*88 Decision will be entered under Rule 50.
1. Even though taxpayer had abnormal net income of a class within section 721 (a) (2) (A), I. R. C., held, no part thereof is excludable from excess profits net income where evidence fails to show the portion thereof attributable to prior years.
2. Held, sale of warehouse receipts covering 1,152 barrels of whiskey in November 1943 was made by stockholders of taxpayer and not by taxpayer, which had distributed such receipts prior thereto as a dividend in kind without restriction and without negotiation for the sale thereof.
*326 The Commissioner determined deficiencies as follows:
| Fiscal year ended June 30 -- | ||
| 1943 | 1944 | |
| Income tax | $ 4,679.28 | |
| Declared value excess profits tax | 376.76 | $ 2,988.94 |
| Excess profits tax | 36,091.89 |
The questions involved are: (1) Whether the amount of $ 7,500 received by petitioner in the fiscal year ended June 30, 1943, is abnormal *327 income as defined in section 721 of the Internal Revenue Code, and (2) whether petitioner sold 1,152 barrels of whiskey in the year ended June 30, 1944, realizing a profit of $ 39,233.24 therefrom, or whether such whiskey was owned and sold by its stockholders, having received it prior to the sale as a dividend in kind. Assignments of error involving depreciation allowances for the years ended June 30, 1943 and 1944, were adjusted by stipulation. The assignment of error as to the disallowance of an excess profits*90 credit carry-over of $ 7,607.20 in computing excess profits tax for the year ended June 30, 1944, was abandoned.
FINDINGS OF FACT.
The petitioner is a Kentucky corporation and was organized in 1933 to carry on a general distillery and warehousing business. Its principal offices are at Lawrenceburg, Kentucky. Its returns for the taxable years were prepared on an accrual basis and were filed with the collector of internal revenue for the district of Kentucky.
Throughout the year 1943, the issued and outstanding capital stock of petitioner consisted of 960 shares of common stock of the par value of $ 100 per share.
On April 1, 1940, the petitioner entered into a written agreement with Schenley Distillers Corporation, hereinafter referred to as Schenley. Under the contract petitioner agreed to sell and Schenley agreed to purchase from petitioner 12,897 barrels of whiskey, which had been produced prior to January 1, 1940, and an additional 41,000 barrels, 9,000 of which were to be produced in 1940 and 8,000 barrels in each of the years 1941, 1942, 1943, and 1944, all at a purchase price equal to cost, as defined in the contract, plus 5 cents per proof gallon original gauge. The contract*91 further provided, in part, as follows:
8. Seller agrees that it will produce no whiskey at said distillery other than that provided for in this contract, except that seller may produce not more than one thousand (1,000) barrels per annum beginning in 1941 for its own account, provided said whiskey is so produced that the word "Ripy" does not appear in any form on the barrel and that such name is not required on any bottle label or bottled in bond stamp.
* * * *
10. Seller agrees not to dispose of any of the whiskey produced for its own account prior to January 1, 1945. If buyer exercises its option to renew this agreement as hereinafter provided, then buyer shall have the option to purchase all of the said whiskies produced by seller for its own account at seller's cost of production computed as above plus interest and insurance actually paid by seller to date of exercise of option, plus 2 1/2 cents per gallon. If buyer does not exercise said option to purchase the whiskey produced by seller for its own account, buyer shall be entitled to no credit against storage charges hereinafter provided for on account of said seller's whiskey in seller's bonded warehouses.
