*121 Decision will be entered for the respondent.
"Gross receipts," for purposes of the excess profits tax "growth formula" (sec. 435 (e) (1), I. R. C. 1939) held to include all amounts received or accrued from sales, not excluding those added to the sales price as reimbursement for beer excise taxes.
*836 Respondent determined a deficiency of $ 102,343.94 in income and excess profits tax for the calendar year 1950, of which $ 92,108.20 is in dispute. The single general issue involved is whether petitioner was entitled to compute its excess profits tax credit using average base period income under the alternative method based on growth, reflected by an increase in gross receipts. Resolution of that issue depends on whether the term "gross receipts" includes Federal and State beer excise taxes.
FINDINGS OF FACT.
Certain facts have been stipulated and are found accordingly.
Petitioner, a California corporation, brews and sells beer. It filed its returns for all years involved with the collector of internal revenue for the northern district of California. It keeps its books on an accrual basis and uses the calendar year. On January 1, 1949, petitioner changed its name from General Brewing Corporation.
Petitioner's base period was the calendar years 1946, 1947, 1948, and 1949. Adjusted basis for determining gain on sale or exchange of all assets held by it for business purposes as of January 1, 1946, amounted to less than $ 20 million. It had no privilege*123 of filing a consolidated return with any other corporations for 1950.
Petitioner reported on its income tax returns gross sales of $ 12,878,751.99 for 1946, $ 16,311,138.47 for 1947, $ 18,161,135.39 for 1948, and $ 23,003,696.22 for 1949. These amounts represent the total amounts received or accrued from the sale of beer. Federal and State excise taxes paid or accrued for 1946 through 1949 upon beer manufactured and sold totaled $ 4,849,076.70, $ 5,687,831.75, $ 5,837,412.88, and $ 7,192,289.27, respectively. These amounts were not excluded from gross sales but were included in cost of goods sold as reported on line 2 of the Federal income tax return.
The 2-year total of the gross sales shown on the 1948 and 1949 returns is $ 41,164,831.61, and for 1946 and 1947 is $ 29,189,890.46. *837 The total for the later 2 years is 141 per cent of the total for the prior 2 years. The total of the gross sales, excluding Federal and State beer excise taxes, for 1948 and 1949 is $ 28,135,129.46, and for 1946 and 1947 is $ 18,652,982.01. This total for the later 2 years is 150.8 per cent of the total for the earlier years.
The following items also constituted gross receipts:
| 1946 | 1947 | 1948 | 1949 | |
| Interest | $ 768.88 | $ 749.99 | $ 4,284.73 | $ 1,360.56 |
| Royalties | 45,000.00 | 45,000.00 | 45,000.00 | 45,000.00 |
| Sales of spent grain and sacks | 24,030.47 | 28,292.45 | 29,201.88 | 35,187.79 |
| Sales of yeast | 3,476.61 | 4,755.06 | 7,670.25 | 11,747.47 |
| Total | $ 73,275.96 | $ 78,797.50 | $ 86,156.86 | $ 93,295.82 |
*124 These items for 1948 and 1949 total $ 179,452.68, and for 1946 and 1947, $ 152,073.46. Those figures added to gross sales change the ratio including excise taxes from 141 to 140.9, and the ratio excluding taxes from 150.8 to 150.57.
Other income during the base period included:
| 1946 | 1947 | 1948 | 1949 | |
| Cash discounts on purchases | $ 11,642.97 | $ 26,314.59 | $ 27,108.96 | $ 43,530.23 |
| Interest on U. S. bonds | 18,886.51 | 19,102.75 | ||
| Judgment | 3,139.88 | |||
| Miscellaneous | 1,071.96 | 41.13 | 25.45 | |
| Total | $ 31,601.44 | $ 48,598.35 | $ 27,108.96 | $ 43,555.68 |
Inclusion of these amounts in the computations does not significantly affect the ratios of gross receipts.
On invoices covering shipments to customers within the United States, petitioner did not state beer excise taxes separate from unit prices. Invoices covering shipments to United States territories (e. g., Hawaii) stated that Federal tax was paid and the shipment was exempt from State tax. Invoices covering shipments to United States possessions(e. g., Samoa) stated that the shipment was tax free.
