Opinion
Docket Nos. 26983 29753.
1953-09-9
MIDWEST LIQUOR DEALERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Philip B. Heller, Esq., for the petitioner. Julian L. Berman, Esq., for the respondent.
Petitioner, a wholesale liquor dealer, commenced business on April 10, 1935, approximately 1 year prior to the beginning of its base period. During its base period petitioner embarked upon a program of purchasing whisky in bulk, having it bottled, and selling it as an exclusive distributor within at least part of its area. Petitioner also moved from a rented warehouse in which its operations could not be carried on efficiently to a warehouse which it purchased and in which, with remodeling, it was able to operate its business at lower cost. Held, petitioner has qualified for relief under section 722(b)(4), Internal Revenue Code. Constructive average base period net income determined. Philip B. Heller, Esq., for the petitioner. Julian L. Berman, Esq., for the respondent.
These proceedings were consolidated for trial. Docket No. 26983 relates to the fiscal years ended March 31, 1941 to 1945, inclusive, and Docket No. 29753 relates to the fiscal year ended March 31, 1946. The only issues presented are whether petitioner's applications for relief from excess profits taxes, under section 722(b)(4) and (b)(5) of the Internal Revenue Code, were properly denied by the Commissioner.
FINDINGS OF FACT.
The stipulated facts have been so found and are incorporated herein by this reference. The petitioner was organized, on April 10, 1935, as a corporation under the laws of the State of Indiana for the purpose of engaging in the wholesaling of wines and liquors. Petitioner filed its excess profits tax returns for the periods involved herein with the collector of internal revenue at Indianapolis, Indiana. It keeps its books of account on the basis of a fiscal year extending from April 1 to March 31, and its base period consists of 4 fiscal years ended March 31, 1937, to March 31, 1940, inclusive. The following schedule indicates petitioner's excess profits net income, its average base period net income, the amount of the excess profits tax paid, and the excess profits tax credit for each of the taxable years:
+------------------------------------------------------------------------------+ ¦Fiscal year ¦Excess profits¦Average base ¦Excess profits ¦Excess ¦ ¦ended Mar. 31 ¦net income ¦period net income ¦tax credit used ¦profits tax ¦ ¦ ¦ ¦1 ¦ ¦paid ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1941 ¦$37,182.22 ¦$24,025.25 ¦2 $22,823.99 ¦$2,339.56 ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1942 ¦116,411.62 ¦28,315.80 ¦2 26,900.01 ¦34,530.22 ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1943 ¦123,883.08 ¦28,315.80 ¦2 26,900.01 ¦74,506.28 ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1944 ¦112,620.93 ¦28,315.80 ¦2 26,900.01 ¦65,224.19 ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1945 ¦195,191.05 ¦28,315.80 ¦3 29,719.23 ¦127,441.48 ¦ +--------------+--------------+------------------+----------------+------------¦ ¦1946 ¦264,403.64 ¦28,315.80 ¦3 35,413.06 ¦131,428.99 ¦ +------------------------------------------------------------------------------+
The petitioner requested relief from excess profits taxes in accordance with the following forms duly filed with the collector of internal revenue at Indianapolis, Indiana:
+------------------------------------------------------------+ ¦ ¦Application for ¦ ¦ +-------------------------+-----------------+----------------¦ ¦Fiscal year ended Mar. 31¦relief under sec.¦Claim for refund¦ +-------------------------+-----------------+----------------¦ ¦ ¦722, I. R. C. ¦(Form 843) ¦ +-------------------------+-----------------+----------------¦ ¦ ¦(Form 991) ¦ ¦ +-------------------------+-----------------+----------------¦ ¦1941 ¦$2,455.73 ¦ ¦ +-------------------------+-----------------+----------------¦ ¦1942 ¦34,628.51 ¦ ¦ +-------------------------+-----------------+----------------¦ ¦1943 ¦1 10,363.65 ¦( 1 $37,811.00¦ +-------------------------+-----------------+----------------¦ ¦ ¦ ¦( 23,727.82 ¦ +-------------------------+-----------------+----------------¦ ¦1944 ¦2 5,951.83 ¦2 58,155.56 ¦ +-------------------------+-----------------+----------------¦ ¦1945 ¦65,149.45 ¦ ¦ +-------------------------+-----------------+----------------¦ ¦1946 ¦23,537.00 ¦ ¦ +------------------------------------------------------------+
+----------------------------------------------------------+ ¦Size ¦Number in case ¦Wine gallons ¦ +--------------------------+----------------+--------------¦ ¦Fifths (1/5 of one gallon)¦12 bottles ¦2.4 ¦ +--------------------------+----------------+--------------¦ ¦Quarts ¦12 bottles ¦3.0 ¦ +--------------------------+----------------+--------------¦ ¦Pints ¦24 bottles ¦3.0 ¦ +--------------------------+----------------+--------------¦ ¦One-half pints ¦48 bottles ¦3.0 ¦ +----------------------------------------------------------+
Determined without regard to sec. 722, I. R. C.