* * * *
18. Beginning*92 as of April 1, 1940 buyer shall pay to seller for storage of all whiskey purchased and to be purchased under this agreement and for all *328 whiskey heretofore produced and stored in seller's warehouses, which is or may be owned by buyer, at the rate of $ 13,500.00 per annum. Against said charge seller shall credit buyer with all storage charges collected by it which accrue on and after April 1, 1940 whether such charges accrue on whiskey now owned by others or on whiskey hereinafter sold to others by buyer. Said storage charges shall be collected by seller at 10 cents per barrel per month on all whiskey for which warehouse receipts are now outstanding, and at the rate provided for in any warehouse receipt hereafter issued. All warehouse receipts hereafter issued shall be approved by buyer as to form and amount of charges. * * *
19. Seller represents that it has bottling facilities to bottle either in bond or taxpaid at the rate of approximately five hundred (500) cases of pints per day. Except as herein otherwise provided, seller will do no bottling for anyone other than buyer during the term of this contract or any renewal thereof. Seller agrees to bottle for buyer either*93 in bond or taxpaid all whiskey purchased under this agreement and all whiskey previously produced at seller's distillery which may be owned by buyer, as requested by buyer, for 5 cents per case in excess of cost of bottling to seller. Buyer is to furnish all bottling supplies and agrees to purchase from seller all usable bottling supplies now owned by seller. Cost of bottling as herein used shall include:
(a) Cost of direct labor in the bottling house;
(b) Workmen's Compensation Insurance premiums and Social Security taxes paid with respect to such labor;
(c) Real Estate taxes on bottling house;
(d) Cost of fire insurance premiums on bottling house;
(e) Fuel and power cost, reasonably allocable to bottling house;
(f) Minor repairs on machinery in bottling house not in excess of $ 250.00 in any one year;
(g) Cost of Federal special tax stamps.
* * * *
21. On sixty days' notice previously given, buyer shall have the right as of January 1, 1945 to purchase seller's business, good will and the aforesaid brand names owned by seller for $ 15,000.00
22. On sixty days' notice previously given, buyer shall have the right on the expiration of this agreement or on the expiration of any renewal*94 thereof, to renew this agreement for five additional years until four such renewals have occurred. Such renewals shall be on the same terms and conditions as this agreement, except
(a) Buyer shall purchase under each renewal up to 40,000 barrels at the rate of 8,000 barrels per year subject to the exceptions and under the conditions above stated;
(b) Seller shall produce no whiskey during any such renewal period except for buyer.
23. If buyer exercises its option to renew this agreement for one additional five-year period, the business, good will and aforementioned brand names of seller shall become the property of buyer at the expiration of said first renewal period.
* * * *
26. If buyer does not exercise its option under Paragraph 21 hereof and does not exercise its option to renew this agreement as of January 1, 1945, seller shall have the option to purchase from buyer so much of buyer's good will as attaches to aforementioned brand name of buyer together with such brand name for $ 15,000.00. If such option is exercised by seller, buyer on receipt of said $ 15,000.00 agrees to execute the necessary bills of sale, conveyances or other documents to *329 vest in seller all *95 of buyer's right, title and interest in the aforementioned brand name of buyer.
* * * *
28. As of January 1, 1945 or during the term of any renewal of this agreement buyer shall have the option upon sixty days notice to purchase seller's distillery plant and premises, machinery, equipment, warehouses, and all Real Estate and personal property owned by seller and used in connection with said distillery for $ 175,000.00, plus the cost new, less depreciation, of any capital additions made thereto by seller after April 1, 1940. If this option is exercised, the purchase price shall include the purchase of the business, trade marks and good will of the seller. Seller hereby agrees upon exercise by the buyer of the option to purchase as in this paragraph provided, to execute the necessary deeds and other documents to convey title to the Real Estate, personalty, business, good will and trade marks to the buyer, warranting a good and clear title to all of the same subject to the lien of the United States and the State of Kentucky on the Real Estate for taxes on whiskey produced on said property. Upon completion of said transfer this contract shall terminate.
* * * *
35. Buyer hereby is granted*96 the right to assign this contract, and hereby guarantees performance thereof by any such assignee.
* * * *
37. If because of conditions beyond its control seller is unable to bottle whiskey for buyer as herein provided, and such conditions shall continue for 30 consecutive days, buyer shall have the right to remove so much of said whiskey from seller's premises as may be necessary in its judgment to meet its bottling requirements and may bottle said whiskey at any other bottling house under any of the aforesaid brands without making any payment to seller on account of said bottling, or until such conditions have been removed.
* * * *
During 1941 and 1942, in addition to meeting its contract requirements as to production of whiskey for Schenley and Bernheim, petitioner manufactured more than 1,450 barrels of whiskey for its own account. It had such whiskey on hand on June 30, 1942.
On June 10, 1940, Schenley assigned its interest in the aforementioned contract to its wholly owned subsidiary, Bernheim Distilling Co., hereinafter referred to as Bernheim.
