Lucky Lager Brewing Co. v. Comm'r of Internal Revenue
| Decision Date | 19 July 1956 |
| Docket Number | Docket No. 53063. |
| Citation | 26 T.C. 836 |
| Parties | LUCKY LAGER BREWING COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Valentine Brookes, Esq., and Russell Shearer, Esq., for the petitioner.
Aaron S. Resnik, Esq., for the respondent.
‘Gross receipts,‘ for purposes of the excess profits tax ‘growth formula’ (sec. 435(e)(1), I.R.C. 1939) held to include all amounts received or accrued from sales, not excluding those added to the sales price as reimbursement for beer excise taxes.
Respondent determined a deficiency of $102,343.94 in income and excess profits tax for the calendar year 1950, of which $92,108.20 is in dispute. The single general issue involved is whether petitioner was entitled to compute its excess profits tax credit using average base period income under the alternative method based on growth, reflected by an increase in gross receipts. Resolution of that issue depends on whether the term ‘gross receipts' includes Federal and State beer excise taxes.
Certain facts have been stipulated and are found accordingly.
Petitioner, a California corporation, brews and sells beer. It filed its returns for all years involved with the collector of internal revenue for the northern district of California. It keeps its books on an accrual basis and uses the calendar year. On January 1, 1949, petitioner changed its name from General Brewing Corporation.
Petitioner's base period was the calendar years 1946, 1947, 1948, and 1949. Adjusted basis for determining gain on sale or exchange of all assets held by it for business purposes as of January 1, 1946, amounted to less than $20 million. It had no privilege of filing a consolidated return with any other corporations for 1950.
Petitioner reported on its income tax returns gross sales of $12,878,751.99 for 1946, $16,311,138.47 for 1947, $18,161,135.39 for 1948, and $23,003,696.22 for 1949. These amounts represent the total amounts received or accrued from the sale of beer. Federal and State excise taxes paid or accrued for 1946 through 1949 upon beer manufactured and sold totaled $4,849,076.70, $5,687,831.75, $5,837.412.88, and $7,192,289.27, respectively. These amounts were not excluded from gross sales but were included in cost of goods sold as reported on line 2 of the Federal income tax return.
The 2-year total of the gross sales shown on the 1948 and 1949 returns is $41,164,831.61, and for 1946 and 1947 is $29,189,890.46.
The total for the later 2 years is 141 per cent of the total for the prior 2 years. The total of the gross sales, excluding Federal and State beer excise taxes, for 1948 and 1949 is $28,135,129.46, and for 1946 and 1947 is $18,652,982.01. This total for the later 2 years is 150.8 per cent of the total for the earlier years.
The following items also constituted gross receipts:
+--------------------------------------------------------------------------+
¦ ¦1946 ¦1947 ¦1948 ¦1949 ¦
+------------------------------+----------+----------+----------+----------¦
¦Interest ¦$768.88 ¦$749.99 ¦$4,284.73 ¦$1,360.56 ¦
+------------------------------+----------+----------+----------+----------¦
¦Royalties ¦45,000.00 ¦45,000.00 ¦45,000.00 ¦45,000.00 ¦
+------------------------------+----------+----------+----------+----------¦
¦Sales of spent grain and sacks¦24,030.47 ¦28,292.45 ¦29,201.88 ¦35,187.79 ¦
+------------------------------+----------+----------+----------+----------¦
¦Sales of yeast ¦3,476.61 ¦4,755.06 ¦7,670.25 ¦11,747.47 ¦
+------------------------------+----------+----------+----------+----------¦
¦Total ¦$73,275.96¦$78,797.50¦$86,156.86¦$93,295.82¦
+--------------------------------------------------------------------------+
These items for 1948 and 1949 total $179.452.68, and for 1946 and 1947. $152,073.46. Those figures added to gross sales change the ratio including excise taxes from 141 to 140.9, and the ratio excluding taxes from 150.8 to 150.57.
Other income during the base period included:
+-----------------------------------------------------------------------+
¦ ¦1946 ¦1947 ¦1948 ¦1949 ¦
+---------------------------+----------+----------+----------+----------¦
¦Cash discounts on purchases¦$11,642.97¦$26,314.59¦$27,108.96¦$43,530.23¦
+---------------------------+----------+----------+----------+----------¦
¦Interest on U. S. bonds ¦18,886.51 ¦19,102.75 ¦ ¦ ¦
+---------------------------+----------+----------+----------+----------¦
¦Judgment ¦ ¦3,139.88 ¦ ¦ ¦
+---------------------------+----------+----------+----------+----------¦
¦Miscellaneous ¦1,071.96 ¦41.13 ¦ ¦25.45 ¦
+---------------------------+----------+----------+----------+----------¦
¦Total ¦$31,601.44¦$48,598.35¦$27,108.96¦$43,555.68¦
+-----------------------------------------------------------------------+
Inclusion of these amounts in the computations does not significantly affect the ratios of gross receipts.
