Continental Folding Paper Box Co. v. Commissioner

Continental Folding Paper Box Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Continental Folding Paper Box Co. v. Commissioner Docket No. 24929 United States Tax Court 17 T.C. 984; 1951 U.S. Tax Ct. LEXIS 15; December 13, 1951, Promulgated *15 Decision will be entered under Rule 50. Held, on the facts, that the petitioner has not shown any commitment prior to January 1, 1940, to a course of action within the intendment of section 722 (b) (4), Internal Revenue Code. Benjamin Mahler, Esq., for the petitioner. Charles R. Johnston, Esq., for the respondent. Disney, Judge. Murdock, J., dissenting. DISNEY *984 This proceeding involves the denial of applications for excess profits tax relief under*16 section 722 for the years 1941 to 1945, inclusive, notice of which, and of a deficiency determined for all of the years except 1941, was sent to petitioner in accordance with sections 272 and 732 of the Internal Revenue Code. The deficiencies in controversy in excess profits tax for the years 1942 to 1945, inclusive, are as follows: [1942] $ 15,899.51 [1943] 13,746.89 [1944] 12,091.68 [1945] 11,076.66 Petitioner's claim for relief is based upon a change in the character of its business under commitments made in 1939 within the meaning of section 722 (b) (4) of the Code. The returns of petitioner for the taxable years were filed with the collector for the fifth district of New Jersey. *985 FINDINGS OF FACT. The petitioner, a New York corporation, organized in 1916, was during the years 1936 to 1939, inclusive, and is engaged in the manufacture and sale of folding paper boxes, paper cartons and paper containers, paper board being the principal material used in the manufacture of the products. Its customers packed their own products in the containers. About 95 per cent of petitioner's business was the production of containers under specifications of the customer, which*17 might include an imprint of the customer's name, insignia and other matter. Petitioner also produced plain pastry boxes without printing matter on them, which were produced at times to keep cutting and creasing machines busy and were placed in stock for sale to jobbers. The manufacture of folding boxes starts with the designing of the cutting and creasing die and the layout of the matter that is to be printed on the boxes. Where one color is required, or where only two colors are required and a two-color press is used, the press, or presses where more colors are required and more than one press is used, is prepared by having the proper color or colors applied for printing. After the boxboard has been printed and given other types of surface treatment where required by the order, to enhance its appearance or its protective qualities, it is cut and creased by machines. The box blanks required to be glued are then brought to the gluing department where they are glued by machines and made ready for shipment. Petitioner's business was during the base period competitive and at times petitioner was underbid for work offered by some of its customers. During the base period the petitioner*18 operated seven presses, of which four were one-color machines and three were two-color presses. One each of the two types of presses was the same size for printing purposes. The other machines were smaller and of varying sizes. The maximum continuous operating speed of six of petitioner's machines when new, ranged from 1,500 to 1,750 impressions per hour under most favorable operating conditions. The speed of the other machine, its smallest, was 2,850. Some printing work can not be run through a press at its maximum rated speed. Production in petitioner's printing department was governed by the number and size of presses and their rate of operation. Actual production is about twenty per cent less than the rated speed on account of time lost to remove printed matter and other similar reasons. Normally a one-color machine prints one color at a time and a two-color press two colors in a single operation. Additional colors, on certain types of work, can be printed on machines. On small work, such as razor *986 blade boxes, eight colors can be printed on a two-color press. Some jobs, containing very small type for the second color, require the use of two presses, one for*19 each color. All jobs for three colors, not including two colors plus varnish, are printed by using a two-color press and a single-color press. Some two-color, plus varnish, jobs are printed by running the sheets through the press twice, first for the colors and then for the varnishing. A hoist, known as a Berry Lift, is used with each printing press to bring the paper automatically up to the operator engaged in feeding the press. No other type of mechanized lift was available during the base period. Use of a Berry Lift increased the productivity of the press over hand methods. It was necessary to have a Berry Lift for each size of printing press. Petitioner could have obtained more three-color jobs during the base period if it had had more machines to do the work. It could have operated more economically during the base period if it had had a 6/0 Miehle two-color press. Petitioner could not meet the prices of its competitors on jobs some of its customers had to offer and did not have sufficient two-color presses to handle the particular work. Prior to the completion of its warehouse on July 1, 1937, petitioner did not respond to some inquiries for bids on account of lack of*20 warehouse facilities. It chose not to handle certain types of