In 1941 Bernheim discontinued the bottling of whiskey at petitioner's bottling plant. In 1942, when petitioner began to operate part*97 time for the Government, it noticed that Bernheim began to withdraw barrels of whiskey from petitioner's warehouses, transfer the same to warehouses owned by it, and had it bottled elsewhere than at petitioner's plant. The petitioner questioned the right of Bernheim to have the whiskey produced by petitioner bottled by others, contending that under the contract it was entitled to bottle all the whiskey manufactured by it and to make a profit therefrom of 5 cents a case or approximately 80 cents a barrel. For that reason it had maintained its bottling house on a standby basis, necessitating the employment of a bottling house manager. The bottling supplies began to deteriorate. Petitioner contended that Bernheim should pay for the salary of the bottling house manager and for the supplies.
*330 In about March 1942 the War Production Board placed the distilling industry on a time allocation basis under which petitioner was required to operate part time for the Government in the production of alcohol for war purposes. Beginning October 1942 all distilleries were operated exclusively for the production of alcohol for war purposes. During this period prices of alcohol and whiskey*98 and other products were fixed by OPA. As a result, questions arose between petitioner and Bernheim as to the allocation of costs of production and bottling supplies.
In December 1942 petitioner made a demand upon Bernheim for the payment to it of 80 cents for every barrel of whiskey removed from petitioner's warehouse which petitioner had not been permitted to bottle, and of the salary of the bottling house manager and supplies; that Bernheim begin to bottle at petitioner's plant; and that an allocation of costs be made. Bernheim contended that the bottling provisions merely constituted an option in its favor of which it could avail itself, but that it was under no obligation to do so, and it advised petitioner that it did not expect to do any more bottling of whiskies at petitioner's plant.
A conference between general counsel for petitioner and counsel for Bernheim and various correspondence and telephone calls failed to bring about a settlement of the differences between the parties satisfactory to both. Finally, at the suggestion of Lester Jacobi, the president of Schenley, who was also an officer and director of Bernheim, a conference between officers and general counsel of*99 petitioner and officers and counsel of Bernheim was held beginning June 21, 1943, in New York, where the office of Schenley was located. As a result thereof, an agreement modifying the agreement of April 1, 1940, was entered into by petitioner and Bernheim on June 23, 1943.
Such contract provided, among other things, that Bernheim was to be liable for certain of the items of costs embraced in the purchase price fixed in the original agreement to the extent such items related directly to the production of whiskey for Bernheim and only for such periods during which the distillery was actually engaged in the production thereof, for only five-sixths of certain other such cost items in the agreed amount of $ 4,238.43 for 1942, and that in subsequent years such cost items were to be paid by Bernheim only for the number of days of each year during which petitioner was both legally able to engage in the production of whiskey for Bernheim and was not engaged in production of whiskey or any other commodity for any one other than Bernheim, and that Bernheim was not to be liable for any items of cost except warehousing charges for any period during which petitioner was using its distillery in*100 the production of high wines, alcohol, or any other production for the war effort. The agreement provided further as follows:
*331 VII. Paragraph 10 shall be amended to read as follows:
10. Seller agrees to reserve out of any whiskey produced at the distillery pursuant to paragraph 8 hereof for anyone other than Buyer the first 1,000 barrels per annum so produced during each of the years 1941 through 1944 inclusive, and not to dispose of the same prior to January 1, 1945. If prior to said date Buyer exercises its option to renew this agreement (as hereinafter provided) or if prior to said date Buyer gives notice of its intention to exercise its option to purchase the distillery and other property pursuant to paragraph 28 hereof, then Buyer shall have the option to purchase all of said whiskies so produced by Seller and so reserved at Seller's cost of production computed as above, plus interest and insurance actually paid by Seller to the date of exercise of option, plus 2 1/2 cents per gallon. Seller shall have the right to store without payment of charges or credit therefor against the yearly storage charge of $ 13,500.00 such whiskies as are produced by it and reserved*101 for Buyer as in paragraph "8" and in this paragraph provided so long as said whiskies are so reserved. As to whiskey produced by Seller and not so reserved, storage charges to be credited to Buyer shall be computed at the rate of $ 0.05 per barrel per month while such whiskey remains the property of Seller and is stored in the existing warehouses at said distillery; provided that the regular storage charges as hereinafter provided shall apply to all barrels of whiskey so stored not owned by Seller.
