Red Salmon Canning Co. v. Commissioner

RED SALMON CANNING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Red Salmon Canning Co. v. Commissioner Docket No. 4146. United States Board of Tax Appeals 15 B.T.A. 790; 1929 BTA LEXIS 2798; March 11, 1929, Promulgated *2798 1. SPECIAL ASSESSMENT - ABNORMALITIES. - Where approximately 80 per cent of petitioner's product for the year 1918 was commandeered by the United States and subsequently released to and sold by petitioner in 1919, in addition to its regular product for 1919, this created an abnormality in income. 2. ID. - Where valuable trade-marks and cannery sites have not been included in invested capital, their exclusion may be considered as grounds for granting special assessment. 3. ID. - Borrowed capital. Virgil Y. Moore, Esq., andrew T. Smith, Esq., and N. L. McLaren, Esq., for the petitioner. Brice Toole, Esq., for the respondent. MILLIKEN *790 The respondent determined a deficiency of $1,098.65 in income and profits taxes for the year 1919. In asking a redetermination of the deficiency the petitioner alleges that the respondent erred (a) in eliminating realized depreciation from invested capital, and (b) in refusing to grant petitioner special assessment under sections 327 and 328 of the Revenue Act of 1918. Petitioner introduced no evidence to sustain the first assignment of error and abandoned it at the preliminary hearing, leaving*2799 for determination only petitioner's right to special assessment. On motion of the respondent it was ordered that this hearing be limited to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice. As grounds for special assessment, petitioner alleges (1) that the United States commandeered approximately 80 per cent of its salmon pack produced during 1918 and released same to petitioner after the Armistice, which it sold during 1919 in addition to the 1919 pack, thus producing a largely increased and abnormal income for the taxable year 1919; (2) petitioner's valuable trade-marks and brands were not included in invested capital; (3) no allowance was made for petitioner's canning sites in computing invested capital; and (4) no allowance was made for borrowed capital. FINDINGS OF FACT. The petitioner is a California corporation, with its principal office at No. 2 Pine Street, San Francisco. It is engaged in the business of canning and selling salmon and owned and operated two canning sites in the Bristol Bay area in northern Alaska. The company was incorporated in 1901 with $100,000 capital stock and was a close or *791 family corporation. *2800 The president, F. B. Peterson, was the owner of the majority of the capital stock and was its active manager and financial support. During the taxable year and in previous years it was frequently necessary to borrow money to carry on petitioner's business. On account of the uncertainty and hazardous nature of the business and petitioner's lack of assets for collateral purposes, the banks would not lend it money except upon the personal endorsement of F. B. Peterson. During the year 1919, monthly balances on petitioner's bank loans obtained on personal endorsement of Peterson were as follows: December 31, 1918 $262,524.00 January 31, 1919 250,524.00 February 28, 1919 217,524.00 March 31, 1919 195,374.00 April 30, 1919 258,652.74 May 31, 1919 270,132.74 June 30, 1919 143,632.74 July 31, 1919 $16,332.74 August 31, 1919 20,707,74 September 30, 1919 119,294.24 October 31, 1919 4,394.24 November 30, 1919 Nothing December 31, 1919 Nothing The money obtained from these loans was used to outfit vessels, buy supplies for a season's canning, and pay off the crews when the vessels returned. The fishing and canning operations of petitioner were*2801 carried on in the Bristol Bay area in northern Alaska, where it owned valuable canning sites on the Ugashik and Naknek Rivers. The former was acquired in 1901 and the latter in 1915. The cost of the Ugashik site does not appear, but the Naknek location was bought for $2,919.65 and was carried on the books at that figure. The value of canning sites is dependent upon an adequate supply of fish, firm land for buildings, adequate supply of fresh water for canning purposes, indented shore line as protection from ice packs, and sufficient depth of water to provide access and anchorage for small vessels and lighters. The cannery sites owned by petitioner possessed these qualifications and were the only canning sites used or owned by petitioner. There were only seven other such sites in the Bristol Bay area during the taxable year and those of the petitioner were of great value to it and essential to its business. Such sites were rarely placed on the market for sale and there were no contemporaneous sales with which to compare their value. Petitioner sells its output under certain well known trade brands which it originated and established, their names and dates of introduction*2802 being as follows: Deep Sea and Royal Club, 1901; Bering Sea, 1902; Red Crown, 1905; Lucile, 1913; and Pirate, 1916. The Deep Sea brand was petitioner's leading brand and was well known on the market because of the excellence of its quality, the method of packing, the kind of cans, and attractiveness of its labels. Petitioner *792 received a premium over other brands of from 12 to 20 cents a case of 48 cans on salmon packed under its Deep Sea brand. The additional cost of packing under this brand was less than 5 cents a case of 48 cans. The brand was originated by petitioner and developed practically without cost, as it was not advertised except that it was its own advertisement because of its good quality and the attractive appearance of the cans. No figure is carried on petitioner's books representing the value of trade brands. In 1918 the United States commandeered approximately 80 per cent of the petitioner's pack for that year and after holding it in storage, subject to the orders of the Government, for six to nine months at considerable expense to it for storage, insurance and other incidental expenses, it was released after the signing of the Armistice, November 11, 1918, and*2803 turned back to petitioner about January 1, 1919, so as to be available for sale during 1919. Petitioner in 1918 packed 92,168 cases of salmon, of which it sold in that year 20,309 cases, and 70,566 cases which had been commandeered were sold in 1919. In 1919 it packed 28,386 cases of salmon and sold during that year 26,177 cases, making a total of 96,743 cases sold in 1919. The invested capital of petitioner for the year 1919, as determined by respondent, was $461,779.02, and the net income, as determined by respondent, for the year 1919 was $187,298.49. The gross sales for 1918 were $257,846.15 and for 1919 were $983,006.03. OPINION. MILLIKEN: Section 327, Revenue Act of 1918, provides as follows: SEC. 327. That in the following cases the tax shall be determined as provided in section 328: (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; * * * (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an*2804 exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. * * * It appears to us that the principal question to be considered in this case is that of the effect of the commandeering by the Government of approximately 80 per cent of petitioner's 18 pack, and the subsequent release and sale thereof during 1919, in addition to its pack of that year, and the application thereto of subsection (d) of section 328. *793 The facts are simple and we believe speak for themselves. The invested capital determined for the year 1919 was $461,779.02 and so far as the record indicates was approximately the same during both the packing seasons of 1918 and 1919. For the season 1918 petitioner packed 92,168 cases, of which it sold 20,309 cases during that year, leaving on hand unsold, and subject to Government order, 71,859 cases. Its gross sales for that year were $257,846.15. After the Armistice was signed, November 11, 1918, the United States released petitioner's 1918 pack, leaving it available for sale by petitioner during the year*2805 1919. In 1919 petitioner sold 70,566 cases left over from its 1918 commandeered pack, and in addition thereto packed 28,386 cases, of which it sold 26,177 cases that year. It thus appears that petitioner sold a total of 96,743 cases in 1919, of which 70,566 cases, or approximately 73 per cent, were produced in 1918 and under ordinary circumstances would have been disposed of during 1918. The gross income for the year 1919 was $299,748, and net income, $187,298.48, and 73 per cent of each resulted from the activities of the petitioner during the prior year 1918. The gross sales for 1919 were $983,006.03, of which 73 per cent, amounting to $717,594.40, resulted from the 1918 season. The United States was confronted with grave dangers in 1918 and in the emergency exercised its war powers for the purpose of obtaining supplies for its military forces and to control the supply of food for its civilian population. Conditions were abnormal and drastic powers were exercised to meet the situation. Thus it was that 80 per cent of petitioner's product for 1918 was commandeered and withdrawn from the market for that year. When it was released and sold in 1919 it more than tripled*2806 the gross sales, gross and net income of petitioner for that year, and this was a situation and condition resulting entirely from the action of the Government and for which the petitioner was in no way responsible and which it could not avoid. Certainly this situation, resulting as it did in practically throwing two years income into the year 1919, was not one occurring in the ordinary course of business. The business activities of petitioner for two years have been thrown into one year for the purpose of computing its excess-profits tax, but its credits have been calculated upon invested capital for but one year. We had a somewhat analagous situation in , where we said: In 1921, petitioner recovered through various means $110,407.34 of an item of $111,949.31 charged off as a bad debt in 1920 and allowed as a deduction from 1920 income. The entire amount recovered was reported in 1921 income. When the charge-off was made in 1920 the cost of the goods shipped was *794 eliminated from petitioner's books, so that upon the recovery in 1921 the entire amount recovered was reported as income; there was no "cost of goods*2807 sold" which was deducted from the amount received as in the case of ordinary sales. Certainly this transaction can not be viewed as one in the ordinary course of business or as one likely to recur. The amount of petitioner's net income as determined by respondent is $109,906.84, or $500.50 less than the recovery on the bad debt of the prior year. In other words, but for the recovery of the item previously charged off, all of which went into income, the petitioner would have reported no net income in the taxable year. The net income for 1921 may therefore be said to be attributable to business activities of a prior year or years. The evidence satisfies us of the existence of abnormalities sufficient to entitle petitioner to have its profits taxes computed under section 328. See also , where the income of the taxable years resulted from the activities of the taxpayer during former years, which was given as one of the reasons for granting special assessment. It is further alleged by the petitioner that the respondent failed to include in invested capital the value of petitioner's brands and trade-marks, packing sites, *2808 and borrowed money. We have no doubt that the brands and trade-marks were of considerable value to petitioner in its business, but it does not appear that anything was ever paid for them or that anything was ever paid in the way of advertising or otherwise as a capital expenditure to produce them. A trade-mark or brand standing alone has no intrinsic value and can not be disassociated from the business to which it belongs. It is a name or sign which indicates or certifies that a given article of commerce is what it claims to be. It is a certificate of the truth. The property itself is valuable. It is the result of the labor or ingenuity or honesty of the owner or manufacturer and tells the purchaser that the goods are what he seeks. ; . It is akin to good will, and if nothing was paid therefor or in its development it can not be included in invested capital. . Relative to the value of the canning sites, the respondent merely allowed the cost thereof appearing on petitioner's books. These sites were no*2809 doubt of much greater value and were necessary and essential to petitioner's business. By reason of the decision reached in this case and the nature of the evidence offered, we do not attempt to fix their 1919 value. Witnesses valued the sites at figures ranging from $75,000 to $15,000. We have held that where assets which were principal income-producing factors have been excluded from invested capital, or included at a nominal figure only, this may be considered as a reason entitling the taxpayer to special assessment. Clarence*795 ; . Section 326(5)(b), Revenue Act of 1918, provides, "As used in this title, the term 'invested capital' does not include borrowed capital." The large sums of money borrowed from the bank during 1919 through the personal endorsement of Peterson were properly excluded from invested capital, but in , we held that, where borrowed capital was a large income-producing factor, its exclusion created an abnormality entitling the taxpayer to special assessment under*2810 section 328. The borrowed money here constituted a large part of petitioner's working capital and was essential to the success of the business. On the whole case, and without determining the specific grounds to the exclusion of others, we think petitioner is entitled to special assessment under section 328. Further proceedings will be had under Rule 62(c) and (d).