Krim-Ko Corp. v. Comm'r of Internal Revenue
| Decision Date | 11 January 1951 |
| Docket Number | Docket No. 20394. |
| Citation | 16 T.C. 31 |
| Parties | KRIM-KO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Chester J. McGuire, Esq., and E. T. Simpson, Esq., for the petitioner.
Wm. Schwerdtfeger, Esq., for the respondent.
1. Respondent's disallowance of deductions for additions to a reserve for bad debts for the years 1942 and 1944, approved.
2. Corporation, engaged primarily in manufacture and sale of chocolate syrup, entered into agreements with some of its customers wherein, it agreed to furnish designated advertising material and services, and customers agreed to pay therefor a price per gallon for a specified number of gallons of syrup in excess of the base price paid by those not entering into such agreements. Advertising accounts carried in the names of participating customers were credited with amounts received and charged for advertising material and services rendered and for any refunds made. Held, excess of credits over charges to these accounts during each of the years 1942, 1943, and 1944 is includible in taxable income of corporation.
This proceeding involves petitioner's liability as transferee of the assets of its predecessor, the Krim-Ko Company, for the following deficiencies in tax:
+---------------------------------------------------------+
¦ ¦ ¦Declared value ¦Excess profits ¦
+------+------------+--------------------+----------------¦
¦Year ¦Income tax ¦excess-profits tax ¦tax ¦
+------+------------+--------------------+----------------¦
¦1942 ¦ ¦ ¦$27,039.93 ¦
+------+------------+--------------------+----------------¦
¦1943 ¦$955.69 ¦$692.53 ¦9,057.83 ¦
+------+------------+--------------------+----------------¦
¦1944 ¦1,359.27 ¦ ¦15,504.37 ¦
+---------------------------------------------------------+
The petitioner concedes its liability, as transferee, if this Court decides that deficiencies in taxes were due from the Krim-Ko Company for the taxable years 1942, 1943, and 1944.
The issues are:
(1) Whether respondent properly disallowed as unreasonable the addition of $4,400 to the Krim-Ko Company's reserve for bad debts for 1942 and $3,000 for 1944.
(2) Whether respondent properly included in the gross income of the Krim-Ko Company for the taxable years the following amounts reflected in the credit balances in accounts carried on its books in the names of customers who entered into ‘Cooperative Marketing and Sales Promotion Agreements‘:
+----------------+
¦1942¦$16,536.18 ¦
+----+-----------¦
¦1943¦13,072.65 ¦
+----+-----------¦
¦1944¦9,548.63 ¦
+----------------+
The facts in this proceeding were developed through a written stipulation of facts, exhibits and oral testimony.
The stipulated facts are hereby found accordingly.
The petitioner is a corporation organized under the laws of the State of Illinois on October 17, 1929, as the Chocolate Corporation of America. It owned a majority of the shares of stock of the Krim-Ko Company, a corporation which was organized under the laws of the State of Illinois on January 14, 1926, under the name of Creamko Corporation, which was changed in 1935 to the Krim-Ko Company. Prior to August 1, 1945, the Krim-Ko Company (hereinafter referred to as Krim-Ko) was engaged in the business of manufacturing and selling chocolate-flavored syrup and powder and the processing of moss as a stabilizer for its products. This syrup and powder were sold to dairies and creameries throughout the country for use in making so-called ‘chocolate milk.‘
On August 1, 1945, Krim-Ko was merged in accordance with the laws of the State of Illinois with the Chocolate Corporation of America. All of its assets were transferred to the latter on that date, and it thereupon ceased to exist. Thereafter the business previously carried on by Krim-Ko was conducted by petitioner, the Chocolate Corporation of America. Petitioner's name at the time of the merger was changed to Krim-Ko Corporation.
For the taxable years 1942, 1943, and 1944, Krim-Ko had its principal place of business at 4830 S. Christiana Avenue, Chicago, Illinois, and filed its income and declared value excess-profits tax returns and its excess profits tax returns with the collector of internal revenue at Chicago, Illinois. Krim-Ko maintained its books and filed its returns on the accrual method of accounting.
