Binghamton Candy Co. v. Commissioner

BINGHAMTON CANDY COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Binghamton Candy Co. v. Commissioner Docket No. 96737. United States Board of Tax Appeals 43 B.T.A. 327; 1941 BTA LEXIS 1516; January 15, 1941, Promulgated *1516 In 1936 the petitioner received from its vendors $719.24 to reimburse it for processing taxes included in the sales price of corn syrup and peanuts purchased by it from August 1, 1935, to January 6, 1936. The respondent has held that the petitioner did not bear the burden of such taxes in making sales of candies and that it is liable to the "unjust enrichment tax" imposed by section 501(a)(2) of the Revenue Act of 1936. The petitioner contends that it is not liable for the tax upon the ground that it bore the burden of the processing taxes for which it received reimbursement. Held, that the evidence of record does not show that the petitioner bore the burden of such processing taxes. William Cogger, Esq., for the petitioner. R. H. Transue, Esq., and Percy C. Young, Esq., for the respondent. SMITH *327 This proceeding involves a deficiency in "unjust enrichment tax" of $575.39 for 1936 imposed by Title III, section 501(a)(2), of the Revenue Act of 1936. The petitioner contends that it is not liable for the tax upon the ground that it did not shift to its vendees the burden of certain processing taxes for which it received reimbursement*1517 in 1936 in the amount of $719.24. FINDINGS OF FACT. The petitioner is a corporation, with its office and principal place of business at Binghamton, New York. It is a manufacturing confectioner and has been engaged in such business since some time prior to 1927. It manufactures and sells hard candies, taffy, peanut candy, and chocolates. In its business the petitioner uses large quantities of corn syrup, cornstarch, and peanuts. These commodities, or the basic commodities from which they are manufactured were subject to the processing taxes collected pursuant to the provisions of the Agricultural Adjustment Act and supplements thereto. The corn syrup was purchased in tank car lots of about 100,000 pounds each. The processing tax, which amounted to about 13 cents or 14 cents per hundredweight, was not billed to the petitioner as a separate item but was included in the invoices as a part of the total cost of the material purchased. The same is true with respect to peanuts bought by the petitioner. The petitioner fixed the sale price of its candies to its vendees partly on the basis of the cost of manufacturing, including the cost of materials and supplies, labor, overhead, *1518 etc., and partly on the basis of prices at which like commodities were sold by its competitors. *328 Petitioner sold to the wholesale trade only and its margin of profit was small. Some time during 1935 the petitioner learned that injunctions had been obtained by some of its vendors prohibiting the collection of the processing taxes which its vendors had, up to that time, paid. Petitioner was advised that the vendors would continue to bill corn syrup, cornstarch, and peanuts with the tax included as theretofore but that if the Agricultural Adjustment Act and supplements thereto should be declared invalid by the Supreme Court, as was confidently predicted, an adjustment in the sales price would thereafter be made to the petitioner. The petitioner, relying upon the information received, thereafter did not include the amount of the processing taxes on the materials which it purchased in determining its cost of sales of manufactured products. After invalidation of the Agricultural Adjustment Act by the Supreme Court in an opinion handed down on January 6, 1936, and some time during 1936 petitioner received from three of its vendors reimbursements of processing taxes on*1519 corn syrup and cornstarch purchased over the period August 1, 1935, to January 6, 1936, inclusive, in the aggregate amount of $404.99. On November 3, 1936, it received from one of its vendors a reimbursement of processing taxes on peanuts purchased over the period September 30 to October 30, 1935, in the amount of $314.25. The total amount of the reimbursements received was $719.24. The petitioner reported the $719.24 as a part of its gross income in its income tax return for 1936. It did not refund to its vendees any part thereof. The petitioner filed income tax returns from 1927 to 1936, inclusive, which show net income and net losses as follows: Year Net income Net loss [1927] $1,435.17 [1928] 4,250.06 [1929] $2,921.84 [1930] 421.08 [1931] 5,159.90 [1932] $2,422.78 [1933] 4,722.45 [1934] 1,429.24 [1935] $9,381.75 [1936] 2,748.74 The following table shows the average number of pounds of candy sold by the petitioner during the six-year period 1927 to 1932, inclusive, and for each of the years 1935, 1936, and 1937, together with the total selling price of the candies, cost of materials and supplies, the excess of the selling price over cost*1520 of materials and supplies (margin), and the margin per pound of candies sold: 1927-32 incl. (average) [1937] Total sales (pounds) 2,450,283 1,948,695 2,026,255 2,322,781 Total selling price $197,071.06 $138,442.93 $128,133.49 $162,981.76 Cost of materials and supplies 136,100.40 100,101.30 91,385.02 118,484.88 Margin 60,970.66 38,341.63 36,748.47 44,496.88 Margin per pound .0214 .0196 .0180 .0191 *329 During the period 1927 to 1932, inclusive, the petitioner sold 14,701,699 pounds of candy for $1,182,428.34 or at an average price of 8.04 cents per pound. In 1935 it sold 1,948,695 pounds at an average price of 7.1 cents per pound and in 1936, 2,026,255 pounds at an average price of 6.3 cents per pound. On May 14, 1937, the petitioner filed with the collector for the twenty-first collection district of New York a return on Form 945, in skeleton form, of tax on "unjust enrichment" imposed by section 501(a)(2) of the Revenue Act of 1936. This return showed the reimbursements received by it from its vendors in 1936 as follows: Corn syrup, $404.99; peanuts, $314.25; total, $719.24. The return showed no tax liability. *1521 The supporting schedules called for by the return were left blank. Upon the audit of the return the respondent determined that the petitioner had a liability for unjust enrichment tax of 80 percent of the amount of the reimbursements, or $575.39. OPINION. SMITH: The question for our determination in this proceeding is whether the amount of $719.24, which the petitioner received in 1936 from its vendors as reimbursements of processing taxes on corn