'Buyer and Seller further agree that regardless of the amount of whiskey produced by Seller for its own account, after the date hereof, Buyer will be obligated to make available to Seller storage space in the existing bonded warehouses of Seller's distillery for not more than 3,000 barrels excluding all barrels containing whiskies of the Seller heretofore manufactured.'
VIII. Buyer agrees to pay Seller upon execution of this agreement, in addition to the amount provided in paragraph III of this modification agreement, and in addition to the bottling house costs specified below in this paragraph, the sum of Ten thousand dollars ($ 10,000), in complete discharge of all claims of every *102 nature arising prior to the date hereof and whether or not heretofore asserted by Seller. It is further agreed that paragraph 19 of the said original contract is hereby eliminated therefrom. It is further agreed that Seller shall have the right to use its bottling facilities for its own account, except that no bottling done by Seller shall be bottled under any brand name in which the name "Ripy" appears, or in such way that the name "Ripy" appears on any bottle, bottled-in-bond strip stamp, or any label. Buyer shall pay the cost of the bottling house operations, including salary to T. B. Ripy up to November 1, 1942, which costs now are agreed to amount to $ 1,055.41, but thereafter shall have no obligation for any of the costs of said bottling house. The Seller further agrees that it will bottle for the Buyer at such times as the Buyer may request same at the then standard bottling rates or at such lower price as may be agreed upon by the parties, provided such bottling shall not be done at any time during which Seller is using the bottling house for other bottling.
* * * *
XI. Paragraph 24 of the contract is hereby eliminated. Paragraph 37 of the contract shall be amended to *103 read as follows:
"37. Buyer shall have the right at any time and from time to time to remove any whiskey purchased under this agreement or owned by Buyer - - whether produced during the original term or any renewal of this agreement- - and stored in Seller's warehouses and bottle the same elsewhere or make any other disposition of said whiskey as Buyer shall desire in its sole discretion. Upon such removal Buyer may, if it so desires, bottle the said whiskey under any of the brands specified in paragraph 20 as belonging to *332 the Buyer or as belonging to the Seller or under any other brand name without any obligation, in any case, to Seller to pay any royalty or other charge or amount whatsoever. Except as herein specificially provided the provisions of paragraph 18 of said contract shall remain in full force and effect."
* * * *
The petitioner was paid the $ 10,000 provided for in paragraph VIII of the above agreement within the taxable year ended June 30, 1943. Of this amount, $ 2,500 was paid out for expenses, leaving net income to petitioner of $ 7,500.
From January 1, 1938, to June 23, 1943, petitioner received no income in settlement of any claim, breach of contract, *104 judgment, or decree, or interest thereon.
The contract of April 1, 1940, as amended by the agreement of June 23, 1943, is still in effect. There were some amendments after June 23, 1943, which related solely to production problems.
On February 3, 1943, OPA fixed a ceiling price on all whiskies in bond. The price for 1941 whiskey was higher than the price for 1942 whiskey. Under Bernheim's option to purchase, petitioner was obligated to sell such whiskey to it at approximately 50 cents a gallon, whereas the ceiling price was in excess of one dollar a gallon. Under prevailing conditions whiskey was scarce and buyers were not difficult to find.
After the conference in June 1943 it was the opinion of petitioner's officers who attended the conference and its general counsel that Bernheim would not exercise its option to purchase petitioner's assets, as petitioner had hoped it would do, but that Bernheim would exercise its option to renew the contract as amended for an additional five-year period beginning January 1, 1945. In that event Bernheim had the further option to purchase all the whiskey petitioner had manufactured on its own account and which, under the contract, it was required*105 to hold until January 1, 1945, at cost of production, plus interest and insurance actually paid and 2 1/2 cents per gallon profit. As the holding of whiskey until January 1, 1945, would result in a loss to petitioner, petitioner's general counsel recommended to petitioner's officers in their hotel room at the time of the New York conference to distribute the whiskey manufactured on petitioner's own account to its stockholders as a dividend, instead of holding it pending the probable renewal of the contract. It was his opinion that Bernheim or Schenley would not sue petitioner if the whiskey were distributed to the stockholders as a dividend but that it would sue if such whiskey were sold by petitioner to competitors of Bernheim or Schenley.
