Iten Biscuit Co. v. Commissioner

ITEN BISCUIT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Iten Biscuit Co. v. Commissioner Docket Nos. 43667, 45164. United States Board of Tax Appeals 25 B.T.A. 870; 1932 BTA LEXIS 1458; March 15, 1932, Promulgated *1458 1. The petitioner sold the greater part of its products in can containers, so-called "returnable packages," and included a separate and uniform charge for such containers in the invoices to its customers. Such sales were made with the understanding that containers would be repurchased upon the return of the empty cans. Held, upon the evidence, that there was an actual transfer of such ownership and that the containers, not being owned by the petitioner or used in its trade or business, are not assets on which taxpayer is entitled to deductions for depreciation. 2. Respondent's claim for an increased deficiency for 1922, and the alternative claim for an increased deficiency for 1926, denied; the former, because of failure to prove the affirmative allegations of the claim, the latter, because the item of income claimed to have been received in that year is determined to have been income for 1922. Ferdinand Tannebaum, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. LANSDON *870 The respondent determined deficiencies in income taxes for the years and in amounts as follows: Docket No. Year Deficiency [1922] $32,222.53 45164 [1923] 18,936.67 [1924] 9,440.69 43667 [1925] 7,975.15 [1926] 28.53 *1459 *871 While the petitions set forth several assignments of error, they all relate to the single question of whether the petitioner is entitled to deductions for depreciation of can containers, so-called "returnable cans," the amounts of the several deductions, if allowable, not being in controversy. The respondent claims an increased deficiency for 1922, alleging that he allowed an excessive deduction for that year for a loss sustained by the petitioner in the liquidation of a subsidiary corporation, or, alternatively, an increased deficiency for 1926, alleging that he failed to include in income for the latter year the amount of income taxes of the same subsidiary corporation refunded to the petitioner in such year. The proceedings were consolidated for hearing and decision. FINDINGS OF FACT. 1. The petitioner, a Nebraska corporation, with its principal office at Omaha, is, and was during the taxable years in controversy, engaged in the business of manufacturing and selling biscuits, cakes, cookies and crackers. 2. With the inception of the business in 1908, the petitioner began the practice of selling and shipping its products in can containers, so-called "returnable*1460 cans." In the years under review herein approximately 95 per cent of petitioner's products were sold and shipped in this fashion. 3. The returnable cans are of metal construction, square or rectangular in shape, with two horizontal oval openings in the front. In the top opening there appear, in bold white letters on a green background, the words "ITEN BISCUIT CO. - QUALITY PRODUCTS - SNOW WHITE BAKERIES." The bottom opening contains a plain glass, through which part of the contents of the can may be seen. On the bottom of the can the name "ITEN" is stamped, in large letters, within an oval. There are no markings on these cans designating them the property of the petitioner. They differ from the cans used by the petitioner's competitiors in that the openings in the front are of different shape. 4. These returnable cans used by petitioner afford several advantages over other containers of different, but less substantial, construction. The contents keep in better condition and are more exposed for display; they are a better facility for shipment of petitioner's products, which they help to advertise and, when returned empty to the petitioner and the retail grocer, by the*1461 retailer and the consumer, respectively, for credit for or refund of the charges thereon, of which more will be stated later, they serve to put the former on notice that the latter are out of the particular products which had been contained therein. *872 5. One of the mediums of advertising used by the petitioner during the years in controversy is a printed circular, distributed to the trade, entitled "Ten Good Reasons for Returnable Cans of Fairy Crackers." This circular contains, in heavy type letters, the following statement: Returnable cans are not sold outright, but in order to simplify accounting and to safeguard against loss of cans, we require a deposit of 50 cents each for them regardless of size. Therefore, always get a similar deposit from your customers when selling in can lots. * * * When empty, the cans are returned to us in the carrier by freight at our expense. We credit your account for full amount or give you a check in full - whichever you prefer. 6. The petitioner furnished its salesmen with two booklets, entitled "Instructions to Salesmen" and "Suggestions to Salesmen." These booklets contain, under the heading "Policy," the following instructions: *1462 We charge 50c each, net, for cans (blind fronts for crackers and three sizes of full and half size brass fronts for sweet goods), 10c each, net, for two-can crates, and $2.00 each, net, for 12-can carriers, all of which must be paid for the same as other merchandise. Deductions from invoices for cans and crates are never allowed. Cans and crates are returnable to us at invoice prices. We pay the freight charges and credit the customer's account with the full value immediately upon receipt of bill of lading. 