Petroleum Heat and Power Co. v. United States, 80-67.

• Decision Date: 24 January 1969
• Docket Number: No. 80-67.,80-67.
• Citation: 405 F.2d 1300
• Parties: PETROLEUM HEAT AND POWER CO., Inc. v. The UNITED STATES.
• Court: U.S. Claims Court

405 F.2d 1300 (1969)

PETROLEUM HEAT AND POWER CO., Inc. v. The UNITED STATES.

No. 80-67.

United States Court of Claims.

January 24, 1969.

Louis H. Shereff, New York City, attorney of record, for plaintiff.

Philip R. Miller, Washington, D. C., with whom was Asst. Atty. Gen., Mitchell Rogovin, for defendant.

Before COWEN, Chief Judge, and DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

ON PLAINTIFF'S MOTION AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

COLLINS, Judge.

Plaintiff, a New York corporation with its principal office in Stamford, Connecticut, brings this action for refund of corporate income taxes paid in 1963 and 1964 for the period July 1, 1962, to December 31, 1962. The case is now before us on the motions of the parties for summary judgment. For reasons herein expressed, we grant plaintiff's motion and deny defendant's. The stipulated facts pertinent to the decision are as follows:

Plaintiff corporation was organized in 1952 as successor to a corporation of the same name which had carried on the same business as plaintiff for approximately 25 years. Although it had other interests, plaintiff's principal business was the sale of fuel oil at retail. As part of this business plaintiff entered into contracts with most of its fuel oil buyers under which plaintiff was to service its customers' oil burners. In 1962, most of these contracts were for an annual period beginning on July 1 of one year and ending on June 30 of the next, thereby coinciding with plaintiff's then July-to-June fiscal year.

The oil burner service contracts had always been performed by plaintiff and its predecessor at substantial losses. The contracts were used as sales devices to obtain fuel oil sales agreements, the sale of fuel oil being the means whereby plaintiff's profits were earned. Each of the burner service agreements required plaintiff to overhaul the oil burner during the contract year. In addition, plaintiff was obligated to provide emergency service, which plaintiff performed only upon demand.

The provisions of the contracts allowed cancellation. Contracts for domestic service could be canceled by either party upon 30 days' notice. The amount of any refund to the customer was arranged by negotiation based upon a minimum fee of $2 per month (for the availability of emergency service) for each month the contract was in effect, plus a charge of $12.50 if the burner had been overhauled prior to the date of cancellation. Contracts for industrial burner service provided for a minimum charge of $5.50 to $7.50 per month for each month the contract was in effect, plus a charge of $50 if the overhaul had been completed prior to termination. Under all the contracts, plaintiff could have terminated if the customer purchased fuel oil from another dealer or supplier or for unsatisfactory credit or nonpayment of a bill. As an historical fact, however, a contract was canceled only when the customer sold his building or buildings, and in most of these cases plaintiff attempted, usually with success, to have the new owner assume the contract. Thus, although there had been terminations and refunds, the cancellation rate was low.

The contracts did not specify a particular time during the 12-month period when the burners were to be overhauled. For the convenience of plaintiff and for the practical distribution of the work among its employees, the overhauls were started during the summer months. When the heating season began and emergency service calls were received, the overhauls were then performed with each emergency service call. As a result of this practice, approximately 50 percent of the overhauls were made during the first 6 months of plaintiff's July-to-June fiscal year, and half were made during the last 6 months of each fiscal year.

During the period in issue plaintiff used the accrual method of accounting in keeping its books and filing its income tax returns. It was plaintiff's practice to bill a customer for the full amount of the contract price upon the signing and receipt by it of the contract. In accordance with its method of accounting, therefore, receipts from the oil burner service contracts were put into a deferred income account. Income was deemed earned on the basis of one-twelfth of the contract price for each of the 12 months of the contract period. As expenses were incurred in the servicing of oil burners, they were charged to the deferred income account, thereby reducing the account by a like amount. Plaintiff closed its books at the end of every month and prepared monthly balance and operating statements.

The parties have stipulated that the method of accounting used by plaintiff was in accord with generally accepted commercial accounting principles under the accrual method of accounting as customarily employed by similar taxpayers. It is also agreed that plaintiff's income for any period of time ending with the last day of the month could be clearly and accurately determined for plaintiff's commercial purposes.