work, one of which was six-color, plus varnish, cigarette cartons, the other types not being shown. Petitioner made inquiries from time to time in 1936 and 1937 of the Miehle Printing Press Co. and other dealers in printing presses on the availability for purchase of a 6/0 two-color Miehle press but no attempt was made to acquire one of the presses. Petitioner had funds during the base period to purchase a 6/0 Miehle two-color press and a press of that kind was available. It did not purchase a press of that type at that time because certain business it could have obtained would have been unprofitable if it had had the press. In 1939 a change occurred. At that time a number of customers for whom petitioner was sole source of supply advised petitioner that they were going into an increased packaging program. To meet commitments made by it to supply more boxes to them, petitioner decided to purchase an additional press. It was unable to purchase a new machine at that time from the Miehle Printing Press Co. The H. Weinstein Machinery Co., Inc. (hereinafter referred to as the Weinstein Co. or Weinstein), since at least*21 1917 has been engaged in the business of buying old machinery, including printing presses, and reconditioning them for resale. It was the practice of Henry Davis, general manager and treasurer of the Weinstein Co., to visit customers periodically to solicit orders. Davis in 1939 received *987 an inquiry from Abraham Rossum, president in charge of production of petitioner, concerning the purchase from Weinstein Co. of a used 6/0 two-color Miehle printing press. Thereafter Davis informed petitioner that he had such a press and petitioner requested the Weinstein Co. to recondition the machine. It was not unusual for Weinstein Co. to accept oral orders. The press was purchased by the Weinstein Co. in its own name. The oral order was not confirmed in writing. No correspondence was received by petitioner from Weinstein Co. concerning the order, and no down payment was made by petitioner at the time the press was ordered but at some undisclosed time thereafter $ 5,000 was paid on account. It was the policy of the Weinstein Co. not to treat an order as bona fide until its customer was satisfied and, when it was, to expect payment in full for the machine. When the Weinstein Co. *22 acquired a machine for resale after reconditioning, parts were cleaned and missing and worn ones were immediately ordered from the manufacturer. The Miehle Co. took from two to four months to deliver parts. At times it took the Weinstein Co. six or seven months to recondition a machine, deliver it, and get it running. At the time petitioner requested the Weinstein Co. to recondition the 6/0 Miehle printing press, Abraham Rossum gave Davis an order for a new Berry Lift for use in the operation of the press. The new lift ordered by petitioner was shipped directly to it on February 10, 1940, by the manufacturer, the Berry Machine Co., St. Louis, Missouri, and was never in the physical possession of Weinstein. The Berry Machine Co. made its lifts one at a time. The press was delivered by the Weinstein Co. to petitioner in May 1940. On March 23, 1943, the Weinstein Co. wrote a letter signed by its bookkeeper, I. Shapiro, to petitioner reading as follows: Regarding the 6/0 Two Color Miehle Press and Berry Lift which you purchased from us in the early part of 1940, this is to advise that your inqiuries [sic] for this machinery were received by us during the summer of 1939. We trust*23 that this is the information required by your accountants. Petitioner asked Davis for a letter relating to the sale of the Miehle press to it without specifying why it wanted the communication. Thereafter Davis requested Shapiro to check the records of the Weinstein Co. including the list of orders to obtain data for inclusion in the letter. The records were in the possession of Shapiro and he had access to and placed orders in Davis' order book. Davis did not know at the time he made his request and was not advised by Shapiro that Shapiro had written the letter of March 23, 1943. *988 Pursuant to such request of petitioner, on January 31, 1946, Shapiro signed a letter on behalf of Weinstein Co. to petitioner reading as follows: In accordance with your request we have reviewed the circumstances of the sale to you of a 6/0 two color Miehle Press, December 30th, 1939. Your first inquiry concerning this machine was made to us on or about August 1st, 1939. We immediately communicated with all possible sources of supply and succeeded in locating a press on August 10th, 1939, at which time we notified you to this effect and advised you that the machine would require reconditioning*24 and fixed the price at $ 10,000.00. We immediately started the work of reconditioning, but due to our help situation at that time and delays in securing necessary parts for replacement the work was not completed until the early part of May, 1940 and we delivered the press on May 7th, 1940. During the month of September 1939 you ordered a Berry Lift to be used in connection with the press and on December 18th 1939, we located one and advised you that the cost would be $ 1,320.00 reconditioned. We immediately started the work of reconditioning this Berry Lift and completed the work on February 10th, 1940. Our cost, approximately, of the reconditioning work on the press and lift was $ 4,000.00. The plant of the Weinstein Co. was torn down in July 1950 and at that time records of the company, except for the 3 years prior thereto, were destroyed. Petitioner paid $ 10,000 for