Opinion
Docket No. 31238.
1953-04-3
FORT PITT BREWING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
R. J. Cleary, Esq., for the petitioner. A. W. Dickinson, Esq., for the respondent.
INCOME— DEPOSITS ON CONTAINERS— METHOD OF ACCOUNTING FAILING TO REFLECT INCOME— SECTION 41.— The experience of the petitioner indicates that many of its containers will never be returned and the balance at the beginning of the taxable years in its reserve for returnable containers is ample to meet its liability for refunds which might reasonably be expected. Consequently, the Commissioner did not err in including in income the amounts added to the balance in the reserve in the taxable years, i.e., the excess of deposits over refunds in those years, where the petitioner is recovering the full cost of the containers through deductions for depreciation. R. J. Cleary, Esq., for the petitioner. A. W. Dickinson, Esq., for the respondent.
The Commissioner determined deficiencies as follows for the fiscal years ended October 31:
+---------------------------------------------+ ¦ ¦ ¦Declared ¦ ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦value ¦ ¦ +----+----------+--------------+--------------¦ ¦Year¦Income tax¦excess-profits¦Excess profits¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦tax ¦tax ¦ +----+----------+--------------+--------------¦ ¦1942¦$12,911.42¦ ¦$34,129.16 ¦ +----+----------+--------------+--------------¦ ¦1943¦18,931.78 ¦$10,996.68 ¦303,783.06 ¦ +---------------------------------------------+
The only issue for decision is whether the Commissioner erred in adding $82,971.60 to income for 1942 and $181,196.25 to income for 1943, each representing the excess of deposits received on returnable containers over deposits refunded for the year.
FINDINGS OF FACT.
The petitioner, a Pennsylvania corporation, filed its returns for the taxable years with the collector of internal revenue for the twenty-third district of Pennsylvania. It kept its books and filed its returns on an accrual basis.
The petitioner was engaged at all times material hereto in the business of operating breweries at plants located at Sharpsburg and Jeannette, Pennsylvania. It sold its products in barrels, half barrels, quarter barrels, eighth barrels, and bottles packed in cartons and cases.
It was licensed under and governed by the laws of Pennsylvania. It required the purchasers of its products to deposit with it various amounts for the return of the containers in which it delivered its products. The following was printed on the invoices for all sales to its customers:
Deposit for return of package is as follows: Barrels $8.00, Half Barrels $6.00, Quarter Barrels $4.00 and Eighth Barrels $1.00 each, Cartons of 2 Dozen Small Bottles 50¢, Case of 2 Dozen Small Bottles 75¢, Bottles short in cases returned will be charged at rate of 2¢ each for small bottles. Purchaser buys only the beer delivered and billed. Bottles, Cases, Kegs, Etc. containing the products delivered therein are never sold but remain absolute property of Brewing Company. Deposit for return of packages repaid purchaser for number delivered only on return of packages to Brewing Company. Purchaser agrees to these conditions.
The deposits required were in each case somewhat less than the cost of the containers. There was no time limit within which containers could be returned for refund.
The petitioner received deposits and made refunds on its containers during the taxable years in accordance with the above agreement. It maintained a liability account on its books entitled ‘Reserve for Returnable Containers‘ wherein it credited the deposits and debited the refunds. The information in the following table is shown in that account:
+-----------------------------------------------------------------------+ ¦ ¦ ¦ ¦Excess of ¦ ¦ +-----------------+-------------+-------------+------------+------------¦ ¦Fiscal year ended¦Deposits ¦Deposits ¦deposits ¦Balance in ¦ +-----------------+-------------+-------------+------------+------------¦ ¦Oct. 31 ¦received ¦refunded ¦over ¦reserve ¦ +-----------------+-------------+-------------+------------+------------¦ ¦ ¦ ¦ ¦refunds ¦ ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1936 balance ¦ ¦ ¦ ¦$17,962.50 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1937 ¦$842,464.25 ¦$832,179.75 ¦$10,284.50 ¦28,247.00 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1938 ¦1,214,122.75 ¦1,184,063.25 ¦30,059.50 ¦58,306.50 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1939 ¦2,381.485.50 ¦2,335,750.65 ¦45,734.85 ¦104,041.35 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1940 ¦3,063,054.00 ¦3,035,347.75 ¦27,706.25 ¦131,747.60 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1941 ¦3,998,938.27 ¦3,910,821.23 ¦88,117.04 ¦219,864.64 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1942 ¦4,822,919.50 ¦4,739,947.90 ¦82,971.60 ¦302,836.24 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1943 ¦5,940,221.75 ¦5,759,025.50 ¦181,196.25 ¦484,032.49 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1944 ¦7,587,196.25 ¦7,457,638.00 ¦129,558.25 ¦613,590.74 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1945 ¦7,500,625.50 ¦7,400,878.25 ¦99,747.25 ¦713,337.99 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1946 ¦8,176,090.50 ¦8,034,014.00 ¦142,076.50 ¦855,414.49 ¦ +-----------------+-------------+-------------+------------+------------¦ ¦1947 ¦9,824,681.00 ¦9,601,216.32 ¦223,464.68 ¦1,078,879.17¦ +-----------------+-------------+-------------+------------+------------¦ ¦1948 ¦12,225,591.00¦12,144,419.25¦81,171.75 ¦1,160,050.92¦ +-----------------+-------------+-------------+------------+------------¦ ¦1949 ¦12,260,618.50¦12,364,799.00¦(104,180.50)¦1,055,870.42¦ +-----------------+-------------+-------------+------------+------------¦ ¦1950 ¦10,112,643.00¦10,090,142.75¦22,500.25 ¦1,078,370.67¦ +-----------------+-------------+-------------+------------+------------¦ ¦1951 ¦8,401,717.25 ¦8,455,950.25 ¦(54,233.00) ¦1,024,137.67¦ +-----------------------------------------------------------------------+
The petitioner has never transferred any amount to surplus from its reserve for returnable containers. The balance in that reserve was shown at all times as a liability of the petitioner.
The petitioner maintained a separate account for the cost of returnable containers and reserves for depreciation thereon. The cost of containers, reserve for depreciation, and undepreciated cost as shown in the petitioner's books or, for the years beginning with 1944, as tentatively agreed upon by the petitioner and the Commissioner, are as follows:
+-----------------------------------------------------------------+ ¦Fiscal year ended Oct. 31¦Total cost ¦Reserve for ¦Undepreciated¦ +-------------------------+------------+------------+-------------¦ ¦ ¦ ¦depreciation¦cost ¦ +-------------------------+------------+------------+-------------¦ ¦1936 ¦$70,231.47 ¦$7,023.15 ¦ ¦ +-------------------------+------------+------------+-------------¦ ¦1937 ¦100,928.47 ¦9,260.66 ¦$91,667.81 ¦ +-------------------------+------------+------------+-------------¦ ¦1938 ¦163,010.04 ¦25,142.80 ¦137,867.24 ¦ +-------------------------+------------+------------+-------------¦ ¦1939 ¦258,362.95 ¦51,334.14 ¦207,028.81 ¦ +-------------------------+------------+------------+-------------¦ ¦1940 ¦361,933.66 ¦89,886.08 ¦272,047.58 ¦ +-------------------------+------------+------------+-------------¦ ¦1941 ¦481,391.01 ¦144,891.32 ¦336,499.69 ¦ +-------------------------+------------+------------+-------------¦ ¦1942 ¦576,729.35 ¦200,540.89 ¦376,188.46 ¦ +-------------------------+------------+------------+-------------¦ ¦1943 ¦666,368.03 ¦254,981.61 ¦411,386.36 ¦ +-------------------------+------------+------------+-------------¦ ¦1944 ¦868,988.43 ¦405,611.36 ¦463,377.07 ¦ +-------------------------+------------+------------+-------------¦ ¦1945 ¦1,141,602.21¦588,265.45 ¦553,336.76 ¦ +-------------------------+------------+------------+-------------¦ ¦1946 ¦1,288,521.06¦720,758.91 ¦576,762.15 ¦ +-------------------------+------------+------------+-------------¦ ¦1947 ¦1,860,159.98¦960,583.44 ¦899,576.54 ¦ +-------------------------+------------+------------+-------------¦ ¦1948 ¦2,282,218.38¦1,257,658.76¦1,024,559.62 ¦ +-------------------------+------------+------------+-------------¦ ¦1949 ¦2,435,424.17¦1,560,354.68¦875,069.49 ¦ +-------------------------+------------+------------+-------------¦ ¦1950 ¦2,594,052.67¦1,846,843.04¦747,209.63 ¦ +-------------------------+------------+------------+-------------¦ ¦1951 ¦1,725,945.43¦1,007,538.62¦718,406.81 ¦ +-----------------------------------------------------------------+
The entire cost of its containers has been or is being taken by the petitioner as deductions for depreciation on its returns.
