Brown & Williamson Tobacco Corp. v. Commissioner , 16 T.C. 432 ( 1951 )

Brown & Williamson Tobacco Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

Brown & Williamson Tobacco Corp. v. Commissioner

Docket No. 15020

United States Tax Court

16 T.C. 432; 1951 U.S. Tax Ct. LEXIS 269;

February 26, 1951, Promulgated

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">*269 Decision will be entered under Rule 50.

Amounts to be subtracted from sales as necessary for redemption of proportion of cigarette coupons issued by petitioner during taxable years which would eventually be redeemed determined from evidence. Regulations 111, section 29.42-5.

Richard L. Shook, Esq., Eugene Meacham, Esq., Harrison M. Robertson, Esq., and Louis Seelbach, Esq., for the petitioner.

W. W. Kerr, Esq., for the respondent.

Opper, Judge.

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OPPER

">*433 This case involves deficiencies aggregating $ 1,834,135.16 for the years and in the amounts as follows:

		Declared value	Excess profits
Year	Income tax	excess-profits	tax
		tax
1940	$ 398,854.82	$ 16,983.87	$ 640,012.08
1941	153,080.71
1942	170,960.10	2,190.20
1943	353,042.04	62,368.24
1944	31,141.63	5,501.47

Three issues were raised by the">*270 pleadings, one of which was abandoned by petitioner at the hearing, and another was conceded by respondent. The remaining issue is what percentage of the coupons issued in each taxable year by petitioner will eventually be presented for redemption. Some of the facts have been stipulated. The proceeding was heard before William G. Hamilton who was designated as a Commissioner for that purpose pursuant to Rule 48 of the Rules of Practice of the Tax Court and section 1114, Internal Revenue Code.

FINDINGS OF FACT.

The proposed findings of fact of the Commissioner heretofore filed August 30, 1950, and served upon the parties are hereby found and adopted as the findings of fact herein. They are as follows:

1. The petitioner is a corporation organized and existing under the laws of the State of Delaware. Its principal office and place of business is in Louisville, Kentucky. It filed its corporation income and declared value excess profits tax returns for the calendar years 1940-1944, inclusive, as well as its corporation excess profits tax returns with the collector of internal revenue at Louisville, Kentucky. The petitioner's corporation excess profits tax returns for 1941, 1943, ">*271 and 1944 disclosed no excess profits tax liability. Its return for 1942 reported an excess profits tax liability of $ 156,307.36 which liability was reduced to $ 118,372.36 by reason of renegotiation. Said liability thus reduced was eliminated through the operation of an unused excess profits credit adjustment as provided in section 710 (c) of the Internal Revenue Code. On July 31, 1944 the petitioner filed a claim for refund claiming a refund of excess profits tax for 1942 in the amount of $ 156,307.36. The petitioner filed its returns and kept its books on the accrual and calendar bases.

2. From its incorporation on or about March 16, 1927 and at all times material hereto the petitioner manufactured and sold tobacco products including cigarettes and snuff. In 1928 petitioner introduced its Raleigh brand of cigarettes. It packed Raleighs in a unique cardboard box, called a saddle bag pack, and sold them at a premium price. Although extensively advertised the sales response was disappointing. Petitioner's management then explored other means of ">*434 promoting the sale of its Raleigh cigarettes. Petitioner's parent corporation, British-American Tobacco Company, Limited, ">*272 and subsidiaries thereof, had used coupons in various countries to stimulate the sale of tobacco products. Prior to September 1932 petitioner adopted a coupon redemption plan as a means of promoting the sale of its cigarettes. In September 1932 petitioner started to issue coupons with its Raleigh cigarettes for the purpose of promoting their sale. For like reasons petitioner issued coupons with its Kool and Viceroy cigarettes when these brands were introduced on the market in 1933 and 1936, respectively.

3. Petitioner affixed one coupon to each package of coupon bearing cigarettes. Extra coupons were placed in each ten package carton of cigarettes as a bonus to carton buyers and as an inducement to dealers to promote the sale of petitioner's cigarettes. The first coupons issued by petitioner listed certain specific merchandise items for which the coupons were redeemable. Subsequent coupons stated that the coupons were redeemable for "nationally advertised merchandise according to terms of premium catalog in effect at time of redemption." Coupons issued prior to and during the taxable years, except for the date of expiration and minor variations not here material, provided as">*273 follows:

SAVE THIS VALUABLE B & W COUPON

Redeemable

By the undersigned:

For nationally advertised merchandise according to terms of premium catalog in effect at time of redemption. Write for illustrated catalog. These coupons are packed with:

KOOL

RALEIGH

VICEROY

CIGARETTES

Brown & Williamson Tob. Corp.

