Seven-Up Co. v. Comm'r of Internal Revenue
| Decision Date | 31 May 1950 |
| Docket Number | Docket No. 20643. |
| Parties | THE SEVEN-UP COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Under the facts, held, that amounts received by petitioner, the manufacturer of a concentrated extract known as ‘7-Up,‘ from bottlers who contributed to a national advertising fund were burdened with obligation to expend them for national advertising and constituted a trust fund which petitioner administered as agent; that no gain or profit was realized by petitioner as the result of the receipt of these amounts; and that respondent erred in determining that the excess of amounts received by petitioner over expenditures made from the national advertising fund constituted taxable income to petitioner during taxable years. Fred L. Kuhlmann, Esq., and William H. Charles, Esq., for the petitioner.
Gene W. Reardon, Esq., for the respondent.
The respondent determined deficiencies in declared value excess profits tax and excess profits tax of petitioner for the taxable years 1943 and 1944 as follows:
The issues are:
(1) Did the Commissioner err in determining that certain amounts paid to petitioner by 7-Up bottlers to finance a national advertising program were income to petitioner?
(2) Did the Commissioner err in determining that petitioner was not entitled to excess profits tax relief under the provisions of section 736(b) of the Internal Revenue Code?
(3) Is petitioner entitled to special relief on its excess profits taxes as having received net abnormal income in 1943 and 1944 attributable to future years under section 721 of the Internal Revenue Code?
Petitioner is and at all times herein mentioned was a corporation organized and existing under and by virtue of the laws of the State of Missouri, with its principal office at 1316 Delmar Boulevard, St. Louis, Missouri. During the taxable years here involved and until July 1, 1948, its offices were located in the Shell Building, St. Louis, Missouri.
Petitioner keeps its books and files its tax returns on an accrual basis. Its taxable year is the calendar year and its income and excess profits tax returns for the years 1943 and 1944, the taxable years here involved, were filed with the collector of internal revenue for the first district of Missouri.
The Howdy Co., which was organized in 1920, originated, and, beginning in 1930, marketed an extract known as ‘7-Up.‘ In 1936 the name of the company was changed from the Howdy Company‘ to ‘The Seven-Up Company,‘ petitioner herein. The petitioner owns the registered trade-mark ‘7-Up‘ and the formula for making 7-Up extract.
Petitioner manufactures and sells 7-Up extract to various franchised bottling companies, sometimes hereinafter called bottlers. The extract is highly concentrated and at the end of the year 1941 its contents were changed from single to double strength. The extract contains no sugar or syrup. For 1941 and prior years one gallon of the single strength extract was sufficient flavoring to produce 350 cases of bottled 7-Up, 24 bottles to the case, or 8,400 bottles. For 1942 and subsequent years, one gallon of the double strength extract was sufficient flavoring to produce 700 cases of bottled 7-Up, 24 bottles to the case, or 16,800 bottles. The petitioner sold its single strength extract to its bottlers at $19 per gallon and in 1942 increased the selling price for double strength extract to $38 per gallon. The price of the extract was frozen at $38 per gallon in 1942 by the General Maximum Price Regulation promulgated by the Price Administrator under the authority of the Emergency Price Control Act of 1942. (Fed. Reg. Apr. 30, 1942.) Petitioner from time to time has advertised its extract in bottlers' trade journals to keep its trade name and the name 7-Up before the bottling industry and it has paid for the cost of such advertising.
The bottlers buy their own sugar, make their own syrup and manufacture and sell the bottled beverage known as ‘7-Up.‘ Petitioner does not bottle 7-Up or sell the bottled beverage.
Petitioner gives each bottler an exclusive territory and each bottler controls the sales of the bottled beverage within the bottler's territory. The bottlers each carry on their own sales promotion and local advertising within their respective territory with the aid, suggestions, and counsel of petitioner's specialists. Petitioner stocks point-of-purchase advertising material and on the bottlers' orders sells such material to the bottlers at petitioner's costs. (Point-of-purchase advertising is advertising at the place where the beverage is purchased by the consumer and consists of such items as cardboard bottle riders, easels, stringed and other hangers, calendars, and utility cards.) Petitioner also sells to the bottlers at cost metal signs for outdoor locations, decalcomanias and other display items. Petitioner furnishes movie trailers free of charge and bottlers pay for curtain time and space. If a bottler advertises on outdoor billboards the bottler rents the billboards and petitioner, at its cost, furnishes the posters. If the bottler wants to do so, the bottler may also advertise at the bottler's own expense in newspapers and on local radio stations.
The margin of profit of 7-Up bottlers from the sale of the bottled beverage is at least 8 cents per case more than the margin of profit derived by bottlers of other franchise drinks.
Petitioner's method of pricing and merchandising its product differs from that followed by other parent companies in the soft-drink industry, such as Coca-Cola and Dr. Pepper, in that the other parent companies retain a larger margin of profit in the product which they sell to their franchised bottlers. The other parent companies retain and use the larger margin of profit for promoting consumer patronage and advertising the bottled beverage as they see fit.