The petitioner does not keep any records showing the number of type of returnable containers which are outstanding in the hands of customers at the end of each year and it does not know who holds the unreturned containers. The petitioner retains a duplicate invoice showing each sale of beer, each deposit on containers, the empties returned, the freight allowance, and the net amount of each transaction. It had about 60,000 such transactions during the taxable years. Those invoices are recorded in a daily sales book which is totaled daily and monthly. Monthly totals are put in the journal voucher and from that postings are made to the general ledger. All cash received in connection with the invoices was deposited in the general cash fund of the petitioner. No amount represented in the reserve for returnable containers account was ever reported by the petitioner as income.
The Commissioner, in determining the deficiencies, added to income, as disclosed by the return, $82,971.60 for 1942 and $181,196.25 for 1943. The explanation for 1942 was: ‘It is determined that the excess of deposits received on returnable containers over deposits refunded in the fiscal year ended October 31, 1942, or $82,971.60, should be included in your gross income. ‘ A similar explanation was given for the 194; adjustment.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The petitioner owned and supplied its customers with containers for its beer. Its plan was not to sell the containers but to have them returned, so it required the customers to make a deposit with it for each container as it went out full of beer to the customer, and it refunded the equivalent of the deposits as empty containers were returned to it. The present question would not have arisen if the above system had worked perfectly, that is, if all containers had been returned. The record shows, however, that not all containers were returned and, as the deposits exceeded the disbursements in the reserve for returnable containers account in almost all years and the reserve for possible disbursements increased, it became obvious that many containers would never be returned, and the petitioner, which meanwhile had mingled the deposits with its other funds, would never be called upon to refund or disburse a substantial portion of the bookkeeping reserve. This indicates that the petitioner had parted with some containers and had received money for them which it would not have to repay. The deposits were a pledge or security for the return of the containers and it was an important inherent part of the arrangement that the deposit would be forfeited to compensate the petitioner to some extent for the loss if the containers were not returned. That money represented income to the petitioner for Federal income tax purposes since the petitioner was recovering or had recovered the cost of the containers through depreciation deductions.
The petitioner never, in its accounting or reporting, recognized any of the consistent excess of deposits over disbursements for returns as income. Had it done so, as other taxpayers have done under substantially similar circumstances, as by a transfer to surplus of some amount which in all probability would not have to be paid, there would have been taxable income at that time. Wichita Coca Cola Bottling Co. v. United States, 61 F.Supp. 407, affd. 152 F.2d 6, certiorari denied 327 U.S. 806; Boston Consolidated Gas Co., 44 B.T.A. 793, affd. 128 F.2d 473; Nehi Beverage Co., 16 T.C. 1114. Cf. G. M. Standifer Construction Corporation, 30 B.T.A. 184; North American Coal Corporation, 32 B.T.A. 535, affd. 97 F.2d 325. Does the failure of the petitioner to recognize any of this excess as income mean that the Commissioner must wait an unreasonable time, perhaps indefinitely, for the collection of tax on the amounts which obviously will not have to be repaid? He has determined that the excess of deposits for containers delivered to customers over disbursements for containers returned in each of the taxable years is taxable as income in those years. The experience of the petitioner from 1937 through 1942 was that, out of total deposits of $16,322,984.27, $284,873.74, or over 1.74 per cent was not reclaimed by return of containers. Had the petitioner reported some reasonable amount
Breakage and loss undoubtedly entered into the computation of those deductions.
annually, based upon its experience, La Salle Cement Co. v. Commissioner, 59 F.2d 361, certiorari denied 287 U.S. 624, the present controversy would probably not have arisen, but to the date of the hearing it had not reported any amount although the reserve in the account had increased to over $1,000,000. The reserve at the end of 1943, after deducting the amounts included in income by the Commissioner, would amount to $219,864.64, an ample amount so far as this record shows. The Commissioner has the right to make such adjustments where the method of accounting regularly employed by a taxpayer, as here, does not clearly reflect its taxable income. Sec. 41. Cf. North American Coal Corporation, supra. The adjustment which he made in each year was not unreasonable or unjustified. It is immaterial that the petitioner was compelled by state authority to require some deposits and to make disbursements when containers were returned or that under state law it was not relieved, even in part, of its liability to make disbursements whenever containers were returned. The important fact is that it has not shown there was actually any reasonable probability that the amounts added to income will ever be required to discharge any such liability. Boston Consolidated Gas Co., supra.
The average for the whole period here shown was 1.15 per cent.
Decision will be entered for the respondent.