Box 599, Louisville, Kentucky.

This offer expires [date inserted] and is subject to the limitations and conditions stated on reverse side hereof. * Cash value 3/4 of one cent as explained on reverse side.

ONE B. & W. COUPON

(Reverse side)

In any State where redemption in goods is prohibited or requires the payment of a license or tax not required for cash redemption, this coupon will be redeemed only for its cash value of 3/4 of one cent and, except as aforesaid, this coupon is void and the offer herein contained is not extended in any State or locality where redemption or issuance thereof is prohibited or in which any tax, license, or other restriction is imposed upon the redemption or issuance thereof.

ONE B. & W. COUPON

4. The coupons issued by petitioner with its three brands of cigarettes were identical. They were redeemable for cash at all times until February ">*274 28, 1946. They were redeemable for merchandise until about December 1, 1943. In 1941 and subsequent years they were also redeemable for defense stamps, war savings stamps and bonds. Beginning April 1, 1944 all cigarette coupons were redeemed ">*435 for cash, war stamps, or beginning November 1, 1944 for cigarettes. The coupons were given a cash redemption value of 3/4 of one cent per coupon to comply with the laws of certain states and to appeal to customers who preferred cash to premiums. Cash redemption of bonus coupons increased the retail dealer's profit on each purchase of less than a carton.

5. The expiration date printed on each coupon fixed a time limit on petitioner's liability on the outstanding coupon and fixed a date when petitioner could terminate its over-all liability if for any reason it discontinued its coupon redemption plan. From time to time petitioner changed the expiration date on the coupons being issued but generally speaking the coupons expired within 36 months from the date of issue. Prior to February 28, 1946, petitioner ignored the various expiration dates and redeemed all coupons presented regardless of the date of issue. The only expiration ">*275 date ever enforced was that of February 28, 1946. This expiration date appeared on coupons issued during the months of March to October 1943, which were the last coupons issued under this coupon redemption plan.

6. Initially, petitioner contracted with United Profit-Sharing Corporation, a wholly owned subsidiary of the United Cigar Stores Company of America to service its coupon redemption plan. This contract was canceled when petitioner decided to service its own coupon redemptions so that it could exercise complete control of the plan in all its phases. In operating its own plan petitioner felt that the plan could be advertised and promoted more effectively, consumer good will could be protected, and substantially better values could be offered to its consumers.

7. In 1932 in pursuance of the plan adopted petitioner established a premium department which it staffed with a manager and his secretary. Additional employees were added, as required, until eventually 175 persons were employed therein. During the fall months of each year the premium department expanded its facilities in all directions to take care of the increased load from redemptions in November and December. In ">*276 servicing the coupon redemption plan the premium department was responsible for clerical work, the correspondence, the redemption of coupons, the shipment of premiums, store employees, stock men in the warehouses, and the supervision of the different groups and subdivisions that were required and functioned under the plan. The premium department's personnel shopped for and selected merchandise suitable for use as premiums, fixed the number of coupons necessary to acquire each premium, secured approval of the premium from petitioner's executive committee, catalogued each premium, and purchased a sufficient quantity to provide an inventory to fill redemption orders by customers. Premiums were shipped prepaid and every effort was made to ship the premium within 24 to 48 hours of the receipt of the customer's order. No substitute premiums were shipped. If a premium was not immediately available, or too many coupons were received for the premium ordered, or if, for any reason, the customer had a surplus of coupons, the premium department sent back a credit certificate to the customer. Premiums damaged in transit or defective in manufacture were immediately replaced. Normally the premium">*277 department carried a 30 days' supply of premiums on hand, a 30 days' supply in transit or readily available for shipment, and an additional 30 days' supply on order with the supplier or manufacturer. Complaints from customers were very infrequent.

8. The first premium offered by petitioner to its customers was playing cards, then a card table cover, a score pad, and in 1934 a card table. In June 1934 the first premium catalog was distributed offering coupon holders a dozen or ">*436 more different premiums in redemption of their coupons. Subsequent premium catalogs were distributed usually in the spring and fall of each year. The catalogs reflected changes in the merchandise offered by the addition of new premiums and the discontinuance of premiums with less popular appeal. The premium department constantly strove to improve the attractiveness of the catalog, the quality of the premiums, and to publicize the coupon redemption plan. From June 1934 through 1943 petitioner's distribution of premium catalogs was as follows:

Year	Catalogs distributed
June-Dec. 1934	250,000
1935	925,000
1936	4,285,000
1937	2,750,000
1938	2,400,000
1939	5,000,000
1940	3,750,000
1941	3,000,000
1942	3,000,000
1943	3,000,000

">*278 9. To facilitate the redemption of its coupons petitioner opened premium stores in the following cities:

City	Location	Opening Date
Chicago, Ill	24 S. Michigan Blvd	December 1936
New York, N. Y	22 E. 46th Street	December 1936
Louisville, Ky	674 S. 4th Street	December 1936
San Francisco, Cal	605 Third Street	December 1937
Los Angeles, Cal	3701 Wilshire Blvd	October 1938

These stores, which remained open until the cigarette coupon plan was discontinued in the fall of 1943, were handsomely appointed, well located, and had facilities and surroundings comparable to the finest retail stores. The merchandise offered as premiums for coupons was attractively displayed but no merchandise was offered for sale.

