Monarch Cooperage Co. v. Commissioner

MONARCH COOPERAGE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Monarch Cooperage Co. v. Commissioner

Docket No. 11590.

United States Board of Tax Appeals

13 B.T.A. 929; 1928 BTA LEXIS 3145;

October 11, 1928, Promulgated

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">*3145 Where petitioner keeps its accounts on the accrual basis, an estimated reserve for freight charges incurred in 1920 is not deductible from gross income, but only the amount actually incurred is deductible.

O. G. Maxwell, Esq., for the petitioner.

A. S. Lisenby, Esq., for the respondent.

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SIEFKIN

">*929 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1920 in the amount of $1,180.38. Not all of this deficiency is in controversy.

The errors alleged are:

1. The disallowance by the respondent of a deduction in the sum of $2,311.89, which the petitioner had agreed should be taken as a deduction by the Mill Shoals Cooperage Co. from the quoted price of staves purchased from the petitioner in 1920; and

2. The disallowance by the respondent of a deduction of freight in the sum of $251.06 paid by Fowler & Pay at the request of petitioner upon a car of staves held in storage by Fowler & Pay.

FINDINGS OF FACT.

The petitioner is a corporation organized and existing under the laws of the State of Tennessee, with its main office and place of business at Dyersburg. Dring the year 1920 it was engaged">*3146 in the manufacture of slack barrel cooperage stock. It purchased its plant in January, 1920, from a predecessor company.

At the time it sold out the plant, the predecessor company had certain contracts for staves and the petitioner agreed to supply them the material needed for those particular orders. These orders amounted to 8 cars of staves. The remainder of the staves manufactured by the petitioner during the year 1920 were covered by a sales arrangement with the Mill Shoals Cooperage Co. This agreement, which was oral, provided that the Mill Shoals Cooperage Co. should market all of the petitioner's stock at te best price obtainable and furnish orders to the petitioner. Petitioner was to pay the Mill Shoals Cooperage Co. a commission of 50 cents for each 1,000 staves sold. All shipments were billed in the name of the Mill Shoals Cooperage Co. When a sale was made, the Mill Shoals account on the books of the petitioner was charged and the sales account was credited. The Mill Shoals Co. was to pay the petitioner ">*930 the price obtained by them less freight charges, allowance on account of the quality of the stock, and the commission of 50 cents for each 1,000 staves. ">*3147 The Mill Shoals Cooperage Co. collected from the customers and the petitioner, in turn, collected from the Mill Shoals Co.

When a sale was made, the petitioner entered in the sales account the full amount of the invoice which was, in most cases, the delivered price. This amount was carried on the books throughout the year. When petitioner was informed of amounts of freight charges or deductions on account of stock, charges were made to the freight account or to the allowance account and the Mill Shoals' account was credited. Petitioner had nothing to do with payment of freight. At the end of the year the sales account was charged with the amount of freight for the year.

At December 31, 1920, there were freight charges outstanding against 12 carloads of staves that had been shipped during 1920. No receipted freight bills had been received by the petitioner covering these shipments, but a reserve in the amount of $2,531.89 was set up to cover such charges. The amount of the freight charges was computed by the petitioner by multiplying the standard weight of the stock by the specified tariff. The computed freight charge was charged to the freight account but was not entered">*3148 in the sales account. In 1921, when information was received as to the exact amount of the freight charges, credit was given to the Mill Shoals Cooperage Co. on the books of the petitioner. At December 31, 1920, he total sales price of this stock, amounting to $24,360.45, had not been received by the petitioner. There still remained to be paid between $5,000 and $5,500. In 1921 receipted bills covering freight on these shipments, amounting to $2,134.04, were rendered the petitioner and credit in that amount was given the Mill Shoals Cooperage Co.

In July or August, 1920, a car of staves was sent to a consignee who became insolvent. The car was taken back by the petitioner and was shipped to Fowler & Pay at Mankato, Minn., and there put in storage. The Mill Shoals Cooperage Co. paid the freight and their account was credited. The adjustment of the freight charge, however, had not been made at January 1, 1920, as far as the petitioner and the Mill Shoals Cooperage Co. were concerned, because the company to which the car was consigned had not notified either company of the amount of the charges. When this carload of staves was inventoried at the end of the year, it was taken">*3149 in at cost of manufacture plus freight charges from point of origin to destination. No offsetting liability, however, was entered upon the books.

">*931 OPINION.

SIEFKIN: The petition alleges error on the part of the respondent, (1) in disallowing as a deduction the sum of $2,311.89 which the petitioner had agreed should be taken as a deduction by the Mill Shoals Cooperage Co. from the quoed price of staves purchased from the petitioner in 1920, and (2) in disallowing as a deduction, freight in the sum of $251.06 paid by Fowler & Pay at the request of the petitioner upon a car of staves held in storage by Fowler & Pay.

The evidence discloses that the petitioner, at December 31, 1920, had not received receipted bills for freight and did not know the exact amount of freight which had been paid or which was due. A reserve in the amount of $2,531.89 was set up to cover such freight. This was based upon an estimate calculated by multiplying the standard weight of staves by a specified tariff. The amount so calculated was charged to freight account but was not reflected in the sales account. It is apparent from the evidence that the petitioner kept its books and filed">*3150 its return upon the accrual basis. A similar situation was being considered in , in which case the taxpayer's books were kept on the accrual basis, where we said:

The only other question presented by the record herein relates to the reserves set up by the taxpayer on its books at the close of the taxable years 1916, 1917, and 1918, to cover freight charges on products that had been shipped but for which freight bills had not been received. Although merely estimates, these reserves were included in the amounts which the taxpayer deducted from gross income in the year 1918, and the effect thereof was that, in computing its net income for the years 1917 and 1918, the taxpayer deducted on account of freight charges $19,580.07 more for the year 1917, and $27,192.56 less for the year 1918, than the amount of such charges actually paid or incurred in those years. These reserves represented an indefinite liability, which could not be determined until the freight was actually paid, and they should not have been deducted by the taxpayer in computing its net income for the years 1917 and 1918. Only the amounts of freight charges">*3151 actually paid or incurred in those years should have been deducted. The taxpayer's income for the year 1917 should, therefore, be increased by $19,580.07, and that for the year 1918 should be decreased by $27,190.56.

It is also argued in the petitioner's brief, although it is doubtful whether such an argument is consistent with the allegations of the petition, that the amount of freight actually paid should be deducted from the amounts of the invoices for such goods. See . In our opinion, however, it is not necessary to discuss this argument, since we believe the petitioner has shown the right to a deduction in 1920 of $2,134.04, the amount of ">*932 freight charges incurred in 1920 and later paid, as shown by receipted bills in evidence.

With regard to the second assignment of error, no evidence was adduced to show that the petitioner requested Fowler & Pay to pay the freight, that the amount of $251.06 was paid or incurred by the petitioner in 1920, or that the petitioner had received a receipted bill covering freight upon the shipment in question.

It is our opinion that such a deduction has not been proved by the petitioner.

">*3152 Judgment will be entered under Rule 50.