of its products were being sold each month. Petitioner's purchases of Schenley and National products during the base period were as follows:
Based upon income method, sec. 713, I. R. C.
In the fall of 1938, petitioner was appointed by National as the sole and exclusive distributor, in lake, La Porte, and Porter counties in Indiana, for all of National's nationally distributed standard brands
Based upon invested capital method, sec. 714, I. R. C
of domestic whiskeys, except with respect to the so-called secondary brands, which included the contract brands were given to petitioner in the individual contracts. In some of its bulk whiskey contracts, petitioner was given exclusive distribution rights in the entire State of Indiana and in others the rights extended only to Lake, La Porte, and Porter counties.
Petitioner was granted the right to use the ‘Bond & Lillard‘ brand label in conjunction with its purchase of bulk whiskeys. There was also an understanding between petitioner and National that it could adopt on a similar basis the use of ‘Sunny Brook‘ and ‘Hill & Hill‘ labels. In December 1939, petitioner for the first time made use of the ‘Hill & Hill‘ and ‘Sunny Brook‘ labels in the conversion of its bulk whiskeys to bottled goods. When converting the bulk whiskey into bottled goods petitioner could use these labels interchangeably with respect to any of the bulk whiskey it had purchased. The petitioner was one of two contract holders serving the State of Indiana with National's contract brands of whiskey.
It was the practice of petitioner, as a contract holder, in developing the sale of its contract brands to exchange barrels of whiskey which it owned, for barrels of similar whiskey, owned by National or other contract holders, with a distillation date different from its own whiskey. This was done in order to maintain continuity of the product that petitioner was offering for sale when petitioner was short of whiskeys of a certain distillation date or age. The power of attorney which petitioner gave to National was used by National in making these exchanges.
When the petitioner ordered the bottling of its bulk whiskey an additional charge for bottling was made by National. The petitioner's bulk whiskey contracts made during its base period with National set the bottling charge as follows:
1The total relief claimed for the fiscal year ended March 31, 1943, was $71,902.47.2The total relief claimed for the fiscal year ended March 31, 1944, was $64,107.39.
At the time of petitioner's organization, it had an authorized capital stock of $25,000, consisting of 250 shares of preferred stock with a par value of $100 each and 500 shares of no par value common stock. Each purchase of 1 share of preferred stock entitled the purchaser to an additional 2 shares of no par common stock. On March 19, 1937, its charter was amended to provide for an additional authorization of 750 shares of common ‘A‘ stock with a par value of $100 per share. The common ‘A‘ stock was issued as follows:
+--------------------------------------------------+ ¦ ¦ ¦Capital stock outstanding¦ +-------------+----------+-------------------------¦ ¦ ¦Number of ¦ ¦ ¦ +-------------+----------+------------+------------¦ ¦ ¦common ¦ ¦ ¦ +-------------+----------+-------------------------¦ ¦Date ¦“A” shares¦Increased ¦ +-------------+----------+-------------------------¦ ¦ ¦issued ¦ ¦ ¦ +-------------+----------+------------+------------¦ ¦ ¦ ¦From— ¦To— ¦ +-------------+----------+------------+------------¦ ¦Apr. 30, 1937¦300 ¦$25,000 ¦$55,000 ¦ +-------------+----------+------------+------------¦ ¦Mar. 30, 1938¦360 ¦55,000 ¦91,000 ¦ +-------------+----------+------------+------------¦ ¦July 6, 1939 ¦90 ¦91,000 ¦100,000 ¦ +--------------------------------------------------+
During the base period, the petitioner serviced the following counties situated in the northwest section of the State of Indiana: Lake, Porter, La Porte, St. Joseph, Elkhart, Newton, Jasper, Starke, Marshall, Benton, White, Pulaski, and Fulton. Some of the principal cities located within that area are Gary, Hammond, East Chicago, Whiting, Crown Point, Michigan City, La Porte, South Bend, Mishawaka, Elkhart, Goshen, Winamac, and Knox. It is an area which is both industrial (containing a variety of light and heavy industries) and agricultural.