10. The premiums offered by petitioner were, generally speaking, luxury items of high quality that appealed to men, women and children. The current retail price on most of its premiums exceeded two dollars and many were made by nationally known manufacturers. The number of items shipped as premiums, the amount of cash, defense and war stamps used to redeem coupons during some of the taxable years, and the percentage of the latter of the total coupons redeemed, were as follows: ">*279

	Number of	Cash, war and	Per cent of total
Year	items	defense	coupons
	shipped	stamps	redeemed
1940	1,897,554	$ 531,556.02	12.46
1941	1,742,186	531,484.46	11.57
1942	1,289,305	(1943	710,129	32.33
		29.32
1944	(1)	(1)

">*437 During 1940 the most popular premiums, next to stamps and cash, based upon the coupons redeemed in that year, with the name of the manufacturer of the premium as shown by the 1940 catalog, were as follows:

		Per cent of
Item	No. shipped	total redeemed
Silverware (Oneida)	178,249	08.70
Card Tables	60,366	07.96
Toasters (Toastwell)	49,234	06.06
Hose (Gotham Gold Stripe)	236,874	05.19
Bathroom scales (Detecto)	70,676	04.66
Coffee Brewers (Cory)	57,693	04.19
Fishing Tackle (Shakespeare)	31,997	02.92
Irons (Westinghouse)	23,833	02.72
Glassware	137,151	02.50

11. Petitioner purchased its premiums direct from the manufacturer. It bought many items in carload or multiple carload lots. It took almost the entire output of two factories to supply petitioner with card tables. It was Westinghouse's">*280 largest customer for electric irons. It was able to purchase quality merchandise at maximum discounts. It computed its delivered-to-the-customer cost by adding together the cost of the premium, handling expenses, and all transportation charges. It then converted delivered-to-the-customer cost to redemption value in terms of coupons necessary to redeem by a mathematical formula. The petitioner did not mark up its premiums, and realized no profit upon the redemption of its coupons.

12. During the taxable years petitioner's coupons were worth from one cent to two and one-half cents per coupon when redeemed for merchandise. When coupons were redeemed for card tables the coupon holder realized two and one-half cents per coupon based on the retail selling price of comparable card tables. For certain premiums the purchasing power of each coupon was as low as one cent, but the average was about one and one-half cents or twice the cash redemption value of each coupon. Petitioner's premium department constantly checked the market costs and the retail prices of various types of merchandise in order to determine which articles offered the most value as premiums to its customers. The value">*281 of petitioner's coupons whether redeemed for merchandise or cash was one of the highest if not the highest of any coupon plan.

13. The petitioner used all kinds of advertising media to promote the sale of its coupon bearing cigarettes and to acquaint the public with its coupon redemption plan. It advertised its products and its plan over the radio by sponsoring nation wide evening programs, such as Baron Munchausen, Tommy Dorsey's Band, Paul Sullivan, Plantation Parties, Red Skelton, Hildegarde-in-the-Raleigh Room, and People Are Funny. It advertised with full page ads in color, as well as smaller ads in black and white, in magazines, such as Life, Colliers, Liberty, The Saturday Evening Post, Army & Navy Journal, and others. Newspaper advertisements along the same line were carried in many papers. Posters, billboards, window displays, the premium stores, and the catalogs urged the public to save "B. & W." coupons and acquire the premiums offered. The coupon redemption plan and some of the premiums were featured in many of its advertisements. ">*438 Petitioner's advertising expenditures made with respect to its coupon bearing cigarettes during the period for which they bore">*282 coupons were as follows:

Year	Amount
1932 (Sept.-Dec.)	$ 110,059.24
1933	596,309.25
1934	955,384.24
1935	1,004,457.41
1936	1,517,916.91
1937	1,911,385.45
1938	2,078,975.93
1939	2,532,511.62
1940	2,634,287.52
1941	3,089,201.34
1942	3,288,313.40
1943	2,976,137.78
Total	22,694,940.09

