Amalgamated Sugar Co. v. Commissioner

4 B.T.A. 568, 1926 BTA LEXIS 2248

• Court: United States Board of Tax Appeals
• Decided: July 30, 1926
• Docket: Docket No. 6439.
• Status: Published

Opinions

OPINION.

Steknhagen

: The Commissioner has conceded that the petitioner has paid the amounts of taxes set forth in our findings and that adjustment of the deficiency will be made accordingly. He also confesses error as to the basis of depreciation. To these two issues originally raised by the pleadings we need give no further attention.

The third point of the petitioner is that invested capital has been reduced by taking from the opening surplus the tax for the year just closed and by taking from earnings available for dividends the estimated tax for the current year. Since the hearing the law, as held in Guarantee Construction Co., 2 B. T. A. 1145, has been changed by the enactment of section 1207 of the Revenue Act of 1926, which in effect approves a computation of invested capital made in accordance with the Commissioner’s regulations in so far as it is affected by the tax of the preceding year. The validity of such a computation is therefore no longer open to question. Russel Wheel & Foundry Co., 3 B. T. A. 1168. This section does not, however, affect the question of reducing the earnings available for dividends by the estimated amount of taxes for the current year, which was decided adversely to the Commissioner in L. S. Ayers & Co., 1 B. T. A. 1135, upon the authority of which the petitioner’s claim in this respect is sustained.

The fourth point has been vigorously tried, although we are without a brief for the Commissioner and can not therefore be certain of the grounds and authorities upon which his determination rests. During the fiscal year 1917 the petitioner manufactured and sold sugar and its business was carried on in all respects in its customary manner. There was nothing unique in this year and the facts majr be regarded as those of a normal year of business operations. The evidence upon which the facts are found was all elicited from petitioner’s witnesses — its own employees, buyers of many bags of sugar for many years, and the broker who for thirty years had negotiated the sale of much of the beet sugar of the country. The Government produced no witnesses. Despite vigorous cross examination these witnesses, representing all sides of the sugar trade, presented a clear and consistent description of the business and all agreed upon its salient features.

This taxpayer is one of the principal beet sugar producers in the United States. It has carried on its business for many years and in that time it has not only established a substantial volume of trade but has established uniform customs and practices recognized by all those with whom it has transacted its business. These customs and common understandings are accepted as part of all its transactions. We have admitted all evidence of such customs because it has seemed pertinent and. worthy of consideration. To exclude it from any consideration whatever, and thus to say that it has no probative value, would be entirely unwarranted, for we should be construing contracts and giving regard to general business practices and at the same time leaving out of consideration matters which all the parties thereto regard as inherent in them. It seems clear that, whatever may be said of the weight of such evidence as part of the whole record, and even although it should be found to have but little significance, this would not justify its entire exclusion from the case. The petitioner introduced in evidence a typical contract covering its sales as bearing upon the question when the stipulated price accrued and offered aliunde evidence of customs and usages by the aid of which the contract should be construed. This was objected to as incompetent for the reason that the contract could only be construed according to its literal terms. For example, it was argued by the Government that oral testimony of the commonly accepted meaning of the words “ no guarantee ” appearing in the contract could not be received. The objection, we think, is not well founded, not only because the words are not self-explanatory and of clear and single meaning, but upon a more general ground. Let it be conceded that there may be cases where a single contract, being the subject of litigation, must be construed according to its letter; still we are here dealing not with the disputed rights of the parties to such a specific agreement but with the methods and accounts of a corporation and the extent to which they are affected and illustrated by its uniform contract. The contract itself is only part of its system of doing business, and whether the customs and usages be regarded only as elucidating the contract or as elaborating the description of the system, it seems clearly admissible for the light it may throw upon the general «question of accrual accounting. Since the rule is that even a particular written instrument may be explained and interpreted, as against the Government not a party to it, by extraneous evidence, Converse & Co., 1 B. T. A. 742; J. W. Solof, 1 B. T. A. 776; a fortiori, the significance of a form of contract as part of a system of carrying on business may be determined by reference to the usages by which its terms are commonly understood and interpreted by the parties themselves.