At a meeting of the board of directors of petitioner held on October 12, 1943, the following resolution was adopted:
Resolved, that there be and hereby is declared, subject to the terms and conditions hereinafter stated, on the common stock of this company, to common stockholders *333 of record at the close of business on the record dates as hereinafter defined and fixed, and payable on the dividend date as hereinafter defined and fixed, *106 a dividend of 1,152 barrels of whiskey, payable in warehouse receipts of one and two-tenths barrels of whiskey for each share of common stock, subject to the terms and conditions set forth in such warehouse receipts, to be paid to the following named stockholders (being all of the stockholders of said corporation) in the amounts set forth opposite their names, to wit:
| No. of Barrels | ||
| Shares of | at 1.2 | |
| Name | Stock | Barrels per |
| share | ||
| J. Pelham Johnston | 27 1/2 | 33 |
| Susan Johnston | 27 1/2 | 33 |
| Ernest W. Ripy | 135 | 162 |
| Mrs. E. F. Ripy | 10 | 12 |
| Ernest W. Ripy, Jr | 10 | 12 |
| Tilford L. Wilson | 65 | 78 |
| Catherine Wilson | 65 | 78 |
| Dr. Coleman Johnston | 15 | 18 |
| Marius Johnston, Jr | 10 | 12 |
| Nancy C. Johnston | 60 | 72 |
| T. Ward Havely | 30 | 36 |
| W. Bruce Isaacs | 30 | 36 |
| Manfrdd [sic] V. Burgin | 285 | 342 |
| Charles E. McGinnis | 10 | 12 |
| Horace Wilson | 30 | 36 |
| Mary Rodes Wilson | 10 | 12 |
| E. Reed Wilson | 90 | 108 |
| Samuel P. Burnam | 25 | 30 |
| Lister Gaines | 12 1/2 | 15 |
| Raymond Gaines | 12 1/2 | 15 |
| 960 | 1,152 |
Further Resolved, that the record date for the payment of such dividend in kind on the common stock be and it hereby is defined and *107 fixed as and at November 8, 1943, and that the dividend date for the payment of such dividend in kind to the common stockholders be and hereby is defined and fixed as and at November 8, 1943.
Further Resolved, that it is the intention of the company and of the Board of Directors in the declaration of the foregoing dividends, that such dividends irrevocably belong to the stockholders of record at the close of business on October 12, 1943, that this company by action of its Board of Directors in this connection, has divested itself of all title to the warehouse receipts necessary to carry such distribution in kind into effect and it is hereby directed that all necessary entries on the books of this company be made accordingly, so as to separate such dividends from the corporate assets of the company.
Under date of October 13, 1943, petitioner sent a letter to each of its 20 stockholders reading as follows:
You are advised that the Board of Directors of your company did, on the 12th day of October, 1943, authorize the payment to stockholders of record, as of October 12, 1943, a dividend consisting of one and two-tenths barrels of whiskey per share of Common Stock, issued and outstanding.
*108 Due to the fact that the company made whiskey in two different years you will receive distillation of both 1941 and 1942. This is done in order to make the distribution entirely equitable and fair to each stockholder.
Purely for your information, we would like to advise that the O. P. A. has placed maximum prices on warehouse receipts and bulk whiskey and the maximum amount you can receive under this regulation is $ 1.25 per proof gallon for your 1941 whiskey, and $ 1.07 per proof gallon for your 1942 whiskey. These *334 prices are subject to deductions for State and County Taxes against these whiskies. No storage has accrued to date and there will be no deduction on that account until after the whiskey is owned by you. For your information we have enclosed a computation based on proof gallons and have made the deductions for taxes and storage, in the event you are desirous of selling your whiskies at this time.
In the event you desire to sell your whiskey at this time, the company would like to suggest to you that Schenley Distillers Corporation, Empire State Building, New York City, owns all of the whiskies heretofore manufactured by this company. Schenley also has a contract*109 to take a percentage of all future production. The company believes that it would be good for future business for its stockholders to sell this whiskey to Schenley, in the event you desire to sell same.