During the years 1946 through 1949, petitioner published for various trading areas price schedules showing sale prices and*125 terms. It regularly filed copies of schedules covering California areas with the California Board of Equalization pursuant to law. The California schedules did not state excise taxes separately. Price schedules for Nevada bore the notation that Nevada State tax was not included. Nevada schedules dated on and after February 1, 1948, specifically deducted California tax. The prices in Nevada from December 1, 1946, to February 1, 1948, were identical to those in Los Angeles from November 15, 1946, to June 20, 1947. Schedules for exports to United States possessions and foreign countries deducted both State and *838 Federal taxes in the explanation of the price. Petitioner did not alter its methods of invoicing or pricing after March 1, 1950. It followed the general procedure in the brewing industry, not to show excise taxes separately on invoices or price lists.
Petitioner's published annual reports for 1946 through 1949 reported the same gross sales as shown on the returns. They did not show excise taxes separately.
Prior to March 1, 1950, breweries paid Federal excise tax by stamps. Petitioner carried the amount of unused stamps on hand, along with any State stamps, *126 in an account entitled "Revenue Stamps on Hand." It carried this account as a separate item under "Current Assets" in the annual report, rather than as an inventory item. When beer was canned or bottled, it transferred the amount of stamps surrendered from "Revenue Stamps on Hand" to "Tax on Canned Beer" or "Tax on Bottled Beer." It paid State tax by monthly return on the previous month's sales.
Petitioner credited refunds to the "Tax on Bottled Beer" or "Tax on Canned Beer" accounts, except one substantially delayed refund in 1949, which it credited to "Miscellaneous Income."
After March 1, 1950, Federal tax was collected by stamp after the bottled or canned beer was withdrawn for sale or consumption. The beer tax statute remained unchanged during any material year.
Petitioner's accounts reflect manufacturing processes from the purchase of raw materials through the brewing, placement of beer in fermenting tanks, movement to aging tanks in cellars, and transfer to the bottling and canning lines. After packaging, beer is sent to the shipping warehouse and from there to distributors. "Inventory Beer in Process," to which a large bulk inventory is transferred when the beer reaches*127 the cellars, reflects costs incurred up to that point including real and personal property taxes and social security taxes. After aging, the beer is withdrawn for bottling and canning, at which time costs of inventory in process are apportioned to a bottled beer cost account and a canned beer cost account, to which accounts bottling and canning costs are also charged. Warehousing and shipping costs are allocated to the bottled beer and canned beer cost accounts, which then show the total cost of beer produced exclusive of excise taxes.
Petitioner carried beer on hand in inventory. It recorded taxes paid on unshipped beer in accounts entitled "Inventory -- Bottle Tanks -- Federal Tax" and "Inventory -- Canned Beer -- Federal Tax." On the balance sheet it combined these accounts into "the inventory of federal tax," which in turn it combined with the bottled and canned beer cost accounts to arrive at a total inventory figure.
Since March 1, 1950, petitioner has used the same accounting method, except that it shows no Federal tax related to inventories, *839 since it pays no tax until beer is sold. Its method of invoicing and pricing of merchandise remained unchanged. The tax*128 now appears as an expense in the month when the liability accrues, as State excise taxes had always been handled.
Petitioner increased its over-all average prices, exclusive of excise taxes, for 1948 and 1949 over 1946 and 1947 by 21.6 per cent. Excise tax rates did not change during the base period.
No single classification of excise taxes is customary in accounting practice. Some are included in gross sales in corporate returns, while others are customarily excluded. Reports to stockholders generally conform to the company books, but may differ from the tax returns due to statutory requirements of tax reporting.
Where excise taxes are included in gross sales, tax returns and corporate reports subtract them as part of cost of goods sold, or as an expense deduction, or as a deduction from gross sales in arriving at net sales. Net sales for one period are frequently compared with those of another to determine a company's growth.
Petroleum companies exclude Federal and State gasoline taxes from gross sales. Retail establishments exclude State and city retail sales taxes, as well as luxury taxes, such as on furs. The Federal tax on phonographs and television sets is customarily*129 excluded. These taxes are not regarded as an item of income or expense.
None of nine breweries chosen at random from Securities and Exchange Commission records excluded the excise taxes from gross sales, all reporting the total proceeds from beer sales. These breweries treated excise taxes in three different ways: Seven deducted the taxes from gross sales to arrive at net sales; another deducted both cost of goods sold and excise taxes from sales to determine gross profit; the ninth included excise taxes in cost of goods sold, dropping a footnote thereto stating that excise taxes of a certain amount were included.
A manufacturer makes no distinction as to excises on sales to a distributor or directly to the consumer.
Amounts of retail sales taxes collected, sometimes unknown, do not necessarily correspond to the amounts excluded from gross sales. California practice calls for application to the gross collections of a percentage based on an analysis of purchases as agreed to by the State Board of Equalization. Even though the retailer records the actual tax collected, he must apply the tax rate to his sales regardless of collections. Fractional differences in certain transactions*130 necessarily result in an overage or shortage. Failure of collections to correspond to exclusions from gross sales does not improperly reflect income.