14. The annual domestic sales in thousands of petitioner's coupon brands, the annual United States consumption of cigarettes, and the ratio of petitioner's sales to total U. S. consumption, the latter being based on tax-paid withdrawals as officially reported by the Commissioner of Internal Revenue and the United States Department of Commerce were as follows:

	BRANDS
				Total All		Per cent of
Year				brands	Consumption	col. A of
				(col. A)	(col. B)	col. B
	Raleigh	Kool	Viceroy
1928	8,290			8,290	105,912,000	0.01
1929	444,615			444,615	119,040,000	.37
1930	166,808			166,808	119,628,000	.14
1931	115,062			115,062	113,448,000	.10
1932	134,445
Jan-Aug				215,746	103,584,000	.21
Sept-Dec	81,301
1933	191,434	497,957		689,391	111,768,000	.62
1934	627,759	2,437,137		3,064,896	125,616,000	2.44
1935	1,378,632	3,406,572		4,785,204	134,604,000	3.56
1936	2,368,298	3,713,287	437,721	6,519,306	153,168,000	4.26
1937	3,467,982	3,988,806	264,001	7,720,789	162,624,000	4.75
1938	4,843,654	3,508,756	240,368	8,592,778	163,764,000	5.25
1939	6,907,513	3,407,818	263,561	10,578,892	172,464,000	6.13
1940	7,759,413	3,278,614	260,111	11,298,138	180,660,000	6.25
1941	9,135,397	3,998,280	342,357	13,476,034	206,424,000	6.53
1942	12,114,375	4,690,694	315,364	17,120,433	235,836,000	7.26
1943	14,300,289	5,721,099	429,998	20,451,386	257,736,000	7.94
1944	15,341,546	5,672,811	622,559	21,636,916	238,668,000	9.07
1945	15,206,297	5,188,622	704,290	21,099,209	267,204,000	7.90
1946	3,754,587	4,160,644	405,764	8,320,995	321,732,000	2.59

">*283 15. The following table shows domestic sales for certain months, in thousands, of Raleigh and Kool cigarettes, United States consumption of cigarettes for the same months, and the ratio of petitioner's sales to total U. S. consumption, the latter being based on tax-paid withdrawals as officially reported by the Commissioner of Internal Revenue and the United States Department of Commerce. In the case of Raleighs, the period covered is the six months preceding and following the initial issuance of coupons in connection with that brand. In the case of Kools, the period begins with the introduction of the brand on the market and includes the six months following the initial issuance of coupons thereon.

RALEIGHS
			Per cent
	Sales	Consumption	of col. A
1932	col. A	col. B	of col. B
March	11,977	8,446,577	0.14
April	24,095	7,562,290	.32
May	20,352	8,685,337	.23
June	12,392	10,560,212	.12
July	10,991	9,534,022	.12
August	18,131	9,558,922	.19
Total	97,938	54,347,360	.18
RALEIGHS
			Per cent
	Sales	Consumption	of Col. A
1932	col. A	col. B	of col. B
(First coupons issued on brand in September)
September	18,121	9,310,988	0.19
October	27,562	8,351,365	.33
November	21,412	7,613,942	.28
December	22,796	7,319,117	.31
1933
January	23,351	8,622,222	.27
February	19,204	7,853,997	.24
Total	132,446	49,071,631	.27
KOOLS
1933
(Brand introduced on market in February)
February	1,511	7,853,997	0.02
March	14,525	7,974,030	.18
April	15,317	7,973,021	.19
May	20,202	12,822,973	.16
Total	51,555	36,624,021	.14
(First coupons issued on Kools in June)
June	26,232	12,462,970	0.21
July	23,522	9,526,101	.25
August	40,521	11,189,334	.36
September	74,271	9,529,723	.78
October	93,956	9,176,408	1.02
November	97,504	6,835,039	1.43
Total	356,006	58,719,575	.61

">*284 ">*439 16. The following table shows the cigarette coupons issued, the number going to Alaska and Hawaii, the coupons contained in cartons of cigarettes, the number of coupons redeemed, and percentage figures as indicated:

			Per cent
Year	Issue, net Export	of col. B,	Carton
		issue of col. A	coupons
	Col. A	Col. B	Col. C	Col. D
1932	4,457,269	(	349,070
1933	36,795,295	(6)		6,132,544
1934	185,516,362	(6)		30,894,607
1935	291,316,714	970,587	0.33	50,450,030
1936	370,909,794	1,022,532	.28	63,688,453
1937	457,303,746	1,350,755	.30	76,014,153
1938	554,986,541	1,814,265	.33	103,346,775
1939	710,570,065	2,421,598	.34	161,127,894
1940	752,601,846	3,146,131	.42	166,468,387
1941	4,030,418	.47	178,314,839
1942	1,049,355,207	17,067,992	1.63	224,293,807
1943	5 787,193,504	None		40,854,152
1944	(11,184,083)
1945	(920,751)
1946
Total	6,053,963,595			1,101,934,711

