Opinion
Docket No. 15518.
1948-12-2
VEENSTRA & DEHAAN COAL CO., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George Lewis, Esq., and Ferdinand Tannenbaum, Esq., for the petitioner. John E. Mahoney, Esq., for the respondent.
In 1943 petitioner, which was engaged in the business of selling coal at retail and was on an accrual basis, received deposits from customers on contracts to sell and deliver coal at retail prices prevailing at time of sale. As of December 31, 1943, these deposits, subject to application on sales to be made in 1944, amounted to approximately $11,000. At that time petitioner had on hand only a small amount of coal, did not know whether it would be able to obtain the coal wanted by its customers, did not know the wholesale price at which it could be purchased if available, and did not know what the retail price of such coal would be. Held, respondent erred in determining these deposits of $11,000 constituted taxable income to petitioner in 1943. George Lewis, Esq., and Ferdinand Tannenbaum, Esq., for the petitioner. John E. Mahoney, Esq., for the respondent.
The Commissioner determined deficiencies in petitioner's income, declared value excess profits, and excess profits taxes for the taxable year 1943, as follows:
+-------------------------------------------+ ¦Income tax ¦$679.02 ¦ +---------------------------------+---------¦ ¦Declared value excess profits tax¦$1,063.65¦ +---------------------------------+---------¦ ¦Excess profits tax ¦$7,534.88¦ +---------------------------------+---------¦ ¦Total deficiency for 1943 ¦$9,277.55¦ +-------------------------------------------+
The deficiency was determined in part by increasing petitioner's gross income in the amount of $11,380.93, which amount petitioner listed on Schedule L of its ‘corporation income and declared-value excess-profits tax return for calendar year 1943‘ as ‘accounts payable (Customers' credit balances).‘ The sole issue is whether this amount constitutes gross income.
FINDINGS OF FACT.
Petitioner is a corporation, incorporated under the laws of New Jersey, with its principal office in Paterson, New Jersey. Petitioner maintained its books and records on an accrual basis of accounting. Its returns were filed on this basis for the calendar year 1943 with the collector for the fifth district of New Jersey.
Petitioner was engaged in the retail sales of coal and coke. By 1940, due to the prevailing ‘seller's market,‘ petitioner was able to enter into contracts with its customers requiring them to deposit cash with petitioner against future sales of coal and coke. Petitioner was allotted a certain amount of coal and coke in 1943 which was not in an amount large enough to satisfy all of its customers.
A sample contract for 1943, entitled ‘Wartime Fuel Protection Contract for Summer and Winter Delivery‘ and marked ‘Approved by Fuel Merchants Association of New Jersey,‘ indicates that the buyer listed the maximum coal required. The buyer then made an initial deposit and made additional monthly deposits by coupon up to and including November of 1943. The fuel purchased under this agreement was to be delivered at the option of the seller in partial deliveries between May 1, 1943, and April 30, 1944. The contract contained the following provision:
It is agreed that all deposits will be applied toward the payment of the purchase price of the fuel covered by this contract, which will be seller's retail cash price in effect at time of delivery.
The terms and conditions of the contract also provided:
The Seller shall not be responsible for failure to deliver the fuel because of car shortages, fuel shortages, scarcity of labor, railroad delays, embargoes, strikes, riots, accidents, orders, acts or regulations of any governmental authority or other cause beyond Seller's control, and in every such case the Seller shall have the right at its option to postpone or cancel delivery without liability to the Buyer therefor.
Any money deposited for fuel covered by this contract and not delivered in accordance with terms and conditions hereon, will be refunded.
The seller also guaranteed that:
If practical demonstration by Seller's representative in Buyer's home does not convince Buyer that the fuel delivered hereunder is entirely satisfactory, Seller will remove said fuel from Buyer's premises and refund the money for the amount removed.
In 1943 petitioner entered into a number of these contracts. As of December 31, 1943, advance deposits for coal and coke to be delivered in 1944 totaled $11,380.93. Approximately 55 per cent of this deposit represented advancements for coke, and 45 per cent for coal.