7. In taking orders for the petitioner's products, the salesman informs the customer that a charge of 50 cents will be made for each returnable can; that the customer is not buying the can, but merely making a deposit thereon, which may be returned to the petitioner, at the latter's expense, for credit for, or refund of, such charge. 8. In billing merchandise to customers, in can lots, it has been the petitioner's consistent practice to include, in the invoice, a separate and uniform charge for cans of 50 cents per can. The following is a sample of all invoices containing such a charge, and constitutes the entire written contents thereof: ITEN'S QUALITY PRODUCT *1463 ITEN BISCUIT COMPANY Snow White Bakeries Reg. U.S. Pat. Off. Omaha Agency 1224 Capitol Avenue Omaha, Nebraska. Date Mr. Jack West, Braddyville, Iowa. Terms 30 days net One per cent for cash in ten days QUANTITY PRICE AMOUNT 2 Cans FAIRY salt 12 11 1/2 1 38 2 Can 1 Crt 1 10 2 48 *873 9. There are no signed written agreements between the petitioner and its customers purporting to set forth their understandings as to the rights and duties of each in respect of returnable cans and the charges made therefor. The charges to customers for such cans conform with a trade custom of several years, adhered to by twelve or fourteen competitors of the petitioner, and they are made with the understanding that credit therefor, or refund thereof, will be made, if and when the customers return the cans. 10. During the years in controversy the petitioner encountered considerable resistence from the trade to the making of these charges for returnable cans, due mainly to propaganda spread by its competitors. The latter were incessantly pointing out to the trade, including the petitioner's customers, the disadvantage of having money "tied*1464 up" in cans while on the store floor. To meet the situation, the salesmen were directed to, and did, advise the petitioner's customers that they were not purchasing the cans; that they were merely making deposits thereon; and that their deposits were as good as bank deposits, because the cans were returnable at full value. The petitioner did not pay interest on customers' deposits. 11. The petitioner always accepted a returned can, regardless of its condition, whether usable or not, and gave full credit for the charge thereon. It did not accept cans returned by persons not engaged in the retail grocery business, who were instructed to take the cans to a retail grocer. If cans were returned by a retail grocer who had no account, past or present, with the petitioner, he was allowed a credit or was paid in cash, at his option, at the rate of 50 cents per can. These practices were adopted as a matter of good business policy, from a sales standpoint, as they frequently enabled salesmen to establish new contacts and open new accounts. 12. The petitioner used every effort to secure the prompt return of cans, in order to avoid the necessity of acquiring new ones and the resulting*1465 increased investment beyond the actual necessities of the business. Salesmen were instructed and constantly reminded by circular letters to check up on empty cans in customers' stores and endeavor to have the customers return them promptly. Frequently, in country districts, salesmen would obtain the services of draymen to collect and haul the cans to the freight stations. Trucks were sent out from petitioner's branch plants to pick up empty cans. Drivers of petitioner's trucks, when making deliveries, always looked over the store premises in search of empties and, after giving receipt therefor, returned them to the plants. The petitioner bore all expenses incident to the return of empty cans to its plants. 13. If a customer was slow in paying his account, or information was obtained indicating his failure or probable failure in business, the petitioner would make special effort to secure the return of any *874 cans in his possession. If a city account was involved, the petitioner sent a truck for the cans. No attempt was ever made by the petitioner to secure the return of cans through legal proceedings. 14. There have been infrequent instances of customers of*1466 petitioner using these returnable cans for purposes other than as containers for petitioner's products. Whenever an instance of this sort was observed a salesman took the matter up with the customer, but never pressed it to the extent of risking loss of an account. As a rule, petitioner's customers returned the empty cans for credit. 15. The petitioner encouraged its customers to press the sale of its products in full-can lots. It also encouraged them to advise consumers of its products that they paid only for those products when buying them in can lots, that they were merely leaving a deposit on, and not buying, returnable cans. This advice was followed, in some instances, by the use of small printed stickers which the petitioner's customers would place inside of the can. Substantially the same advice was contained in advertising literature sent to customers, for distribution to consumers, during the years in controversy. 16. The petitioner did not carry any insurance on returnable cans in the possession of its customers. 