	Per cent	Redemption Per cent
Year	of col. D,		of col. F,
	of col. A		of col. A
	Col. E	Col. F
1932	7.83	135,245	3.03
1933	16.66	6,991,806	19.00
1934	16.65	47,777,689	25.75
1935	17.31	120,275,826	41.28
1936	17.17	190,821,817	51.44
1937	16.62	248,258,253	54.28
1938	18.62	334,413,022	60.25
1939	22.67	489,970,176	68.95
1940	22.11	567,044,862	75.34
1941	20.61	610,956,458	70.62
1942	21.37	644,177,294	61.38
1943	5.18	589,924,383	74.94
1944		346,055,094
1945		81,997,422
1946		11,639,948
Total	18.20	4,290,439,295	70.86

">*285

">*440 17. The annual cost of redeeming petitioner's cigarette coupons, September 1932-February 1946, including">*286 both domestic and export issue, was as follows:

Year	Amount
1932 (September-December)	$ 3,420.90
1933	89,138.79
1934	605,664.87
1935	1,189,285.88
1936	1,564,966.87
1937	2,066,536.71
1938	2,608,555.06
1939	3,645,823.81
1940	4,138,144.97
1941	4,487,196.56
1942	4,886,236.06
1943	4,778,230.93
1944	2,779,321.67
1945	675,009.27
1946 (January and February)	93,568.99
Total	33,611,101.34

18. In October 1936, Sir Hugo Cunliffe-Owen of England was Chairman of the board of both petitioner and its parent corporation, the British-American Tobacco Company, Limited. By that time petitioner's coupon redemption plan had become a large operation and the whole plan was discussed and reviewed by the responsible officers of the two companies at a conference on October 9, 1936. The conference was called by Sir Hugo to impress upon the management of the petitioner the importance of setting up ample provision to take care of the redemption of the coupons that were being issued. Sir Hugo had had world-wide experience with the coupon plans of British-American subsidiaries and suggested the desirability of making provisions for and maintaining an amount which would enable petitioner">*287 to redeem 95 per cent of its outstanding unredeemed coupons. The failure of the Imperial Tobacco Company of Canada, Limited, a British-American subsidiary, to provide an adequate amount for redeeming its coupons, with the resulting necessity of providing an additional reserve in 1935, was discussed at this conference. The possible tax consequences of a policy providing for an amount sufficient for redemption of 90 per cent or more of outstanding coupons was recognized and considered but, nevertheless, it was decided that an amount would be set aside each year on the books sufficient to redeem 90 per cent of the coupons issued during the year.

19. In May, 1939, another conference was held between officials of the petitioner and the British-American Tobacco Company, Limited, relative to the amounts to be provided for redemption of petitioner's outstanding coupons. The policy adopted at the meeting on October 9, 1936, had not been followed, and it was decided that effective April 1, 1939, the provision for redemption of petitioner's cigarette coupons should be at the rate of $ 0.00684 per coupon, an increase of $ 0.00018 per coupon. The new rate represented 90 per cent of $ 0.0076, ">*288 which was the then average cost of redemption per coupon. During the taxable years petitioner provided for the redemption of cigarette coupons at the end of each month upon the basis that 90 per cent of the coupons issued during the month would ultimately be redeemed. This policy was followed until the issuance of cigarette coupons was discontinued in November, 1943. During part of the taxable year 1940 petitioner provided for the redemption of coupons at the rate of 100 per cent of the anticipated cost of redemption in order to build up the credit balance of its provision account. This additional amount was not claimed as a deduction on its 1940 Federal income tax return.

20. The following table sets forth the credit balance in petitioner's book account captioned, "Provision for Redemption of Cigarette Coupons" as of ">*441 December 31, 1932-1945, inclusive, and at February 28, 1946, "Per Books" and "For Federal Income Tax Purposes":

		For Federal income tax
		purposes
		Prior to adjustments	After adjustments
Year	Per books
		per 90	per 90
		day letter herein	day letter herein
		for years	for years
		1940-46,	1940-46,
		inclusive	inclusive
1932	$ 16,904.38	$ 12,839.32	$ 12,839.32
1933	81,079.37	46,351.55	46,351.55
1934	653,570.28	546,373.46	546,373.46
1935	1,366,743.42	1,103,930.45	1,103,930.45
1936	2,273,831.15	1,851,997.15	1,851,997.15
1937	3,252,556.36	2,728,066.94	2,728,066.94
1938	4,349,021.21	3,581,962.71	3,581,962.71
1939	5,535,394.46	4,588,522.21	4,588,522.21
1940	6,932,013.27	5,351,023.21	3,708,067.30
1941	8,299,092.75	6,546,381.66	4,388,388.86
1942	10,317,613.99	7,905,307.20	5,274,249.21
1943	10,719,116.27	7,663,732.91	4,146,093.67
1944	1,293,180.73
1945	1 5,056,048.56	1 4,129,752.16	612,112.92
Feb. 28, 1946	1 4,876,220.77	1 4,036,183.17	518,543.93