"Gross receipts" is not clearly or precisely defined by accountants, who usually keep accounts on the basis of "gross sales" and "net sales."
*840 Petitioner's excess profits net income was overstated in the notice of deficiency by $ 70,772.21 for 1949, but understated by that amount for 1948.
Petitioner's gross receipts for the last half of the base period are less than 150 per cent of its gross receipts for the first half of its base period.
OPINION.
Although a large part of the argument of the parties is occupied with an examination of the characteristics of the Federal and State tax on beer, we think the true issue requires a consideration primarily of the scope and purpose of the growth formula in the 1950 Excess Profits Tax Act. 1
*131 In place of the net taxable income test of the wartime excess profits tax law, 2 the statutory approach adopted in 1950 was to determine growth by presumably objective tests, 3 one of which was the size of the corporation's "gross receipts." The issue here is whether there should be considered as part of petitioner's gross receipts the amounts of Federal and State excise taxes on beer which it claims increased the selling price petitioner received for its product. If the amount of the beer taxes is excluded from gross receipts, petitioner's figures show an increment to more than 150 per cent, which entitles it to use the growth formula. If they are included in gross receipts the percentage falls some 10 points lower and the growth formula is inapplicable.
The general approach of the 1950 Act was apparently an attempt to determine growth by an "increase" in "physical volume of production." 4 Probably recognizing*132 the difficulties of using that measure directly, the result was sought to be accomplished by the use of one of *841 two "automatic" 5*133 tests: Either an increase of 30 per cent in payroll or an increase of 50 per cent in "gross receipts." It is the meaning, and purpose of the use, of this term, which as to this issue is defined only as "The total amount received or accrued * * * from the sale * * * of stock in trade of the taxpayer * * *," 6 which poses the instant question.
Bearing in mind that it is an increase*134 in physical volume of production with which the lawmakers were concerned, as petitioner apparently recognizes in its excellent brief, the question is what effect should be given to unit taxes, the rate of which did not increase during the base period. It can be accepted that percentage or ad valorem taxes would be neutral in such a situation since presumably they would increase in the same proportion as the total amount received from sales, at least unless the rate changed during the period. Similarly, a unit tax not based on any percentage of the selling price would be neutral if the amount of the tax were increased during the base period in the same proportion that gross receipts increased. Petitioner's situation was different. It was subject to a unit, not an ad valorem, tax and the rate did not change during the base period but remained constant.
Neither the gross receipts test nor the payroll test, which is the alternative, are direct measures of physical volume of production. Gross receipts may rise at least in part due to an increase in the price of the commodity sold, as they did in the present case. Theoretically an increase of 50 per cent in the selling price might, *135 without any addition to physical volume, create a statutory eligibility which was not actually intended. Similarly, a rise of 30 per cent in payroll might come about solely by an increase in wage rates with no improvement *842 in physical volume. These possibilities were in the legislative mind but "the percentages used in the payroll and gross receipts tests" were deemed to be "sufficiently large so that only those taxpayers will be able to qualify whose business has grown substantially more rapidly than the average * * *." 7 (Emphasis added.)
Petitioner suggests, we think correctly, that the tendency is to pass on to the consumer all possible costs of production. In ideal terms the growth formula will work best when all items of such costs, and therefore unit sales prices, remain static and any increase in gross receipts can hence be attributed solely to a growth in physical volume. The test selected by Congress must assume that most production costs will remain*136 stationary, otherwise the formula adopted by it would have no direct relationship to any increase in the physical volume of production. By that test items which remain stable in their relationship to units produced, such as the taxes in the present case, do not throw the formula off nor make its workings inequitable. Nothing less would compel a departure from the literal statutory language.
Petitioner is in effect asking that we reject a simple and direct application of the term "total amount received" as including everything received by the corporation in its own right, and employ instead a meaning which will give effect to the statutory purpose. We need not determine whether such an approach is permissible. Even if it were, it seems to us that the object of the statute as shown by its legislative history will best be served by including all items actually received and particularly those which represent a stable and unchanging cost per unit.