The defense of the Commissioner was founded in great measure upon the argument that the sugar contracted for in February and not delivered until the following year was not sold until delivery— that title did not pass to the buyer until the following year — and hence that the contract price could not be treated as accrued income within the contract year or until title passed. Upon the question of time of passing of title most of the argument has centered, the petitioner’s brief containing elaborate discussion and a wealth of citation. We have considered this and have examined the books at some length, and we are impressed with the realization that however we may decide the question of title generally it must still remain open in respect of the rights of the parties under any particular contract.- Our task goes only so far as to determine whether, under the Eevenue Act of 1916 and the Eevenue Act of 1918, this taxpayer has, upon an alleged accrual basis, properly returned its income for the years in question. The former Act, section 13 (d), is as follows:

A corporation * * * keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned.

Section 212 (b) of the 1918 Act is as follows:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

The matter under these statutes, it will be seen, is not one only of the correct legal construction of each individual contract made by a taxpayer, which in any event could by this Board be only tentative; but one of consistent and fair reflection of the taxpayer’s annual income. As to this, the title is only one element, which may not always be controlling. In B. B. Todd, Inc., 1 B. T. A. 762, the Board held that the sales price was accrued income under a uniform contract expressly providing that title remained in the vendor with a right to repossess for nonpayment. In the instant case all the parties testify to an intention to pass title at the time of execution of the contract, and there is nothing in the instrument itself indicating otherwise. Bather does the form of the instrument use words of immediate sale, such as “sold” or “we confirm sale,” and the sanction of the accrual method given in the Todd case may not be readily withheld here except for reasons other than the time of sale.

But an examination into the question has led us to conclude that in the usual sale by this corporation title passes and the sale is complete when the contract is executed. The passing of title must be determined from the evidence. It is not a question which can be dogmatically answered. The primary factor is the manifest intention of the parties to any given transaction. Hatch v. Oil Co., 100 U. S. 124.

The evidence shows that petitioner’s product is in all respects uniform and is so sold. The rules in respect of sales of fungible goods are applicable. It appears that the goods have in all cases been in existence at the time of contract and that fulfillment of the contract has never failed. Delivery is always made by the seller upon demand of the buyer. The quantity sold is always part of a greater quantity owned by the seller, although the sugar from which the sale is made may be in one or all of several factories or warehouses located in different places in Utah and Idaho, or elsewhere. The location of the particular sugar is not specified for it is a matter of complete indifference to the buyer, who is concerned only with delivery at the prescribed destination.

All of the parties to the greater number of petitioner’s sugar sales for many years — the seller, the buyers, and the leading broker— testify that they have uniformly regarded and treated the sale as complete when the contract is executed. The buyers say “ The sugar is ours ”; the broker calls the contract a “ positive sale,” and all act consistently with this idea. All account for the sugar on their own books as though ownership were transferred. The seller and broker account for a commission fully earned, and the seller treats such commission as an immediate expense and deducts it on its return for the year of the contract. The buyer inventories the sugar as its own or resells immediately and gives delivery instructions to the seller.

And the petitioner’s accounting is entirely consistent with the concept of immediate sale. Unfortunately for the requirements of this case, the petitioner included the sugar sold and undelivered in a so-called “ inventory account.” The word “ inventory ” in this connection has provoked much of the dispute because it has caused the Government to reason that the inclusion of the sugar in “ inventory account ” connotes a recognition of continuing owership, which is inconsistent with an intention to pass title to another. But the reasoning does not withstand analysis, since it leaves out of consideration the facts and circumstances of petitioner’s accounting system which indicate that its so-called “inventory account” is quite different from a simple inventory. There is a confusion arising from the accounting nomenclature employed and this must always give way before a true interpretation of the facts. In its perpetual inventory, revised daily to advise the management of the current state of affairs, appears the sugar on hand, that part contracted and that available for sale. Its copies of contracts are kept as the original record of sales and its copies of invoices as the original record of sales deliveries and accounts receivable. Thus account is taken currently of the true situation. The financial situation is recorded by including sold but undelivered sugar in the inventory at sales price and the unsold sugar at manufacturing cosh The effect of this is to raise the valuation of closing inventory and thus include the sales profit in gross income. It is not enough under these circumstances to say that the amount of sugar on hand is included in inventory or inventory account. In order to learn the significance of this in determining income, the pricing of the inventory must be considered and the method of accounting for it financially. It is only when translated into their money equivalent that goods on hand may affect the profit and loss statement from which taxable income is determined, and the effect of entering contracted sugar at sales price is the same as if it were taken from inventory and the sale price included in gross sales. This effect is to treat such price as accrued gross income. This was the petitioner’s way of expressing its interpretation of the contracts as passing title in the goods to the buyer and establishing in itself an account receivable.

