$56.57 ¦--- ¦
+------------+----------+--------------------------------¦
¦1977 ¦20,788.66 ¦$1,533.13 ¦
+------------+----------+--------------------------------¦
¦1978 ¦21,476.71 ¦1,157.30 ¦
+------------+----------+--------------------------------¦
¦1979 ¦9,559.78 ¦477.99 ¦
+--------------------------------------------------------+
The Commissioner also determined that petitioners Richard and Shirley M. Laroche were liable for the addition to tax under section 6653(a) in the amount of $154.72 for 1977, and that petitioners Ronald D. and Beverly Laroche were liable for the addition to tax under section 6653(a) in the amount of $255.55 for 1977. The issues for our decision are: (1) Whether petitioner Metra Chem Corp. is entitled to deductions for the cost of items used by the company's salesmen as promotional premiums; (2) whether petitioner Metra Chem Corp. is liable for the addition to tax for negligence under section 6653(a); and (3) whether petitioners Richard and Shirley M. Laroche and petitioners Ronald D. and Beverly Laroche are liable for the addition to tax for negligence under section 6653(a) for 1977.
Some of the facts have been stipulated, and those facts are so found.
At the time the petitions in this case were filed, petitioner Metra Chem Corp. had its principal place of business in Shrewsbury, Massachusetts; petitioners Richard and Shirley M. Laroche, husband and wife, resided in Hudson, New Hampshire; and petitioners Ronald D. and Beverly Laroche, husband and wife, resided in North Chelmsford, Massachusetts. All the petitioners filed Federal income tax returns for the years in issue with the Internal Revenue Service Center in Andover, Massachusetts.
Metra Chem Corp. (Metra Chem) is a Massachusetts corporation formed in 1975. It reports its income on an accrual method, with a tax year ending March 31. We shall identify a taxable year by the calendar year in which it ends. Petitioners Ronald and Richard Laroche, who are brothers, serve as the officers of Metra Chem.
Metra Chem is a wholesaler of industrial chemicals. It sells road salt, liquid chloride, and other chemicals to various users, including municipalities, fire departments, and colleges. Its products are sold by salesmen who spend much of their time visiting customers away from Metra Chem's office.
Metra Chem exerted a substantial degree of control over the activities of its salesmen. It offered training programs and assigned sales territories for new salesmen. It required that salesmen file weekly written reports to keep track of their sales efforts. In addition, Metra Chem provided its salesmen with fringe benefits, such as vacation and sick pay and insurance coverage.
Metra Chem operated in competition with several other businesses. Its products and the prices for such products were approximately the same as those offered by its competitors. As a result, a customer could meet its needs for industrial chemicals from any of the businesses in Metra Chem's market. Such freedom of movement made the industrial chemical market highly competitive.
In an attempt to promote loyalty among its customers, Metra Chem instituted a ‘premium program,‘ under which customers were given various promotional items. The promotional items, or premiums, included equipment used in applying the chemicals purchased by the customers. In addition, customers or the employees of such customers received a wide variety of consumer goods, including citizen band radios, television sets, watches, fishing equipment, prime meats, and, in one instance, a gocart. Some of Metra Chem's competitors had instituted similar premium programs.
Metra Chem purchased the items used in the premium program in large quantities and stored such items in its warehouse. All the premiums were made available to the company's salesmen at the warehouse. When salesmen found it inconvenient to go to the warehouse to inspect such items, they called the Metra Chem office to see what was available. When a salesman selected a premium from the warehouse, he signed a receipt and took the item with him. When a salesman requested an item by phone, such item was mailed to him at his home.
A different procedure was used when a salesman selected prime meats, such as sirloin steak and filet mignon, as the premium. On such occasions, the salesman called Richard Laroche in Metra Chem's office and told him the name and address of the individual to whom the meat was to be sent. Mr. Laroche then ordered the meat from Metra Chem's supplier and instructed that the meat be shipped directly to the individual.
Metra Chem exercised only minimal control over its salesmen's participation in the premium program. It encouraged the salesmen to use the program to promote customer loyalty and to establish new accounts, but the salesmen were to use their discretion in deciding when to make a gift. Metra Chem had no control over who ultimately received premiums. At times, salesmen converted premiums to their personal use.
Metra Chem charged each salesman for the premiums given by him at prices representing a 5- to 15-percent markup over the company's costs for the premiums. The amount of such markup was not uniform, but was set at the discretion of Ronald Laroche. Metra Chem did not mark up its costs for the prime meats. The charges for the items selected by a salesman appeared on his commission statement which he received each month. At times, the commissions earned by a salesman in a month were insufficient to cover the charges for the premiums selected. On such occasions, the salesman,s commission statement reflected a credit balance, representing an amount owed to Metra Chem. There is no evidence regarding whether Metra Chem attempted to collect such amounts.
The amount of gross commissions earned by a salesman was reduced by commissions on sales for which the company had not received payment, by advances for automobile expenses, and by the charges for premiums selected by the salesman. Metra Chem issued W-2 forms to its salesmen for the years in issue. The wages reported on such a form reflected the salesman's net commissions. Such wages did not include the amounts ‘charged back‘ for premiums. Metra Chem withheld employment taxes from net commissions.
The transfers of the premiums to the salesmen were not reflected in the general sales records or in any sales account of Metra Chem. The markups on such items were not recognized as gains on sales by the corporation. Metra Chem's payments for the premiums were recorded in its cash disbursements records. It did not maintain an inventory account of such items.
On its corporate Federal income tax return for 1977, Metra Chem included in its cost of goods sold expenditures of $23,878.63 attributable to the cost of premiums. On its return for 1978, Metra Chem deducted $44,743.14 attributable to ‘promotional premiums.‘ On its return for 1979, Metra Chem deducted expenditures for premiums of $44,058.95 and described such expenditures as a deduction for ‘advertising and promotion.‘
Ronald and Richard Laroche formed Sax Management Corporation (Sax) to provide management services to Metra Chem. Ronald and Richard own all the outstanding stock of both Metra Chem and Sax. During 1977, Ronald and Richard authorized and received dividends from both Sax and Metra Chem. Ronald received $10,000 from Sax and $200 from Metra Chem. Richard received $6,666 from Sax and $200 from Metra Chem.
On their Federal income tax return for 1977, Ronald and Beverly Laroche reported gross income of $47,088. They reported no income from dividends in 1977. On their Federal income tax return for 1977, Richard and Shirley Laroche reported gross income of $33,786. They reported no income from dividends in such year. All of the Laroches employed Donald R. Nash to prepare their returns. Mr. Nash also served on the board of directors of Metra Chem and prepared its corporate Federal returns.
In his notice of deficiency to Metra Chem, the Commissioner adjusted Metra Chem's cost of goods sold for 1977 to eliminate the cost of the...
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