On this approach to the meaning of the Excess Profits Tax provision, it is of no consequence whether the beer taxes are manufacturers' taxes or sales taxes. They were included in the amount received for its stock in trade by petitioner, *137 and we see nothing in the statute or its background which will justify their elimination. It is not contended that such taxes, particularly the Federal tax, 8 are collected by the brewer as a trustee or fiduciary. While it may pass the economic burden of the tax to the purchaser, its failure to do so would not relieve it of the tax liability. Lash's Products Co. v. United States, 278 U.S. 175">278 U.S. 175; Liggett & Myers Co. v. United States, 299 U.S. 383">299 U.S. 383; Shearer v. Commissioner, (C. A. 2) 48 F. 2d 552; R. J. Reynolds Tobacco Co. v. Robertson, (C. A. 4) 94 F. 2d 167, certiorari denied 304 U.S. 563">304 U.S. 563; Casey Jones, Inc. v. Texas Textile Mills, (C. A. 5) 87 F. 2d 454; Continental Baking Co. v. Suckow Milling Co., (C. A. 7) 101 F. 2d 337; Heckman & Co. v. I. S. Dawes & Son Co., (C. A., D. C.) 12 F. 2d 154; Consolidated Distributors v. City of Atlanta, 193 Ga. 853">193 Ga. 853, 20 S. E. 2d *843 421;*138 Western Lithograph Co. v. State Board of Equal., 11 Cal. 2d 156">11 Cal. 2d 156, 78 P.2d 731">78 P. 2d 731; cf. Indian Motorcycle Co. v. United States, 283 U.S. 570">283 U.S. 570; Fresno Grape Products Corporation v. United States, (Ct. Cl. 1935) 11 F. Supp. 55">11 F. Supp. 55; F. Strauss & Son v. Coverdale, 205 La. 903">205 La. 903, 18 S. 2d 496; Wayne County Produce Co. v. Duffy-Mott Co., 244 N. Y. 351, 155 N.E. 669">155 N. E. 669. It cannot hence be said that amounts collected by petitioner, even though they effectively reimbursed it for the beer tax, were not its own "gross receipts."
Decision will be entered for the respondent.
Footnotes
1. SEC. 435. EXCESS PROFITS CREDIT -- BASED ON INCOME.
(e) Average Base Period Net Income -- Alternative Based on Growth. --
(1) Taxpayer to which subsection applies. -- A taxpayer shall be entitled to the benefits of this subsection if the taxpayer commenced business before the end of its base period, and if either --
(A) (i) the total assets of the taxpayer as of the first day of its base period (when added to the total assets for such day of all corporations with which the taxpayer has the privilege under section 141 of filing a consolidated return for its first taxable year under this subchapter), determined under paragraph (3), did not exceed $ 20,000,000, and
(ii) the total payroll of the taxpayer (as determined under paragraph (4)) for the last half of its base period is 130 per centum or more of its total payroll for the first half of its base period, or the gross receipts of the taxpayer (as determined under paragraph (5)) for the last half of its base period is 150 per centum or more of its gross receipts for the first half of its base period; or ↩
2. Sec. 713 (f), I. R. C. 1939↩ (repealed by sec. 122 (a), Rev. Act of 1945).
3. See footnote 5 infra↩.
4. "The use of the alternative gross receipts test is justified by the fact that a corporation may increase its physical volume of production materially by introducing additional equipment and new operating procedures which do not involve a corresponding increase in its labor force. * * *" H. Rept. No. 3142, 81st Cong., 2d Sess., p. 24; S. Rept. No. 2679, 81st Cong., 2d Sess., p. 27.↩
5. Petitioner, in its brief, quotes as "relevant" two passages from the committee reports (H. Rept. No. 3142, supra, at pp. 16 and 17; S. Rept. No. 2679, supra↩, at p. 18), including the statements that tests applied under the wartime Act were "largely a matter of subjective judgment" and referring to the 1950 Act as providing "automatic formulas for each of the most important types of cases." These statements were apparently made with reference to section 722. However, they may well represent the legislative frame of mind as applied to all the excess profits abnormality amendments.
6. SEC. 435. EXCESS PROFITS CREDIT -- BASED ON INCOME.
(e) Average Base Period Net Income -- Alternative Based on Growth. --
* * * *
(5) Gross receipts. -- As used in this subsection the term "gross receipts" with respect to any period means the sum of:
(A) The total amount received or accrued during such period from the sale, exchange, or other disposition of stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, and
(B) The gross income, attributable to a trade or business regularly carried on by the taxpayer, received or accrued during such period excluding therefrom --
(i) Gross income derived from the sale, exchange, or other disposition of property;
(ii) Gross income derived from discharge of indebtedness of the taxpayer;
(iii) Dividends on stocks of corporations; and
(iv) Income attributable to recovery of bad debts.↩
7. S. Rept. No. 2679, supra↩, at p. 27.
8. If the Federal tax is not eliminated, petitioner would not qualify even disregarding the State tax.↩