17. The cost to the petitioner of the returnable cans was approximately 50 cents per can. 18. The petitioner has always regarded the returnable*1467 cans, whether in its possession or in the possession of its cutomers, as its property; and it never considered that it had sold returnable cans to its customers. 19. On its books of account the petitioner accounted for returnable cans in the following manner: Two accounts were maintained in the general ledger, namely, "Returnable Package Account" (an asset account), and "Can Liability Account" (a liability account). The costs of new cans were charged to the returnable package account. When merchandise was shipped to a customer in can lots the customer's account was charged, and the returnable package account credited, with an amount equal to 50 cents per can; and when the customer returned the empty cans, the entry was reversed. At the end of every quarter an inventory was taken of the cans on hand, the cans being valued at 50 cents each. If, at this time, the debit balance in the returnable package account was greater than the inventory value of the cans on hand, the excess was credited to that account and charged to can liability account; and if the debit balance in the returnable package account was less than the inventory value of the cans on hand, the difference was charged*1468 to that account and credited to can liability account. No entries were ever made transferring any portion of the balances in the can liability account to *875 profit and loss account. The credit balances in the can liability account, at January 1 of each of the years 1918 to 1931, inclusive, were as follows: Jan. 1 Credit balances [1918] $192,674.94 [1919] 180,420.32 [1920] 250,464.89 [1921] 287,933.35 [1922] 354,856.99 [1923] $357,150.96 [1924] 426,036.58 [1925] 433,363.23 [1926] 452,356.28 [1927] 382,287.85 [1928] $141,382.69 [1929] 92,748.21 [1930] 66,453.36 [1931] 60,383.26 20. In computing taxable net income for each of the years in controversy the respondent has not allowed any deduction for depreciation of returnable cans. 21. At the hearing the parties filed a stipulation setting forth certain facts which they agreed the Board may find. Some of the stipulated facts we have already included in our findings, in the interests of a clear presentation; the remainder are as follows: IV. If the Board concluded from the evidence that there was no sale on so-called Returnable Packages, then it is agreed that the Petitioner is entitled to depreciation*1469 on said packages and that the consolidated net income for the year 1922, shown on page 4 of the deficiency letter (Docket #45164), to- wit, $812,217.18, should be reduced by $93,116.91, and that the net income for the year 1923 as shown on page 5 of said letter, to- wit, $960,990.44, should be decreased by $115,907.39. V. If the Board finds from the evidence that there was a sale of these so-called Returnable Packages, then the net income as shown in the deficiency notice aforesaid is correct, so far as depreciation allowances are concerned, because, it being a sale, the Petitioner is entitled to no depreciation. However, it is agreed that for the year 1922, if the Board finds there was a sale of these Returnable Packages, then the Petitioner is entitled to deduct a loss of $22,454.82, which amount represents the net debit to the Can Liability account for that year, which loss the Respondent has not allowed in his deficiency notice, and for the year 1923, the Petitioner is entitled to deduct a loss of $43,114.28, representing the net debit to the Can Liability account for that year, which loss the Respondent has not allowed in his deficiency notice for that year. VI. *1470 It is also agreed that in any event, whether there was a sale or not of Returnable Packages, the Respondent erred in his determination of deficiencies in adding to income for the years 1922 and 1923 the item shown on page 1 of the schedule attached to the deficiency notice and styled "Adjustment Can Liability Account $42,293.97," and on page 5 of said deficiency notice the item styled "Increase in Can Liability $28,885.72." *876 VII. If the Board concludes from the evidence that there was no sale of so-called Returnable Packages, then it is agreed that the Petitioner is entitled to depreciation on said packages and that the net income for the year 1924, as shown on page 4 of the deficiency letter (Docket #43667), to- wit, $909,324.44 should be reduced by $113,572.92; that the net income for the year 1925, as shown on page 4 of said letter, to- wit, $938,330.00 should be reduced by $92,204.02, and for the year 1926 the net income as shown on page 6 of said deficiency letter, to- wit, $693,019.60 should be reduced by $64,114.45. VIII. If the Board finds from the evidence that there was a sale of these so-called Returnable Packages, then the net incomes as shown in*1471 the deficiency notices, as aforesaid, are correct, because it being a sale the petitioner is entitled to no depreciation in those years, and the Respondent in his determination of net income has allowed the net debits shown in the Can Liability account and accordingly, the deficiencies as proposed for the years 1924, 1925, and 1926 are correct. IX. However, if the Board finds from the evidence that there was no sale of Returnable Packages