Petitioner's first place of business was situated at 3352-54 Michigan Avenue, East Chicago, Indiana, and consisted of the first floor and basement of a former bank building. The premises, which were leased by petitioner, were approximately 9,800 square feet in size. Portions of the premises were still devoted to safety deposit boxes, bank vaults, cages, and a directors' room, which were not susceptible of conversion to warehouse space. The usable space for storage of petitioner's merchandise was approximately 7,500 square feet. The building was used by petitioner primarily for warehouse purposes; some space was allotted for the assembling of orders of less than case lots, a bookkeeping department, a lobby where customers could enter and be received, and a small private office. Since the building was not constricted for use as a warehouse, the weakness of the floors prevented the stacking of merchandise in the basement also presented a breakage problem since a seepage of water into the basement weakened the cases on the bottom of the stacks. The stacks were therefore more likely to fall and cause the bottles to break.
All of the merchandise which was shipped and received by petitioner had to pass through one door which opened on to an alleyway in the rear of petitioner's premises. The alleyway was shared with the Railway Express Company which occupied the premises opposite the rear of petitioner's warehouse. If one of the Express Company's trucks desired to use the alleyway, any truck which was loading or unloading merchandise for petitioner had to stop its operations in order to give it a means of access to the alleyway. Petitioner's rear door, which was only 40 inches wide, was too narrow to permit the use of standard size warehouse trucks. The single door operation was such that it was not possible for petitioner to ship and receive merchandise at the same time.
When merchandise was being delivered to the petitioner, it was necessary to remove it from the delivery truck and place it on a small hand truck, to push the hand truck into the building, and to unload and stack the cases. When the cases were to be stored in the basement, they were placed on a metal slide and pushed down into the basement where they were received by a laborer and stacked. When the cases stored in the basement were needed, it was necessary, at first, to carry them up to the first floor by hand. Later, a conveyor with a rubber belt was installed to carry those cases mechanically to the first floor.
On November 15, 1936, the petitioner leased an old store building, adjoining the bank premises which it was then using, and gained approximately 4,400 square feet of additional warehouse space. A doorway was cut through the wall which separated the two buildings and a ramp was built to facilitate movement between the buildings, since the floor levels therein were different. Another adjacent store building was leased and cut into on November 18, 1939, and approximately 2,200 square feet of space was thereby added. The problems created by the availability of only a single narrow doorway through which to carry on shipping and receiving operations were in no way alleviated by the acquisition of the two adjoining stores.
Petitioner's shipping department consisted of warehouse men, helpers, and truck drivers. The petitioner's salesmen solicited orders from customers and turned them over to the shipping department. This department frequently became congested while filling orders and it was necessary for others outside of the department to assist in the preparation of such orders. Salesmen, who were anxious to serve their customers' needs, frequently prepared the orders personally and made deliveries in their own cars. The salesmen frequently devoted as much as two hours a day to that kind of work. This condition prevailed throughout the base period. All but one of the salesmen were hired on a commission rather than a salary basis, and no extra costs were incurred by reason of their work in the shipping department.
