United States v. Utah-Idaho Sugar Co., 1615.

• Decision Date: 02 May 1938
• Docket Number: No. 1615.,1615.
• Citation: 96 F.2d 756
• Parties: UNITED STATES v. UTAH-IDAHO SUGAR CO.
• Court: U.S. Court of Appeals — Tenth Circuit

96 F.2d 756 (1938)

UNITED STATES v. UTAH-IDAHO SUGAR CO.

No. 1615.

Circuit Court of Appeals, Tenth Circuit.

May 2, 1938.

Wm. B. Waldo, Sp. Asst. to the Atty. Gen. (James W. Morris, Asst. Atty. Gen., Dan B. Shields, U. S. Atty., of Salt Lake City, Utah, and Sewall Key and J. Louis Monarch, Sp. Assts. to the Atty. Gen., on the brief), for the United States.

Benj. H. Saunders, of Washington, D. C. (Charles D. Hamel, of Washington, D. C., and Ashby D. Boyle, of Salt Lake City, Utah, on the brief), for appellee.

Before PHILLIPS, BRATTON, and WILLIAMS, Circuit Judges.

BRATTON, Circuit Judge.

This is an action at law for the recovery of an alleged overpayment of income and profits taxes for the fiscal year ended February 28, 1918.

The taxpayer is a corporation engaged in the manufacture, refinement, and sale of sugar at wholesale. Its books were consistently kept on the accrual basis, and its fiscal year ended on February 28th; but up to the end of 1916 its returns for income tax purposes were made on the basis of the calendar year. With permission of the Commissioner of Internal Revenue, and in order that the two might coincide, it made a return at February 28, 1917, for the 2 months ended at that time; and thereafter its returns were made on the basis of the fiscal year. The sugar manufactured and sold was of uniform grade, in bags of 100 pounds each. On February 28, 1917, the taxpayer had 888,642½ bags on hand in its 11 warehouses located in Utah, Idaho, and Oregon. Contracts had been previously entered into for the sale and delivery of 160,492½ bags, but delivery was made after March 1st. The contracts were preserved as original records. As contracts were executed, appropriate deductions were currently made in the permanent records of the company concerning the quantity of sugar on hand and subject to sale. The entries thus made were on the daily sales record. The accounts receivable and the general books of account did not reflect the transactions until the sugar was shipped and invoiced to purchasers. The contracts for the sale of the 160,492½ bags were identical in substance and form with those uniformly used by the taxpayer in the conduct of its business at that time. Each specified the quantity of sugar sold, fixed the sale price, and provided that shipment should be completed within 30 days from the date of the contract; that delivery should be completed on receipt of the merchandise by the carrier; that, if the buyer should fail to furnish specifications within the stipulated period, the seller was authorized to complete the contract by shipment or delivery at its convenience as soon as possible after the expiration of the contract date without further notice; that the terms were cash, less 2 per cent., payable in New York exchange within 7 days after arrival; and that the agreement was subject to strikes, fires, transportation, and business conditions, and extraneous causes which rendered performance commercially impracticable. It had been and was the custom in the sugar industry and in the conduct of the business of the taxpayer for the purchaser to have sugar purchased under such a contract delivered at such places and in such quantities as his needs required; and, further, if sugar was not delivered within 30 days after the date of the contract, invoice was sent forward, payment was made, and the sugar continued in the warehouses of the taxpayer subject to the order of the buyer. Sugar was frequently resold many times before payment and delivery. The commission of the broker making the sale was regarded as earned when the contract was executed regardless of delivery, but it usually was not paid until shipment went forward. The insurance carried by the taxpayer expressly included sugar held in trust or on commission or sold, but not delivered.

The taxpayer treated the gain on the 160,492½ bags of sugar as taxable for the fiscal year ended February 28, 1917. In making adjustments, the Commissioner treated it as taxable in the succeeding fiscal year, and a deficiency followed. Payment was made under protest and this suit was instituted to regain the amount. The taxpayer prevailed and the government appealed.

Income tax is an annual tax and it usually must be returned for the year in which the gain was derived. But a taxpayer keeping its books on the accrual basis was authorized to make its return for the year 1917 according to that system if the return correctly reflected true income. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347; United States v. Amalgamated Sugar Co., 10 Cir., 72 F.2d 755.

The incurring of the right to receive and of the obligation to pay definite and fixed sums accrue items for income tax purposes where books are kept and returns made on the accrual basis. Actual receipt and actual payment are not essential. United States v. Anderson, supra; Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 51 S.Ct. 11, 75 L.Ed. 234; Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725; Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 54 S.Ct. 644, 78 L.Ed. 1200; United States v. Amalgamated Sugar Co., supra.

Extended argument is addressed to the question whether title to the sugar passed upon the execution of the contracts or at the time of segregation and shipment. The government contends that title did not pass until separation and shipment — during the fiscal year ended February 28, 1918. The facts presented here are substantially identical in all material respects with those in United States v. Amalgamated Sugar Company, supra. We there said that sugar of uniform grade in bags of uniform size is fungible property and falls in the same class with flour, sugar, or oil; that title to an unseparated part or unit of a larger quantity of fungible property passes under a valid contract of sale without separation or segregation where that is the intention of the contracting parties; that as between contracting parties, if the statute of frauds or the rights of third persons are not involved, neither immediate delivery nor payment of the purchase price is essential to effect a present sale with immediate passage of title; that title to the sugar passed eo instanti upon the execution of the contracts involved there; and that the company held it thereafter in bailment for the purchaser. The correctness of that holding is challenged. The language was general and broad; but it was used in a case presenting liability for income taxes where the seller consistently maintained its books of account and made its returns on the accrual basis. No question was involved or considered in respect of title as between parties to an action of replevin, attachment, or execution. The single question decided was the time at which profits arising from such transactions become taxable gain. The question of title entered only as a factor in determining the rights of the parties for the purpose of measuring the liability of the seller for taxable gain.

The contracts covering the 160,492½ bags of sugar each created a present, binding, and enforceable obligation of sale on the part of the taxpayer, and a present, binding, and enforceable obligation of purchase on the part of the buyer of a fixed amount of sugar at a specified price; and provided in unqualified language...