*243 Decision will be entered for the respondent.
Petitioner, a manufacturer of cosmetics, paid a manufacturers' excise tax which was assessed on a distributor's selling price. In the determination of petitioner's excess profits tax credit for 1943 and 1944, held, on the facts, that excise taxes paid in the fiscal years 1937 and 1938 were not abnormal deductions, or deductions abnormal in class, under section 711(b)(1)(H) or (b)( 1)(J)(i) of the Internal Revenue Code. Held, further, that under the facts petitioner's payment of these taxes did not result in an accrual of income for petitioner in 1937 or 1938.
*829 Respondent has determined deficiencies in petitioner's excess profits tax for the fiscal years ended June 30, 1943, and June 30, 1944, in the respective amounts of $ 30,162.05 and $ 25,015.60.
The issues are:
(1) In determining petitioner's excess profits tax credit for the fiscal years 1943 and 1944 computed on base period net income, should adjustments for manufacturers' excise taxes paid by petitioner for and during its fiscal years 1937 and 1938 be made as abnormal deductions under section 711 (b)(1)(H) or (b)(1)(J)(i), I. R. C.?
(2) Whether certain manufacturers' excise taxes became accruable as income by petitioner in the fiscal years 1937 and 1938 and thus increased petitioner's base period net income?
(3) What is the effect of section 734, I. R. C., if the excise taxes are abnormal deductions or if they are accrued income?
Another issue relating to excess profits tax credit carry-over was settled by stipulation.
FINDINGS OF FACT.
Most of the facts were stipulated and are so found.
Petitioner, a Delaware corporation with its principal office at Batavia, Illinois, filed*245 its income and excess profits tax returns for the years before us with the collector of internal revenue for the first district of Illinois. Petitioner keeps its books and files its returns on the accrual method of accounting with its fiscal year ending June 30.
Petitioner was organized December 13, 1926. From the date of its organization to July 1, 1933, petitioner was engaged in both the manufacture and the distribution of toilet preparations and pharmaceuticals. However, after July 1, 1933, the distribution of petitioner's products was exclusively handled by a selling corporation known as Campana Sales Company.
Effective June 21, 1932, there was imposed upon various enumerated articles, including cosmetics and toilet preparations, a manufacturers' excise tax equivalent to 10 per cent of the price for which these items were sold by the manufacturer. Section 603, Revenue Act of 1932. From June 21, 1932, to June 30, 1933, petitioner paid the manufacturers' excise taxes computed on the basis of petitioner's selling price to its trade.
*830 On June 9, 1933, petitioner entered into a contract for the exclusive distribution and sale of its toilet preparations for the period *246 after July 1, 1933. Under this contract petitioner agreed to sell its products exclusively to E. M. Oswalt, or his corporate transferees. On July 1, 1933, the sales contract was transferred to a corporation known as the Campana Sales Company (hereinafter sometimes referred to as the Distributor). Thereafter petitioner confined its activity solely to manufacturing; the Distributor in turn undertook the distribution, advertising, and sales promotion of the products. The contract between the petitioner and the Distributor contained the following:
Any excise tax now or which may hereafter be imposed by the State of Illinois or the United States shall be added to the above prices and paid by the Distributor.
The stock of petitioner and the stock of the Distributor were held by the same five people; three of these shareholders held 90 per cent of the stock in both companies. E. M. Oswalt held 60 per cent of petitioner's stock, and 45 per cent of the Distributor's stock.
From June 21, 1932, petitioner computed and paid the manufacturers' excise tax on the basis of its selling price to the trade. As of July 1, 1933, petitioner computed and paid the manufacturers' excise tax on the basis*247 of its selling price to the Distributor.
On or about June 20, 1935, the collector of internal revenue issued a notice and demand for tax covering additional manufacturers' excise taxes for the period from July 1933 to January 1935. This additional tax was computed on the selling price of the product as it was sold by the Distributor to the trade. The additional tax was the amount by which the excise tax, computed upon the Distributor's sales price, exceeded the original excise tax paid by petitioner, computed upon petitioner's own sales price to the Distributor. The reason for the assessment of additional excise tax was the Commissioner's claim that the proper basis for the tax was the selling price of the Distributor to its trade, rather than petitioner's selling price. On July 1, 1935, petitioner paid under protest the additional excise tax assessed by the collector. On August 22, 1935, petitioner paid under protest the additionally assessed excise tax for the months of February, March, and April 1935. Thereafter, petitioner continued to pay under protest the additional excise tax for the period May 1935 through March 31, 1939.
