Fruehauf Trailer Co. v. Comm'r of Internal Revenue, Docket Nos. 88221

• Decision Date: 13 April 1964
• Docket Number: 89949.,Docket Nos. 88221
• Parties: /1/ FRUEHAUF TRAILER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

42 T.C. 83

/1/ FRUEHAUF TRAILER COMPANY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 88221

89949.

Tax Court of the United States.

Filed April 13, 1964.

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Raymond C. Cushwa and George D. Webster, for the petitioner.

George J. LeBlanc and Leo A. McLaughlin, for the respondent.

Petitioner was incorporated in 1918. It manufactured and sold commercial truck trailers. It kept its books and filed its returns on a calendar year accrual basis. About 1926 petitioner began to acquire used trailers as trade-ins or by repossession. Although petitioner inventoried its manufactured trailers at the lower of cost or market, it began inventorying its used trailers at $1 per unit. This practice was not disturbed by respondent for the years prior to 1942. While auditing the years 1942 through 1945, a revenue agent in 1948 proposed to change the closing inventory for 1945 to the lower of cost or market. Petitioner vigorously protested but as an alternative offered to agree providing all the years were changed beginning with the opening inventory for 1942. After a 2-day conference the alternative offer was tentatively accepted on September 10, 1948, by the conferee in the field, which action was subject to review in the national office. On May 16, 1949, the Excess Profits Tax Council allowed petitioner's claims in part for relief under section 722 of the 1939 Code for the years 1940 through 1945. A recomputation of tax liability showed a net overassessment due petitioner for these years of over $1,500,000. The matter came on for review by the national office under section 3777 of the 1939 Code. On review, the opening inventory of used trailers for January 1, 1942, was objected to by the reviewing officials. They pointed out that if such opening inventory were valued at the lower of cost or market, petitioner would receive a windfall of over $567,000 of untaxed income. Petitioner adamantly insisted that the September 10, 1948, agreement with the conferee be approved but suggested, if this could not be done, a return to the $1 practice for all the years 1942 through 1945 would be acceptable. After many conferences, both in the field and in the national office, the latter, on June 20, 1950, addressed a letter to the field, recommending that for the years 1942 through 1945 the inventory of used trailers be recomputed at $1 per unit, which was done. After the tentative agreement of September 10, 1948, but before June 20, 1950, petitioner filed a claim for refund for 1946, an amended return for 1947, and the original return for 1948, based on the inventorying of used trailers at the lower of cost or market. Beginning as of January 1, 1949, petitioner changed the inventory of used trailers on its books to the lower of cost or market method and has kept its books on that basis ever since 1949 but has inventoried its used trailers on its returns for the years 1949 through 1958 on the basis of $1 per unit. In later actions by respondent the inventories of used trailers for the years 1946 through 1953 were all computed on the basis of $1 per unit to conform with the letter dated June 20, 1950. No closing agreement under section 3760 of the 1939 Code between petitioner and respondent was executed for any year prior to 1954. On March 31, 1959, petitioner was informed that the Internal Revenue Service had decided to compute the inventory of all used trailers acquired after December 31, 1953, on the lower of cost or market method. In the deficiency notices mailed April 28, 1960, and August 29, 1960, the inventory of all used trailers acquired after December 31, 1953, was computed on the basis of the lower of cost or market method. Held: (1) Respondent was not estopped by his prior actions from changing for Federal income tax purposes petitioner's practice of inventorying used trailers acquired after December 31, 1953, from $1 each to the lower of cost or market; (2) respondent was not precluded in 1959 from making the change beginning with the then open years 1954, 1955, and 1956; (3) petitioner is entitled under section 481 of the 1954 Code, as amended, and under many court decisions prior to the 1954 Code, to have its opening inventory of used trailers for 1954 computed on the same basis (the lower of cost or market) as the closing inventory of used trailers for 1954; and (4) that the 172 used trailers that had been acquired prior to January 1, 1954, which were still in the inventory on December 31, 1954, should likewise be computed on the lower of cost or market method.

ARUNDELL, Judge:

In these consolidated proceedings respondent, in docket No. 88221, determined deficiencies in income tax for the

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calendar years 1954 and 1955 of $2,955,903.12 and $3,717,622.52, respectively, and, in docket No. 89949, a deficiency in income tax for the calendar year 1956 of $3,296,142.33.