On invoices covering shipments to customers within the United States, petitioner did not state beer excise taxes separate from unit prices. Invoices covering shipments to United States territories (e.g., Hawaii) stated that Federal tax was paid and the shipment was exempt from State tax. Invoices covering shipments to United States possessions (e.g., Samoa) stated that the shipment was tax free.
During the years 1946 through 1949, petitioner published for various trading areas price schedules showing sale prices and terms. It regularly filed copies of schedules covering California areas with the California Board of Equalization pursuant to law. The California schedules did not state excise taxes separately. Price schedules for Nevada bore the notation that Nevada State tax was not included. Nevada schedules dated on and after February 1, 1948, specifically deducted California tax. The prices in Nevada from December 1, 1946, to February 1, 1948, were identical to those in Los Angeles from November 15, 1946, to June 20, 1947. Schedules for exports to United States possessions and foreign countries deducted both State and Federal taxes in the explanation of the price. Petitioner did not alter its methods of invoicing or pricing after March 1, 1950. It followed the general procedure in the brewing industry, not to show excise taxes separately on invoices or price lists.
Petitioner's published annual reports for 1946 through 1949 reported the same gross sales as shown on the returns. They did not show excise taxes gross separately.
Prior to March 1, 1950, breweries paid Federal excise tax by stamps. Petitioner carried the amount of unused stamps on hand, along with any State stamps, in an account entitled ‘Revenue Stamps on Hand.’ It carried this account as a separate item under ‘Current Assets' in the annual report, rather than as an inventory item. When beer was canned or bottled, it transferred the amount of stamps surrendered from ‘Revenue Stamps on Hand’ to ‘Tax on Canned Beer’ or ‘Tax on Bottled Beer.’ It paid State tax by monthly return on the previous month's sales.
Petitioner credited refunds to the ‘Tax on Bottled Beer’ or ‘Tax on Canned Beer’ accounts, except one substantially delayed refund in 1949, which it credited to ‘Miscellaneous Income.’
After March 1, 1950, Federal tax was collected by stamp after the bottled or canned beer was withdrawn for sale or consumption. The beer tax statute remained unchanged during any material year.
Petitioner's accounts reflect manufacturing processes from the purchase of raw materials through the brewing, placement of beer in fermenting tanks, movement to aging tanks in cellars, and transfer to the bottling and canning lines. After packaging, beer is sent to the shipping warehouse and from there to distributors. ‘Inventory Beer in Process,‘ to which a large bulk inventory is transferred when the beer reaches the cellars, reflects costs incurred up to that point including real and personal property taxes and social security taxes. After aging, the beer is withdrawn for bottling and canning, at which time costs of inventory in process are apportioned to a bottled beer cost account and a canned beer cost account, to which accounts bottling and canning costs are also charged. Warehousing and shipping costs are allocated to the bottled beer and canned beer cost accounts, which then show the total cost of beer produced exclusive of excise taxes.
Petitioner carried beer on hand in inventory. It recorded taxes paid on unshipped beer in accounts entitled ‘Inventory— Bottle Tanks— Federal Tax’ and ‘Inventory— Canned Beer— Federal Tax.’ On the balance sheet it combined these accounts into ‘the inventory of federal tax,‘ which in turn it combined with the bottled and canned beer cost accounts to arrive at a total inventory figure.
Since March 1, 1950, petitioner has used the same accounting method, except that it shows no Federal tax related to inventories, since it pays no tax until beer is sold. Its method of invoicing and pricing of merchandise remained unchanged. The tax now appears as an expense in the month when the liability accrues, as State excise taxes had always been handled.
Petitioner increased its over-all average prices, exclusive of excise taxes, for 1948 and 1949 over 1946 and 1947 by 21.6 per cent. Excise tax rates did not change during the base period.
No single classification of excise taxes is customary in accounting practice. Some are included in gross sales in corporate returns, while others are customarily excluded. Reports to stockholders generally conform to the company books, but may differ from the tax returns due to statutory requirements of tax reporting.
Where excise taxes are included in gross sales,...
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