Prior to 1943, 7-Up bottlers on various occasions brought up the subject of advertising the bottled beverage through national advertising media. They wanted to get more tie-in advertising from one territory to another and at various meetings of bottlers they discussed among themselves the inauguration of a national advertising program. They recognized that such advertising could not be carried on by one or two bottlers, and they wanted a group of 7-Up bottlers to get together. These discussions were initiated by the 7-Up bottlers and not by petitioner. Among other things discussed by the bottlers was the establishment of a trust fund or ‘kitty‘ due to the fact that the costs of their raw materials were such, in comparison with other nationally advertised drinks, that they anticipated that they would have to pay the cost of any national advertising program for 7-Up.
Early in 1943 the J. Walter Thompson Co., an advertising agency, familiar with the 7-Up bottlers' problem and with 7-Up advertising and merchandising methods, drafted a program for the national advertising of the carbonated beverage 7-Up and presented it to the petitioner in order to get the opinion of its officers as to the advisability of presenting it to the bottlers. At the suggestion of the advertising agency, 21 7-Up bottlers, representing more than 50 per cent of the sales volume of bottled 7-Up, were invited to a two-day meeting in St. Louis on May 24 and 25, 1943, so that the advertising agency could present its reasons for 7-Up bottlers undertaking the national advertising program. Only large bottlers were invited to the meeting, on the theory that if they did not agree to the program its presentation to the other bottlers would serve no useful purpose, and if they saw the wisdom of the undertaking the other bottlers would be inclined to agree to the program.
At the meeting a representative of the advertising agency was introduced by the president of petitioner. The agency representatives explained to the bottlers the reasons for the national advertising program and its recommendations as to how it should be established. The subject matter of his presentation was subsequently reproduced in a brochure entitled ‘More Power for 7-Up.‘
The presentation of the J. Walter Thompson Co. assumed that the cost of the program was to be paid by the 7-Up bottlers and dealt with the problem of how the cost should be shared among them. It pointed out that some 7-Up bottlers had suggested a gallonage assessment and other a territorial per capita levy, and stated that all proposals had been studied and that a plan had been worked out which was fair and equitable to all, large and small, both in sharing the cost and sharing the benefits. The plan outlined called for 7-Up bottlers sharing the cost on the basis of 2 1/2 cents per case of bottled beverage sold. There was a general discussion at the meeting of this problem of sharing the cost of the program and there were differences of opinion expressed by the 7-Up bottlers. A few contended that the contribution should be made on the basis of 1 cent per person within the bottler's territory. This plan was rejected, for several reasons. Besides the impossibility of getting accurate population figures, the bottlers felt that a per capita basis for contribution would penalize those bottlers who had undeveloped territories or unfavorable climate or who were not ‘blessed with‘ Army camps and was industries. The bottlers finally settled upon the 2 1/2 cents per case method of contribution as being most equitable for all, because it was exactly tied to bottlers' sales— ‘pay as you go.‘
The 7-Up bottlers had no central organization of their own and the J. Walter Thompson Co. recommended that 7-Up bottlers make their payments to petitioner rather than directly to it, because it had no facilities for handling the bottler's contributions. The 2 1/2 cents per...
To continue reading
Request your trial
-
Auto. Club of New York, Inc. v. Comm'r of Internal Revenue
...purposes. Clay Sewer Pipe Ass'n v. Commissioner, 139 F.2d 130 (C.A. 3), affirming 1 T.C. 529; Krim-Ko Corporation, 16 T.C. 31. Seven-Up Co., 14 T.C. 965, upon which petitioner relies, was distinguished in Krim-Ko Corporation, supra at 40, as involving ‘a mere conduit in passing funds.’ Cf B......
-
Johnson v. Comm'r of Internal Revenue
...Commissioner, 48 T.C. 411, 417–418, 1967 WL 951 (1967), revd. on other grounds 400 F.2d 981 (7th Cir.1968); Seven–Up Co. v. Commissioner, 14 T.C. 965, 977–978, 1950 WL 201 (1950); Twin Hills Meml. Park & Mausoleum Corp. v. Commissioner, T.C. Memo.1954–206. If and to the extent that the cont......
-
Nat. Federation of Republican Assemblies v. U.S.
...gain or profit was realized" by the taxpayer, suggesting that the transfer did not result in "gross income." Seven-Up Co. v. Commissioner, 14 T.C. 965, 978-79, 1950 WL 201 (1950). 22. While some courts assumed for argument that political contributions were excluded from gross income, see, e......
-
National Federation of Republican Assemblies v. United States, Civil Action 00-0759-RV-C (S.D. Ala. 8/27/2002)
..."[n]o gain or profit was realized" by the taxpayer, suggesting that the transfer did not result in "gross income." Seven-Up Co. v. Commissioner, 14 T.C. 965, 978-79 (1950). 22. While some courts assumed for argument that political contributions were excluded from gross income, see, e.g., Un......
-
IRS issues second directive on gift cards.
...card company is set up as a not-for-profit entity, all other income will never be recognized for tax purposes. They cite Seven-Up Co., 14 T.C. 965 (1950), to support the argument that they are only holding gift card sale revenues as a fund to satisfy the liabilities of others. The IRS advis......