As of December 31, 1943, petitioner had only 115 tons of stove coal, 170 tons of nut coal, and 50 tons of coke available for delivery. The inventory cost was taken at this date as $10 a ton for coke and $9.80 a ton for coal. The fluctuation of costs and sale prices of coal and coke to be delivered in 1944 was as follows:
+------------------------------------------------+ ¦ ¦ ¦ ¦Selling ¦ +-----------------------+-----+--------+---------¦ ¦1944 ¦ ¦Cost per¦price per¦ +-----------------------+-----+--------+---------¦ ¦ ¦ ¦ton ¦ton ¦ +-----------------------+-----+--------+---------¦ ¦ ¦{Coal¦$9.80 ¦$13.99 ¦ +-----------------------+-----+--------+---------¦ ¦Prior to end of January¦{Coke¦10.00 ¦13.49 ¦ +-----------------------+-----+--------+---------¦ ¦ ¦{Coal¦10.25 ¦14.45 ¦ +-----------------------+-----+--------+---------¦ ¦End of January ¦{Coke¦10.49 ¦13.99 ¦ +------------------------------------------------+
Petitioner did not, and could not, know in December 1943 what the cost and selling price of coal and coke would be in 1944.
A portion of the coal and coke called for under the terms of the contract, represented by the deposits of $11,380.93, was delivered in January, February, and March of 1944. Between $300 and $400 of the advance deposits was refunded to customers. The deposits were kept by petitioner in its one bank account.
OPINION.
KERN, Judge:
As a result of the wartime conditions prevailing in 1943, petitioner, which was engaged in the business of buying coal and coke at wholesale and selling these commodities at retail, desired to have its customers indicate their needs in advance and was able to obtain deposits from its customers to be applied on the price of coal and coke to be charged by petitioner when and if the coal and coke was sold and delivered to them. As of December 31, 1943, petitioner had on hand the amount of $11,380.93 representing the balance of deposits made in 1943 which either was applicable on the sale prices to which it might be entitled by reason of sales and deliveries to be made in 1944, or was refundable to customers by reason of its inability to obtain coal and coke for sale to them. As of that date petitioner did not know whether it would be able to fill all the orders on which deposits had been made. Neither did it know what the wholesale price of coal and coke would be, nor did it know what the retail price of coal and coke would be at the time of sale and delivery to the customers. As of that date it had on hand only a small amount of coal and coke. Thus, the amount of deposits on hand at the end of the year was conditionally held by petitioner against future performance by it of contingent executory contracts to sell. Respondent determined ‘that the amount of $11,380.93 received during the taxable year 1943 is includible in your gross income for said taxable year.‘
Income subject to tax under the Sixteenth Amendment to the Constitution, and designated as taxable in section 22(a) of the Internal Revenue Code, may be gross income not subject to deductions granted as a matter of legislative grace; but gross receipts are not equivalent to gross income. See Doyle v. Mitchell Brothers Co., 247 U.S. 179; Southern Pacific Co. v. Lowe, 247 U.S. 330. It is axiomatic that a receipt of capital or a return of capital does not constitute taxable income. In the usual sale of property the price is paid by the vendee at the time of or after the sale and the delivery of (or a passing of title to) the property sold. In such a case the gross income derived by the vendor from the transaction is the excess of the purchase price over his cost or other basis to the property, and the usual problem is whether the payments, when received, should ‘be attributed in their entirety to capital until it is fully returned, the excess thereafter being treated as income,‘ or whether a part of each payment should be considered as a return of capital and the remainder considered as taxable gross income. See Mertens, Law of Federal Income Taxation, sec. 5.07. In some cases involving contracts to sell property, even specific property, at a specific price,
an amount is paid to the vendor before the sale to be applied on the purchase price, contingent upon the consummation of the sale upon stated conditions. In those cases the gain from the sale, i.e., the excess of price over basis, has been held to be gross income in the year when the sale is consummated, and not in the year when the contract was executed and the ‘advance payment‘ was made. See Sophia M. Garretson, 10 B.T.A. 1381; Consolidated Utilities Co. v. Commissioner, 84 Fed.(2d) 548. The reason for this is obvious: In the case of sales of property the gross income of the vendor is the gain derived from the sale, and until the sale is made, there is no gain. As the Court said in Consolidated Utilities Co. v. Commissioner, supra ‘ * * * the statute taxes gains from sales, not estimated gains from contracts to sell * * * .‘ Not until the transaction of sale is a closed one will a gain arise which will constitute gross income to the vendor. See Burnet v. Logan, 283 U.S. 404.