Krim-Ko maintained a reserve for bad debts and made provision for its bad debts by making additions to such reserve. When debts became worthless or uncollectible, the amounts of such debts were charged to the reserve. In addition, there were also added to the reserve amounts representing the recovery sums previously charged to the account as bad debts. For the years 1941 to 1945, inclusive, the additions to the reserve, the charges for bad debts and the additions for the recovery of debts previously charged off, together with the balance in the reserve at the end of such years were as follows:
+----------------------------------------------+
¦Year¦Additions¦Charges ¦Recoveries¦Balance ¦
+----+---------+---------+----------+----------¦
¦ ¦ ¦ ¦ ¦12/31 ¦
+----+---------+---------+----------+----------¦
¦1941¦$7,566.45¦$6,198.21¦$125.44 ¦$13,973.71¦
+----+---------+---------+----------+----------¦
¦1942¦4,400.00 ¦5,316.07 ¦119.60 ¦13,177.24 ¦
+----+---------+---------+----------+----------¦
¦1943¦343.23 ¦812.02 ¦233.94 ¦12,942.39 ¦
+----+---------+---------+----------+----------¦
¦1944¦3,000.00 ¦1,947.21 ¦12.80 ¦14,007.98 ¦
+----+---------+---------+----------+----------¦
¦1945¦400.00 ¦587.62 ¦None ¦13,820.36 ¦
+----------------------------------------------+
The bad debt charges to the reserve were made only after Krim-Ko and a commercial collection agency had made exhaustive and unsuccessful efforts to collect, with resort to suit if feasible, and officials of the taxpayer were ‘positive from all sources‘ that collection was not possible. All recoveries of debts previously charged off were credited to the reserve.
For the years 1941 to 1944 Krim-Ko had the following amount of sales and at the end of each of said years had the following amount of accounts receivable attributable to sales:
+------------------------------------------+
¦Year ¦Sales ¦Accounts receivable ¦
+------+-------------+---------------------¦
¦1941 ¦$1,043,376.65¦$102,056.89 ¦
+------+-------------+---------------------¦
¦1942 ¦1,155,867.07 ¦69,456.85 ¦
+------+-------------+---------------------¦
¦1943 ¦1,343,974.64 ¦85,068.64 ¦
+------+-------------+---------------------¦
¦1944 ¦1,516,027.12 ¦76,525.81 ¦
+------------------------------------------+
Krim-Ko's reserve for bad debts in the years 1942 and 1944 was adequate, apart from the amounts of $4,400 and $3,000 which it added at the end of those years, respectively, and the Commissioner's refusal to treat those amounts as reasonable additions to the reserve was not arbitrary. They did not constitute reasonable additions to the reserve.
During the taxable years 1942, 1943, and 1944, Krim-Ko sold chocolate-flavored syrup to its customers and agreed to furnish advertising and sales promotion service for them under so-called ‘cooperative advertising and sales promotion agreements.‘ These agreements were sometimes in writing on a form printed for that purpose, while other agreements were oral. The agreements, when made on the printed form, were usually for a period of 1 year. In a number of instances, after the period of the agreement had expired, the same arrangement continued even though the contract was not renewed in writing.
About one-half of the customers of Krim-Ko entered into the cooperative advertising and sales promotion agreements, although neither Krim-Ko nor the customer was compelled to do so. In addition to the Krim-Ko advertising provided for in these agreements, Krim-Ko also engaged in other advertising activities of a more general nature.
The terms of the agreements varied, depending largely upon the desires and needs of the individual customers. The special advertising could be of any type the customer specified. Among other things, it consisted of supplying ‘Krim-Ko Komics‘; signs and show cards; store clerks' aprons; pencils; uniforms for baseball, softball and bowling teams, and special newspaper advertisements. In addition, it furnished newspaper sampling advertisements and redeemed sampling coupons; arranged driver salesmen's contests, and made available the sales promotion services of a salesman of Krim-Ko. While the charge for the advertising and sales promotion services varied under the terms of oral or written contracts, it was usually 40 cents per gallon of syrup sold.
The petitioner used two different printed forms in drawing up the contracts with its customers. Each form contained the statement that ‘This agreement covers advertising features and sales promotion services incident thereto to be furnished by Krim-Ko upon the following terms:‘; each contained a list of the advertising material and services to be furnished, and in each the customer agreed that during the period covered by the contract it would buy its full requirements of Chocolate Drink flavoring in the form of Krim-Ko chocolate-flavored drink base (syrup) at a price of $1.60 per gallon for a specified number of gallons, and $1.20 per gallon thereafter. The principal difference between the two printed forms was the method used in arriving at the number of gallons, or ‘gallonage quota,‘ to which the $1.60 price would apply. In one this was determined by multiplying the number of dairy routes by 150 gallons. In the other the ‘gallonage quota‘ was determined by inserting after each item of advertising or service to be furnished an amount designated ‘Local...
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