This uniform recognition by all directly concerned of an intention to transfer title is strong evidence to support such transfer. We do not understand that in any case where the parties themselves intend and agree to pass title without possession the law will refuse to recognize such deliberate agreement, irrespective of whether the goods be specific or fungible. See Williston on Sales (2d ed., 1924), section 146, et seq.; Mackellar v. Pillsbury, 48 Minn. 396; 51 N. W. 222. The actual construction by the parties is always important, Roberts v. Tuttle, 36 Utah, 614; 105 Pac. 916, and is clearly entitled to greater weight than the dry interpretation of the language itself by a third party. As we understand the Government’s contention, it is that, as a matter of law, no title could pass because the location of the goods was not specified, and that even although the goods be fungible there is still not a sufficient identification because there is no specification of the particular greater quantity or mass from which the delivery is to be made. We do not find the law so rigid. In 24 R. C. L. 29, Sales §291, the following statement appears:

But where a certain number of bushels of grain are sold to be taken from a larger mass, it has been held that if the acts and declarations of the parties clearly evince an intention to mate an immediate transfer of title, effect will be given thereto, though there is no actual segregation of the part sold from the larger mass which is and remains in the actual possession of the seller.

The rule in Minnesota is expressed in Mackellar v. Pillsbury, supra, as follows:

Where a certain number of articles are sold out of a greater number of exactly the same kind and quality, with the intention that the title should presently pass, and where the vendee has the absolute right at any time to take the amount or number out of the whole mass or quantity, this is sufficient to pass the title, although the specific articles are not actually fiesignated or separated from the remainder. Under such circumstances, until the separation is made the vendor and vendee are tenants in common of the whole according to their respective interests.

In Gourd v. Healy, 206 N. Y. 423; 99 N. E. 1099, it was held that wine sold in New York by description o'ut of a larger quantity in cellars in Bordeaux, France, could be treated in respect of the passing of title precisely the same as though the wine had been in the vendor’s cellar at the time of the contract, and the buyer was held liable.

Reliance is placed by respondent upon the fact that the vendor insures the goods while in its possession. But title is not controlled by the assumption of the risk of loss or damage. And furthermore, the policy of insurance introduced in evidence covers the interests of all parties in the goods insured, thus taking care of the situation as to such sugar as may be under bailment.

It is also urged that the r'ule as to fungible goods does not apply unless the larger mass is identified as in a specified location, and that since, in the instant case, there may be sugar of the seller in many places from which the contract may be fulfilled title can not pass at least until designation of the mass. No authority for this is cited and no reason is given to support it. In the leading case of Kimberly v. Patchin, 19 N. Y. 330; 75 Am. Dec. 334, the larger mass was in two piles and the rule was nevertheless laid down. There is no doubt that tenancy in common may exist whether the aggregate property of all be in a single mass or in several masses and without regard to the size or proximity of the masses. And, since the American rule of transfer of title is founded in the law of tenancy in common, there would seem no reason why it may not be applied where the masses are separated.

Our attention is directed to Haas Bros., 3 B. T. A. 113, as supporting the Government’s position here. That was an appeal of a buyer under certain specific contracts covering respectively several kinds of groceries and requiring construction under a California statute prescribing identification as a condition of transfer of title. The goods were not identified and in some cases not in existence. In each instance the contract expressly provided that something remained to be done before the buyer was bound and, unlike this case, there was no evidence of intention of all parties that title should pass. The buyer there, like the Government here, sought to prove from the bare words of the contracts themselves that, as a proposition of law and irrespective of actual intent, the title was in him and should be included in his inventory at cost or market whichever was lower. Under the law of California this was not established. That decision is not determinative here. The cases are different and both may stand without conflict.

But concluding as we do that title to the sugar left the seller contemporaneously with the execution of the contract, we repeat for the purpose of emphasis that this is but one consideration when we are called upon to pass upon the taxpayer’s accounting system and say whether it clearly reflected income. The uniform and unquestioned practice of the taxpayer was to regard these contracts as reflecting income. Its customers so regarded them. Its balance sheets treated the price among its assets. This is a consistent basis for accrual and we think it may not be denied on the questionable if not definitely incorrect ground that title remained in the seller.

The petitioner is entitled to judgment on all the issues raised, except that as to the invested capital the tax of the previous year should be treated in accordance with section 1201 of the Revenue Act of 1926.

Order of redeteiynmation will be entered on W days’ notice, under Rule 50. ■