Canada Dry Bottling Co. of Florida v. Fahs
| Decision Date | 09 August 1952 |
| Docket Number | Civ. A. No. 1956-J. |
| Citation | 109 F. Supp. 187 |
| Parties | CANADA DRY BOTTLING CO. OF FLORIDA, Inc. v. FAHS, Collector of Internal Revenue. |
| Court | U.S. District Court — Southern District of Florida |
Marshall S. Scott, Loftin, Anderson, Scott, McCarthy & Preston, Miami, Fla., for plaintiff.
Edith House, Asst. U. S. Atty., Jacksonville, Fla., for defendant.
After due notice, this cause was argued before the Court on final hearing, upon the pleadings and upon the agreed statement of facts filed by the partiesApril 10, 1952.Leave was granted to the respective parties to file briefs covering the sole question of law involved, viz., whether plaintiff's deliveries of bottles and cases to customers during the tax years involved constitutes sales of said articles, or only bailments thereof, with title retained.Briefs have now been filed, and the decision of this question and entry of final judgment are in order.For its findings of fact the Court adopts said agreed statement of facts (filed April 10, 1952) and the same is incorporated herein.
It is hereby stipulated by and between the parties hereto, by their respective attorneys, that the following facts shall be taken as true in this case, subject only to the objection of materiality and further provided, that this stipulation shall be without prejudice to the right of either party to introduce other and further evidence not inconsistent with the facts here stipulated as true:
I.
Canada Dry Bottling Company of Florida, Inc., hereinafter called taxpayer, was incorporated under the laws of the State of Florida in September of 1939 and its business operations began in November 1939.Taxpayer files its returns on a fiscal year ending September 30th and filed its first return with the defendant for its fiscal year ending September 30, 1940.Its principal place of business is in Tampa, Florida.
II.
John L. Fahs, hereinafter called the Collector, is a resident of Duval County, Floriday and is and was at all times material to this action, the Collector of Internal Revenue for the District of Florida maintaining his office in Jacksonville, Florida.
III.
(a) The taxpayer is engaged in the business of bottling and selling various soft drink beverages throughout the State of Florida.Its principal products are various beverages identified by the Canada Dry trademark and brand name.Taxpayer has the exclusive right to sell Canada Dry products in the State of Florida under a licensing agreement with Canada Dry Ginger Ale Inc., a Delaware corporation.During the fiscal year ended September 30, 1941, taxpayer was also licensed to distribute Hires Root Beer in thirty-three of the State of Florida's sixty-seven counties.This is not a Canada Dry product.Under both franchise agreements, the grantor furnished taxpayer with the basic syrups which can be purchased only from the grantor.These agreements also gave taxpayer the right to bottle, sell and distribute exclusively within the territories covered carbonated beverages under the respective companies' brand names.
(b) The various soft drink beverages bottled and sold by the taxpayer are placed in glass bottles, which are packaged into case lots of 12 or 24 bottles to a case.All sales by the taxpayer are made at a fixed price per case, the price consisting of a charge for the beverage and a charge for the bottles and cases.These charges are not billed separately.A credit or cash refund is made to anyone, whether the original purchaser or not, who returns to taxpayer, in good condition, empty bottles and cases of the type in which taxpayer bottles its products.However, almost all returns are from the original customer.
(c) During the fiscal year ended September 30, 1941, the following table shows the average cost of new containers from the manufacturers thereof and their return valuation.
Average price Return
paid manufacturer valuation
----------------- ---------
Large bottles .047258 .05
Small bottles .025877 .02
Cases .213120 .10
(d) Empty bottles and cases returned in good condition are cleaned, refilled and placed in the channels of trade.Not all cases and bottles placed in trade are returned to taxpayer and, therefore, it is necessary to purchase new bottles and cases in order to maintain a constant supply of containers, and also to meet demands of business growth.Attached as Exhibit 1 is a breakdown of the inventory in hands of the trade for the years 1941 through and including 1944 showing opening and closing inventory and the charge-off for non-returned containers.
