JAPANESE TRADING COMPANY, LIMITED v. Commissioner, Docket No. 1027-63 — 1029-63.
| Decision Date | 15 April 1966 |
| Docket Number | Docket No. 1027-63 — 1029-63. |
| Citation | 1966 TC Memo 78,25 TCM (CCH) 441 |
| Parties | Japanese Trading Company, Limited, et al. v. Commissioner. |
| Court | U.S. Tax Court |
James R. Zuckerman, 350 Fifth Ave., New York, N. Y., for the petitioners. Leon M. Kerry, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in the income taxes of petitioners:
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Petitioner Docket No. Year Deficiency
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Japanese Trading Company, Limited ....... 1027-63 1959 $24,384.40
A. Zerkowitz & Co., Inc. ................ 1028-63 1958 55,048.84
1959 85,188.10
Overseas Shoe Corporation ............... 1029-63 3-2-59 to 47,180.47
12-31-59
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Several issues raised in Docket No. 1028-63 have been settled by stipulation of the parties and will be given effect in the Rule 50 computation. The only issue remaining for decision is whether an importer, using the accrual method of accounting, may accrue and deduct customs duties in excess of the amounts declared and paid by it during the years of importation when such excess amounts are subsequently contested by it in later years.
Most of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Each petitioner herein was a New York corporation which maintained its principal office at 82 Beaver Street in New York, New York, and filed its tax returns with the district director of internal revenue for the Manhattan District of New York during the taxable years in question. Each petitioner maintained its books and records and prepared its income tax returns on the accrual basis of accounting.
During the years involved herein, petitioner A. Zerkowitz & Co., Inc. (hereinafter called Zerkowitz), was principally engaged in the business of importing rubber boots and footwear commonly known as sneakers; petitioner Overseas Shoe Corporation (hereinafter called Overseas) was engaged in the business of wholesale footwear distribution in New York City, principally distributing footwear which was imported by Zerkowitz; and petitioner Japanese Trading Company, Limited (hereinafter called Japanese), was engaged in the business of wholesale footwear distribution throughout the United States outside of New York City, principally distributing footwear imported by Zerkowitz. Prior to their taxable year 1958, Zerkowitz was principally engaged in importing sweaters, and Japanese and Overseas were principally engaged in selling such sweaters. Zerkowitz did not begin importing the footwear previously described until sometime during their taxable year 1958, and Japanese and Overseas did not begin selling such footwear until sometime in 1959.
The following is the procedure involving customs duties when goods subject to the tariff involved herein were imported into the United States:
1. The importer (or its customs broker) files a Consumption Entry form with the Collector of Customs (hereinafter referred to as the Collector) at the port of entry, and the duty declared thereon is paid. In addition, the importer (or its customs broker) posts a bond with the Collector guaranteeing the payment of any duties which may subsequently and ultimately be found to be due on the goods. The goods are then released from Customs.
2. At a subsequent time (which may be months later) Customs officials review the Consumption Entry form and their files to determine whether the goods were valued properly (this is called "appraisement") and whether the amount of the duty, including the rate to be applied, was properly computed (this is called "liquidation of the entry"). The importer (or its customs broker) is notified of any proposed changes in the valuation of the goods on appraisement and of any proposed changes in the liquidated amount of the duty, including proposed changes in rate of duty to be applied.
3. If the importer disagrees with the appraisement (valuation), it may by letter file an appeal for reappraisement with the United States Customs Court. This is known as an "appeal case." No payment of additional duty is required until after the appeal is finally decided.
4. If the importer disagrees with the liquidation of the entry (i.e., the Customs officials' determination of the rate of duty to be applied), it files a letter of protest with the Collector. If the protest is rejected by the Collector, upon the payment by the importer of the total liquidated amount, the Collector transmits the file to the United States Customs Court for determination. This is known as a "protest case."