‘Contracts to sell‘ as distinguished from ‘Contracts of sale‘ or ‘Sales in praesenti‘ are executory contracts intended to pass title to goods from the vendor to the vendee at some future time. See sec. 1, Uniform Sales Act; Comp. Stat. New Jersey, 1910, pp. 4647-4665.
In the instant case the contracts between petitioner and its customers were executory and contingent contracts to sell unascertained, not specific goods, at an unspecified price, which were to be acquired, if possible, by petitioner at a cost unknown to it at the time the contracts were executed. At the end of the taxable year, the contracts, in so far as the deposits here at issue were concerned, were still executory, were still contingent upon petitioner's obtaining coal and coke, were still contracts to sell unascertained goods at an unspecified price, and, except for a small amount of goods on hand, were contracts to sell goods which were to be acquired at a cost unknown and unknowable by petitioner. Even if ‘estimated gains from contracts to sell ‘ constituted gross income subject to tax, no possible way has been suggested by respondent, and none occurs to us, by which the gain from the petitioner's contracts to sell could be estimated as of December 31, 1943. Under the facts presented by the record, we are of the opinion that respondent's determination that the entire amount of the deposits on hand as of that date constituted gross income to petitioner in 1943 is not only erroneous, but is also arbitrary within the rule of Helvering v. Taylor, 293 U.S. 507.
Respondent's determination is probably due to a misconception of such cases as South Tacoma Motor Co., 3 T.C. 411; Your Health Club, Inc., 4 T.C. 385. National Airlines, Inc., 9 T.C. 159; and Capital Warehouse Co., 9 T.C. 9 l6 upon which he relies on brief. Those were cases in which payments were made in advance for personal services, and the transactions were closed in the several taxable years in which the payments were made. The advance payments in those cases constituted gross income when received, and the fact that deductions might be accrued or paid in a subsequent year when the services, or a part of them, were rendered, did not prevent the inclusion of the payments in taxable income for the year when they were received. In the instant case the transactions were executory contingent contracts for the sale of unascertained goods, and they were in no sense closed transactions. The deposits made incident to these transactions would be gross income only if they represented gains from closed and completed sales, or at least from contracts of sale. Since they were not gains from such sales, they were not gross income, and, therefore, were not taxable to petitioner in 1943.
From the practical standpoint, the deposits made with petitioner by its customers in advance of sales were equivalent to a forced temporary advance by the customers to petitioner's working capital. By reason of conditions prevailing in 1943 petitioner, instead of buying coal and coke at wholesale with its own capital and then selling at retail to its customers, thus recovering its capital plus a realization of profit, arranged, in effect, for its customers to advance the capital with which it purchased the coal and coke at wholesale. In this analysis the facts are not unlike those in Summit Coal Co., 18 B.T.A. 983. As in that case, the advances or loans of capital repayable by deliveries of coal did not constitute gross taxable income in the year in which its advances or loans were made, but as we said in the cited case, p. 988, ‘these advances became income to petitioner only as and when recoupment was made from deliveries.‘
The issue presented is decided in favor of petitioner. In view of the fact that another adjustment in petitioner's tax liability for the taxable year has been made by respondent and is not here in issue.
Decision will be entered under Rule 50.