Monarch Mfg. Co. v. Comm'r of Internal Revenue
| Decision Date | 10 October 1950 |
| Docket Number | Docket No. 19418. |
| Parties | MONARCH MANUFACTURING COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
The advent of chain store and the building of modern highways brought about a change in merchandising as between manufacturers and consumers and necessitated a change from petitioners established policy of selling its products only to wholesalers and jobbers, exclusive of Sears, Roebuck & Co., and Montgomery Ward & Co., to a policy of selling direct to retailers. Held, that such change in the merchandising of manufactured goods was a permanent rather than a temporary economic event bearing upon petitioner's business; and further, that petitioner has not shown that its earnings but for the circumstances in question would have resulted in an excess profits credit greater than that computed and allowed by the respondent on the basis of invested capital. Benjamin Poss, Esq., Howard Schuler, Esq., and Louis L. Meldman, Esq., for the petitioner.
Harold H. Hart, Esq., and Richard L. Greene, Esq., for the respondent.
The respondent has rejected applications of petitioner for relief under section 722(b)(2) and (5) of the Internal Revenue Code for the years ended January 31, 1942 and 1943. No evidence at the trial and no argument on brief was directed to the claim for relief under section 722(b)(5) and to that extent the claim will be regarded as having been abandoned, leaving for determination only the question whether petitioner is entitled to a refund of excess profits tax for the said years under section 722(b)(2).
The facts have been partially stipulated and to the extent stipulated are so found. Some of the facts stipulated will be set forth herein for the purpose of clarity.
Petitioner is a Wisconsin corporation, organized on October 6, 1906. Its principal office is located in Milwaukee, Wisconsin. It filed its excess profits tax returns for the years ended January 31, 1942 and 1943, with the collector of internal revenue for the district of Wisconsin. For all years pertinent petitioner's books have been kept and its tax returns have been filed on an accrual basis. Up to and including the year 1936 petitioner reported its income for the calendar year. By letter dated March 11, 1938, from the collector of internal revenue it was granted permission to change from a calender year to a fiscal year ending January 31 for the purpose of reporting income, this change to be effective January 31, 1938. Beginning with the fiscal year ended January 31, 1938, petitioner has at all times since reported its income for the fiscal year ending January 31 of each year.
Upon organization petitioner acquired the outer wear manufacturing department of Cohn Brothers of Milwaukee, which department had been conducted by Cohn Brothers under the name Monarch Manufacturing Co. The term ‘outer wear‘ includes items such as sheepskin lined coats, leather coats, leather coats, mackinaw coats, wool coats, and various types of other jackets and ulsters made of cloth. Cohn Brothers was a clothing manufacturer and in the beginning had sold its products directly to retailers. In or about 1989 it decided to sell to wholesalers or jobbers and created a new and separate department to conduct that business. This new department was set up and conducted under the name Monarch Manufacturing Co. in order to avoid or eliminate possible ill feelings on the part of its wholesale customers who were opposed to direct sales by manufacturers to retailers. After its organization, and except as hereafter shown, petitioner adopted and carefully adhered to the policy of selling its product only to the wholesale trade. It has at all times up to and including the taxable years continued in and limited itself to the business of manufacturing and selling outer wear.
By World War I petitioner had become a leader in the outer wear business. It established wholesale outlets with jobbers from coast to coast. In or prior to 1909 it acquired two important and substantial customers which were not wholesalers. They were Sears, Roebuck & Co. and Montgomery Ward & Co. Except for these two companies the petitioner prior to 1931 had no customers other than wholesalers and jobbers. The selling of its product was simple and inexpensive. It had only three salesmen and they could cover the entire territory and sell petitioner's entire annual output in about eight weeks time.
During the period 1919 through 1929 petitioner's sales reached a level never before attained and a level which was not again approached until the taxable years herein. Its sales for 1920 and 1924 were higher than those shown for any other years in petitioner's history up to and including the year 1948.
In selling to wholesalers and jobbers and to Sears, Roebuck and Montgomery Ward petitioner's products did not go to the consumers under petitioner's name or brand. The goods sold by petitioner to each of its customers carried the brand or name designated by such customer.
Beginning about the middle twenties a definite change in merchandising as between manufacturers and consumers became apparent. These changes were brought about or largely influenced by two things— one was the advent of chain stores and the other was the building of modern highways which enabled people from rural areas and communities and from small towns to make their purchases from the larger stores in the big centers. These changes began seriously to affect the fortunes of petitioner's wholesale and jobber customers. A very substantial if not the greater part of the wholesalers' outlets were country and small town stores. These stores in some instances went out of business entirely and in others stopped handling certain lines of goods which were in competition with the stores in the larger centers. The chain stores and the stores in these larger centers in the main bought their merchandise directly from the manufacturer and through the elimination of wholesalers and jobbers profits were able to offer the consumers more attractive prices and a wider assortment of merchandise.
These changes affected petitioner's business much more seriously than that of some of its competitors. Some competitors had over the years been selling a part of their output directly to retailers and some, if not all, of such manufacturers sold under their own brands or trade names. As early as 1927 petitioner decided that it was very desirable that its products be established under its own brand or name with the retailers and the buying public and in that year it spent $28,728.32 for advertising in trade journals describing petitioner's products and urging that wholesalers be requested to use the Monarch name in handling petitioner's products. Previously it had not been necessary for petitioner to spend more than $1,000 to $2,000 per year on advertising. Opposition was met from the wholesalers and petitioner, acceding to pressure from them, continued its policy of selling only to wholesalers and jobbers until 1931. By that year petitioner's most valuable wholesale outlets had disappeared and its sales to wholesalers and jobbers were thereafter comparatively small. Petitioner made no sales to wholesalers and jobbers after the fiscal year ended January 31, 1938. By that date many of the wholesalers and jobbers with which petitioner had previously done business were no longer in existence.
By reason of the developments above described, the crash in 1929 and the general business depression which followed, a change was brought about beginning with 1931 in petitioner's merchandising policy. In 1931 it first started selling its products to retailers other than Sears, Roebuck and Montgomery Ward. To do this it organized and trained a corps of salesmen and in that year its sales to such retail outlets amounted to $255,634. Sales to such outlets gradually increased from the figure named for 1931 to $677,203 for 1936.
As incorporated in 1906 petitioner's authorized capital was $100,000, divided into shares of common stock of which $80,000 par value was immediately issued as fully paid. During the taxable years there were outstanding 10,500 shares of no par common stock and $388,500 of preferred stock which had been issued as stock dividends.
The following table reflects in column (1) petitioner's total gross sales, including scrap sales, (less returns and allowances); (2) petitioner's sales to wholesalers; (3) petitioner's sales to Sears, Roebuck & Co., and Montgomery Ward & Co., (4) petitioner's sales to retail stores; (5) petitioner's sales to United States Rubber Co. covering 1928 to 1934, only; (6) petitioner's cash sales covering 1928 to 1935, only, and (7) petitioner's net taxable income (or loss) as finally agreed upon by petitioner and the Commissioner of Internal Revenue for Federal income tax purposes.
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