Petitioner also made use of the facilities of 3 public warehouses, 2 of which were located in Chicago and 1 in Hammond, Indiana, about 5 or 6 miles from petitioner's warehouse. Charges for using those warehouses consisted of a handling charge of 5 cents per case when the merchandise was received; 5 cents per case a month for storage; and 5 cents per case, handling charge, when the merchandise left the warehouse. It was necessary for petitioner to send one of its trucks to pick up the merchandise from the public warehouses. The truck would transport the merchandise to petitioner's warehouse where it would be unloaded, carried in, and stacked. The use of a public warehouse caused extra handlings of the merchandise by petitioner's employees.
Petitioner used the public warehouses not only to store domestic merchandise but also to store imported merchandise in the United States Customs bonded warehouses (referred to hereinafter as bonded warehouses) located within such public warehouses. Petitioner had an importer's basic permit which allowed it to import merchandise without paying duty thereon at the time of importation provided that it was stored in bonded warehouses. The bonded warehouse is a locked enclosure constructed in accordance with customs regulations; the key to the lock is in the custody of the customs service. The duty on merchandise so stored is paid at the time the merchandise is withdrawn from the warehouse. By making use of such facilities, petitioner was able to buy imported whiskeys in larger quantities with the same cash outlay. Thus, it was enabled not only to obtain the merchandise at quantity discounts, but also to effect savings on transportation charges since the goods could be brought in directly to the port of Chicago. The additional costs incurred by using the bonded warehouse were inconsequential in relation to the savings that could be made on the cost of the merchandise stored therein. Petitioner did not have a bonded warehouse on its own premises, which were such that the requirements for housing a bonded warehouse probably could not be met.
Petitioner expended the following amounts for public warehouse charges:
+-------------------------+ ¦Calendar year ¦Amount ¦ +----------------+--------¦ ¦1936 ¦$727.53 ¦ +----------------+--------¦ ¦1937 ¦1,485.38¦ +----------------+--------¦ ¦1938 ¦1,604.36¦ +----------------+--------¦ ¦1939 ¦1,208.06¦ +-------------------------+
The maximum number of cases of merchandise which petitioner had stored in public warehouses at any particular time was approximately 3,000. Generally, however, petitioner did not have that amount of whiskey stored in public warehouses.
On February 19, 1940, after devoting a substantial period of time toward finding suitable premises for its warehouse and office, the petitioner acquired, by purchase, the corner land and building at 2316-18-20 Broadway Avenue, in East Chicago, Indiana. The building was originally constructed for use as a garage and contained two floors and a basement. It contained somewhere between 22,500 and 23,000 square feet of usable space. The building was of brick, concrete, suspended steel truss, and concrete floor construction. Its doors were not large enough to permit large trucking equipment to back in and they were enlarged to accommodate such units. The floors were reinforced with steel for the same purpose. A ramp which connected the basement to the roof was removed to give more space. A conveyor system capable of moving merchandise between the basement and the two floors was installed. Air conditioning, private offices, a bookkeeping department, and other improvements were installed prior to moving from the old premises. The cost of the land and building was $22,500; and the cost of the improvements made therein, or for which commitments had been made prior to the end of the base period, was $13,881.07.
The new premises provided for simultaneous shipping and receiving operations, which could be performed inside the warehouse. The merchandise being received was taken from the trucks and put directly on the conveyor system on which it was sent to the proper location in the warehouse, where it was removed and stacked. This process involved less handling of the merchandise and there was therefore less labor involved and a smaller likelihood of breakage.
The petitioner also arranged for a part of its new warehouse to become a bonded warehouse. The cost of this enclosure was $309. Merchandise could be stacked in the new warehouse to heights of 12 to 15 cases and the use of public warehouses was eliminated. The operational difficulties which petitioner had encountered at its old warehouse were eliminated and petitioner was able to send its delivery trucks to the out-lying country areas in its territory two or more times a week; when using its old warehouse petitioner was able to service those areas only once a week.
