SPIEGEL, MAY, STERN CO. v. UNITED STATES, 37 F.2d 988 (Ct.Cl. 1930)
SPIEGEL, MAY, STERN CO. et al. v. UNITED STATES.
No. J-660.Court of Claims.
February 10, 1930.
Suit by the Spiegel, May, Stern Company and another against the United States. Judgment for defendant.
The court made special findings of fact as follows:
I. Plaintiff is a corporation organized under the laws of West Virginia. For the calendar year 1920 plaintiff was affiliated, for income tax purposes, under regulations prescribed by the Commissioner of Internal Revenue, with Martha Lane Adams Company, a corporation organized under the laws of Illinois. The principal place of business of both corporations was 1061 West Thirty-Fifth street, Chicago, Ill.
II. For the year 1920 the plaintiff and its subsidiary filed their income-tax return on the calendar year and accrual basis; their books of account being also maintained on the accrual basis of accounting.
III. Within the time prescribed by the act of Congress approved February 24, 1919, entitled "The Revenue Act of 1918" (40 Stat. 1057), plaintiff filed with the collector of internal revenue at Chicago, Ill., a consolidated return of income for the year 1920 of itself and its subsidiary, Martha Lane Adams Company, and duly paid the said collector the amount of tax shown to be due on said return in the amount of $61,601.71.
IV. In 1920 plaintiff and its subsidiary were engaged in the business of selling merchandise, house furnishings, and wearing apparel exclusively through mail orders. It was the practice of plaintiff and its subsidiary to publish catalogues and distribute copies of same to customers and prospective customers. Said catalogues described the merchandise therein offered for sale, and also set out the terms upon which the merchandise could be purchased. During 1920 this practice was followed, and such catalogues were published and distributed during the year. Plaintiff purchased each year a stock of print paper for use in making such catalogues, follow-up circulars, and other advertising matter. Plaintiff did not buy such print paper for the purpose of selling the same on the market, nor was such paper sold by plaintiff in 1920, but the paper was purchased for the purposes above stated. At the close of the years here below set out, plaintiff had on hand print paper which had cost it the amounts set opposite each year, as below stated: 1919 — $22,798.34. 1920 — $141,063.17.
V. For the year 1919 plaintiff deducted from gross income as an ordinary and necessary business expense an amount representing the cost of all print paper purchased by it during said year.
VI. Upon its income tax return for 1920 plaintiff deducted $3,173,822.16 from its gross income on account of ordinary and necessary business expenses incurred during said year. The deduction so taken included an item of $141,063.17 (being the amount paid for the print paper on hand at the close of the year 1920, and which had not then been used in making catalogues or circulars).
VII. This action involves only the year 1920, and for said year the Commissioner of Internal Revenue disallowed the deduction from gross income of $141,063.17, being the amount expended in purchasing said print paper on hand at the close of that year, and required plaintiff to carry said item in its assets as a deferred expense item. The commissioner allowed as a deduction from gross income, as ordinary and necessary business expenses, all sums expended in purchasing print paper which had been used during 1920 in making catalogues or circulars.
VIII. Plaintiff's merchandise bought for sale (print paper not being included therein) was during 1920 inventoried at cost or market, whichever was lower, and at the close of the year was in the amount of $938,714.93 for Spiegel, May, Stern Company, and $409,176.07 for Martha Lane Adams Company, a total of $1,347,891.00.Page 989
IX. By reason of adjustments with respect to plaintiff's income for 1920, including the adjustment relating to the disallowance of the claimed deduction from income in the amount of the cost of said print paper (as set out hereinbefore), the Commissioner of Internal Revenue, within the period provided by law therefor, assessed against the plaintiff for said year a tax in the amount of $70,439.13, in addition to the tax shown to be due on plaintiff's income-tax return. This sum (with interest thereon), less a credit of $7,716.83, being an overpayment of 1921 taxes, was paid to the collector of internal revenue at Chicago, Ill., on January 27, 1927.
X. On March 15, 1927, plaintiff filed a claim for refund of the additional taxes paid on January 27, 1927, on the ground "that its inventory of paper is properly determinable on the basis of cost or market, whichever is lower, as that is the basis used by the company in computing its inventory, and that the department in letter dated December 22, 1926, erred in holding that such inventory could only be accounted for at cost."
XI. On February 24, 1928, the Commissioner of Internal Revenue allowed an adjustment as to certain items upon which the additional assessment of taxes was based, and thereupon refunded to plaintiff $22,797.59. No refund, however, has been allowed with respect to the claim, asserted by plaintiff and its subsidiary, that the print paper on hand at the close of the year 1920 should be inventoried at cost or market, whichever was lower, and as to said claim the Commissioner held that the print paper on hand at the close of 1920 should not be included in plaintiff's merchandise inventory, but should be carried in its assets as a deferred expense item at the cost price thereof.