">*289

After discontinuing the issuance of coupons in November 1943, no further amounts were credited to the above account. All entries in the account thereafter were debit entries. The cost of redeeming coupons was charged to the account, and amounts were transferred therefrom to surplus. In December 1944, petitioner transferred $ 1,752,000 from this account to its surplus account. On its corporate income tax return for 1946 petitioner reported the sum of $ 4,122,441.97 as taxable income by reason of the closing of this account. Due to a mathematical error, the amount returned to income in 1946 on said return was overstated by $ 86,258.80.

21. The redemption cost to petitioner of cigarette coupons to be used in determining the amount of subtraction from gross sales for each of the years involved herein is as follows:

Year	Cost per thousand
1940	$ 7.6613
1941	7.5295
1942	7.4685
1943	7.5586

22. Petitioner first encountered minor difficulties in buying suitable premiums in 1941. Its difficulties became progressively worse during 1942 and 1943 as">*290 materials became critical in the war period. The premiums containing metals were the first affected, and petitioner's last premium catalog, number 22, effective until September 1, 1943, omitted silverware, fishing tackle, and all electrical appliances. Petitioner substituted for these premiums defense and war stamps, and chinaware, glass ware, furniture, textiles, and other top quality, nationally advertised merchandise.

23. By October 1943, acute shortages had developed in household domestic goods. Petitioner found it impossible to secure the kind of premiums it needed to successfully operate its coupon redemption plan. It decided that the plan would not serve its purpose of promoting sales without such premiums, and, accordingly, petitioner ceased issuing coupons with its Raleigh cigarettes on November 11, 1943. Prior thereto, it had ceased issuing coupons with its specialty ">*442 cigarettes, Viceroy and Kools, because the management thought that the market would absorb petitioner's production without a sales promotion plan.

24. Petitioner announced that it had discontinued issuing coupons with its Raleigh cigarettes by inserts placed in each package and each carton of ">*291 cigarettes, which read as follows:

SPECIAL NOTICE: We regret that conditions beyond our control compel us to discontinue packing coupons with Raleigh plain and tipped cigarettes, effective November 20, 1943.

All merchandise offers are hereby withdrawn but we shall continue to redeem all B. & W. Coupons outstanding in accordance with the terms of their issue for War Stamps and Bonds or cash at the rate of 3/4 cents per coupon until FEBRUARY 28, 1946, the last expiry date.

Our primary aim of blending Raleighs from the choicest Turkish and Domestic Tobaccos that money can buy will be maintained and you will continue to find Raleigh "the finest cigarette you ever smoked."

Remember you have until February 28, 1946 to redeem your coupons.

BROWN & WILLIAMSON TOBACCO CORP., P. O. BOX 599, LOUISVILLE, KY., U. S. A.

25. After November 1943, petitioner's executives became concerned about the company's ability to redeem the expected upsurge in coupon redemptions. The petitioner was then heavily in debt. It entered into negotiations with its parent company, British-American Tobacco Company, Ltd., seeking funds from it. The parent company could transfer funds out of England only upon authorization">*292 of the British Treasury. Permission was received therefrom and British-American transferred $ 2,500,000 to petitioner during 1944 to assist in the redemption of its outstanding coupons.

26. During the years 1920 to 1928, inclusive, the United Cigar Stores of America operated retail tobacco stores throughout the United States. Its wholly-owned subsidiary, United Profit Sharing Corporation, conducted a coupon plan during these years which was used by United Cigar Stores and William Wrigley Company in merchandising their products. One coupon was issued for each five cent retail purchase. The coupons were redeemable for cash or premiums at premium stores and redemption stations and by mail. The only advertising in connection with the United coupon plan was by the display of premiums on counters and the distribution of catalogs at the premium stores and redemption stations. The cash value of one United coupon was one-tenth of a cent, but when exchanged for premiums it was worth about three-tenths of a cent. United offered its coupon holders many of the same types of premiums as petitioner, e. g., card tables, bathroom scales, electric irons, electric toasters, and glassware. Considering">*293 the difference in the time and spending power the premiums offered by United during the years 1920 to 1928, inclusive, were comparable to the premiums offered by petitioner during the taxable years. During the nine-year period United issued 2,570,000,000 coupons. During the same period it redeemed 2,170,000,000 coupons or 84.44 per cent of the coupons issued.