On March 19, 1940, the Commissioner assessed *248 against petitioner additional manufacturers' excise taxes totaling $ 9,321.85. This tax covered petitioner's sales to the Distributor for the months of April, May, and June 1939, computed on the basis of the Distributor's selling price. Petitioner filed claims for abatement of these assessments for the 3 months of April, May, and June. On March 12, 1945, in response *831 to the Commissioner's demand for payment, petitioner paid this additionally assessed excise tax.
Beginning with the month of July 1933 petitioner paid the collector monthly, and without protest, the manufacturers' excise tax computed on the basis of its sales price to the Distributor. After July 1935 petitioner also paid the collector, as a separate amount and under protest, the additional excise tax computed upon the basis of the Distributor's selling price to the trade.
Petitioner paid the following excise taxes without protest, and also passed on these taxes to the Distributor as part of petitioner's selling price:
| Taxable year | |
| ended June 30 | Amount |
| 1934 | $ 51,852.76 |
| 1935 | 54,878.21 |
| 1936 | 54,728.84 |
| 1937 | 61,478.38 |
| 1938 | 58,622.39 |
| 1939 | 43,265.04 |
Under petitioner's regular method of accounting *249 the above unprotested excise taxes, which were computed on the basis of petitioner's selling price to the Distributor, were not set up on petitioner's books as an expense item or claimed as deductions in its tax returns. Instead, the unprotested excise taxes paid were debited to an "excise tax payable" account. The Distributor's reimbursements for these taxes were credited to the "excise tax payable" account. Thus neither the unprotested excise tax payments to the Government nor the reimbursements from the Distributor were claimed as deductions or reported as income in petitioner's income tax returns.
For each of the fiscal years from 1934, through 1938, petitioner claimed (and the Commissioner allowed) as deductions from gross income the excise taxes which petitioner had paid under protest. The payments for 1937 and 1938 are the subject of this litigation. The protested manufacturers' excise taxes for these years are as follows:
| Taxable year | |
| ended June 30 | Amount |
| 1934 | $ 68,966.01 |
| 1935 | 121,414.87 |
| 1936 | 114,270.42 |
| 1937 | 85,473.31 |
| 1938 | 82,978.22 |
From July 1, 1938, to March 31, 1939, petitioner paid under protest additional excise taxes totaling $ 62,605.36. On March*250 12, 1945, petitioner also paid $ 9,321.85 in additional taxes which had previously been assessed for the months of April, May, and June 1939.
*832 On June 29, 1939, the manufacturers' excise tax statute was amended. As amended, the statute permitted the computation of the excise tax on the basis of the sales price less certain selling and advertising costs. This amendment materially reduced the basis of the tax, and petitioner paid no further excise taxes under protest with regard to sales made after June 29, 1939.
On October 4, 1937, petitioner commenced suit in the United States District Court for the Northern District of Illinois, Eastern Division, against the collector of internal revenue for the first district of Illinois. This suit was for recovery of the additionally assessed manufacturers' excise tax for the month of July 1933, which was paid under protest in 1935. On May 5, 1939, the district court decided the case in favor of petitioner, Campana Corporation v. Harrison (U. S. D. C., N. D. Ill. 1939). The collector appealed and on August 14, 1940, the Circuit Court of Appeals for the Seventh Circuit reversed the decision of the lower court. The Circuit *251 Court held that the tax should be computed upon the basis of the sales price of the exclusive distributor after reducing such price by the latter's selling and advertising expenses. Campana Corporation v. Harrison, 114 F. 2d 400. This resulted in a refund to petitioner in August 1942 of $ 2,708.37, exclusive of interest -- a lesser amount than that first determined by the district court. Upon audit, the internal revenue agent included the amount of $ 2,708.37 as income in petitioner's income and excess profits tax returns for the fiscal year 1941, the taxable year in which the district court entered its decision under the Circuit Court's mandate, and petitioner raised no formal protest thereto.
On June 4, 1941, petitioner commenced a second suit against the collector of internal revenue in the United States District Court at Chicago, Illinois. This suit was for recovery of the additionally assessed manufacturers' excise taxes paid by petitioner under protest for the months beginning with August 1933 through March 1939. Upon motion for summary judgment, judgment was entered in March 1942 in favor of petitioner, Campana Corporation v. Harrison*252 (U. S.D. C., N. D. Ill. 1942). The collector appealed and on May 12, 1943, the Circuit Court of Appeals for the Seventh Circuit reversed the lower court and remanded the case for trial on the merits. Campana Corporation v. Harrison, 135 F.2d 334">135 F. 2d 334.