the Miehle press and $ 1,320 for the Berry Lift. The balance of $ 5,000 on the purchase price of the press was paid on June 10, 1940. The lift was paid for on March 12, 1940. Petitioner paid $ 655.20 for two upright grain bases for the Miehle press. Petitioner is entitled to use an excess profits tax credit based*25 on income. Its net income as adjusted in the revenue agent's report and excess profits tax credit as determined by respondent for the years shown were as follows: Net income [1936] $ 9,872.47 [1937] 14,021.67 [1938] 14,314.92 [1939] 21,348.68 Credit [1941] $ 22,086.02 [1942] 25,319.66 [1943] 28,561.18 [1944] 31,991.48 [1945] 35,588.93 Petitioner filed applications for relief under section 722 for the years 1941 to 1945, inclusive, and claims for refund in the respective amounts of $ 24,360.10, $ 42,952.36, $ 14,800, and $ 26,655.74 for the last four of those years. OPINION. Petitioner's claim for relief is under the provisions of section 722 (b) (4) of the Code, which relates to changes in the character of a taxpayer's business. The provision defines a "change *989 in the character of the business" as including "a difference in the capacity for production or operation." It also provides that a change in capacity for production or operation consummated after December 31, 1939, "as a result of a course of action to which the taxpayer was committed prior to January 1, 1940 * * * shall be deemed to be a change on December 31, 1939, in the character of the business." Petitioner*26 relies upon the acquisition of the 6/0 Miehle press and Berry Lift to establish a change in character of business and alleges that it committed itself to purchase the machines in 1939. Respondent contends that no steps were taken to purchase the machines until 1940. Did petitioner show that it committed itself to purchase the machines in 1939, as alleged by it? Determination of the question entails examination of extended testimony and of two letters introduced. In support of its contention, petitioner relies upon testimony of two of its officers, Robert Rossum and Abraham Rossum, and Henry Davis, who in 1939 and 1940 was general manager and treasurer of the Weinstein Co., from whom the machines were purchased. Robert Rossum testified that during the years 1936 and 1937 there was some discussion about the purchase of additional equipment and inquiries were made of the Miehle Co. and various machine dealers from time to time concerning the availability of a press, but no definite action was taken, and that oral inquiries were also made by Abraham Rossum or Charles Rossum in late 1938 and early 1939. He also testified that a decision was made in 1939 to purchase the press in order*27 to take care of additional business offered by Rockwood and Company, a customer which purchased all of its requirement of boxes from petitioner. Abraham Rossum, petitioner's president and officer in charge of production, testified that the latter part of July or sometime in August 1939 he requested Davis to look for a used 6/0 Miehle press, that not later than a couple of weeks thereafter Davis informed him that he had located such a press, whereupon he "Told him to go ahead -- it is our press, go ahead, recondition it for our purpose," that at that time he requested Davis to order a new Berry Lift to use with the press, without inquiring how long it would take to get the lift, that he ordered a new lift and Davis so understood him, and that the lift was received directly from the Berry Machine Co. without going through Weinstein Co. Davis testified at considerable length concerning the transaction. His recollection of the matter was based upon memory refreshed in 1946 when records of Weinstein Co. were examined in connection with the writing of the letter of January 31, 1946, to petitioner. He testified that there might have been some discussion about the purchase *990 three*28 or four months prior to August 1939, that petitioner "more or less" gave him an oral order for the press in August 1939, that "I believe we went out and tried to locate one of the machines," that he did not exactly recall when they located it, but that it must have been in 1939. He also testified that he did not know when the press was received in the plant of Weinstein Co. for reconditioning or the parts it needed and its condition when received, but that before starting reconditioning work he notified petitioner of the receipt of the press and inasmuch as the invoice for the press was rendered May 23, 1940, and it takes from six months to as long as a year to recondition a press, deliver it and get it running, the time of his notification must have been in 1939. Other testimony of Davis is that it took from two to four months to obtain parts from the Miehle Co., and that he did not know how long it took to recondition the press involved here. Petitioner did not confirm the oral order in writing or receive any correspondence from Weinstein Co. with respect to the order. It was not unusual for Davis to accept orders given orally. Davis had to rely upon reference by petitioner's*29 counsel to a bill of lading showing shipment of the lift by Berry Machine Company on February 10, 1940, to establish the sale of a Berry Lift to petitioner. Based upon an assertion that "with Berry it used to take three, four, or five months to get a lift from them," he "thought" the order was placed with Berry three or four months before February 10, 1940. Thereafter he testified that it took "quite a bit" of time to get a lift from the Berry Machine Company based upon experiences