O. J. Morrison Dep't Store Co. v. Commissioner

O. J. MORRISON DEPARTMENT STORE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MORRISON DEPARTMENT STORE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. O. J. Morrison Dep't Store Co. v. Commissioner Docket Nos. 31247, 39590. United States Board of Tax Appeals 23 B.T.A. 895; 1931 BTA LEXIS 1802; June 29, 1931, Promulgated *1802 Upon cash retail sales of merchandise the petitioners issued to customers sales slips redeemable in merchandise. The merchandise thus given as premiums in the redemption of the sales slips was included in the cost of merchandise and in the merchandise inventories at the beginning and close of the year; when sales slips were redeemed, retail sales were not affected thereby; the cost of the premium merchandise was deducted from gross income in obtaining the taxable income.Held, that the petitioners are not entitled to a further deduction from gross income of any amount representing the liability of the petitioners to redeem the sales slips issued. Michael M. Doyle, Esq., and J. S. Wolfe, Esq., for the petitioners. L. W. Creason, Esq., for the respondent. SMITH *895 These proceedings, consolidated for hearing, are for the redetermination of deficiencies as follows: Petitioner Year Docket No. O. J. Morrison Department Morrison Department Store Co. Store Co. [1923] 31247 $750.00 [1924] 31247 94.00 [1925] 31247 77.99 [1926] 39590 $333.80 *896 The petitioner in Docket No. 31247 alleges*1803 that the Commissioner erred in failing to allow premium expense as follows: [1923] $15,352.00 [1924] 13,576.83 [1925] 12,426.87 The petitioner in Docket No. 38590 alleges that the Commissioner erred in failing to allow expense incurred in the issue of premiums or trading stamps in the amount of $2,475.58 for the year 1926, which was set up as a reserve at the close of the year. FINDINGS OF FACT. O. J. Morrison, a man who has been in the department store business in West Virginia for 39 or 40 years, owns interests in a number of corporations and/or partnerships in the State of West Virginia, among which are the two petitioners involved herein, the O. J. Morrison Department Sotre Company, charleston, W. Va., Docket No. 31247, and the Morrison Department Store Company, Huntington, W. Va., Docket No. 39590. The former was organized in 1910; the latter on November 14, 1914. Each of these stores or corporations has from the beginning followed a practice of giving premiums in merchandise under certain specified conditions in redemption of its sales slips issued to customers in connection with cash sales of merchandise. The petitioners never issued trading stamps*1804 or coupons in the usual meaning of the term, but issued ordinary sales slips, which, in order to be valid for premiums, were validated by being stamped in the cash register. The sales slips show on their face the amount of the sale and contain a statement on their back that under certain conditions they are good for premiums, but they do not show on their face what, if anything, is their value in exchange for premiums. The customers of the petitioners knew that the sales slips would be redeemed in the petitioner's premium departments. It was their custom to save up the sales slips until their purchases totaled a given amount and then to exchange them for premium merchandise. Except in rare instances the minimum amount of sales for which premiums were issued was $25. Articles of merchandise which were given out as premiums were purchased in the same manner as other merchandise. The cost of the merchandise was included in the total cost of merchandise reported by the petitioners on their tax returns. The premium merchandise was included in the petitioners' inventories at the beginning and close of the year the same as other merchandise. The costs of all premium merchandise*1805 were automatically reflected as a deduction through the inventories. When premium articles were *897 given to customers the petitioner's retail sales for those years, as shown by their books of account, were not affected. The amount of the net cash retail sales of the Charleston store, Docket No. 31247, for the years 1923, 1924, and 1925 were $928,314.12, $807,501.21, and $849,067.14, respectively. The net cash retail sales of the Huntington store, Docket No. 39590, for 1926, were $314,359.47. The amount of sales slips redeemed in any of the taxable years is not known and can not now be determined. The retail slips were destroyed as soon as they were redeemed. Sales slips are often redeemed which have been outstanding for a period of one day to a period of 15 years. The record does not show and there is no way to determine what part of the total amount of the sales slips redeemed in any one year applied to sales slips issued in such particular year. The amount of unredeemed sales slips outstanding at the close of any year is not known. The O. J. Morrison Department Store Company does not have on its books of account, as reflected by its balance sheets for the*1806 years 1923, 1924, and 1925, any account in the nature of a premium liability account or a premium reserve account. The Morrison Department Store Company did not have any such account at the beginning of 1926, but its balance sheet submitted with its income-tax return for the calendar year 1926 shows an account as at December 31, 1926 entitled "Premium Reserves," with a credit balance of $2,475.58. OPINION. SMITH: The sole issue involved in these proceedings is the allowance as a deduction from gross income of the taxable years involved of certain alleged premium expense on sales made in each of the years involved on account of certain premiums which it is anticipated will be given out in the future upon presentation by the customers of sales slips representing sales made in said years. The petitioners contend that under their method of merchandising they have a liability at the close of each year to redeem certain sales slips outstanding which have been issued to customers upon cash sales; that they have always held themselves out to the public as ready and willing the redeem these sales slips in merchandise regardless