Petitioner, at the end of the base period, owned five delivery trucks. It acquired its first truck in 1935 and the others during the course of the base period. Petitioner employed men as truck drivers and helpers at a salary approximating $27 weekly. Petitioner also had four other employees regularly working in connection with shipping and warehouse operations. Their salaries ranged from approximately $20 per week to $40 per week. Petitioner's warehouse salaries or shipping room wages during the base period were as follows:
+-------------------------------------+ ¦Fiscal year ended Mar. 31 ¦Amount ¦ +---------------------------+---------¦ ¦1937 ¦$4,102.04¦ +---------------------------+---------¦ ¦1938 ¦3,806.13 ¦ +---------------------------+---------¦ ¦1939 ¦3,637.33 ¦ +---------------------------+---------¦ ¦1940 ¦4,830.46 ¦ +-------------------------------------+
In the first few years after the repeal of prohibition, conditions in the liquor industry were chaotic. The relationship between wholesalers and distillers was not a close one. It was not uncommon for a wholesaler to stock the lines of several distillers. Petitioner, during this period and shortly after its organization, handled the following principal lines: Schenley, Seagram, Hiram Walker, Frankfort, and Glenmore. Sales of products in the Schenley line accounted for a substantial part of petitioner's sales and also represented a major factor in the total liquor business done in petitioner's area. Petitioner was one of several distributors in its area that handled Schenley products and therefore the business was very competitive. The relationship between the wholesalers and the retailers during that period was also unstable. Wholesalers did not have planned sales programs or trained sales forces.
In May of 1936, the petitioner, for the first time, started to handle and distribute the products of the Penn-Maryland Company, which was operating as a division of the National Distillers Products Corporation (hereinafter referred to as National). In August 1938, the petitioner stopped purchasing Schenley lines, replacing them with National's products. Prior to that time, although it had a distributor for its whiskies in petitioner's area, National was not a major factor in that market, since only 300 to 400 cases
+-----------------------------------------------------+ ¦ ¦Schenley ¦National ¦ +-------------------------+-----------+---------------¦ ¦Fiscal year ended Mar. 31¦products in¦products 1 in¦ +-------------------------+-----------+---------------¦ ¦ ¦unit cases ¦unit cases ¦ +-------------------------+-----------+---------------¦ ¦1937 ¦21,582 ¦3,794 ¦ +-------------------------+-----------+---------------¦ ¦1938 ¦17,791 ¦14,105 ¦ +-------------------------+-----------+---------------¦ ¦1939 ¦2 6,815 ¦28,676 ¦ +-------------------------+-----------+---------------¦ ¦1940 ¦ ¦27,830 ¦ +-----------------------------------------------------+ 1These figures do not take into account purchases from National of “bulk whiskeys” which were not converted to bottled goods. The practice of purchasing bulk whiskeys and converting them to bottled goods will be hereinafter explained.2The final purchase of Schenley products consisted of 400 cases in August 1938.
Late in 1937, National decided to begin the sale of build whiskeys to its distributors, and to give the distributors the right to use certain National labels on such whiskeys when they were converted to bottled goods. Such arrangements were formalized in contracts between National and its distributors, and the bulk whiskeys purchased under the plan as herein explained will be referred to as the ‘contract brands.‘ National believed that such practice would establish closer relations between the distributors and itself, and it was contemplated that the distributors would take a greater interest in the promotion and distribution of such whiskeys and National products, in general. Other considerations in National's decision to enter the bulk whiskey field were that National could anticipate its profit on the whiskey at the time the contract for its sale was made and that by creating a demand for whiskey of a certain quality and age it could ‘force‘ the distributors to purchase in advance of their actual needs in order to assure themselves of a continuous supply of like whiskeys in the future.
Pursuant to the typical bulk whiskey contract, the distributor buys whiskey in original proof gallons by the barrel. The particular barrels purchased are identified by serial numbers. The distributor pays all insurance, storage, and local taxes on the whiskey. The distributor pays the purchase price for the whiskey by giving the distiller an interest-bearing note. When it desires to have the whiskey delivered it is bottled for the distributor by the distiller in sizes that the distributor chooses, and a charge is made by the distiller for bottling. The distiller retains possession of the warehouse receipts for the whiskey and the distributor signs a power of attorney giving the distiller authority to deal with the warehouse receipts.