The company has discussed with its counsel, John K. Skaggs, Jr., in Louisville, Kentucky, if his office would be willing to handle the paper work connected with such sales. He has said he would be glad to do it as a courtesy to the stockholders, making no charge for his services, the only charge being made would be the cost of mailing and registration.
If you wish Mr. Skaggs to do this for you, will you please endorse this letter to that effect and return it to us, as our authority for delivering the warehouse receipts owned by you to Mr. Skaggs.
Let us hear from you promptly upon receipt of this letter, as to your wishes in the matter.
All letters were returned to petitioner by the stockholders, each bearing an endorsement which in substance authorized delivery of the declared dividend in kind to Skaggs and sale thereof.
The 1,152 barrels of whiskey were stored in petitioner's Government bonded warehouses and were covered by warehouse receipts of petitioner numbered 138 to 205, *110 inclusive, dated October 20, 1943, and stating that the whiskey covered by each was received "for account of and subject to the order of Ripy Bros. Distillers." The 1,152 barrels of whiskey were not removable from such warehouse until called for by the holder or holders of such receipts and unless such holder or holders were licensed to sell the same. None of petitioner's stockholders were so licensed and they could not have withdrawn the 1,152 barrels of whiskey from the warehouse.
The warehouse receipts, endorsed in blank as follows:
Ripy Bros. Distillers
Thomas B. Ripy
Ass't Sec'y
were delivered on November 5, 1943, to Skaggs at Louisville, Kentucky, by petitioner's assistant secretary. The delivery was then made because such officer had to be in Louisville, Kentucky, on that date and it would have been inconvenient for him to be there again on November 8. Skaggs signed a receipt, which listed the names of the stockholders, warehouse receipt numbers, and the number of barrels and gallons of whiskey to which each stockholder was entitled. The receipt also stated as follows:*335 These warehouse receipts are delivered to you as a dividend on the common stock of this*111 company and are delivered to you as agent of the respective stockholders, in accordance with written authority received from each stockholder.
Skaggs, to whom the warehouse receipts were delivered, had represented petitioner as legal counsel from time to time prior to 1941 and in 1941 became its general counsel on a retainer basis.
On November 9, 1943, Skaggs telephoned to the president of Shenley at New York City. He informed Jacobi that petitioner had declared a dividend of warehouse receipts and that he was acting as agent for the stockholders and asked him whether Schenley or any of its affiliated companies, including Bernheim, would be interested in buying such warehouse receipts. The answer was in the affirmative, with a request that a list of the number of barrels and date of manufacture be furnished. This list was sent by air mail the same day. On November 11, 1943, Jacobi informed Skaggs that Bernheim would purchase the warehouse receipts and instructed him to draw on Bernheim through the Bankers Trust Co. of New York. Separate invoices, dated November 11, 1943, were prepared at Skaggs' office showing sale to Bernheim by John K. Skaggs, Jr., agent for each stockholder, *112 of the amount of whiskey to which he or she was entitled at $ 1.25 a gallon for the 1941 whiskey and $ 1.07 a gallon for the 1942 whiskey. The warehouse receipts, without endorsement by any of the stockholders or by Skaggs as agent, or otherwise, and invoices were delivered on November 17, 1943, to the Louisville Trust Co. with instructions to draw on Bernheim through Bankers Trust Co. of New York for the sum of $ 65,483.36, the aggregate amount of the invoices. The draft so drawn was paid and the proceeds credited to the regular account of Skaggs on November 26, 1943. From such proceeds the amount of $ 65,463.56 was distributed to the stockholders in various amounts by checks dated November 29, 1943, the difference of $ 19.80 being the amount expended for bank charges, postage, insurance, etc., incurred in the sale of the warehouse receipts.
On November 20, 1943, an entry was made in petitioner's journal charging dividends paid and crediting barrel whiskey inventory as follows:
| Dividend paid | $ 26,230.32 | |
| Barrel whiskey inventory, | ||
| 1941 distillation, 576 barrels, | ||
| 28,788.47 gallons at 42.7 cents a gallon | 12,292.68 | |
| 1942 distillation, 576 barrels, | ||
| 28,707.83 gallons at 48.55 cents a gallon | 13,937.64 |
*113 The explanation of the entry given was to set up dividend in kind paid in whiskey at the rate of six-tenths barrel per share each of 1941 and 1942 whiskey as declared by the board of directors on October 12, 1943. The entries were posted to the general ledger.
