Readers' Pub. Corporation v. United States

Full title: READERS' PUB. CORPORATION v. UNITED STATES

Court: Court of Claims

Date published: Apr 21, 1930

40 F.2d 145 (Fed. Cir. 1930)

Opinion

No. H-208.

April 21, 1930.

Action by the Readers' Publishing Corporation against the United States.

Petition dismissed.

The question in this case is whether plaintiff was entitled to deduct for ordinary and necessary expenses in its income tax returns for the years ending June 30, 1920 and 1921, certain amounts set up on its books as "Reserves for returns," which grew out of a contract between it and the American News Company, whereby the distribution of plaintiff's magazine was undertaken by said company on what was termed a returnable basis; that is, the distributor was to be credited with all magazines which it was unable to dispose of within a certain length of time. The magazines so returned were sold for waste paper. The Commissioner of Internal Revenue disallowed the amounts deducted as reserves, but allowed as deductions amounts based upon the actual number of magazines returned in the respective years at the allowance provided for in the contract.

The case having been heard by the Court of Claims, the court, upon the evidence, makes the following special findings of fact:

1. The Readers' Publishing Corporation, the plaintiff, is a corporation under the laws of the state of New York, and has its office and principal place of business at 799 Broadway, in the city of New York, state of New York, and is, and was during the periods hereinafter referred to, engaged in the business of publishing and selling fiction magazines and periodicals.

2. The plaintiff, on the 27th of August, 1920, and within the time prescribed by law, made and filed with the collector of internal revenue of the United States for the Second district of New York, at New York City, N.Y., in which district its place of business is located, a return of its income for the fiscal year ended June 30, 1920. The said return was made on form 1120 of the office of the Commissioner of Internal Revenue, and showed thereon a total net income of $1,320.34, and no income taxes to be due.

3. The plaintiff, on the 12th of September, 1921, and within the time prescribed by law, made and filed with the collector of internal revenue of the United States for the Second district of New York, at New York City, N.Y., a return of its income for the fiscal year ended June 30, 1921. The said return was made on form 1120 of the office of the Commissioner of Internal Revenue, and showed thereon a total net loss of $7,235.43, and no income taxes to be due.

4. The plaintiff was informed and advised by the Commissioner of Internal Revenue, on the 7th of April, 1925, that, in an amended or revised computation of the income of the plaintiff, he included in its net income for the fiscal year ended June 30, 1920, the sum of $9,340, which the plaintiff had deducted from its gross income as a "Reserve for returns," and for the fiscal year ended June 30, 1921, he included in its net income the sum of $12,114.43, which the plaintiff had deducted from its gross income as a "Reserve for returns."

5. The Commissioner of Internal Revenue, on the 10th of March, 1926, and within the time provided by law, assessed against the plaintiff additional income and profits taxes in the sums of $2,480.13 for the fiscal year ended June 30, 1920, and $1,099.46 for the fiscal year ended June 30, 1921, and interest thereon amounting to $207.18, or a total assessment of additional taxes and interest of $3,786.77, and through and by the collector of internal revenue for the Second district of New York, made demand upon the plaintiff for the payment of said taxes so assessed, together with interest thereon, with notice of penalties against it if payment were not made, and stated that, if payment were not made, summary action would be taken to enforce the payment of said taxes and interest.

6. The refusal of the Commissioner of Internal Revenue to exclude from the taxable net income of the plaintiff the amount set up on its books as a "Reserve for returns," amounting to $9,340 for the fiscal year ended June 30, 1920, and $12,114.43 for the fiscal year ended June 30, 1921, was the sole cause of the assessment of additional taxes against the plaintiff and interest thereon amounting to $3,786.77.

7. On the 4th of May, 1926, the plaintiff paid said taxes amounting to $3,579.59, and interest thereon amounting to $207.18, or a total of $3,786.77, to the collector of internal revenue for the Second district of New York, and at the time of making said payment protested against the assessment and collection of said taxes and interest.

8. On the 22d of June, 1926, the plaintiff filed a claim for refund of said additional taxes and interest amounting to $3,786.77 with the collector of internal revenue for the Second district of New York, to whom said taxes and interest were paid.

9. The said claim for refund was made on form 843 of the office of the Commissioner of Internal Revenue as required, and was in all respects complete and regular, and in accordance with the laws and regulations relating thereto.

10. The Commissioner of Internal Revenue thereafter, on the 2d of November, 1926, rejected said claim for refund, and has since refused to repay to the plaintiff the said money and interest thereon as aforesaid.

11. This magazine was sold and distributed principally through the American News Company and its branches under a contract dated July 15, 1919, as follows:

"Mr. D.C. Dean, Manager the American News Company.

"Dear Sir: We hereby appoint the American News Company agents for supplying Telling Tales to the trade, and agree not to sell any copies of said publication to any other person or persons except copies to actual subscribers, not for trade sales.

"We agree to grant the American News Company a subscription rate equal to the lowest rate allowed any subscription agency or agent.

"We further agree to bill this publication to the American News Company at 12 cents per copy, and to credit all unsold copies at 12 cents per copy, and to pay in addition 2 ½ cents per pound to cover expenses on such unsold copies, and to accept front covers or headings from all branches, paying expense upon the weight of the complete publication represented by covers or headings; and to pay transportation over 1 ¼ cts. per pound.

"As these prices are based on the weight of this publication being under 12 ounces, we further agree to pay the American News Company for any excess of weight over 12 ounces of any issue at the rate of 1 ¼ cents per pound.

