Pacific Grape Prods. Co. v. Comm'r of Internal Revenue

• Decision Date: 02 January 1952
• Docket Number: Docket No. 15596.
• Citation: 17 T.C. 1097
• Parties: PACIFIC GRAPE PRODUCTS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 1097

PACIFIC GRAPE PRODUCTS CO., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 15596.

Tax Court of the United States.

Promulgated January 2, 1952.

1. Petitioner, a canner of fruit products, reported its income on a calendar year accrual basis. On December 31 of each of the years 1939, 1940, and 1941, it had billed buyers for goods on hand which it had in those years contracted to sell but for which the buyers had not yet issued shipping instructions; however, the goods were not labeled, cased, shipped out, or paid for until later taxable periods. When it billed the goods the petitioner recorded on its books as of the same dates sales of these products and recorded also the accrual of both the expense of brokerage fees incurred with respect to the sale of these goods and the estimated expenses of labeling, casing and freight, all of which it was contractually liable to perform. In the year 1944 petitioner sold to the United States Government certain goods not yet cased. These goods were cased in 1945 prior to shipment. Held, that title to the unshipped and unpaid for goods did not pass to the petitioner's buyers on the billing dates because the goods subject to the contract were not then ascertained. Accordingly, petitioner erroneously accrued income from the sale of these unshipped goods in the taxable years when it billed its buyers therefor. Held, further, that petitioner is not entitled to a deduction for the accrued brokerage fees in the years in which the unshipped goods were billed for lack of proof as to when its liability to pay such fees became fixed. Held, further, that petitioner's liability with respect to expenses for labeling, packing, freight, and the like did not become fixed until such services were performed and, accordingly, estimates of such expenses are not deductible in prior taxable years when the petitioner undertook the contractual obligation to perform such services.

2. On the basis of the facts presented, held, that the salaries and traveling expenses of an executive assistant to the petitioner's president and of regularly employed chemists, as well as various costs incurred with respect to work performed by the chemists, were ordinary and necessary business expenses deductible under section 23(a) of the Internal Revenue Code. Samuel Taylor, Esq., and Walter G. Schwartz, Esq., for the petitioner.

Robert G. Harless, Esq., for the respondent.

Respondent determined deficiencies in income taxes, declared value excess-profits taxes and excess profits taxes against the petitioner as follows:

+----------------------------------------+
                ¦    ¦          ¦Declared ¦              ¦
                +----+----------+---------+--------------¦
                ¦    ¦          ¦value    ¦              ¦
                +----+----------+---------+--------------¦
                ¦Year¦Income tax¦excess   ¦Excess profits¦
                +----+----------+---------+--------------¦
                ¦    ¦          ¦profits  ¦tax           ¦
                +----+----------+---------+--------------¦
                ¦    ¦          ¦Tax      ¦              ¦
                +----+----------+---------+--------------¦
                ¦1940¦$12,298.07¦         ¦$2,055.35     ¦
                +----+----------+---------+--------------¦
                ¦1941¦          ¦         ¦4,401.88      ¦
                +----+----------+---------+--------------¦
                ¦1942¦          ¦         ¦59,254.23     ¦
                +----+----------+---------+--------------¦
                ¦1943¦12,686.64 ¦         ¦              ¦
                +----+----------+---------+--------------¦
                ¦1944¦          ¦$1,989.76¦38,868.59     ¦
                +----------------------------------------+
                

The petitioner claims an overpayment of its excess profits tax for the taxable year 1941 in the amount of $19,620.01 and for the year 1944 in the amount of $1,689.77. In his answer to the amended petition, the respondent asserted a claim for an additional deficiency in excess profits tax for 1941 in the amount of $3,865.90. Of the adjustments made by the respondent in determining the above deficiencies, those contested by the petitioner result in the presentation of the following questions for decision:

(1) Did petitioner erroneously report accrued income from sales of certain unshipped and unpaid goods in the taxable years in which it billed its buyers for such goods?

(2) In each of the taxable years in which petitioner treated the unshipped but billed goods as sold, was it entitled to take a deduction for accrued brokerage fees incurred in connection with the sale of such goods?

(3) Was petitioner entitled to accrue estimated costs of freight and other expenses relative to the preparation of its products for shipment in the taxable periods in which it undertook a contractual liability to perform the services where such preparation and shipment of the goods took place, and the liability for the costs thereof was established, in subsequent taxable periods?