On January 15, 1945, the United States Supreme Court decided the case of F. W. Fitch Co. v. United States, 323 U.S. 582">323 U.S. 582. The Court held that selling and advertising expenses were not deductible in computing manufacturers' excise taxes under section 603 of the Revenue Act of 1932.
Following the adverse decision in F. W. Fitch Co. v. United States, supra, petitioner on June 20, 1945, dismissed its suit pending in the United States District Court against the collector of internal revenue. *833 Thereafter, on June 25, 1945, petitioner and the Distributor entered into an accounting agreement respecting the additionally assessed manufacturers' excise taxes for the intercompany sales for the period July 1933 to June 1939.
Under the terms of the accounting agreement, petitioner collected on June 25, 1945, from the Distributor the aggregate*253 of the additional excise taxes paid by petitioner for the months from July 1933 through June 1939 (less the amount recovered from the United States as a result of petitioner's first suit for July 1933), plus certain interest charges thereon. The Distributor's payment totaled $ 542,321.67 plus $ 594.17 interest.
Petitioner included the amounts of additional excise tax which it collected from the Distributor as taxable income in its return for the fiscal year 1945 (with the exception of an aggregate amount of $ 71,927.31 of additionally assessed manufacturers' excise taxes paid by petitioner for the period July 1938 to June 1939 which had not been claimed by petitioner as a deduction from gross income in its tax return for the fiscal year 1939, or in its income tax returns for any other fiscal year). Petitioner paid its taxes for the fiscal year 1945.
Petitioner also reported these payments received from the Distributor for the additional excise tax in its excess profits tax return for the fiscal year 1945. Petitioner asserted, however, that these items constituted abnormal income attributable to the prior fiscal years 1934 through 1939, and claimed the benefits of section 721 of*254 the Code with respect thereto. Because the amounts of $ 85,473.31 and $ 82,978.22 were included as income in petitioner's income and declared value excess-profits tax return for the fiscal year 1945, petitioner paid more income tax and excess profits tax for the fiscal year 1945 than it would have paid if these items were not included in the return.
Petitioner did not accrue as income on its books for the fiscal years 1934 through 1939, nor report as income in its tax returns for these years, any of the additional excise taxes as being due from the Distributor for the intercompany sales in that period. Neither did petitioner assert any claim for or collect any amount from the Distributor for these additional taxes prior to the settlement of June 25, 1945.
In determining the excess profits tax deficiencies for the fiscal years 1943 and 1944, respondent computed petitioner's excess profits credit under the provisions of section 713. In computing petitioner's average base period net income for the purpose of determining petitioner's excess profits credit, respondent did not include in income for the fiscal years 1937 and 1938 any amounts representing the $ 85,473.31 and $ 82,978.22*255 of protested additional excise taxes paid by petitioner in those years.
*834 Petitioner's distributor did not accrue on its books nor deduct in its income tax returns for its fiscal years 1935 through 1939 any of the additional excise taxes paid by petitioner under protest for these years. However, the Distributor did accrue these amounts on its books for the fiscal year 1945, and it did deduct these amount in its income and excess profits tax returns for 1945. The Distributor showed in its June 30, 1938, audit report under a "Reserve for Contingencies," and similarly for other years, a footnote as follows:
Campana Sales Company, under a contract with Campana Corporation, may become liable for an aggregate amount of $ 489,044.34 of Manufacturers' excise taxes additionally assessed against Campana Corporation by the United States Bureau of Internal Revenue for the period from July 1, 1933, to June 30, 1938, including interest amounting to $ 15,941.51, all of which aggregate amount of $ 489,044.34 has been paid under protest by Campana Corporation.
The deductions for the additionally assessed manufacturers' excise tax for the fiscal years 1937 and 1938 were not abnormal, nor*256 were they of a class of deductions abnormal to the petitioner.
The amounts of $ 85,473.31 and $ 82,978.22 did not accrue as income for the petitioner in the fiscal years 1937 and 1938.
OPINION.
The basic issue involved in this proceeding is the amount of petitioner's excess profits tax credit for the fiscal years 1943 and 1944. The issue arises from the question of the proper treatment to be accorded certain items of manufacturers' excise taxes which petitioner paid in the fiscal years 1937 and 1938.
