Illinois Cereal Mills, Inc. v. Commissioner
| Decision Date | 11 August 1983 |
| Docket Number | Docket No. 1619-76,3013-79. |
| Citation | 46 TCM (CCH) 1001,1983 TC Memo 469 |
| Parties | Illinois Cereal Mills, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Warren C. Seieroe, 111 West Monroe St., Chicago, Ill., for the petitioner. Stephen J. Morrow, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's corporate income taxes as follows:
Fiscal Year Ending Deficiency
9/30/72 .......... $ 78,773.41
9/30/73 .......... 371,139.04
9/30/74 .......... 606,078.18
9/30/75 .......... 176,717.11
9/30/76 .......... 83,330.84
After numerous concessions by both parties as set out in their stipulation of issues and first supplemental stipulation of issues, the following issues remain for our decision:
1. Whether certain corn represented by warehouse receipts is properly includable in petitioner's year-end LIFO inventory;
2. Whether the price petitioner paid to purchase a competitor's Mogul binder business is allocable among the various intangible assets acquired, and, if so, the various tax consequences of such an allocation;
3. Whether structures housing certain industrial processes qualify as "section 38 property"1 for purposes of the investment tax credit, and whether the useful lives of such structures for purposes of computing depreciation are the same as the useful lives of the machinery and equipment within the structures or independent of the useful lives of such machinery and equipment;2 and
4. Whether certain grain storage tanks owned by petitioner's subsidiary are assets that come within Asset Guideline Class "01.1" for purposes of determining their depreciable useful lives.3
Some of the facts have been stipulated and are so found. The stipulation of facts, first supplemental stipulation of facts, second supplemental stipulation of facts, and all exhibits attached thereto are incorporated herein by this reference.
Illinois Cereal Mills, Inc. (herein ICM) is a Delaware corporation with its principal office and place of business at Paris, Illinois, for all times relevant hereto. ICM filed its corporate income tax returns using the accrual method of accounting for its fiscal years ending September 30, 1972 through and including September 30, 1976, with the Midwest Service Center at Kansas City, Missouri. ICM's principal business activity is the operation of a corn milling business. Incident to this business ICM purchases shelled corn which it processes into various products including meals, grits, flakes, flours, oil, starches, and hominy as well as certain specialty products. These products are used by a number of different industries including food manufacture, brewing, industrial products, and animal food.
ICM operated a large corn mill in Paris, Illinois, during the years in issue and for many years prior thereto. In its business ICM purchased and processed vast amounts of shelled corn. ICM had storage capacity for about 1.2 million bushels of shelled corn. Because of the large quantities of shelled corn it processed to make its finished goods and because of its lack of storage capacity for finished goods or for the various particle sizes left over after a production run, ICM's production in excess of existing orders at any given time was sold as "hominy feed," which was used as an animal feed. Although subject to certain variables, hominy feed usually sold for about $10 per ton less than raw corn.
Generally, for a dry miller such as ICM that breaks up the corn by mechanical rather than by chemical means, "new corn" from the recent harvest has better milling qualities than "old corn" from the prior year's growing season. Generally, unless the "new corn" comes from a particularly bad harvest year, the new corn will result in fewer fine particles of the type that ICM could only dispose of as hominy feed. The corn harvest usually begins about mid October to early November in ICM's geographical area, and in 1974 there was a premature frost that suggested that the new corn to be harvested that year would be of an inferior quality.
During all of the years involved and for many prior years, ICM used the LIFO method of valuing its inventories of corn. As of September 30, 1973, ICM included the following in its ending LIFO inventory of corn:
Corn on hand ......... 312,700 bushels
Corn-in-transit ...... 240,129 bushels
Warehouse receipts ... 200,315 bushels
_______
TOTAL ......... 753,144
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The warehouse receipts mentioned above resulted from a transaction with Cargill, Inc. ("Cargill").