*336 The Commissioner determined that a profit of $ 39,233.34 * from a sale on or about November 8, 1943, of 1,152 barrels of whiskey to Schenley Distiller Corporation purportedly made by petitioner's stockholders was includible in petitioner's income for the taxable year ended June 30, 1944, under section 22 of the Internal Revenue Code.
The sale of the warehouse receipts involved was made by petitioner's stockholders as owners thereof through their agent and not by petitioner.
OPINION.
After the execution of the modification contract entered into June 23, 1943, in addition to other amounts, petitioner received $ 10,000 from Bernheim, of which the amount of $ 2,500 was disbursed for expenses, *114 leaving petitioner a net income of $ 7,500. There is no dispute as to such facts.
The petitioner claims that the amount of $ 7,500 was abnormal in class under section 721 (a) (1) of the Internal Revenue Code and on a class as described in section 721 (a) (2) (A), as follows: "(A) Income arising out of a claim, award, judgment, or decree, or interest of any of the foregoing; * * *" It further claims that the amount of $ 7,500 is excludable from adjusted excess profits net income for the year ended June 30, 1943, and should be spread equally over the period commencing April 1, 1940, the date of the original contract, and ending June 23, 1943, the date of the modification contract and payment of the $ 10,000.
In December 1942 petitioner made three demands upon Bernheim, viz., that the whiskey purchased by Bernheim remaining in petitioner's warehouses be bottled at petitioner's bottling house, that Bernheim pay to petitioner 5 cents per case, or 80 cents per barrel, bottling profit on every barrel of whiskey removed from petitioner's warehouses without bottling at petitioner's bottling house, and that an allocation of cost of bottling house supplies and other costs be made. Other demands*115 were made by petitioner, but they are not material to this issue since they were disposed of in other provisions of the modification agreement.
The above demands were settled in paragraphs VIII and XI of the modification agreement of June 23, 1943. In paragraph VIII it was agreed that paragraph 19 of the original agreement containing the bottling provisions be eliminated. It was further agreed that Bernheim pay the cost of bottling operations in the agreed amount of $ 1,055.41, including salary of the bottling house manager, up to November 1, 1942, and that thereafter it was under no obligation to pay any of the costs of the bottling plant. Petitioner was given the right to use its bottling facilities for its own account and it agreed *337 to bottle for Bernheim at such times as it requested at standard bottling rates or such lower price as might be agreed upon. In addition to the above bottling house costs, Bernheim agreed to pay to petitioner the sum of $ 10,000, "in complete discharge of all claims of every nature arising prior to the date hereof and whether or not heretofore asserted by Seller [the petitioner]."
In paragraph XI of the modification agreement Bernheim was*116 given the right to remove any whiskey purchased by it from petitioner and to bottle the same elsewhere or make other disposition of it as it desired, in its sole discretion.
Assuming, without further discussion, that the amount received was "Income arising out of a claim" under section 721 (a) (2) (A) and that the amount received was abnormal in class in that no such income was received during the four previous taxable years (see Premier Products Co., 2 T. C. 445, 453), "the taxpayer gets no deduction unless the net abnormal income or some part of it is properly attributable to other years under section 721 (b)." Geyer, Cornell, Newell, Inc., 6 T. C. 96, 6 T.C. 96">103; W. B. Knight Machinery Co., 6 T. C. 519, 534, and Harris Hardwood Co., 8 T.C. 874">8 T. C. 874.
The fact that the claim or claims arose out of diverse interpretations of the contract does not establish that the amount received in settlement of the claims is attributable to the period beginning with the date of the execution of the contract, April 1, 1940, and ending with the date of the modification agreement, June *117 23, 1943, as contended by petitioner.
Section 35.721-3 of Regulations 112 provides, in part, as follows:
Items of net abnormal income are to be attributed to other years in the light of the events in which such items had their origin, and only in such amounts as are reasonable in the light of such events. * * *
The "events in which such items had their origin" are those which gave rise to the controversy, whether of omission or commission of obligations required to be performed under the contract.