A brief resume of the facts will be proper:
Issue 1.
The Revenue Act of 1932 imposed an excise tax upon cosmetics and toilet preparations in the amount of 10 per cent of the price for which these items were sold by the manufacturer. From the time this tax was first imposed and until July 1, 1933, petitioner manufactured and distributed its own products. During this time petitioner computed and paid the tax on the basis of its selling price to the trade.
On June 9, 1933, petitioner entered into a contract whereby petitioner agreed to sell its entire output to one distributor. This distributor also undertook the cost of all advertising and sales promotion for petitioner's products. *257 After July 1, 1933, petitioner computed and paid the excise tax on the basis of its selling price to the distributor; petitioner passed this tax on to its distributor by adding the tax to the manufactured selling price. Petitioner's selling prices after the June 9, 1933, agreement were less than its prior selling prices because the prices after the agreement were based on the manufacture only and did not include the cost of promotion.
*835 On or about June 20, 1935, the Commissioner assessed additional excise taxes against the petitioner for the period from July 1933 to January 1935. This additional tax was based on the Distributor's selling price to the trade. Later a like assessment was made on all sales of the Distributor up to June 29, 1939. Then the excise tax provisions were amended so that the basis of the manufacturers' selling price excluded certain selling and advertising costs. Petitioner paid the additionally assessed taxes under protest but did not charge or collect this protested tax from the Distributor. The full amount of the additional excise tax which petitioner paid for the fiscal years 1934 through 1938 was claimed and allowed as deductions in those*258 years. Petitioner brought a test suit in the United States District Court to recover this additional tax from the Commissioner. Petitioner recovered the additional tax for July 1933. Petitioner then instituted a suit for the other months, but prior to the termination of that suit a Supreme Court decision was decided adversely to petitioner's contentions. Petitioner then dismissed its second suit.
In accord with the provisions of the sales agreement of June 9, 1933, and as ratified by another agreement in 1945, petitioner collected from the Distributor the sum of $ 542,915.84 with interest. This sum reimbursed petitioner for the additional excise taxes it paid from July 1933 through June 1939. This amount was included on petitioner's fiscal year 1945 income and excess profits tax returns. Under section 721 petitioner paid no excess profits tax on this sum recovered from the Distributor.
In computing petitioner's excess profits tax liability for the taxable years 1943 and 1944, respondent determined that the deductions for the excise taxes paid in the years 1937 and 1938 did not constitute abnormal deductions within the meaning of section 711 (b) (1) (H) or (b) (1) (J) (i) of*259 the Code. 1 Now, in this first issue petitioner contends that the additional excise taxes for the years 1937 and 1938 *836 should be disallowed in the computation of its excess profits tax credit for the taxable years 1943 and 1944. The issue is whether these deductions were abnormal, or abnormal in class.
*260 After reviewing the record we feel that the substance of petitioner's claim is based upon the contention that there were two separate companies, one for the manufacture and one for the promotion and selling, and that the transactions between the two companies were at arm's length. Therefore, the only excise tax that the petitioner should bear would be that tax levied on the manufacturing process and not the additional tax based on the promotion and selling activities. Perhaps this might be so if the intercompany transactions were at arm's length, but from the record before us we can not find such a fact. On the contrary, the evidence points in the opposite direction. The stock in both companies was closely held by the identical stockholders. These stockholders had identical economic interests -- the preservation of both companies, and this like interest would be adverse to arm's length transactions. Campana Corporation v. Harrison, 114 F. 2d 400, 408. Since the propriety of the additional excise tax was not successfully refuted by the petitioner, we must only determine the normality or abnormality of the protested tax.
The petitioner asks us*261 to find that these additional taxes, which were protested, resulted in abnormal deductions. However, there is nothing in the record to show that these deductions for the protested excise taxes were of a class abnormal for the petitioner. See Frank H. Fleer Corporation, 10 T. C. 191. The excise taxes for 1937 and 1938 were the same excise taxes that were first levied in 1933 on the manufacture of certain toilet preparations and pharmaceuticals. See Universal Optical Co., 11 T. C. 608. The mere fact that petitioner elected to take the protested excise taxes as deductions in these two base years rather than offset these taxes against income, as it had done with the unprotested taxes, did not make the deductions abnormal. Internal bookkeeping procedure in itself can not make a deduction abnormal under section 711(b)(1)(J)(i).