"This agency is given with the understanding that the _____ News Company is to supply it to dealers in cities in which they have branches, when entered as second-class mail matter at the following prices: 15 cents, prices in foreign countries to be based upon the expense of transportation to the distributing point; and will send to dealers such quantities as may be agreed upon from time to time, with the privilege of returning all copies that they do not sell. This publication to be delivered to them sufficiently in advance of time of issue to enable them to ship to their various distributing points by the cheapest mode of transportation in time to publish on the date fixed for issue.

"The American News Company is to make settlement for the first No. delivered them after the issue of the 4th number delivered them, and for succeeding issues upon the same basis, all numbers, regardless of date, returned prior to payment to be deducted. In case the publication is discontinued, or the agency withdrawn the American News Company is to make such approximate settlements from time to time thereafter as the sales in their judgment may warrant, and final settlement four months after the date of the notice to dealers to return unsold copies.

"We hereby agree to furnish the American News Company a full account in detail of all goods delivered to them.

"In the event of our not sending for and taking into our own custody all unsold copies within six months from date of publication we authorize the American News Company to dispose of all unsold copies which they may have on hand for what they will bring as old paper, and place the proceeds to our credit.

"It is understood, that we may withdraw the agency, and that the American News Company may relinquish the same, on giving ______ days' notice.

"[Signed] Readers Publishing Corporation, "W.C. Clayton, President."

Practically all the magazines are distributed through the American News Company. This distribution covers the entire United States and Canada.

12. It does not satisfactorily appear that the plaintiff kept its books on an accrual basis.

13. The reserve for returns set up on plaintiff's books was an estimate. For the years in question, the amounts set up as reserves exceeded the amount allowable or actual return of magazines to the extent of $9,340 for the fiscal year 1920 and $12,114.43 for the fiscal year 1921. Collection for an issue of plaintiff's magazine is not made until the fourth issue after delivery to the American News Company, or in approximately sixteen weeks.

Hitt, Miller, Cain Munson, of Washington, D.C., for plaintiff.

Herman J. Galloway, Asst. Atty. Gen., and Ralph C. Williamson, of Washington, D.C., for the United States.

Before BOOTH, Chief Justice, and WILLIAMS, LITTLETON, GREEN, and GRAHAM, Judges.

GRAHAM, Judge.

Plaintiff brought suit for the recovery of $3,786.77 alleged to have been erroneously collected from it as income taxes for the fiscal years ending June 30, 1920, and 1921. Plaintiff is a corporation organized and engaged in business under the laws of the state of New York, with its principal place of business in New York City, and is, and was during the period in question, engaged in the business of publishing and selling a fiction magazine called "Telling Tales." It began business in July, 1919. On July 15, 1919, plaintiff entered into a written contract with the American News Company whereby the distribution of the magazine was undertaken by the American News Company on what is termed a returnable basis; that is, the distributor would be credited with all magazines which it was unable to dispose of within a certain length of time. The magazines so returned were sold for waste paper. On its returns for the fiscal years 1920 and 1921, the taxpayer included in its deductions for ordinary and necessary expenses $9,340 for the year 1920 and $12,114.43 for 1921, which were included in amounts set up on its books as "Reserves for return." Upon a subsequent audit of the returns so filed, the Commissioner of Internal Revenue disallowed these amounts, but allowed as deductions amounts based upon the actual number of magazines returned in the respective years at the allowance provided for in the contract with the American News Company, and thereupon assessed an additional tax of $2,480.13 for the fiscal year 1920 and $1,099.46 for the fiscal year 1921, and interest amounting to $207.18, which additional taxes and interest were paid by plaintiff on May 4, 1926. On June 22, 1926, plaintiff filed a claim for refund of said amount with the collector of internal revenue for the district in which the taxes were paid. Said claim for refund was rejected by the Commissioner of Internal Revenue November 2, 1926.

It appears from the plaintiff's tax returns for the years in question here that the sums in the so-called reserves were in addition to the actual returns of unsold magazines.

It is incumbent upon the plaintiff to show that the items sought to be deducted are clearly within the provisions of the statute providing for deductions, and upon it also is the burden of showing satisfactorily that the action of the Commissioner of Internal Revenue which he seeks to overturn was illegal. We think that it has failed in both of these particulars. We are of the opinion that the statute contemplated that only such deductions should be made from gross income as are allowed by the statute, and no deductions for reserves are allowed specifically. These so-called reserves are not deductible as business expenses, for the very good reason that expenses in order to be deductible must have been paid or incurred during the taxable year. The statute does permit reserves to be deducted but in exceptional cases such as insurance companies. It is also to be noted that the "reserves for returns" on the plaintiff's books are not allowable deductions because they were not actual reserves. A real reserve should represent an actual obligation, and the reserves set up in this case do not represent obligations for the years involved. As stated, they are reserves in addition to the actual returns of unsold copies of magazines and the number of magazines that would be returned in these reserves was not capable of definite determination in advance. The amounts set up as reserves in its books are therefore a mere estimate or guess. Whether the plaintiff's books were kept on an accrual or cash basis, deductions to be allowed must be absolute in character. The reserves claimed by the plaintiff do not represent any fixed or determinable obligation but only a possible liability that would accrue, if ever, in some future year. See McCauley-Ward Motor Supply Co. v. Commissioner, 10 B.T.A. 394.

The petition should be dismissed, and it is so ordered.