On December 1, 1938, the petitioner entered into its first contract with National for the purchase of bulk whiskey. The following table summarizes the contracts made by petitioner and National for purchases of bulk whiskey during petitioner's base period:
+---------------------------------------------------------------------------+ ¦Contract ¦Number ¦ ¦ ¦ ¦ ¦ ¦Proof to ¦Age to be ¦ +-------------+-------+--------------+--------+--------+---------+----------¦ ¦date ¦of ¦Date of ¦Label to¦Type of ¦be not ¦not less ¦ +-------------+-------+--------------+--------+--------+---------+----------¦ ¦ ¦barrels¦distillation ¦be used ¦whiskey ¦less than¦than ¦ +-------------+-------+--------------+--------+--------+---------+----------¦ ¦Dec. 1, 1938 ¦50 ¦Nov. ¦15,¦1935¦Coon ¦Ohio ¦90° ¦36 months.¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦100 ¦Jan. ¦8, ¦1936¦Hollow ¦Bourbon ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦200 ¦Mar. ¦18,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦50 ¦Apr. ¦3, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦100 ¦June ¦6, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦Dec. 31, 1938¦15 ¦Mar. ¦5, ¦1935¦Bond & ¦Kentucky¦93° ¦36 months ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦Lillard ¦Bourbon ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦15 ¦May ¦18,¦1935¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦40 ¦July ¦18,¦1935¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦10 ¦Aug. ¦30,¦1935¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦20 ¦Nov. ¦26,¦1935¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦65 ¦Jan. ¦9, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦and¦ ¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦Jan. ¦18,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦65 ¦Feb. ¦26,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦and¦ ¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦Feb. ¦28,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦125 ¦Mar. ¦3, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦and¦ ¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦Mar. ¦20,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦25 ¦Apr. ¦22,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦25 ¦June ¦18,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦170 ¦July ¦21,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦and¦ ¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦July ¦22,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦25 ¦Sept.¦1, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦25 ¦Oct. ¦7, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦25 ¦Nov. ¦6, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦50 ¦Dec. ¦9, ¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦Jan. 3, 1939 ¦75 ¦Mar. ¦15,¦1937¦Bond & ¦Kentucky¦93° ¦36 months.¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦75 ¦Apr. ¦15,¦1937¦Lillard ¦Bourbon ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦75 ¦May ¦14,¦1937¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦75 ¦June ¦15,¦1937¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦Nov. 1, 1939 ¦50 ¦Nov. ¦30,¦1935¦Old Crow¦Kentucky¦93° ¦48 months.¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦100 ¦Dec. ¦10,¦1935¦ ¦Bourbon ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦ ¦ ¦and ¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦ ¦Dec. ¦11,¦1935¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦50 ¦Jan. ¦14,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦50 ¦Feb. ¦13,¦1936¦ ¦ ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦Nov. 1, 1939 ¦100 ¦Apr. ¦ ¦1936¦Old Crow¦Kentucky¦93° ¦48 months.¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦100 ¦May ¦ ¦1936¦ ¦Bourbon ¦ ¦ ¦ +-------------+-------+-----+---+----+--------+--------+---------+----------¦ ¦ ¦50 ¦June ¦ ¦1936¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------------------+
The petitioner, sometime prior to November 4, 1939, also agreed to purchase 600 barrels of 1938 distillations and 300 barrels of 1939 distillations of ‘Bond & Lillard‘ from National. The purchase of the 1938 distillations was to be made sometime after January 1, 1940, at a date to be selected by National and carrying charges were to begin on January 1, 1940, the 1939 distillations were to be purchased on or after January 1, 1941, when specified by National, and carrying charges were to begin on January 1, 1941. These agreements were incorporated into formal contracts of purchase and sale on April 30, 1941, and March 31, 1942, respectively.