During the years involved herein, Zerkowitz imported, among other items, a type of footwear with upper portions partially made of leather on which the rate of duty (based on export value at place of origin) was 20 percent ad valorem; but if such footwear was for "men's, youth's, or boy's," the rate of duty was 10 percent ad valorem. The Consumption Entry forms filed for these entries declared in part that the shoes were for men, youths, or boys subject to duty at the 10 percent rate and the declared duty was paid by Zerkowitz (or its customs broker for its account). However, duty at the 20 percent rate on each such entry was, at the same time as the payment of the 10 percent duty, accrued on the books of Zerkowitz. The additional 10 percent was accrued as accounts payable and charged as a current cost of goods sold, although no determination of the higher rate of duty on these entries had then been made by the Customs officials, or paid by Zerkowitz.
Customs officials, over 12 months later, determined that such footwear was also for other persons and the duty thereon was liquidated and assessed at the 20 percent rate. Such liquidations were protested by Zerkowitz and some of the additional duties in regard thereto were paid by Zerkowitz subsequent to 1959. Some of these protest cases were heard by the United States Customs Court and the claim made in each was overruled in A. Zerkowitz & Co., Inc. v. United States, Protests 60/7384, etc. (C. D. 2525), decided April 7, 1965.
In these years Zerkowitz also imported, among other items, rubber footwear and footwear the upper portions of which were in chief value of cotton or other fibers with soles of either rubber, substitutes for rubber, or plastic (a different model of footwear than that referred to above). For customs duty purposes, such footwear is subject to appraisement (valuation) based on the American selling price of like or similar merchandise produced in the United States. Customs officials have designated footwear manufactured by the United States Rubber Company (or that of other domestic manufacturers of comparable price) as the merchandise produced in the United States which is like or similar to such imported footwear for purposes of determining the American selling price for appraisement purposes. The Consumption Entry forms filed for these entries declared a value based either on the price paid by Zerkowitz to its suppliers in the Far East or on the American selling price of domestic footwear which sold for less than the footwear designated by Customs officials for this purpose. The declared duty was paid by Zerkowitz (or its customs broker on its behalf). Also, an additional amount of duty, based on the higher American selling price of the footwear generally used by Customs officials for this purpose, was at the same time accrued on the books by Zerkowitz as accounts payable and charged as a current cost of goods sold although no determination of the higher valuation had been made by Customs officials on these entries. None of this additional amount of duty has ever been paid.
Over 12 months later, Customs officials determined that the appraised value of such importations was in excess of the value declared at the time of entry. In each such instance Zerkowitz received a notice from the Collector and subsequently filed an appeal for a reappraisement by the United States Customs Court. These appeal cases were decided on November 4, 1965, by the United States Customs Court in favor of the Treasury Department in A. Zerkowitz & Co., Inc. v. United States, Reap. Dec. 11095, 100 Treas. Dec. No. 44.
In 1958 the unpaid additional import duties referred to above, which Zerkowitz accrued on its books, totaled $65,361.40. Such amount was deducted on its income tax return for 1958 by increasing cost of goods sold. During 1959 Zerkowitz accrued on its books unpaid import duties, as referred to above, in the total amount of $345,385.27. Of this amount $50,149.94 and $95,015.49 were invoiced to Japanese and Overseas, respectively, representing the amounts of such additional unpaid import duties on goods which Zerkowitz sold to Japanese and Overseas. Both Japanese and Overseas accrued such amounts on their books as accounts payable and deducted the amounts on their income tax returns for 1959 by increasing cost of goods sold. Consequently, the difference of $200,219.84 remained on Zerkowitz's books as an accrual and Zerkowitz deducted that amount on its income tax return for 1959.
The amount of duty accrued by petitioners for each year was matched to the sale during the same year of the items involved in the particular importation for which the duty was accrued. This method of accounting has been consistently followed by the petitioners.
In the preparation of petitioners' income tax returns for the years in issue their accountant accrued and deducted the amounts of...
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