Brown-Forman Corp. v. Comm'r of Internal Revenue, Docket No. 27494-87.

• Citation: 94 T.C. No. 58,94 T.C. 919
• Decision Date: 25 June 1990
• Docket Number: Docket No. 27494-87.
• Parties: BROWN-FORMAN CORPORATION (A DELAWARE CORPORATION), SUCCESSOR BY MERGER TO BROWN-FORMAN CORPORATION (A TENNESSEE CORPORATION), SUCCESSOR IN INTEREST TO SOUTHERN COMFORT CORPORATION (A DELAWARE CORPORATION), Petitioner1, v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

94 T.C. 919
94 T.C. No. 58

BROWN-FORMAN CORPORATION (A DELAWARE CORPORATION), SUCCESSOR BY MERGER TO BROWN-FORMAN CORPORATION (A TENNESSEE CORPORATION), SUCCESSOR IN INTEREST TO SOUTHERN COMFORT CORPORATION (A DELAWARE CORPORATION), Petitioner1,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27494-87.

United States Tax Court

Filed June 25, 1990.

Manufacturer of alcoholic beverages paid Federal excise tax on distilled spirits sold domestically and utilized DISC as commission agent for export sales of its liqueur product. HELD: For purposes of computing the overall profit percentage limitation (‘OPPL‘) under sec. 1.994-2, Income Tax Regs., ‘gross receipts‘ from domestic sales includes the total sales proceeds received from customers, without reduction for manufacturer's payment of excise tax on distilled spirits. HELD FURTHER: For purposes of the OPPL, gross receipts from export sales does not include any amount attributable to the Federal excise tax on distilled spirits, which is relieved upon export. HELD FURTHER: sec. 1.994-2(b)(3), Income Tax Regs., imposing the OPPL, is valid. HELD FURTHER: The aggregation rule of sec. 1.994- 2(c)(2)(ii), Income Tax Regs., may be used to calculate the overall profit percentage (‘OPP‘) with respect to a single related supplier even if aggregation is not used in determining the OPP for any other member of the controlled group.

[94 T.C. 920]

Walter D. Haynes, for the petitioner.

Aubrey C. Brown, for the respondent.

WELLS, JUDGE:

Respondent determined deficiencies in Federal income tax as follows:

+-------------------------+
                ¦TYE ¦Amount ¦
                +--------------+----------¦
                ¦Apr. 30, 1981 ¦$1,668,237¦
                +--------------+----------¦
                ¦Apr. 30, 1983 ¦319,381 ¦
                +-------------------------+
                

After concessions by petitioner, the issues for consideration herein are as follows: (1) whether ‘gross receipts‘ from domestic sales, for purposes of the ‘overall profit percentage limitation‘ (‘OPPL‘) imposed by section 1.994-2(b)(3), Income Tax Regs., may be reduced to reflect the seller's payment of the Federal excise tax on distilled spirits, (2) whether ‘gross receipts,‘ for purposes of the OPPL, includes amounts attributable to the extinguishment of the excise tax lien on distilled spirits which are exported, (3) whether section 1.994-2(b)(3), Income Tax Regs., imposing the OPPL, is valid, and (4) whether the aggregation rule of section 1.994-2(c)(2)(ii), Income Tax Regs., may be applied unilaterally or requires conforming treatment from ‘related suppliers‘ with which aggregation is desired.

FINDINGS OF FACT

Many of the facts have been stipulated. The stipulations of fact and accompanying exhibits are incorporated herein by this reference. Petitioner had a principal place of

[94 T.C. 921]

business in Louisville, Kentucky, at the time it filed the petition in the instant case.

During the taxable years in issue, Brown-Forman Distillers Corporation owned all of the outstanding stock of its two subsidiaries, the Southern Comfort Corporation (hereafter ‘Southern Comfort‘) and Jack Daniel Distillery Lem Motlow Prop., Inc. (hereafter, ‘Jack Daniel‘). Jack Daniel in turn owned all of the outstanding common stock of its subsidiary, the Jack Daniel International Company (hereafter, ‘JDI‘), a Domestic International Sales Corporation under section 992.

Southern Comfort during the years in issue engaged in the production and sale of Southern Comfort liqueur. Southern Comfort sold the liqueur in the United States and for export to foreign markets. On December 1, 1979, Southern Comfort entered into an agreement with JDI appointing JDI as its commission agent for its export sales. Such agreement provided that the commission payable by Southern Comfort to JDI would be ‘the maximum permissible under Section 994 of the Code.‘ Jack Daniel during the years in issue engaged in the production and sale of ‘Jack Daniel's Tennessee Whiskey.‘ On December 1, 1979, Jack Daniel entered into an agreement with JDI identical to the one entered into between Southern Comfort and JDI.