Petitioner also contends that it qualifies under section 711 (b) (1) (H). Since the Federal Government from time to time imposes various kinds of taxes on manufactured products, we can not reasonably say that the assessment of a manufacturer's excise tax was abnormal or extraordinary or something *262 which petitioner could not reasonably expect in the normal operation of its business. Frank H. Fleer Corporation, supra.Our finding that the deductions for excise taxes were not abnormal, or of a class abnormal to the petitioner, therefore disposes of this issue under section 711 (b) (1) (H). The respondent must be sustained on this issue.
*837 Issue 2.
Petitioner also contends that the additional excise taxes which it could pass on to its distributing agent were properly accruable as income in the fiscal years 1937 and 1938, and therefore should be added to its base period net income. The result of this addition would be an increased credit for its excess profits tax taxable years. Respondent, on the other hand, denies petitioner's contention and urges that no adjustment be made for the accrual of income.
In Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182, 184, it was held that "it is the right to revenue and not the actual receipt that determines the inclusion of the amount in gross income" when a taxpayer is on an accrual basis. This right alone is not controlling. We must look at the entire *263 record to determine whether the right to the income was consonant with the surrounding facts.
Petitioner's contention is based on the June 9, 1933, agreement whereby it was agreed between the parties that the petitioner's selling price be increased by any excise taxes levied by the United States or the State of Illinois. Probably without the extenuating facts such as we have here, this agreement would require us to hold that the protested excise taxes accrued as income in 1937 and 1938. Looking at the other facts before us, we find that the bookkeeping records of petitioner, while at best only evidentiary, do not show these additional excise taxes to be accrued or collected by petitioner; nor do the auditor's reports for the Distributor reflect the additional excise taxes as accrued accounts payable. We said in Jamaica Water Supply Co., 42 B. T. A. 359, 365; affd., 125 F. 2d 512, and find that it is apropos here, that:
Petitioner's own treatment of the disputed items in failing to accrue them on its books, or to include them in its return, is persuasive evidence of the correctness of respondent's position. * * *
Further, *264 petitioner's other actions refute any claim that these taxes accrued as income. When petitioner brought suit against the Commissioner for recovery of these additional taxes, prior to recovery petitioner would have been required to show under section 621 (d) of the Revenue Act of 1932 the following:
(d) No overpayment of tax under this title shall be credited or refunded * * * in pursuance of a court decision or otherwise, unless the person who paid the tax establishes * * * (1) that he has not included the tax in the price of the article with respect to which it was imposed, or collected the amount of tax from the vendee, or (2) that he has repaid the amount of the tax to the ultimate purchaser of the article, or unless he files with the Commissioner written consent of such ultimate purchaser to the allowance of the credit or refund.
*838 Certainly, if these requirements were met, petitioner would be precluded from holding that the amounts for the additional excise tax were accrued income. The additional taxes were either accrued income, or refundable from the Commissioner. The alternate theories are incongruous; the additional taxes must be income or not, for both theories*265 can not coexist. We can only conclude from the bookkeeping records, the suits for refund, and the 1945 treatment of the Distributor's payment that petitioner considered that the additional taxes did not accrue as income in the fiscal years 1937 and 1938.
We said in Harbor Plywood Corporation, 14 T. C. 158, 161; affd., 187 F.2d 734">187 F. 2d 734:
If there is any contingency as to the taxpayer's right to the income, as distinguished from an uncertainty as to the time of its receipt, it is taxable in the year when the contingency is removed. United States v. Safety Car Heating & Lighting Co., 297 U.S. 88">297 U.S. 88. * * *
Petitioner's suit created a contingency, and although a right to pass on the tax to its distributor may have existed, petitioner voluntarily elected to seek a refund from the Commissioner rather than accrue the income or collect the additional tax from the Distributor. We therefore must sustain the respondent on this issue.
Issue 3.
Since we have made no adjustments which would require a consideration of section 734 of the Code, it will not be necessary to discuss respondent's alternative *266 contention with respect to Issues 1 and 2.
Decision will be entered for the respondent.
Footnotes
1. SEC. 711. EXCESS PROFITS NET INCOME.
(1) General rule and adjustments. -- The excess profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made * * *:
* * * *
(H) Payment of judgments, and so forth. -- Deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest on any of the foregoing, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess; and
* * * *
(J) Abnormal deductions. -- Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph, of the classification of deductions --
(i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, * * *↩