27. Imperial Tobacco Company of Canada, Limited, like many other subsidiaries of the British-American Tobacco Company, Ltd., operated a coupon redemption scheme. Its plan was known as the "Poker Hand Premium Scheme." The coupons or "inserts" were in the form of poker hands packed with Imperial's tobacco products, approximately 75 per cent of which were packed with cigarettes. The inserts were redeemable for premiums and had no cash value. ">*443 Premium redemptions were made only for complete sets of 52 cards. Most of the inserts had no expiration dates. The expiration dates printed on the early inserts were never enforced. Inserts could be redeemed at premium stores in the principal cities in Canada or by mail, premium prepaid. Premium catalogs were distributed at the premium stores and the redemption plan was mentioned">*294 in advertisements of Imperial's products. During the period August 1925 to December 31, 1935, Imperial issued 2,804,888,592 inserts. Inserts redeemed until the beginning of World War II totaled 2,417,150,579, or an overall redemption of 86.18 per cent of the inserts issued. Prior to 1932 Imperial provided on its books for redemption of inserts upon the assumption that approximately 60 per cent of the inserts would be redeemed. In 1932 it had to make a special appropriation to provide additional funds for redemption.

28. Beginning in October 1938 and continuing quarterly until December 1943, petitioner conducted a series of test checks on coupons redeemed. The test checks were made by taking sample bundles of 37,000 to 60,000 coupons being redeemed for various types of premiums and examining each individual coupon for its expiration date. By this sampling petitioner sought to ascertain how long it took customers to accumulate their coupons, how rapidly the coupons were being redeemed, and eventually how many coupons would be redeemed. The successive samplings developed a pattern from which petitioner determined percentage figures with respect to coupons redeemed monthly and ">*295 annually. Petitioner used these percentages as a guide to project forward its estimate of future coupon redemptions.

29. In filing its income tax returns for the taxable years 1940-1943, inclusive, petitioner computed net income upon the basis that 90 per cent of the cigarette coupons issued each year would eventually be presented for redemption. On its returns for these years petitioner claimed, as a part of its advertising expense, the following amounts for redemption of coupons:

Year	Amount
1940	$ 5,126,275.82
1941	5,787,807.52
1942	6,975,218.92
1943	5,179,733.21

The petitioner never filed with its income tax returns any data dealing with the total issue of coupons each year, the total coupons redeemed in each year, or the rate, in percentage, which coupons redeemed in each year bear to coupons issued in such year. No statement showing the experience of other coupon users was ever filed by petitioner with its tax returns. Such data was furnished regularly to respondent's revenue agents in connection with their examinations of petitioner's books and tax returns. In connection with the audit of its 1934 tax return petitioner furnished the internal revenue agent">*296 in charge, under date of September 11, 1936, detailed monthly and yearly data on its coupon redemption plan from its inception to and including July 1936, together with the experience of five other users of coupon plans. Petitioner cooperated with and assisted respondent's revenue agents in making their various audits of petitioner's books and returns, and prepared statements for the use of the agents summarizing in detail the operation of its coupon redemption plan.

30. In determining the deficiencies herein the respondent held that the amounts subtracted from sales in connection with coupon redemptions were excessive. By use of a formula based upon a so-called "five year cumulation" he determined the percentage of cigarette coupons issued during the taxable years 1940-1943, inclusive, which would eventually be redeemed. These percentages, ">*444 after making allowance for minor corrections and adjustments, were as follows:

Year	Percentage
1940	64.3102
1941	67.3739
1942	67.2984
1943	69.6813

Applying these percentages to the respective annual issues of cigarette coupons gives the annual number of coupons eventually to be redeemed, which, when multiplied by the">*297 stipulated redemption cost, gives respondent's allowable reserve for each year. For the taxable years 1940 to 1943, inclusive, respondent computed the amounts allowable as subtractions from petitioner's sales for coupon redemption and the excessive subtractions claimed by petitioner to be as follows:

Year	Subtraction allowable	Excessive subtraction
1940	$ 3,257,690.06	$ 1,868,585.76
1941	5,167,518.12	620,289.40
1942	5,772,096.41	1,203,122.51
1943	3,650,075.39	1,529,657.82

31. For each of the taxable years 1940-1943, inclusive, petitioner's rate, in percentage, which coupons redeemed in each year bear to the total coupons issued in such year, regardless of the year when such redeemed coupons were issued, is 80 per cent.

32. The parties have stipulated the pertinent facts relative to the snuff coupon plan of the petitioner which involves the deficiency determined for 1944. The parties have also stipulated a formula with respect to the snuff coupon plan which becomes operative upon determination by this Court of the "respective annual anticipatable redemption of cigarette coupons," expressed in per cent.

