PETERSON PRODUCE COMPANY v. United States
Decision Date | 23 May 1962 |
Docket Number | No. 1621.,1621. |
Citation | 205 F. Supp. 229 |
Parties | PETERSON PRODUCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant. |
Court | U.S. District Court — Western District of Arkansas |
COPYRIGHT MATERIAL OMITTED
Little & Enfield, Bentonville, Ark., for plaintiff.
George A. Hrdlicka, Atty., Dept. of Justice, Washington, D. C., Charles M. Conway, U. S. Atty., Robert E. Johnson, Asst. U. S. Atty., Ft. Smith, Ark., for defendant.
The plaintiff, Peterson Produce Company, filed its complaint on August 17, 1961, seeking to recover the sum of $110,410.15 income tax paid for the taxable year ending August 31, 1956, by virtue of a net operating loss carryback to 1956 from the taxable year ending March 31, 1959. The plaintiff alleged that the disallowance of the said net operating loss carryback to the taxable year ending August 31, 1956, by the Commissioner of Internal Revenue and the assertion of a tax deficiency for the taxable year ending March 31, 1959, were erroneous in that the defendant disallowed the use of a cash method of accounting in the plaintiff's broiler farming department, which method disclosed a net operating loss.
In its answer filed October 23, 1961, the defendant denied that the disallowance by the Commissioner of Internal Revenue of plaintiff's use of the cash method of accounting in its broiler farming department was erroneous for the reason that the broiler farming operations did not constitute such a new and separate business that entitled the plaintiff to depart from its accrual method of accounting, which it was accustomed to use to reflect the income of all its previous operations. Defendant further alleged that if plaintiff were to use the accrual method of accounting to reflect the operations of its broiler farming department for the taxable year ending March 31, 1959, in harmony with the feed and hatchery departments of plaintiff, which also used the accrual method of accounting to reflect its operations for the same taxable year, that the cost of broiler flocks on hand at the end of the year in question should be included in the plaintiff's closing inventory, which determination would result in the disallowance of a net operating loss carryback from the said year to the taxable year ending August 31, 1956, and would further result in an assertion of an income tax deficiency for the taxable year in question.
The case was tried to the court on February 6 and 7, 1962, and at the conclusion of the presentation of the testimony, it was taken under advisement by the court and the parties were requested to submit briefs in support of their respective contentions. The briefs have now been submitted and the court, having considered the pleadings, the testimony adduced at the trial, the exhibits, and the briefs of the counsel, now makes and files herein its findings of fact and conclusions of law, separately stated.
The plaintiff is a corporation duly organized and existing under the laws of the State of Arkansas with its principal place of business at Decatur in Benton County, Arkansas.
Peterson Produce Company paid corporation income taxes for the taxable year ending August 31, 1956, amounting to $129,926.02. On or about June 14, 1959, plaintiff filed its federal income tax return for its taxable year ending March 31, 1959, and reported a net operating loss of $212,327.22. On or about June 3, 1959, the plaintiff filed with the District Director its claim for refund of taxes for the taxable year ending August 31, 1956, in the amount of $110,410.15, based on the net operating loss from the taxable year ending March 31, 1959, carried back to the taxable year ending August 31, 1956, which refund was paid to the plaintiff.
During 1960, the District Director examined plaintiff's books and records, and after said examination the District Director disallowed the net operating loss carried back to the taxable year ending August 31, 1956, and asserted an income tax deficiency of the $110,410.15 refund paid to the plaintiff along with a further income tax deficiency of $23,183.89 for the taxable year ending March 31, 1959, all of which was paid to the defendant by June 5, 1961.
Plaintiff was incorporated during the year of 1947. Prior to that time plaintiff was a sole proprietorship owned and operated by Lloyd Peterson, which dealt primarily in the sale of feed for livestock and poultry. During the ten years prior to 1947, Mr. Peterson also sold on a limited scale baby chicks to growers. Subsequent to the date of incorporation, plaintiff not only sold feed to local chicken growers, but also entered the hatchery business. The breeding of chickens had been carried on at one of plaintiff's own farms since 1946, and by 1952 the plaintiff had on hand what is called a laying flock for purposes of producing its own eggs to be incubated. Since 1952 plaintiff's feed and hatchery operations have increased considerably.
On September 1, 1958, plaintiff created a broiler farming division, which made a total of three divisions comprising the plaintiff corporation, the original two being the feed and hatchery divisions, or, as they are sometimes referred to, "departments."
The effect of the creation of this new department by the plaintiff has been characterized as being both external and internal. The external effect is reflected in the plaintiff's dealings with the various chicken growers with whom it contracts. Prior to September 1, 1958, the plaintiff had two basic forms of growing contracts, which it utilized in the broiler farming operations carried on by local growers. One form of contract was called a "profit sharing" type of arrangement whereby the plaintiff guaranteed the grower a minimum price per pound per chicken marketed plus a conversion incentive per head, if any, and any profits above this price were shared equally by both parties. The essential provisions of this agreement (DX B), entitled "Contract for Raising Poultry," are as follows:
Another form of contract was called a "conversion" contract, whereby the plaintiff agreed to pay the grower a price per bird sold based on a sliding scale which was governed by the weight of meat produced per 100 lbs. of feed consumed. The essential provisions of this second type of agreement (DX A), also entitled "Contract for Raising Poultry," are as follows:
"The Grower will also receive all of the profit after the conversion guarantee has been applied against the account.
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