of a delay of 3 months on one occasion, 6 months on another, and over a year on another order, and that he was "pretty certain" that he never received one in less than 3 months. He then testified that he had a definite recollection that he was never, including in 1939, able to get a Berry Lift sooner than 3 months. Thereafter he testified that Weinstein Co. ordered a new lift from the Berry Machine Company, that Weinstein Co. never actually handled the machine, and that he had no idea of the length of time it took to ship or get the lift as he did not know conditions at that time. Other testimony of Davis is that when he was told "to go ahead," perhaps in August 1939, he knew it took about three months*30 to get a lift and it is possible that the order was placed at that time and that the delay extended to four or five months. Nowithstanding the fact that the testimony above referred to had reference to the acquisition of a new lift directly from the Berry Machine Company, the manufacturer, in St. Louis, Missouri, Davis testified thereafter that he did not know whether the lift sold to petitioner was a new one or a reconditioned machine, and that he did not know whether the agreement for the press included the acquisition of the lift. *991 The testimony above referred to tends to establish that petitioner placed a binding order for the press and lift about August 1939. However, other evidence, which we must likewise consider, conflicts therewith and tends to establish that the commitment was not made until the next year. Respondent places considerable reliance upon the letter of March 23, 1943, to establish that petitioner was not committed to purchase the machines until 1940. The letter written in 1943 was signed by Israel Shapiro on behalf of Weinstein Co. Shapiro had been the bookkeeper of Weinstein Co. since 1937 and as such not only kept the company's books, including*31 its order and sales books, but had access to its correspondence. Davis testified that he had a bona fide commitment from petitioner to get a press, that he took it for granted that he would be able to get one and that petitioner "accepted it on that basis," that "whenever we took an order we never considered it a bona fide order until we satisfied the customer, and then we expected to get paid in full," that Weinstein Co. had no order forms and that when he told Shapiro to place an order in his (Davis') order book "it was an order." No down payment was made but at some undisclosed time one-half of the purchase price of the press was paid on account. There is no testimony in the record of the date when, if ever, Davis instructed Shapiro to enter the transaction as an order. Whether petitioner was "satisfied" at any time prior to delivery and acceptance of the machine so as to have its order regarded as such by the Weinstein Co. is not shown in the record. The letter of March 23, 1943, from Weinstein Co. informed petitioner that the press and lift were "purchased from us in the early part of 1940" and that petitioner's inquiries "for this machinery were received by us during the *32 summer of 1939." Without evidence in the record establishing otherwise, we are in no position to say that Shapiro did not examine the records of Weinstein Co. (including Davis' order books in which, under Davis' testimony, Shapiro placed orders and to which he had access) to obtain the information set forth in the letter. The letter implies that the data was obtained from records of Weinstein Co., which were destroyed in 1950 for years prior to 1947. The letter discloses no more than inquiries in 1939, which are far from a commitment within the meaning of section 722(b)(4), particularly in the light of testimony of Davis that he did not regard an inquiry as an order, and the reference to purchase in early 1940, which tends to negative earlier commitment. The letter of January 31, 1946, was written pursuant to a request made by petitioner on Davis without a statement of the purpose for which it was to be used. It is not clear whether he took part in an examination of the records of the company in connection with the writing of the letter. He testified that the letter was written by *992 Shapiro in accordance with instructions given by him, that at that time "I had them check*33 the records" and "* * * we looked it up," that when the letter of January 31, 1946, was written Shapiro did not tell him that he had written a letter on the subject in 1943, that he asked Shapiro to get the information and sent it to petitioner, that when told by Shapiro what the record showed "I told him to send the letter," that Shapiro had possession of all of the records and "He is the one that checked it." He then testified that he just "looked in the order book to see the date of the order when placed," and that Shapiro must have examined it with him. He testified also that the little order book kept for orders the day received would be among the books to which Shapiro had access when he wrote the letter in 1943. The petition filed herein, verified by Abraham Rossum, alleges that Weinstein Co. located a Berry Lift on December 18, 1939, and promptly commenced to recondition it. The allegations are in accordance with assertions made in the letter written by Weinstein Co. to petitioner on January 31, 1946. The record here is devoid of any explanation as to the wide discrepancy between the allegation in the petition and the statement in the letter of January 31, 1946, on the *34 one hand, that the lift was reconditioned by the Weinstein Co., and, on the other hand, the