The occurrence which precipitated the present dispute was the sale by the shareholders of plaintiff of all their stock on January 10, 1963, to Signal Oil and Gas Company of Los Angeles, California. Plaintiff subsequently filed an income tax return pursuant to Treas. Reg. § 1.1502-13A(g) (1955) for the short period July 1, 1962, to December 31, 1962. This return was, in effect, a final return for the period of its fiscal year during which plaintiff was an independent corporation. Plaintiff paid taxes on the basis of this return in March and June of 1963 amounting to $73,944.75.

On January 15, 1964, the District Director of Internal Revenue, Hartford, Connecticut, assessed against plaintiff additional taxes and interest in the amount of $100,268.77, raising plaintiff's taxes for the 6-month period to a total of $174,213.52. Plaintiff paid that additional assessment on January 17, 1964.

Plaintiff had received $479,470 during the 6-month period July 1, 1962, to December 31, 1962, by virtue of customer billings for the oil burner service contracts. In accordance with its above-described accounting method, plaintiff had sought to defer part of the $479,470 income received to offset expenses to be incurred in the 6-month period January 1, 1963, to June 30, 1963. The amount in the deferred income account was $199,560.43.¹ The District Director disallowed the income deferral, and this gave rise to the additional assessment. The tax deficiency, imposed at the rate of 52 percent, amounted to $103,771.42. Plaintiff duly filed a claim for refund of this sum, which was subsequently denied.²

This action is for refund of the amount of the assessed deficiency, plus interest. Plaintiff's primary position is that the regulations then in effect explicitly or implicitly required the Commissioner to accept plaintiff's statement of income as reflected in its books of account. Plaintiff also questions the constitutionality of the disallowance.

In the alternative, plaintiff argues that the Commissioner should have allowed at least the deferral of $97,413.09, and it seeks the tax it paid ($50,654.81) attributable to that amount, plus interest. Plaintiff asserts that, as of December 31, 1962, it had, irrespective of its duty to render emergency service, a fixed and unquestioned obligation to perform overhauls pursuant to its extant contracts. The estimated cost to plaintiff of performing the overhauls for the entire year of July 1, 1962, to June 30, 1963, was $194,826.19. In accordance with the fact that approximately 50 percent of its overhauls were performed in each half year, plaintiff argues that half of the $194,826.19, or $97,413.09, was allocable to each 6-month period. Plaintiff claims that Schuessler v. Commissioner of Internal Revenue, 230 F.2d 722 (5th Cir. 1956), recently followed in Artnell Co. v. Commissioner of Internal Revenue, 400 F.2d 981 (7th Cir. 1968), and Beacon Publishing Co. v. Commissioner of Internal Revenue, 218 F.2d 697 (10th Cir. 1955), permit the deferral of income to offset a fixed future obligation of the sort here involved.

Defendant contends (1) that the regulations relied upon by plaintiff are inapplicable under the facts; and (2) that the general rule that income is to be included in the return for the period in which received, and is not to be deferred to meet future expenditures, requires the court to approve the Commissioner's disallowance of plaintiff's proposed deferral of income. Defendant, of course, relies for this latter proposition upon Schlude v. Commissioner of Internal Revenue, 372 U.S. 128, 83 S.Ct. 601, 9 L.Ed.2d 633 (1963), American Auto Ass'n v. United States, 367 U.S. 687, 81 S.Ct. 1727, 6 L.Ed.2d 1109 (1961), Automobile Club of Mich. v. Commissioner of Internal Revenue, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957), and the line of cases following those decisions.

We hold that plaintiff's construction of the applicable regulations is proper. We therefore do not reach the other issues raised by the parties. The pertinent regulations seem reasonably designed to effectuate the purposes of the statutes under which they were promulgated, and the validity of the regulations has not been questioned by the parties here. Under familiar principles, these regulations have the effect of law.³ Accordingly, because the regulations control in the circumstances unique to this case, the Schlude line of cases is inapplicable, and we express no opinion regarding the effect those cases might have in other circumstances or their relation to the Schuessler, Beacon, and Artnell cases cited by plaintiff.

As the parties have stipulated, plaintiff's business was seasonal. During the cold winter months there was a great demand for fuel oil, while during the summer months plaintiff incurred losses. The greatest net profits were usually realized in January and February of each year. Thus, as the parties agree in paragraph 24 of the stipulation,

* * * It is not

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