(4) Are salaries of chemists and other expenses in connection with their laboratory and analytical work on food products and the salary and traveling expenses of an executive assistant to petitioner's president ordinary and necessary business expenses of petitioner deductible under section 23(a) of the Code?

FINDINGS OF FACT.

Part of the facts were stipulated and we find them as stipulated.

Petitioner, a corporation organized and existing under the laws of the State of California, has its principal office at Modesto, California. It duly filed its corporate income and declared value excess-profits tax returns for the years 1939 to 1945, inclusive, and its excess profits tax returns for the years 1940 to 1945, inclusive, with the collector of internal revenue for the first district of California.

Petitioner has at all times since its incorporation in 1926 kept its books and filed its tax returns on a calendar year accrual basis.

Petitioner is a canner of fruit and fruit products. Its yearly canning season usually covers a period from July 1 to the following November. It currently disposes of its products by sales to wholesalers. These sales are usually made through brokers. Some of the contracts are entered into prior to, and others after, the completion of the canning season. In contracting for the sale of its current pack of fruit products for each of the years 1939, 1940, and 1941, petitioner, following its regularly established practice, employed a standard form of contract known as the Pacific Coast F.O.B. Canned Foods Contract. This contract has been in general use by a predominant number of members of the canning industry in California since about the year 1922. On the face of the contract are printed terms of purchase and sale, stating that ‘* * * buyer has this day bought and * * * seller has this day sold ‘ certain canned foods. Spaces are provided for the indication of the quantity, brand, grade, varieties, and price of the canned products. Additional terms and conditions are contained on the reverse side of the contract and they read in part as follows:

TERMS: Cash less two per cent (2%) if draft, with documents attached, payable in New York, Chicago, or San Francisco exchange, or equivalent, is paid within ten (10) days from date thereof; otherwise less on per cent (1%) in thirty days unless shipment arrives prior thereto, in which case payment less one per cent (1%) in thirty days unless shipment arrives prior thereto, in which case payment less one per cent (1%) shall be made within three (3) full business days after arrival of shipment. Draft shall not be dated earlier than date of bill of lading and instructions to collecting bank shall provide that if draft arrives on the tenth day or thereafter twenty-four hours grace shall be given after presentation. Documents against payment. If during the life of his agreement the financial responsibility of the buyer becomes impaired, or payments from buyer are past due, cash payment in advance with regular discount may be demanded by seller before further shipments are made.

DELIVERIES: F.O.B. Pacific Coast rail shipping point. Local freight and transfer charges from interior points to port of shipment to be paid by buyer. All local freight, cartage and handling charges for assembling purposes incurred on less than carload lots to be paid by buyer.

SHIPMENT AND STORAGE: On account of shipment from different factories, seller reserves the routing of freight. Notwithstanding shipped to seller's order, goods are at risk of buyer from and after delivery to carrier, and buyer hereby assumes all responsibility for shortage, loss, delay, or damage in transit upon issuance to seller by carrier of clean bill of lading.

It is specifically agreed that any route herein specified shall be subject to its being open or available at time of shipment. If, after notice by seller, where seller elects to give such notice, buyer does not desire to have shipment made by some route then open or available, seller may store and insure goods for buyer's account. If so stored and insured, buyer agrees to pay draft with documents, less two per cent (2%) in New York, Chicago, or San Francisco exchange or equivalent, within ten days from date of draft. Draft shall not be dated earlier than date of warehouse receipt and instructions to collecting bank shall provide that if draft arrives on the tenth day or thereafter twenty-four hours grace shall be given after presentation.

Goods to be shipped in (at) seller's discretion as soon as practicable after packing. Any difference in freight and terminal charges on account of seller shipping in more than one carload to be paid by seller. Seller reserves the right to ship goods unlabeled when delay in receiving buyer's labels holds back shipment. If seller shall elect to withhold shipment at buyer's request, then the goods unshipped shall be billed and paid for on the following dates, respectively, hereinafter specified.

PEAS AND SPINACH, July 1st; ASPARAGUS, August 1st; TOMATOES OR TOMATO PRODUCTS, November 1st; FRUITS, FRUIT PRODUCTS OR SUNDRY VEGETABLES, December 31.

Buyer agrees to pay for unshipped goods in ten days from the date of...