Ripy Bros. Distillers, Inc. v. Comm'r of Internal Revenue

• Decision Date: 22 September 1948
• Docket Number: Docket No. 11406.
• Citation: 11 T.C. 326
• Parties: RIPY BROS. DISTILLERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

11 T.C. 326

RIPY BROS. DISTILLERS, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 11406.

Tax Court of the United States.

Promulgated September 22, 1948.

1. Even though taxpayer had abnormal net income of a class within section 721(a)(2)(A), I.R.C., held, no part thereof is excludable from excess profits net income where evidence fails to show the portion thereof attributable to prior years.

2. Held, sale of warehouse receipts covering 1,152 barrels of whiskey in November 1943 was made by stockholders of taxpayer and not by taxpayer, which had distributed such receipts prior thereto as a dividend in kind without restriction and without negotiation for the sale thereof. James E. Fahey, Esq., for the petitioner.

Clarence E. Price, Esq., for the respondent.

The Commissioner determined deficiencies as follows:

+-------------------------------------------------------------+
                ¦                                 ¦Fiscal year ended June 30— ¦
                +---------------------------------+---------------------------¦
                ¦                                 ¦1943         ¦1944         ¦
                +---------------------------------+-------------+-------------¦
                ¦Income tax                       ¦$4,679.28    ¦             ¦
                +---------------------------------+-------------+-------------¦
                ¦Declared value excess profits tax¦376.76       ¦$2,988.94    ¦
                +---------------------------------+-------------+-------------¦
                ¦Excess profits tax               ¦             ¦36,091.89    ¦
                +-------------------------------------------------------------+
                

The questions involved are: (1) Whether the amount of $7,500 received by petitioner in the fiscal year ended June 30, 1943, is abnormal income as defined in section 721 of the Internal Revenue Code, and (2) whether petitioner sold 1,152 barrels of whiskey in the year ended June 30, 1944, realizing a profit of $39,233.24 therefrom, or whether such whiskey was owned and sold by its stockholders, having received it prior to the sale as a dividend in kind. Assignment of error involving depreciation allowances for the years ended June 30, 1943 and 1944, were adjusted by stipulation. The assignment of error as to the disallowance of an excess profits credit carry-over of $7,607.20 in computing excess profits tax for the year ended June 30, 1944, was abandoned.

FINDINGS OF FACT.

The petitioner is a Kentucky corporation and was organized in 1933 to carry on a general distillery and warehousing business. Its principal offices are at Lawrenceburg, Kentucky. Its returns for the taxable years were prepared on an accrual basis and were filed with the collector of internal revenue for the district of Kentucky.

Throughout the year 1943, the issued and outstanding capital stock of petitioner consisted of 960 shares of common stock of the par value of $100 per share.

On April 1, 1940, the petitioner entered into a written agreement with Schenley Distillers Corporation, hereinafter referred to as Schenley. Under the contract petitioner agreed to sell and Schenley agreed to purchase from petitioner 12,897 barrels of whiskey, which had been produced prior to January 1, 1940, and an additional 41,000 barrels, 9,000 of which were to be produced in 1940 and 8,000 barrels in each of the years 1941, 1942, 1943, and 1944, all at a purchase price equal to cost, as defined in the contracts, plus 5 cents per proof gallon original gauge. The contract further provided, in part, as follows:

8. Seller agrees that it will produce no whiskey at said distillery other than that provided for in this contract, except that seller may produce not more than one thousand (1,000) barrels per annum beginning in 1941 for its own account, provided said whiskey is so produced that the word ‘Ripy‘ does not appear in any form on the barrel and that such name is not required on any bottle label or bottled in bond stamp.

10. Seller agrees not to dispose of any of the whiskey produced for its own account prior to January 1, 1945. If buyer exercises its option to renew this agreement as hereinafter provided, then buyer shall have the option to purchase all of the said whiskies produced by seller for its own account at seller's cost of production computed as above plus interest and insurance actually paid by seller to date of exercise of option, plus 2 1/2 cents per gallon. If buyer does not exercise said option to purchase the whiskey produced by seller for its own account, buyer shall be entitled to no credit against storage charges hereinafter provided for on account of said seller's whiskey in seller's bonded warehouses.