+-----------------------------------------------------------------------------+ ¦Fiscal year ended ¦ ¦ ¦ ¦ ¦ ¦ ¦Mar. 31—- ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦ ¦April 10, ¦ ¦ ¦ ¦ ¦ ¦ ¦1935 to ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦ ¦March 31, ¦1937 ¦1938 ¦1939 ¦1940 ¦ ¦ ¦1936 ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Sales ¦$683,526 ¦$1,350,323¦$1,676,734¦$1,516,509¦$1,634,038¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Less—-Special ¦ ¦ ¦ ¦17,873 ¦15,261 ¦ ¦discounts ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Net sales ¦$683,526 ¦$1,350,323¦$1,676,734¦$1,498,636¦$1,618,777¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Less—-Cost of goods ¦598,424 ¦1,171,535 ¦1,454,355 ¦1,302,005 ¦1,412,175 ¦ ¦sold ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Gross profit on ¦$85,102 ¦$178,788 ¦$222,379 ¦$196,631 ¦$206,602 ¦ ¦sales ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Add—-miscellaneous ¦66 ¦25 ¦33 ¦424 ¦393 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+------------+----------+----------+----------+----------¦ ¦Total gross income ¦$85,168 ¦$178,813 ¦$222,412 ¦$197,055 ¦$206,995 ¦ +-----------------------------------------------------------------------------+
Less—-Expenses: Salaries: Officers $6,209 $10,825 $13,190 $11,456 $13,413 Manager 3,550 4,325 5,368 5,663 6,646 Sales commissions 19,866 37,118 45,396 40,656 44,235 Others 11,200 21,399 27,620 24,904 26,475 Bonuses: Officers 15,000 20,000 15,000 20,000 Manager 10,000 15,000 15,000 15,000 Auto and truck maintenance 3,133 5,201 6,167 6,589 5,712 Bad debts 2,890 2,326 2,960 2,670 Professional fees 3,975 6,893 7,352 4,675 4,108 Rent 1,250 1,950 2,400 3,200 3,473 Selling expense 2,107 7,715 12,146 13,156 9,322 Taxes and licenses 4,254 8,097 11,559 10,719 10,926 Stationery, printing, and office 1,438 1,969 1,454 1,908 2,327 supplies Telephone and telegraph 1,642 2,402 2,711 3,043 3,196 General expense 1,346 1,823 1,616 1,882 2,405 Depreciation 1,134 2,065 2,961 2,788 3,185 Insurance 774 2,081 2,982 3,203 3,549 Repairs and maintenance building 613 1,092 951 460 765 Traveling expense 491 896 874 1,740 1,585 Shipping supplies 226 224 181 183 285 Dues and subscription 315 1,120 1,066 1,439 1,427 Financing charges 211 38 Light 290 494 638 738 731 Interest 125 541 620 649 222 Cash shortages—net 93 172 16 A. D. T. and watch service 131 245 120 180 273 Armored car service 229 291 475 540 540 Advertising 377 591 1,650 406 633 Breakage 299 345 302 248 346 Loss on sale of assets 116 55 15 Bank service 349 298 370 255 Contributions 164 150 Collection expense 402 718 Loss on advances to salesmen 234 Total expenses $68,168 $147,867 $188,262 $174,101 $181,783 Net Income $17,000 $30,946 $34,150 $22,954 $25,212
Petitioner's net sales for its base period were as follows:
+-----------------------------------------------------------------------------+ ¦Fiscal years ¦ ¦ ¦ ¦ ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦Month ¦1936-37 ¦1937-38 ¦1938-39 ¦1939-40 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦April ¦$80,455.70 ¦$145,648.04 ¦$112,879.87 ¦$121,037.70 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦May ¦74,730.93 ¦145,583.14 ¦105,714.65 ¦118,593.58 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦June ¦94,853.21 ¦130,472.17 ¦167,818.80 ¦109,686.51 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦July ¦78,718.40 ¦123,654.62 ¦67,977.73 ¦91,395.17 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦August ¦80,067.99 ¦130,359.28 ¦91,866.40 ¦112,287.31 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦September ¦106,337.45 ¦154,990.19 ¦116,266.34 ¦137,475.96 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦October ¦126,443.56 ¦172,069.45 ¦127,026.13 ¦148,871.09 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦November ¦129,978.97 ¦155,931.93 ¦146,500.96 ¦153,129.08 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦December ¦201,768.59 ¦200,255.93 ¦195,290.87 ¦217,853.57 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦January (following ¦117,359.50 ¦106,356.21 ¦113,124.76 ¦133,722.73 ¦ ¦year) ¦ ¦ ¦ ¦ ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦February ¦116,270.07 ¦95,146.80 ¦126,712.03 ¦134,129.91 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦March ¦143,338.41 ¦116,266.08 ¦127,457.24 ¦140,594.45 ¦ +---------------------+-------------+-------------+-------------+-------------¦ ¦Total ¦$1,350,322.78¦$1,676,733.84¦$1,498,635.78¦$1,618,777.06¦ +-----------------------------------------------------------------------------+
