American Can Co. v. Comm'r of Internal Revenue, Docket No. 69174.
| Decision Date | 16 November 1961 |
| Docket Number | Docket No. 69174. |
| Citation | 37 T.C. 198 |
| Parties | AMERICAN CAN COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles C. MacLean, Jr., Esq., John H. Perkins, Jr., Esq., and Frederick B. Boyden, Esq., for the petitioner.
Dean P. Kimball, Esq., for the respondent.
1. Petitioner formerly leased, but refused to sell, the container-closing machines which it manufactured. Under an antitrust decree effective January 1, 1951, petitioner was ordered to offer its closing machines for sale. In compliance with the decree petitioner established a separate department relating to closing machines, which manufactured such machines and which leased and sold such machines, both those on hand as well as those manufactured thereafter by it. Held, petitioner's sales of closing machines in 1953 did not qualify for capital gains treatment under section 117(j), I.R.C. 1939.
2. Petitioner kept its books and reported its income on an accrual system of accounting; however, inconsistently with that method of accounting, it deducted vacation pay and property taxes of certain but not all States in the year that these liabilities were paid rather than in the year that they accrued. Held, notwithstanding that petitioner had erroneously deducted such items uniformly for an undisclosed number of prior years in the year of payment rather than accrual, its income for 1953 must be determined by deducting the amounts of such items which accrued in 1953 rather than the amounts which were paid in that year.
3. Face amount of installment sale contracts assigned without recourse held income in the year of sale notwithstanding retention of a portion thereof by the assignee as a contingency reserve. General Gas Corporation, 33 T.C. 303,affirmed293 F.2d 35 (C.A. 5), followed.
Respondent determined a deficiency in petitioner's income and excess profits tax for 1953 in the amount of $3,280, 059.67. Petitioner claims an overpayment in the amount of $5,254,252.35. The only issues remaining for our determination are (1) whether petitioner properly treated profit derived from sales of some of its equipment as being taxable as capital gain rather than ordinary income; (2) whether petitioner, an accrual basis taxpayer, is entitled to deduct property taxes of certain but not all States and vacation pay in the year the liability accrued rather than in the later year of payment, notwithstanding that petitioner had uniformly deducted such items during an undisclosed period in the past in the year of payment rather than in the year of accrual; and (3) whether petitioner is entitled to a claimed overpayment or adjustment for amounts reported as income in connection with certain installment sales notes transferred by petitioner to a finance company without recourse.
Most of the facts are stipulated and are incorporated herein by reference as stipulated.
Petitioner is a New Jersey corporation, having its principal office at 100 Park Avenue, New York, New York. It filed its 1953 income tax return with the district director of internal revenue, Upper Manhattan, New York.
1. Capital gain.— Since 1901, petitioner has been engaged in manufacturing containers for sale to canners. An indispensable part of this business is the availability of container-closing machines, related and auxiliary equipment (hereinafter collectively called closing machines), which affix tops to containers automatically and at high speeds. The closing machine is similar to a machine used by petitioner to put the bottoms on its containers, except that the closing machine seals filled containers. Due to the precise requirements of this process, these closing machines are elaborate and costly, necessitating skilled maintenance and periodic overhaul. Petitioner, the largest and one of the few manufacturers of closing machines, chose to lease them solely to its container customers under contracts providing for the purchase of the customer's container requirements, or some percentage thereof, from petitioner and at nominal rentals in order to promote the sale of its containers. The terms of the leases were from 1 to 5 years and the leases were customarily renewed. These closing machines were not offered for sale. They were treated as part of petitioner's depreciable assets upon which depreciation was regularly taken. Petitioner manufactured only enough closing machines to meet its current needs. The marketing of many different kinds of containers was made possible by petitioner's ability to furnish appropriate closing machines. By 1951 petitioner was marketing more than 1,000 types of containers, for all of which it furnished closing equipment.