18. Beginning as of April 1, 1940 buyer shall pay to seller for storage of all whiskey purchased and to be purchased under this agreement and for all whiskey heretofore produced and stored in seller's warehouses, which is or may be owned by buyer, at the rate of $13,500 per annum. Against said charge seller shall credit buyer with all storage charges collected by it which accrue on and after April 1, 1940 whether such charges accrue on whiskey now owned by others or on whiskey hereinafter sold to others by buyer. Said storage charges shall be collected by seller at 10 cents per barrel per month on all whiskey for which warehouse receipts are now outstanding, and at the rate provided for in any warehouse receipt hereafter issued. All warehouse receipts hereafter issued shall be approved by buyer as to form and amount of charges. * * *

19. Seller represents that it has bottling facilities to bottle either in bond or taxpaid at the rate of approximately five hundred (500) cases of pints per day. Except as herein otherwise provided, seller will do not bottling for anyone other than buyer during the term of this contract or any renewal thereof. Seller agrees to bottle for buyer either in bond or taxpaid all whiskey purchased under this agreement and all whiskey previously produced at seller's distillery which may be owned by buyer, as requested by buyer, for 5 cents per case in excess of cost of bottling to seller. Buyer is to furnish all bottling supplies and agrees to purchase from seller all usable bottling supplies now owned by seller. Cost of bottling as herein used shall include:

(a) Cost of direct labor in the bottling house;

(b) Workmen's Compensation Insurance premiums and Social Security taxes paid with respect to such labor;

(c) Real Estate taxes on bottling house;

(d) Cost of fire insurance premiums on bottling house;

(e) Fuel and power cost, reasonably allocable to bottling house;

(f) Minor repairs on machinery in bottling house not in excess of $250,000 in any one year;

(g) Cost of Federal special tax stamps.

21. On sixty days' notice previously given, buyer shall have the right as of January 1, 1945 to purchase seller's business, good will and the aforesaid brand names owned by seller for $15,000.00

22. On sixty days' notice previously given, buyer shall have the right on the expiration of this agreement or on the expiration of any renewal thereof, to renew this agreement for five additional years until four such renewals have occurred. Such renewals shall be on the same terms and conditions as this agreement, except

(a) Buyer shall purchase under each renewal up to 40,000 barrels at the rate of 8,000 barrels per year subject to the exceptions and under the conditions above stated;

(b) Seller shall produce no whiskey during any such renewal period except for buyer.

23. If buyer exercises its option to renew this agreement for one additional five-year period, the business, good will and aforementioned brand names of seller shall become the property of buyer at the expiration of said first renewal period.

26. If buyer does not exercise its option under Paragraph 21 hereof and does not exercise its option to renew this agreement as of January 1, 1945, seller shall have the option to purchase from buyer so much of buyer's good will as attaches to aforementioned brand name of buyer together with such brand name for $15,000.00. If such option is exercised by seller, buyer on receipt of said $15,000.00 agrees to execute the necessary bills of sale, conveyances or other documents to vest in seller all of buyer's right, title and interest in the aforementioned brand name of buyer.

28. As of January 1, 1945 or during the term of any renewal of this agreement buyer shall have the option upon sixty days notice to purchase seller's distillery plant and premises, machinery, equipment, warehouses, and all Real Estate and personal property owned by seller and used in connection with said distillery for $175,000.00, plus the cost new, less depreciation, of any capital additions made thereto by seller after April 1, 1940. If this option is exercised, the purchase price shall include the purchase of the business, trade marks and good will of the seller. Seller hereby agrees upon exercise by the buyer of the option to purchase as in this paragraph provided, to execute the necessary deeds and other documents to convey title to the Real Estate, personalty, business, good will and trade marks to the buyer, warranting a good and clear title to all of the same subject to the lien of the United States and the State of Kentucky on the Real Estate for taxes on whiskey produced on said property. Upon completion of said transfer this contract shall terminate.

35. Buyer hereby is granted the right to assign this contract, and hereby guarantees performance thereof by any such assignee.

37. If because of conditions beyond its control seller is unable to bottle whiskey for buyer as herein provided, and such conditions shall continue for 30 consecutive days, buyer shall have the right to remove so much of said whiskey from seller's premises as may be necessary in its judgment to meet its bottling requirements and may bottle said whiskey at any other bottling house under any of the aforesaid brands without making any payment to seller on account of said bottling, or until such conditions have been removed.

During 1941 an...