Petitioner's sales in case units during its base period were as follows:
+-----------------------------------------------------------+ ¦ ¦Unit cases ¦ +---------------------------------------+-------------------¦ ¦ ¦included in sales ¦ +---------------------------------------+-------------------¦ ¦Second quarter, 1936 (April-June) ¦15,327 ¦ +---------------------------------------+-------------------¦ ¦Third quarter, 1936 (July-September) ¦16,891 ¦ +---------------------------------------+-------------------¦ ¦Fourth quarter, 1936 (October-December)¦29,368 ¦ +---------------------------------------+-------------------¦ ¦First quarter, 1937 (January-March) ¦24,418 ¦ +---------------------------------------+-------------------¦ ¦Total, fiscal year ended Mar. 31, 1937 ¦86,004 ¦ +---------------------------------------+-------------------¦ ¦Second quarter, 1937 (April-June) ¦26,073 ¦ +---------------------------------------+-------------------¦ ¦Third quarter, 1937 (July-September) ¦24,702 ¦ +---------------------------------------+-------------------¦ ¦Fourth quarter, 1937 (October-December)¦31,967 ¦ +---------------------------------------+-------------------¦ ¦First quarter, 1938 (January-March) ¦19,571 ¦ +---------------------------------------+-------------------¦ ¦Total, fiscal year ended Mar. 31, 1938 ¦102,313 ¦ +---------------------------------------+-------------------¦ ¦Second quarter, 1938 (April-June) ¦23,747 ¦ +---------------------------------------+-------------------¦ ¦Third quarter, 1938 (July-September) ¦16,724 ¦ +---------------------------------------+-------------------¦ ¦Fourth quarter, 1938 (October-December)¦28,778 ¦ +---------------------------------------+-------------------¦ ¦First quarter, 1939 (January-March) ¦23,054 ¦ +---------------------------------------+-------------------¦ ¦Total, fiscal year ended Mar. 31, 1939 ¦92,303 ¦ +---------------------------------------+-------------------¦ ¦Second quarter, 1939 (April-June) ¦22,090 ¦ +---------------------------------------+-------------------¦ ¦Third quarter, 1939 (July-September) ¦19,204 ¦ +---------------------------------------+-------------------¦ ¦Fourth quarter, 1939 (October-December)¦31,634 ¦ +---------------------------------------+-------------------¦ ¦First quarter, 1940 (January-March) ¦25,882 ¦ +---------------------------------------+-------------------¦ ¦Total, fiscal year ended Mar. 31, 1940 ¦98,810 ¦ +-----------------------------------------------------------+
Apparent per capita consumption of distilled spirits in Indiana in wine gallons was 0.80 in 1936; 0.97 in 1937; 0.83 in 1938; and 0.91 in 1939.
Petitioner commenced business immediately prior to the base period and as a result thereof its average base period net income did not reflect normal earnings for petitioner's business. Petitioner also changed the character of its business by its acquisition of new warehouse facilities. As a result of such change petitioner was able to operate its business more efficiently and at lower costs. Petitioner further changed the character of its business by entering into the bulk whiskey field. Had it made such change 2 years earlier, its annual sales of bulk conversions would have increased by 4,000 cases. Petitioner's excess profits tax for the fiscal years ended March 31, 1941, to March 31, 1946, inclusive, computed without the benefit of section 722 is excessive and discriminatory. A fair and just amount to be used as petitioner's constructive average base period net income is an amount equal to $10,000 more than petitioner's average base period net income determined without the benefit of section 722.
OPINION
RAUM, Judge:
Petitioner contends that it is entitled to excess profits tax relief under section 722(a) and 722 (b)(4) of the Internal Revenue Code,