(e) During the fiscal year ended September 30, 1941, the bottles in which taxpayer's product was disbursed were of two types: (1) so-called applied color label bottles, (these bottles had the brand name of the product permanently etched into the glass); (2) so-called applied paper labels, (paper labels bearing the product's brand name were glued onto either plain white or green bottles and these labels could be removed by washing the bottles).The applied paper label bottles predominated in this period because the applied color label was a comparatively new development in the bottled beverage field.All bottles were sealed with a metal cap which, in addition to keeping the carbonated gas under compression, also bore the product's distinctive brand name and flavor.The franchise agreements of both Canada Dry and Hires Root Beer provided that the taxpayer would use only bottles which were identified in some distinctive manner as to the grantor's product.The wooden cases in which these bottles were packaged were also marked with the grantor's name and the appropriate trademark.
IV.
Taxpayer's income tax return for the fiscal year ended September 30, 1941 was filed with the Collector on December 11, 1941.This return reported a taxable net income of $27,264.38 and an income tax of $5,019.75 was paid to the Collector in four installments: $1,229.94 on December 12, 1941 and three installments of $1,263.27 on March 17, 1942, June 18, 1942 and September 17, 1942.The payment made on September 17, 1942, was refunded by a credit on or about October 25, 1946 along with enough of the previous payment to make $1,647.88, the total amount credited.Interest of $386.61 was then refunded.
(a) Taxpayer's original federal income tax returns for its fiscal years of 1940 through and including 1945 were filed upon the assumption that the title to bottles and cases did not pass to its customers.Therefore, taxpayer's inventory of bottles and cases included not only the containers physically present in its various plants, but also an estimated inventory (based on the history of sales and returns) of containers which were out of its possession and in the hands of its customers.Two inventory accounts were maintained, one being plant inventory based upon a physical count of bottles and cases in its various plants and the other an inventory account of bottles and cases in the hands of trade which was estimated (based on history of sales and returns).In conjunction with the latter inventory there was set up a liability account designated "liability for containers in the hands of customers."
(b) The physical inventory of bottles and cases in the hands of customers was determined by the following process:
(i) As bottles and cases left taxpayer's plants, plant inventory was reduced accordingly and inventory in the hands of customers was increased; while simultaneously the liability account for containers in the hands of customers was increased with that portion of the sales price which represented the charge made for bottles and cases, namely, refund or so-called deposit price.
(ii)If and when bottles and cases were returned to taxpayer's plants, in good condition, the above procedure was reversed; that is, plant inventory was increased, inventory in the hands of customers decreased and the liability account for containers in the hands of customers was reduced by the amount of the refund.
(iii)Over a period of time the liability account and the inventory of bottles and cases in the hands of customers consistently increased and because a large number of bottles and cases were lost, destroyed or appropriated by taxpayer's customers for their own use, these accounts would be grossly inaccurate unless some adjustment was made.Therefore, periodic adjustments were made to these accounts, reducing them by the value of the estimated number of bottles and cases(based on the history of sales and returns) that would never be returned.
(c) Under this method for accounting for containers, inventories were valued at the average cost of bottles and cases from the manufacturers.
VI.
Waivers extending the Statute of Limitations with regard to the fiscal year ended September 30, 1941 until June 30, 1947 were executed by taxpayer on September 2, 1944 and May 28, 1946 and by the Commissioner of Internal Revenue on September 26, 1944 and June 5, 1946 respectively.
VII.
Taxpayer's income tax returns for the fiscal years ended September 30, 1940 through and including September 30, 1944 were audited in 1945 and a Revenue Agent's Report dated February 8, 1945 was issued.A true copy of this report is attached to taxpayer's complaint and designated "Exhibit F".This report proposed a deficiency for the years 1940 through and including 1943 and an overassessment for 1944 resulting principally from a readjustment of a reduction which taxpayer had made in its account "liability for containers in the hands of customer", in its 1944 fiscal year return.The Agent proposed to treat this adjustment as having occurred rateably over the years 1940 through and including 1944 rather than in the year 1944.
VIII.
(a) Taxpayer filed a timely protest to this report and after...
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