in the years 1924, 1925 and 1926, it is agreed that the Respondent has erred in his computation of net income for said years in that when he disallowed depreciation he did allow the net debits shown in the Can Liability account, in the following amounts: [1924] $64,673.45 [1925] 53,005.98 [1926] 70,069.40 And if the Board concludes that there was no sale, the amounts shown about [above] as depreciation sustained on Returnable Packages should be allowed and there should be added the amounts allowed in each of the years as the net debits to the Can Liability account. X. On January 1, 1920, the Iten Biscuit Co., acquired the entire capital stock of the Shelby Biscuit Co., of Memphis, Tenn., by exchanging 2,750 shares of*1472 its capital stock, of a par value of $100 per share, for the entire capital stock of the Shelby Biscuit Co. The Iten Biscuit Co., then operated the Shelby Biscuit Co., as a subsidiary until April 30, 1922, at which time all the usable assets of the Shelby Biscuit Co., were brought on to the books of the Iten Biscuit Co., and the Shelby Biscuit Co., was dissolved by the Iten Biscuit Co., some time later during the year 1922. In 1922 when the assets of the Shelby Biscuit Co. were taken over by the Iten Biscuit Co., and at the time of dissolution of the Shelby Biscuit Co., the Iten Biscuit Co., assumed all the liabilities of the Shelby Biscuit Co., one of which was a payment of additional Federal income taxes due the Federal government by the Shelby Biscuit Co. In filing its consolidated income tax return for the year 1922, the Iten Biscuit Co. claimed a loss on account of said dissolution of $20,713.93, which *877 loss was allowed by the Respondent in his determination of deficiency for said year 1922. In the year 1926, based upon certain claims for refund filed by the Iten Biscuit Co., on behalf of the Shelby Biscuit Co., the Respondent refunded during said year to*1473 the Iten Biscuit Co., a total of $7,657.73, on income taxes paid by the Shelby Biscuit Co. for prior years, which amount has not been returned nor has it been included by the respondent as taxable income in either the years 1922 or 1926. OPINION. LANSDON: The first and most important question for consideration is whether the petitioner is entitled to a deduction, in computing taxable net income of each of the years in controversy, for depreciation of returnable cans in which its products are sold and shipped to its customers. If so, the amounts of such deductions have been agreed upon and stipulated by the parties. The pertinent provisions of the Revenue Acts of 1921, 1924 and 1926 are as follows: SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. The depreciation allowance is limited, by the express provisions of the statutes, to property used in the trade or business. *1474 "It represents the reduction, during the year, of the capital assets through wear and tear of the plant used." . Merchandise held for sale, and, therefore, constituting a part of the taxpayer's stock in trade, is not property used in the business and a taxpayer is not entitled to a deduction for depreciation, specifically as such, in respect thereof. ; and . Obviously, a taxpayer is not entitled to a deduction for depreciation in respect of property disposed of through sale, and in which it has no further capital investment. The petitioner contends that, whether in or out of its physical possession, the returnable cans in which it sold and shipped its products to customers are its property, are used in the business, and that it is entitled to the depreciation deductions provided by the statutes, in respect thereof. The respondent says that the returnable cans are a part of the petitioner's stock in trade; that the petitioner actually sells the cans as well as their contents, obligating itself only to repurchase the cans, *1475 if and when they are returned by the customers; and, therefore, the petitioner is not entitled to the depreciation deductions contended for. *878 A sale is the "transfer of the property in a thing for a price in money." 35 Cyc. 25; Mansinger v. Steiner-Medinger Co., 4 Nebr.(unoff.) 392; . It involves "an agreed price, a vendor, a vendee, an agreement of the former to sell for the agreed price and of the latter to buy for and to pay the agreed price, are essential elements in a contract of sale." . The transactions here involved were either bailments or sales, the distinction between which is stated in , as follows: The recognized distinction between bailment and sale is that when the identical article is to be returned in the same or in some altered form, the contract is one of bailment and the title to the property is not changed. On the other hand, where there is no obligation to return the specific article, and the receiver is at liberty to return another thing of value, he becomes a debtor to make the return and the title*1476 to the property is changed; the transaction is a sale. In all cases involving the distinction between bailment and sale the courts have endeavored to determine and give effect to the intention of the parties as expressed in their agreements. In our opinion the facts herein fail to support the petitioner's theory. The so-called returnable packages were billed to the customers to be paid for as "other merchandise." There was no reservation or stipulation in the invoice that