Petitioner's gross sales of containers, less returns and allowances, for the years 1951 through 1953, were as follows:
+---------------------+
¦1951¦$565,272,321.06 ¦
+----+----------------¦
¦1952¦614,410,455.12 ¦
+----+----------------¦
¦1953¦654,568,336.01 ¦
+---------------------+
During this period approximately 95 percent of petitioner's container sales were made to users of its closing equipment.
On August 27, 1946, the United States commenced an action against petitioner in the United States District Court for the Northern District of California (hereinafter called the District Court). The Government alleged violations of applicable antitrust laws and challenged petitioner's contracts with its customers covering the sale to them of their container requirements and petitioner's system of leasing its closing equipment. Among other things, the Government asked in the alternative for an order of ‘Divestiture of the closing machine part of defendant's business, that is, the manufacture, ownership and leasing of closing machines by defendant,‘ or for an order ‘directing defendant to sell or lease its closing machines to any applicant on non-discriminatory terms and conditions and to provide service for said machines to all lessees on the same terms and conditions.’ The trial was completed March 31, 1949, and on November 10, 1949,the District Court filed its opinion (reported at 87 F.Supp. 18) finding that petitioner violated sections 1 and 2 of the Sherman Antitrust Act and section 3 of the Clayton Act. Extensive hearings pertaining to the decree to be entered continued until June 22, 1950.
On June 22, 1950, the District Court entered its decree (hereinafter sometimes called the judgment) which was to become effective on January 1, 1951, and regulated in detail petitioner's closing machine operations. Pertinent provisions of the judgment are substantially as follows:
III
1. It is the express purpose of this Judgment to assure to those interested in owning container closing machines * * * the opportunity to purchase such machines * * * owned * * * by (petitioner) as of January 1, 1951; and, with respect to * * * closing machines * * * manufactured or acquired by (petitioner) after January 1, 1951, for (petitioner) to adopt a policy of affording to all those desiring such machines * * * every available economic incentive to purchase such machines * * *
(Petitioner) is * * * directed to utilize its maximum efforts to promote, implement and achieve the purposes as set forth herein; and to afford * * * to existing lessees of closing machines * * * owned by it on January 1, 1951, complete information as to the methods of purchasing such machines * * * as compared with the continued leasing of them.
2. (Petitioner) is * * * directed to sell, for a period of ten (10) years * * * to any applicant * * * any * * * closing machine which it owns on the effective date of this provision, or thereafter manufactures or acquires.
2a. In order to effectuate and implement the provisions * * * , the Court does hereby appoint a master who shall be empowered to take all necessary * * * steps * * * to evaluate (petitioner's) efforts under the foregoing provisions * * * . On or before January 1, 1952 the master * * * shall file with the Court and with the Attorney General a full and complete survey and report * * *
5. The maximum sales price for any * * * closing machine owned by (petitioner) on or prior to January 1, 1951, shall be computed in the following manner:
A. The base price shall be ten (10) times the rental * * * in effect for the calendar year 1959. In the event that the weighted average depreciated cost of * * * closing machine, on the effective date of this Judgment, is higher than the base price such weighted average depreciated cost shall be taken as the base price; but in no instance shall this latter base price be higher than the current factory cost of that * * * closing machine on the effective date of this judgment.
C. If any purchaser of any such closing machine desires to purchase it in its existing condition, there shall be deducted from the applicable base price * * * four (4) per cent * * * for each complete calendar year of use since the date the * * * closing machine was last reconditioned * * *
D. In the event that any purchaser * * * desires to purchase any * * * closing machine * * * (where-is, as-is) a further deduction of two (2) per cent shall be allowed from the sales price.
E. * * * Every lease of any closing machine owned by (petitioner) on January 1, 1951, shall contain * * * an option to purchase the leased machine * * *
7. Within one hundred twenty (120) days * * * (petitioner) shall send written notice in a form approved by the Attorney General * * * to each person with whom (petitioner) then has a * * * lease for any closing machine * * * informing said person of his right to purchase * * * said machines * * * and quoting therein the computed sales price * * *
9. The (petitioner) is * * * directed to provide * * * credit terms for * * * ten (10) years * * *
10. The (petitioner)...
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