88 T.C. 654 (1987), 23223-82, Metra Chem Corp. v. C.I.R.

Docket Nº:23223-82, 23224-82, 23225-82.
Citation:88 T.C. 654
Opinion Judge:SIMPSON, JUDGE:
Party Name:METRA CHEM CORP., ET AL., [1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Edward DeFranceschi, Joan Apkin, and Lucien P. Gauthier, for the petitioners. Pamela V. Gibson, for the respondent.
Case Date:March 23, 1987
Court:United States Tax Court
 
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Page 654

88 T.C. 654 (1987)

METRA CHEM CORP., ET AL., [1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 23223-82, 23224-82, 23225-82.

United States Tax Court

March 23, 1987

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.

SIMPSON, JUDGE:

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. 1954[2]
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 Page 655 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. FINDINGS OF FACT 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 Page 656 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...

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