title remained in the seller, which parted with the article at an agreed price. When the returnable package was paid for by the purchaser his rights of ownership were complete. He could sell it for cash or retain it in his store for the display of crackers or other merchandise not purchased from the petitioner. He could, and the testimony is that in some cases he did, include it in his own inventory at the price paid the petitioner. The returnability of the package was a right conceded by the petitioner, but was in no sense an obligation enforceable at law. Every essential element of a sale and transfer of title is present in the practice of the petitioner and every attribute of ownership exists in the purchaser*1477 upon his receipt of the containers and payment therefor. On the other hand the characteristics of bailment as defined by the Supreme Court in , are not in the transaction here involved. There is no obligation to return the identical article in same or altered form. Any old container originally sold by the petitioner will do, even if it is picked out of a junk heap or acquired by purchase from another dealer. "There is no obligation to return the specific article." "The receiver is at perfect liberty to return another thing of value," namely, 50 cents in money, and when he has done so his title as owner is complete. *879 Petitioner relies on the evidence that it was always anxious to have the containers returned as soon as possible. Doubtless this is true, and for the very obvious reason that it was highly undesirable to increase its investment in the returnable packages while so many were outstanding under an agreement to repurchase. The returnable cans were a convenience, a method of advertising, and a means for retaining the trade of customers once secured, but the petitioner, very properly, through its efforts to secure*1478 returns, sought to minimize appropriations from its operating funds for such purposes. It was also necessary to stress returnability to overcome sales resistance created by competitors who, doubtless, often pointed out the wastefulness of paying almost as much for the cans as for the merchandise they contained. All this theory, however, is in no way overcome by the facts. The returnable package was invoiced and sold to the customer at an agreed price, with an understanding by petitioner to repurchase at the same price. Since the returnable packages, while out of the possession of the petitioner, were not its property and not at such times in use in its trade or business, the claim for depreciation thereon is disallowed. Cf. ; . The conclusion reached above in no wise prevents the petitioner from recovering, without tax, his entire investment in returnable cans that became worthless and unusable in its hands. This recovery is effected not through depreciation, but by charges against the returnable package account, each year, of the cost of the cans that have become useless. *1479 The parties have stipulated that for the years 1922 and 1923 the petitioner is entitled to deduct losses on such account in the respective amounts of $22,454.82 and $43,114.28, which have not been allowed in the respondent's computation of the deficiencies for such years, and that for the years 1924, 1925 and 1926 such losses have heretofore been deducted in the respective amounts of $64,673.45, $53,005.98, and $70,069.40. The parties have also stipulated that the respondent erred in his determinations as to 1922 and 1923 in adding to the net income of those years the sums of $42,293.97 and $28,885.72, respectively, representing adjustments in the can liability account. In view of this stipulation, the net income shown in the deficiency notice for those years should be reduced accordingly. The respondent claims an increased deficiency for 1922, or, alternatively, for 1926, alleging that he either allowed an excessive deduction for 1922 for a loss sustained by the petitioner in the liquidation of a subsidiary corporation, or that he has understated the net income for 1926, the allegation being predicated upon the fact that in 1926 there was refunded to the petitioner an overpayment*1480 of income *880 taxes by the Shelby Biscuit Company, in the sum of $7,657.73, a fact which he failed to take into consideration in determining the amount of the loss sustained in 1922 or in computing the net income for 1926. The hearing developed nothing in addition to the stipulated facts. We see no reason for holding that the petitioner realized income in 1926 as the result of the refund which it received in that year of an overpayment of taxes by its subsidiary which had been dissolved. If it was income at all, it was income for 1922, in which year the petitioner, through the liquidation and dissolution of its subsidiary, succeeded, by virtue of being the sole stockholder thereof, to all the assets, rights and choses in action of the Shelby Biscuit Company. Though making an earnest attempt to do so, the respondent failed to prove that in determining the amount of the loss, which he allowed for 1922, as the result of the liquidation of the Shelby Biscuit Company, he did not give proper effect to this item. The respondent's claim for an increased deficiency for 1922, and the alternative claim for an increased deficiency for 1926, must be denied. Decision will be entered*1481 under Rule 50.