of the year in which issued; and that in point of fact*1807 sales slips are redeemed in many cases which have been outstanding many years. The petitioners admit that their records do not show the total amount of the sales slips redeemed during each of the taxable years, but they do contend that in subsequent years the amount *898 redeemed is approximately 57 per cent of the cash retail sales made in those years and they further contend that they should be entitled to deduct from gross income a reserve based upon their total cash sales upon the belief that approximately 100 per cent of the sales slips issued will be redeemed. Petitioners rely upon article 91 of Regulations 62, 65, and 69, which provides in part as follows: Subtraction for redemption of trading stamps. - Where a taxpayer, for the purpose of promoting his business, issues with sales trading stamps or premium coupons redeemable in merchandise or cash, he should in computing the income from such sales subtract only the amount received or receivable which will be required for the redemption of such part of the total issue of trading stamps or premium coupons issued during the taxable year as will eventually be presented for redemption. This amount will be determined*1808 in the light of the experience of the taxpayer in his particular business and of other users engaged in similar businesses. The taxpayer shall file for each of the five preceding years, or such number of these years as stamps or coupons have been issued by him, a statement showing (a) the total issue of stamps during each year, (b) the total stamps redeemed in each year, and (c) the percentage for each year of the stamps redeemed to the stamps issued in such year. * * * The petitioners admit that they can not strictly comply with the requirements of the regulations, inasmuch as they can not show the total sales slips redeemed in each year and the percentage for each year of the sales slips redeemed to the sales slips issued. They contend, however, that this should not deprive them of the right to deduct from their gross incomes an amount representing their liability in respect of the outstanding sales slips. When the petitioners sold a bill of goods to any customer and issued a sales slip for the cash paid therefor the petitioners could not know that the particular sales slip would ever be redeemed in merchandise. *1809 The liability of the petitioners for the sales slips outstanding at the close of any taxable year was purely contingent upon whether the customers would elect to present them for redemption. The decisions of the Board and the courts have been consistent that liabilities set up to provide for contingencies are not deductible from gross income unless clearly authorized by the taxing statute. In , we said: "Reserves for future incurred expenses are not allowable as deductions under the Revenue Act of 1918." In , we said: * * * but when a taxable corporation in the course of its business of making profits receives contractual compensation for work done and material furnished, it can not contend that a part of the amount received is not income because the taxpayer is subject to a collateral obligation the fulfillment of which may require it to spend some of the amount. * * * this result is not changed because in the light of a general experience the taxpayer feels reasonably certain of the necessity to expend the amount and is impelled by business prudence to set up a reserve therefor. *1810 * * * *899 In , we said: * * * Since the statute does not permit a taxpayer to deduct as an expense an amount which he fears he may some day be called upon to spend, there can be no sanction for such a deduction. In , we said: "Reserves are not allowable deductions from gross income unless specifically provided for by statute." In , the Court of Claims of the United States held that the amounts set up in publishing corporations' books as reserve for return of magazines from distributors were not deductible in determining income tax. It stated: * * * Whether the plaintiff's books were kept on an accrual or cash basis, deductions to be allowed must be absolute to character. The reserves claimed by the plaintiff do not represent any fixed or determinable obligation but only a possible liability that would accrue, if ever, in some future year. * * * See also in this connection *1811 ; ; ; . There is a further reason why the petitioners' claims for the allowance of a deduction in respect of their contingent liabilities on outstanding sales slips must be denied and this point is stressed by the respondent. Under the petitioners' method of accounting premium merchandise is included with other merchandise purchased. During the taxable years the cost of such merchandise was included in purchases of merchandise and in inventories at the beginning and end of each year. When the premium merchandise was issued to customers in redemption of the sales slips the retail sales were not affected.The record distinctly shows that the cost of premium merchandise given out by the petitioners was automatically reflected as deductions from gross income through the method of handling the inventories. The petitioners contend that regardless of this method of keeping their books of account they should, nevertheless, be entitled to deduct amounts representing their liability*1812 on the outstanding sales slips. But if this method were permitted the petitioners would very clearly obtain a double deduction from gross income of the cost of the premium merchandise. The taxing statutes do not permit such double deduction. There is nothing in the record to show that petitioners' books of account as kept overstate their net income. There is no evidence before us which shows that a larger percentage of the sales slips issued in each of the taxable years will be ultimately redeemed than *900 the amount which was actually redeemed in each of the taxable years. The petitioners, having obtained a deduction from the gross income of each year of the cost of the merchandise issued as premiums, are not entitled to any additional deduction. Judgments will be entered for the respondent.