Section 5001(a)(1)² imposes an excise tax on ‘all distilled spirits produced in or imported into the United States,‘ at the rate of $10.50 on each proof gallon.³ Section 5001(b) provides that ‘the tax shall attach to distilled spirits as soon as this substance is in existence as such,‘ and section 5004(a)(1) provides the general rule that ‘the tax imposed by section 5001(a)(1) shall be a first lien on the distilled spirits from the time the spirits are in existence as such until the tax is paid.‘ Under section 5171, distilling operations can be conducted only on ‘bonded premises,‘ and section 5173(a)(1) requires the furnishing of a bond before operations at a distilled spirits plant may commence. Southern Comfort's alcoholic beverage production process

[94 T.C. 922]

was, during the years in issue, a ‘distilled spirits operation‘ performed on ‘bonded premises.‘

Under section 5005(b), the persons liable for the excise tax on domestically-produced distilled spirits are, generally, all distillers or proprietors of distilling apparatus. Southern Comfort and Jack Daniel fell within such category. Although under section 5004 the excise tax represents a lien on distilled spirits from the time they come into existence, the actual amount of tax is generally not ‘determined‘ or made payable until a later time. More specifically, under section 5006, the excise tax on distilled spirits is generally determined at the time that the spirits are withdrawn from ‘bonded premises.‘ Such tax determination is accomplished in part through the use of gauging instruments which ascertain the proof of the spirits. Sections 5006(a)(1), 5204; 27 C.F.R. sections 19.25, 19.91-19.93 (1989).

The lien imposed by section 5004 terminates by operation of law (1) at the time that the spirits are withdrawn from bonded premises and the tax ‘determined,‘ (2) upon export of the spirits or deposit of the spirits in a customs bonded warehouse, or (3) under certain other circumstances including the withdrawal of distilled spirits from bond for certain exempt uses (such as laboratory use or use in the manufacture of certain nonbeverage products). Section 5008 provides that, upon presentation of satisfactory proof, no tax will be imposed with respect to distilled spirits which are lost or destroyed while in bonded premises, subject to various exceptions concerning negligent, intentional or collusive (i.e., fraudulent) loss of the spirits.

Southern Comfort manufactured its liqueur by purchasing ‘grain neutral spirits‘ from unrelated distillers and then mixing the neutral spirits with a flavoring concentrate to make the final product. Under section 5005, the unrelated distillers and Southern Comfort were jointly and severally liable for payment of the excise tax. Sections 5005(c)(2) and 5212, however, provide for a procedure under which the liability of the unrelated distillers could be relieved and the spirits transferred to Southern Comfort's facilities without immediate payment of the excise tax. In order to take advantage of such procedure (presumably to lessen the price of the neutral spirits), Southern Comfort posted a ‘unit

[94 T.C. 923]

bond‘ in the sum of $1,300,000 with the Department of the Treasury, Bureau of Alcohol, Tobacco, and Firearms.

The bond posted by Southern Comfort also allowed Southern Comfort to withdraw cased bottles of liqueur from its ‘bonded premises‘ and ship them to customers after ‘determination‘ of the tax but before payment. See section 5173 and 27 C.F.R. section 19.515(b) (1989). The date of withdrawal fixed the date by which the tax was required to be paid, and returns' were required to be filed reporting the amounts of spirits withdrawn from bonded premises in each semimonthly period. See 27 C.F.R. 19.522-19.523 (1989). The bond posted by Southern Comfort could be collected upon by the Government if Southern Comfort defaulted in its return filing and tax payment obligations. Sections 5173(e) and (g). The excise tax was payable during 1981 within ten days after the last day of the succeeding semimonthly ‘withdrawal‘ period, and, starting in 1982, by the end of the second succeeding semimonthly period. Section 5061(d). Such due date was unrelated to the time of sale, if any, of liqueur to Southern Comfort's customers.

The excise tax on distilled spirits is not imposed with respect to exported distilled spirits. See section 5005(e)(2) (liability terminates at time of export). As noted above, the lien imposed by section 5004 terminates when the distilled spirits are exported or deposited in a customs bonded warehouse, and section 5214(a)(9) allows the distilled spirits to be transferred without payment of tax to a customs bonded warehouse for storage pending exportation. Thus, during the years in issue, Southern Comfort was not required to remit any excise tax to the Government with respect to its exported liqueur. Under the excise tax statute as in effect prior to January 1, 1980, however, Southern Comfort was required to pay the tax on ALL liqueur transferred out of its warehouse to its bottling facilities and then obtain a ‘drawback‘ of the tax allocable to the exported items. Such procedure arose from the fact that, prior to January 1, 1980, bottling facilities were not considered part of a distiller's ‘bonded premises,‘ and there was no provision in effect permitting the withdrawal of distilled spirits for bottling pending export without payment of tax.

[94 T.C. 924]

In its accounting records, Southern Comfort recorded as ‘sales‘ the total sales proceeds received from customers (not reduced by the excise tax on distilled spirits). Southern Comfort's internal financial statements classified the excise tax as a component of ‘total production costs,‘ which costs made up part of the ‘cost of goods sold.‘ For the fiscal year ended April 30, 1981, the excise taxis shown on such financial statements as representing 63.9% of total production costs; for the fiscal...