Tri-State Beverage Distributors, Inc. v. Comm'r of Internal Revenue
| Decision Date | 28 March 1957 |
| Docket Number | Docket No. 32887. |
| Citation | 27 T.C. 1026 |
| Parties | TRI-STATE BEVERAGE DISTRIBUTORS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Carl A. Swenson, Esq., for the petitioner.
Julian L. Berman, Esq., for the respondent.
1. Petitioner, a wholesale liquor dealer, allowed discounts from the list price to its customers in order to meet competition during the base period years 1936-1939. The discounts were known at the time of the sale and were not quantity or cash discounts. Petitioner contends these discounts are abnormal deductions under section 711(b)(1)(J), I.R.C. 1939, and should be restored to the excess profits net income for the base period years. Held, the discounts are adjustments of the sales price and are made to arrive at gross income; they are not deductions from gross income and not deductions under section 711(b)(1) (J).
2. Petitioner also contends that its base period earnings were depressed by the amount of the discounts which were given to customers because of a price war which prevailed in the wholesale liquor industry, to which the petitioner belonged, and that it is therefore entitled to relief under section 722(b)(2), I.R.C. 1939. Held, that the petitioner has not established its right to relief under section 722(b)(2).
In a notice of deficiency dated December 5, 1950, the Commissioner determined deficiencies in petitioner's excess profits tax of $10,911.86 for the year 1943 and $5,004.35 for the year 1944. The deficiency notice, among other things, states:
The deficiency in excess profits tax shown herein results from the disallowance of deferments under Section 710(a)(5) of the Internal Revenue Code, because of the disallowance of your applications for relief under Section 722 of the Internal Revenue Code.
To this determination of the Commissioner, the petitioner assigned errors, as follows:
A. The Commissioner erroneously determined that discounts and free goods allowed and granted to petitioner's customers in its base period years in excess of 125% of similar deductions for each of the prior four years were not allowable abnormalities within the meaning of Section 711(b)(1)(J) of the Internal Revenue Code in computing petitioner's excess profits tax base period credit based on income under Section 713 of the Internal Revenue Code.
B. The Commissioner erroneously determined that petitioner did not establish that its excess profits tax computed under sub-chapter E of Chapter 2 of the Internal Revenue Code without the benefit of Section 722(b)(2) of the Code resulted in an excessive and discriminatory tax within the provisions of Section 722(a) and (b) of the Code and that petitioner did not establish what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during the excess profits tax calendar years 1943 and 1944.
All references to section numbers herein are of the Internal Revenue Code of 1939, as amended.
A stipulation of facts has been filed and is incorporated herein by reference.
The petitioner is a corporation organized under the laws of the State of Illinois on December 1, 1933, with its principal office in the city of Rockford, Illinois. During the years material to this proceeding it conducted a wholesale liquor business in said city.
Petitioner has kept its books and filed its income and excess profits tax returns on a calendar year accrual basis since January 1, 1936. It filed timely corporation income, declared value excess-profits, and excess profits tax returns for the taxable years ended December 31, 1943 and 1944, with the then collector of internal revenue for the first district of Illinois.
Petitioner's base period consists of the 4 calendar years 1936, 1937, 1938, and 1939, and since the petitioner was in existence before January 1, 1940, it is entitled to compute its excess profits credit in accordance with the provisions of either section 713 or section 714 and to use whichever amount results in the lesser excess profits tax, as provided by section 712(a). The method (without the application of section 722) which results in the lesser tax for each of the taxable years 1943 and 1944 is the invested capital method prescribed in section 714.
Petitioner's excess profits net income for each of the taxable years 1943 and 1944, computed under section 711, is as follows:
+--------------------------------+
¦ ¦Invested capital method ¦
+------+-------------------------¦
¦Year ¦(sec. 711 (a) (2)) ¦
+------+-------------------------¦
¦1943 ¦$62,952.18 ¦
+------+-------------------------¦
¦1944 ¦42,210.25 ¦
+--------------------------------+
Petitioner's excess profits credit computed pursuant to the provisions of section 714 for each of the taxable years 1943 and 1944, is as follows:
+---------------+
¦1943¦$5,958.38 ¦
+----+----------¦
¦1944¦6,637.37 ¦
+---------------+
The following schedules show petitioner's profit and loss statements per income tax returns1 filed by petitioner (after revenue agents' adjustments) for the fiscal years ended November 30, 1934 and 1935; for the period beginning December 1, 1935, and ending December 31, 1935; and for the calendar years 1936 through 1944:
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