positive testimony before us, particularly of Abraham Rossum, that a new lift was ordered and received. The difference is made more significant by the fact that the records of Weinstein Co. were, according to testimony of Davis, examined especially to obtain the data for inclusion in the letter. Aside from the discrepancy just referred to, the letter asserts that the sale of the press was made on December 30, 1939, contrary to the letter of March 23, 1943, in which it is stated that the petitioner purchased the press in the early part of 1940. The date of December 30, 1939, was not referred to in any of the testimony as the date of purchase of the press. That date is not near the date the order was allegedly given or the date of delivery of the press. If the date reflects what the order book and other records of Weinstein Co. showed, the same date of purchase should have been given in the earlier letter. The grossly misleading information given in the letter of January 31, 1946, concerning the reconditioning of the lift, and stating that Weinstein did it, in spite of the fact that there*35 was no reconditioning since it was a new machine, and was never in the physical possession of Weinstein Co., is clear ground for declining to rely upon it as proof that petitioner was committed to purchase either the press or the lift in 1939. We have carefully examined and compared all of the evidence having any bearing on the point. It contains various inconsistencies. *993 We are not convinced that any commitment was made in 1939. Not only was the recollection and testimony of Davis based upon refreshment in 1946 of his memory by the letter written by Shapiro at that time, but he showed himself to be uncertain of the facts, and the letter can not be reconciled with the one written in 1943, also by Shapiro, who had then access to the records, including Davis' order book, nor can it be reconciled with other evidence of record, as above seen. Though there was destruction of Weinstein's records (in July 1950, long after filing of this case on September 12, 1949), no reason appears why the records of the Miehle Co. or the Berry Co., showing dates, such as orders for parts for the reconditioning, or order for the new Berry Lift, were not produced or why the Weinstein records*36 were not examined before destruction. Under Davis' testimony, that "We must have written the Miehle Company and ordered them," Miehle would reasonably have records on the matter. No indication appears to the contrary. Shapiro, the bookkeeper for Weinstein, did not testify, and nothing indicates that he was not available to explain the strong conflict between his two letters, the latter of which contains statements by other evidence shown to be contrary to fact. Though Davis said there was discussion earlier than August 1939, he also said that it usually took four or five months' discussion before sale of a two-color Miehle press, which indicates that much discussion before agreement or commitment, and the letter of January 31, 1946, says that the petitioner's first inquiry to Weinstein about the machine was about August 1, 1939. This reference to first inquiry, about August 1, 1939, and the statement in the letter of 1943 that the inquiries were made in 1939, together with reference to four or five months' discussion before sale, indicates that the commitment may have been after January 1, 1940. The letter of 1943 places in 1939 only the inquiries, and puts the purchase in 1940. *37 There is discrepancy between Davis' testimony that there was commitment for him to go ahead and get a Miehle press and the letter of 1946 stating that after a first inquiry about August 1, 1939, and the locating of a Miehle press on August 10, 1939, and notification of petitioner thereof the price was fixed at $ 10,000. Commitment prior to fixing of price appears unrealistic. Davis testified also that an inquiry was not an order, and under his statement that Weinstein never considered an order bona fide until they satisfied the customer, it appears that Weinstein did not regard petitioner as committed earlier than May 1940 when the machine was delivered. If Weinstein would not hold petitioner to any earlier agreement, obviously petitioner was not committed. Under the evidence before us, the Miehle press could have been reconditioned within the year 1940 before delivery. The letter of January 31, 1946, though the basis of Davis' often uncertain recollection, in its detail about reconditioning a Berry *994 Lift, contrary to the fact that a new one was both ordered and delivered, and the reference to sale of the Miehle press on December 30, 1939, indicates undue and unfounded*38 effort to put the transaction in 1939. We conclude from all of the evidence that petitioner has failed to show that it was committed prior to January 1, 1940, to a course of action for a change in the capacity for production or operation of its business, and we hold therefore that the petitioner is not entitled to relief under section 722, Internal Revenue Code. We having so concluded, it is unnecessary to consider other grounds ancillary to commitment, relied upon by petitioner for relief, since without the commitment they would be of no effect. Inasmuch as the record before us contains contradictory statements as to the amounts of deficiency for 1944 and 1945, Decision will be entered under Rule 50. MURDOCK Murdock, J., dissenting: I would conclude from the evidence that the petitioner had ordered and was committed, prior to January 1, 1940, to receive the press and lift at a later date.