XII. If said print paper may be properly included in plaintiff's merchandise inventory at cost or market, whichever was lower, plaintiff's consolidated net income for 1920 should be reduced in the amount of $31,853.66. If plaintiff is entitled to so include said print paper in its merchandise inventory at cost or market, whichever was lower, it is entitled to a refund in the amount of $12,418.46, and interest thereon of $561.31, a total sum of $12,979.77, with interest thereon from January 27, 1927. If, however, said print paper should not be included in plaintiff's merchandise inventory at cost or market, whichever was lower, but the said print paper should be carried as a deferred expense in plaintiff's assets, at the cost thereof, the plaintiff is not entitled to recover any sum whatsoever.
XIII. No other action than as aforesaid has been had on this claim in Congress or in any department of the government. The plaintiff and its officers have at all times borne true allegiance to the government of the United States and have not in any way voluntarily aided, abetted, or given encouragement to rebellion against said government. It is the sole and absolute owner of the claim involved herein, and has made no transfer or assignment thereof.
Colladay, Clifford Pettus, of Washington, D.C., for plaintiffs.
Herman J. Galloway, Asst. Atty. Gen., for the United States.
Argued before BOOTH, Chief Justice, and LITTLETON, GREEN, GRAHAM, and WILLIAMS, Judges.
WILLIAMS, Judge.
This suit is brought by the plaintiff and its affiliated corporation to recover income and profits tax collected from it for the year 1920. The parties agree that, if plaintiff is correct in its contention, it is entitled to judgment for $12,418.46, representing the tax, and $561.30, representing interest.
The question involved in this suit is whether the plaintiff is entitled to have its tax determined for 1920 by the inclusion in the merchandise inventory of print paper on hand at the beginning of the year and purchased during the year at cost, or cost or market, whichever is lower. The plaintiff in the consolidated return for the taxable year deducted as an ordinary and necessary expense the entire cost of paper purchased during the year to be used in making catalogues, but the Commissioner of Internal Revenue decided and held that only the cost of the paper purchased during the year and used in printing catalogues should be allowed as a deduction from gross income as an ordinary and necessary expense, and that the cost of the paper purchased during the year which remained on hand and unused at the close of the year, amounting to $141,063.17, should be treated as a deferred expense item to be deducted in subsequent years, as the paper was used in printing catalogues. Plaintiff contends that this was error, and that the print paper was a proper inventory item, and should be included in the merchandise inventory on the basis of cost, or cost or market, whichever was the lower.
During the calendar year 1920, and for several years prior thereto, plaintiff was engaged in the business of selling merchandise, house furnishings, and wearing apparelPage 990
through mail orders. Plaintiff published catalogues and distributed them to its customers and prospective customers. These catalogues contained descriptions of merchandise offered for sale, and set out the terms upon which such merchandise could be obtained.
At the beginning of the year 1920 the market value and the cost of print paper were the same, but on December 31, 1920, the market value of paper on hand was $109,209.51, being $31,853.66 lower than cost. It is this difference upon which the plaintiff predicated its claim for judgment.
The Court is of the opinion that the Commissioner of Internal Revenue was correct in his treatment of the item of print paper in the determination of plaintiff's net income for the taxable year in question. This question has been considered several times by the United States Board of Tax Appeals and the board has consistently held that supplies of the nature of the item with which we are here concerned should not be included in the merchandise inventory, but that the cost of such supplies should be treated as a deduction from gross income, as ordinary and necessary expense, to the extent that such supplies were used during the taxable year, and that the cost of such supplies as remained on hand at the end of the taxable year should be treated as a deferred expense item. In David Baird Son, Inc.,2 B.T.A. 901, the Board held that a taxpayer expending a large part of its profits in a particular year for supplies to be used during the following year should be required to treat the increase in its supply account remaining on hand at the end of the year as a deferred expense, deductible from the gross income of the year in which the supplies are actually used. In Burroughs Adding Machine Co., 9 B.T.A. 938, the Board again considered the question with reference to the proper treatment of factory supplies, small tool stores, and power and maintenance stores on hand and not consumed in the production processes, and, following its decision in David Baird Son, Inc., supra, held that the Commissioner was correct in treating the cost of supplies on hand at the end of the taxable year as a deferred expense, and that the taxpayer was not entitled to include such items in its merchandise inventory. Subsequently, in Francisco Sugar Co., 14 B.T.A. 1062, the Board again considered the question whether items of various grades of oils used in the operation of grinding mills, railroads, and power plants, chemicals used in the analysis of sugar produced, and bricks, cement, window lights, iron pipes, and repair parts for the mills, railroad cars, pumps, plants, and other facilities, should be included in the merchandise inventory at cost, or cost or market, whichever is the lower. In this case the Board construed the regulations with reference to the treatment of such items, and, after considering the manner in which the supplies were used in the taxpayer's operation, reached the conclusion that the contention urged by the petitioner must fail, because the items in question were not consumed or used in productive processes, as those words are used in the regulations, and therefore were not properly to be accounted for as inventory for income tax purposes.
This Court agrees with the decisions of the Board upon this question, which are a complete answer to the question made here by the plaintiff, and shows very clearly that the Commissioner's decision in respect of the manner in which the plaintiff should treat the cost of the print paper on hand and unused at the end of year was correct.
Plaintiff is not entitled to recover. The petition must therefore be dismissed, and it is so ordered.
BOOTH, Chief Justice, and LITTLETON, GREEN, and GRAHAM, Judges, concur.Page 991
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