In an amended petition filed in docket No. 88221, ‘Petitioner also contends that its income taxes for 1955 are overpaid by the amount of $5,632,533.86.‘

In its petition and amended petition filed in docket No. 89949, ‘Petitioner also contends that its income taxes for 1956 are overpaid by the amount of $251,732.90, or such greater amount as may be legally refundable plus interest thereon.’

In an amendment to answer to amend petition filed in docket No. 88221, ¹ respondent makes claim for an increased deficiency for the year 1955 pursuant to the provisions of section 6214(a), I.R.C. 1954.

In an amended answer to the amended petition filed in docket No. 89949, respondent, in the alternative, affirmatively alleges certain facts concerning the acquisition of assets of the Strick Co. and, to the extent that this might result in an increased deficiency for 1956, respondent makes claim for such increased deficiency for 1956 pursuant to the provisions of section 6214(a) of the 1954 Code.

Two issues relating to certain capital gains and to a bad debt have been dropped by petitioner. All other issues, except one, have been settled by stipulations of the parties and effect will be given thereto under Rule 50. The one remaining issue is whether the respondent erred in determining that all used trailers acquired by petitioner as trade-ins or on repossession during the taxable years and still on hand at the close of the year should be included in the inventory at the lower of cost or market rather than at $1 per trailer. ²

The evidence consists of four separate stipulations (three with attached exhibits), oral testimony, and additional exhibits received at the hearing.

FINDINGS OF FACT

The stipulated facts are so found and are incorporated herein by this reference.

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Petitioner is a corporation which was incorporated under the laws of the State of Michigan on February 27, 1918. Its principal office is now, and has been since its organization, in Detroit. Its income tax returns for the periods involved in the instant proceedings were filed with the district director of internal revenue for the district of Michigan.

Petitioner has kept its books and filed its income tax returns on the accrual method of accounting for each calendar year.

Since its incorporation petitioner has been primarily engaged in the business of manufacturing and selling commercial truck trailers. Beginning during the last few months of 1954, it has also engaged in leasing new and used truck trailers.

In its early years petitioner manufactured commercial truck trailers only a special-order basis, each trailer being built to meet the specific requirements and specifications of the customer, and it did not acquire any used trailers. Commencing about the year 1926, petitioner began to acquire used trailers as trade-ins on the sale of new trailers, and it also began to acquire some used trailers by repossession. The amount allowed the customer for a trade-in was a sales device, and involved a discount on the price of the new trailers and did not represent either cost or market value.

During the years 1942 through 1948 petitioner also purchased used trailers for resale in transactions not involving the sale of a new trailer, and such trailers on hand at the end of the respective years were included in used trailer inventories at the lower of cost or market for both book and income tax return purposes. There is no controversy as to these trailers.

During the taxable years 1954, 1955, and 1956, petitioner also acquired used trailers by purchase in transactions wherein new trailers were sold to the vendors thereof.

During the first several years when petitioner took used trailers³ as trade-ins, the trailers were of the homemade variety which had been made by nonestablished manufacturers. They were heavy units with wooden bodies, wooden wheels, solid tires and many were unsafe for highway use, and State and municipal authorities would not permit them to be operated. In many cases the frames had to be scrapped and the bodies burned. Often the cost of cutting up the frames was more than the amount which could be obtained from a junk or scrap dealer.

In the 1920's the trailer industry was in its infancy; the idea of using trailers for transportation was new, and the industry had not been developed to any substantial extent. Until the latter part of the

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1930's, trailers were built tailor made to the customers' specifications, and there was practically no standardization.

In the 1920's trailers were 14 to 16 feet long. As time went on, with the advent of more powerful tractors and better highways, the State laws as to permissible trailer lengths were continually changing, permitting longer trailers, with the result that trailers could become obsolete overnight, and many used trailers taken by petitioner as trade-ins or by repossession were obsolete.

In most cases where petitioner found it necessary to repossess a trailer which it had sold on a time contract, the customer, being in financial straits, had not maintained the vehicle properly, and it was in very poor...