During September 1973, ICM's physical inventory of corn was substantially lower in quantity than it had been at the beginning of the taxable year. ICM, by telephone, entered into a transaction with Cargill on September 28, 1973, whereby six warehouse receipts, representing 200,315 bushels of No. 5 yellow corn, would be transferred to ICM on September 28, 1973 and these receipts would be subsequently transferred back to Cargill on October 1, 1973. The corn represented by the warehouse receipts was held at all times by Cargill at its elevators in Chicago, Illinois. At no time did ICM intend to take delivery of the corn in-kind, but, on the contrary, intended at all times to deliver the six warehouse receipts back to Cargill on October 1, 1973, as was required by the September 28, 1973 agreement of the parties.
As of September 30, 1975, ICM included the following in its ending LIFO inventory of corn:
Corn on hand .......... 293,000 bushels
Warehouse receipt ..... 600,000 bushels
_______
TOTAL ........... 893,000 bushels
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The warehouse receipt mentioned above resulted from a transaction with The Andersons.
During September 1975, ICM's physical inventory of corn was substantially lower in quantity than it had been at the beginning of the taxable year. ICM, by telephone, entered into a transaction with The Andersons on September 29, 1975, whereby a warehouse receipt, representing 600,000 bushels of No. 2 yellow corn, would be transferred to ICM on September 30, 1975, and subsequently transferred back to The Andersons on October 1, 1975. The corn represented by the warehouse receipt was at that time the "old corn" of inferior quality from the preceding 1974 growing season and was held at all times by The Andersons at its elevators. At no time did ICM intend to take delivery of the corn in-kind, but, on the contrary, intended at all times to deliver the warehouse receipt back to The Andersons on October 1, 1975, as was required by the September 30, 1975 agreement of the parties.
The transactions with Cargill in 1973 and The Andersons in 1975 involved exchanges of warehouse receipts, purchase confirmations, sales confirmations, and checks. After the initial telephone contact in each instance, all that was left to be undertaken by the parties to the transactions was the mechanical steps of exchanging matching and reversing confirmation slips, the delivery and redelivery of warehouse receipts, and the exchange of checks. ICM's actual cash expenditures in these transactions were limited to $1,368.16 in 1973 (ICM's draft for $492,776.18 less Cargill's draft for $491,408.02) and to $3,000 in 1975 (ICM's check for $1,698,000 less The Anderson's check for $1,695,000).
Frank Wiggins ("Wiggins"), ICM's executive vice-president at the time, and a Mr. Buchanan ("Buchanan"), who worked in ICM's grain department, discussed these 1973 and 1975 acquisitions of warehouse receipts before ICM contacted either Cargill or The Andersons. During these discussions, both Wiggins and Buchanan knew that ICM would not be able to take delivery of the corn represented by the warehouse receipts and that the only way for ICM to get title to the corn was to agree to sell it back to Cargill and to The Andersons so that the corn would never leave their elevators. ICM's purpose in acquiring the corn represented by these warehouse receipts was not to gain corn inventories to move into production, but simply to avoid the adverse tax consequences of having a closing LIFO inventory amount smaller than the beginning amount (i.e., avoid the "liquidation" of its LIFO base).
In his notices of deficiency, respondent determined that the corn represented by these warehouse receipts should not have been included in ICM's year-end LIFO inventories. The result of this determination was a year-end inventory of corn in an amount less than the beginning inventory, causing a liquidation or recapture of ICM's LIFO inventory base.4 Accordingly, respondent decreased ICM's deduction for cost of goods sold and increased its income for the fiscal years ending September 30, 1973, September 30, 1974, and September 30, 1975.5 Respondent's determination also resulted in an increase in ICM's deduction for cost of goods sold for the fiscal year ending September 30, 1976, reducing its taxable income for that year.
One aspect of ICM's business is the production and sale of cereal binders, a specialty product used primarily in the foundry industry. Prior to February of 1974, ICM produced and sold cereal binders under the names Ceres, Cereatim, and 940.
CPC International, Inc. ("CPC") is a large multinational corporation having extensive corn-processing facilities in the United States, including plants at Argo, Illinois, Pekin, Illinois, and North Kansas City, Missouri. Prior to February of 1974, CPC produced and sold cereal binders under the name "Mogul" that competed directly with ICM's binders, particularly ICM's 940. CPC was a "wet" miller that milled corn by chemical means.
During 1973, CPC had become dissatisfied with the profitability of a...
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