33. At the hearing the respondent conceded that the unemployment">*298 taxes paid by petitioner, as itemized in the parties' stipulation of facts, are deductions for the year for which they were applicable.

34. At the hearing the petitioner announced that it abandoned its allegation of error regarding the pension trust issue for the taxable year 1942.

35. The parties' written and oral stipulations of fact, and Exhibit 5, a statement of coupons issued and redeemed by months and years from September 1932 through February 1946, are incorporated herein by reference.

The amount which could as of the end of each of the taxable years involved be reasonably expected to be required for the redemption of such part of the total of such year's issue of petitioner's cigarette coupons as would eventually be presented for redemption is 80 per cent of the amount which would be required to redeem all such coupons issued in such year.

OPINION.

The single factual issue requires purely a determination of the proportion of premium coupons issued by petitioner with its cigarettes during the years in question which would eventually be presented for redemption. This determination has been made by our ultimate finding of fact. The question arises because of the accounting ">*299 ">*445 system which respondent's regulations impose upon those who, like petitioner, issue trading stamps or redeemable coupons with their products. The requirement is that "he should in computing the income from such sales subtract only the amount 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." 1

">*300 Neither party attacks the regulation ^{Internal1951 U.S. Tax Ct. LEXIS 269">*301 Revenue Code, section 1114, and Rule 48 of our Rules of Practice. Bibb Manufacturing Co., 12 T.C. 665. In conformity with the procedure envisaged by the rule, 16 T.C. 432">*446 we are satisfied that the proposed findings of the Commissioner accord with the facts as they appear from the record, and the proposed findings have hence been adopted in full.}

">*302 All other issues have been or will be disposed of by stipulation of the parties.

Decision will be entered under Rule 50.

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Footnotes

• 1. No data.↩

• 2. Cash.↩

• 3. War stamps.↩

• 1. During each year the petitioner required the return of stale cigarettes bearing coupons. The number of coupons returned in a given year was subtracted from the coupons issued in that year thus producing the net issue. Since no coupons were issued in the years 1944 and 1945, the "net issue" for those years is a negative figure.↩

• 2. Column A includes issue for the United States market (hereinafter called "domestic") as well as issue for Alaska and Hawaii (hereinafter referred to as "export").↩

• 3. From the beginning of the coupon scheme the petitioner placed extra coupons in the cigarette cartons. Thus when 4 extra coupons were enclosed in the carton, the entire carton contained 14 coupons. The number of coupons listed in column D is included in column A.↩

• 6. Data not available.↩

• 5. The petitioner ceased issuing coupons in connection with VICEROY cigarettes in October 1941. On July 20, 1943, it discontinued the issue on KOOLS and on Nov. 11, 1943, it ceased issuing coupons on RALEIGHS.↩

• 4. Column F includes both domestic and export redemptions.↩

• 1. Regulations 111: Sec. 29.42-5. Subtraction for Redemption of Trading Stamps. -- If 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 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 in the light of the experience of the taxpayer in his particular business and of other users of trading stamps or premium coupons 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 rate, in percentage, which the stamps redeemed in each year bear to the total stamps issued in such year, regardless of the year when such redeemed stamps were issued.

  A similar statement shall also be presented showing the experience of other users of stamps or coupons whose experience is relied upon by the taxpayer to determine the amount to be subtracted from the proceeds of sales. The Commissioner will examine the basis used in each return, and in any case in which the amount subtracted in respect of such stamps or coupons is found to be excessive, appropriate adjustment will be made.↩

• 1. The petitioner made no addition to the Provision for Redemption of Cigarette Coupons for the years 1944-46, inclusive.↩

• 2. See United States v. O. J. Morrison Stores of Fairmont↩ (CCA-4), 99 Fed. (2d) 77.

• 3. Petitioner's exceptions request that an ultimate finding "make it clear that the percentages found by the Court are the percentages of the coupons issued in each of the years 1940-1943, inclusive, which would reasonably be expected eventually to be redeemed," and respondent's brief states: "the following percentages of coupons issued in each respective year here involved can be reasonably expected↩ to be redeemed;" (Emphasis added.)

• 4. RULE 48. -- COMMISSIONERS OF THE TAX COURT.

  (a) The term "commissioner" as used in this Rule 48 applies to any attorney on the legal staff of this Court who shall have been designated by the Chief Judge as a "commissioner in a particular case" pursuant to Section 1114 of the Internal Revenue Code↩ * * *.

• 5. See "Tax Court Commissioners," by Edward N. Polisher, Taxes, May 1950, 413.↩