syrup, cornstarch, and peanuts, collected under the provisions of the Agricultural Adjustment Act as amended and supplemented is subject to the tax imposed by section 501(a)(2) of the Revenue Act of 1936. The pertinent provisions of Title III of the Revenue Act of 1936 follows: TITLE III - TAX ON UNJUST ENRICHMENT SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES. (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below: * * * (2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal*1522 excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees. * * * (d) The net income from reimbursement or refunds specified in subsection (a)(2) * * * shall be computed as follows: From the total payment or accrual (1) of reimbursement to the taxpayer from vendors for amounts representing *330 Federal excise tax burdens included in prices paid by the taxpayer to such vendors or (2) of refunds or credits to the taxpayer of Federal excise taxes erroneously or illegally collected, there shall be deducted the expenses and fees reasonably incurred in obtaining such reimbursement or refunds. (e) For the purposes of subsection (a)(1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows: (1) From the selling price of the articles there shall be deducted the sum of (A) the cost of such articles plus (B) the average margin with respect to the quantity involved; or (2) If the taxpayer so elects by filing his return*1523 on such basis, from the aggregate selling price of all articles with respect to which such Federal excise tax was imposed and which were sold by him during the taxable year (computed without deduction of reimbursement to purchasers with respect to such Federal excise tax) there shall be deducted the aggregate cost of such articles, and the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed. The excess of such margin per unit over the average margin (computed for the same unit) shall be multiplied by the number of such units represented by the articles with respect to which the computation is being made; * * * * * * (f) As used in this section - (1) The term "margin" means the difference between the selling price of articles and the cost thereof, and the term "average margin" means the average difference between the selling price and the cost of similar articles sold by the taxpayer during his six taxable years preceding the initial imposition of the Federal excise tax in question, * * * (2) The term "cost" means in the case of articles manufactured or produced by the taxpayer, the cost to the taxpayer of materials*1524 entering into the articles; or, in the case of articles purchased by the taxpayer for resale, the price paid by him for such articles (reduced in both cases by the amount for which he is (3) The term "selling price" means selling price minus * * * (3) The term "selling price" means selling price minus * * * * * * (i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. * * * * * * (1) The taxes imposed by subsection (a) shall be imposed on the net income from the sources specified therein, regardless of any loss arising from the other transactions of the taxpayer, and regardless of whether the taxpayer had a taxable net income (under the income-tax provisions of the applicable Revenue Act) for the taxable year as a whole; * * * Petitioner alleges that it is not subject to the tax imposed by section 501(a)(2) for the reason that it bore the burden of the processing taxes for which it received reimbursement in 1936 and did not shift that burden to others. It admits that prior to some date in 1935 it shifted the burden of*1525 the processing taxes to its vendees but alleges that after it learned that one or more of its vendors had obtained injunctions against the collection of the tax by collectors of internal revenue it thereafter deducted from the cost to it of corn syrup, *331 peanuts, etc., the amount of the processing taxes included therein in determining cost of sales. At what time in 1935 this change in the method of computing cost of sales took place the evidence does not disclose. The petitioner's president testified that he did not know. Neither did he know whether the deduction from the cost of the estimated amount of the processing taxes included in the purchase price had any effect upon the sales prices of the different kinds of candies. The element of the processing taxes in cost of materials purchased was very small. The prices at which candies were sold were largely determined by competition. Although the Board is of the opinion that a taxpayer appealing to it from the determination of a deficiency in the unjust enrichment tax is not limited to any particular form of proof, *1526 , and article 16 of Regulations 95, the proof must be such as to satisfy the Board that the taxpayer himself has borne the burden of the tax before the taxpayer may prevail. A presumption of correctness attaches to the respondent's determination of the deficiency. The petitioner has offered proof to the effect that its margin of profit per pound of candy sold during the calendar years 1935 and 1936 was less than during the six-year period 1927-1932. It submits that this is proof that it bore the burden of the excise taxes for which it was reimbursed. We do not think that the profit margins for 1935 and 1936 and for the period 1927-1932 prove that the taxpayer bore the burden of the processing taxes for which it was reimbursed in 1936. The data offered for 1935 and 1936 do not purport to show the margin of profit for the portion of the years 1935 and 1936 to which the reimbursements of the processing taxes relate. That period began at some time in 1935 and ended on January 6, 1936, the date on which the Supreme Court promulgated its opinion in *1527 . During a part of 1935 petitioner admits that it shifted the burden of the processing taxes to its vendees and the processing tax was not effective after January 6, 1936. For all that the record shows to the contrary the petitioner's margin of profit per pound of candy sold during the period for which the petitioner received the reimbursements was greater than during the balance of the yearly periods. We therefore do not think that the comparison of profit margins made by the petitioner in this case is any proof that the petitioner bore the burden of the processing taxes for which it was reimbursed. In our opinion the proof offered by the petitioner does not show that the respondent erred in his determination of the deficiency. Reviewed by the Board. Decision will be entered for the respondent.