Bernheim failed in 1941 to bottle at petitioner's bottling plant, as it had done in the past, and then "as the company [petitioner] moved into 1942, when it began to run part time for the Government, part time for itself, and part time for Bernheim [March 1942], it noticed that Bernheim was gradually emptying the company's warehouse and transferring the barrels of whiskey to other warehouses that were owned by Bernheim." Apparently there was no controversy in this respect in or during 1940. In December 1942 petitioner demanded, among other things, payment to it of the 5 cents per case, or 80 cents per barrel, profit on every barrel of whiskey withdrawn and not bottled by it. It would*118 seem that the withdrawal of whiskey without bottling was not to any considerable extent prior to about March 1942, or petitioner would have noticed it prior to that date. However, the amount *338 of bottling previously done by petitioner for Bernheim, the number of barrels removed without bottling, the time when such removal began and during which it continued, and the aggregate amount claimed by petitioner are not disclosed. Without such information it can not be determined with reasonable certainty what portion of the abnormal income allocable to the bottling claim is attributable to the taxable year and prior years.
Furthermore, it appears that the income involved was not paid in settlement of the loss of anticipated bottling profits only. The nature of such other claims is not disclosed, except in general terms, i. e., claims of every nature arising prior to the date of the modification contract, whether or not theretofore asserted by petitioner. It may be, as suggested by respondent, that a portion of the amount was paid for the elimination of the bottling provision and the right given Bernheim to withdraw the whiskey from petitioner's warehouses without further dispute. *119 If so, such portion would not be attributable to prior years.
The argument of petitioner that the only period over which the income could have been accrued was the period beginning April 1, 1940, when the first contract, including the bottling provisions, was entered into, and ending June 23, 1943, when the contract was amended, is fallacious. Ordinarily where the right to income is disputed it is not accruable and includible in gross income until taxpayer becomes entitled to and does receive it. North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417. If the income was income ordinarily includible by petitioner in the period beginning April 1, 1940, and ending June 23, 1943, then the income was not abnormal in class. Except for the provisions of section 721, the income involved was includible in gross income for the year ended June 30, 1943. To avail itself of the benefit of that section, petitioner must show that the net abnormal income was attributable to other years "in the light of the events in which such items had their origin." This the petitioner has failed to do. The determination of the Commissioner on this issue, therefore, is approved.
*120 It is contended by petitioner that it, in good faith and unconditionally, distributed the warehouse receipts covering 1,152 barrels of whiskey to its stockholders as a dividend in kind, that the sale thereof in November 1943 was made by the stockholders, acting through their agent Skaggs, and that it realized no gain from such transaction. In support of its position it relies on Commissioner v. Falcon Co. (CCA-5), 127 Fed. (2d) 277; Novo Trading Corporation v. Commissioner (CCA-2), 113 Fed. (2d) 320; Howell Turpentine Co. v. Commissioner (CCA-5), 162 Fed. (2d) 319; Transport, Trading & Terminal Corporation, 9 T. C. 247 (on appeal CCA-2); Acampo Winery & Distilleries, Inc., 7 T. C. 629; Cooper Foundation, 7 T. C. 389; and George T. Williams, 3 T. C. 1002.
*339 The respondent contends that the transaction, while in form a distribution of a dividend in kind and sale thereof by the stockholders, was in substance a sale by the petitioner arranged for at the*121 New York conference held in June 1943, and that petitioner realized a profit of $ 39,233.24 therefrom in the year ended June 30, 1944. The figures involved are not in dispute. The respondent relies on such cases as Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331; United States v. Phellis, 257 U.S. 156">257 U.S. 156; MacQueen Co. v. Commissioner (CCA-3), 67 Fed. (2d) 857; Meurer Steel Barrel Co. v. Commissioner (CCA-3), 144 Fed. (2d) 282; Taylor Oil & Gas Co. v. Commissioner (CCA-5), 47 Fed. (2d) 108; Hellebush v. Commissioner (CCA-6), 65 Fed. (2d) 902; Burnet v. Lexington Ice & Coal Co. (CCA-4), 62 Fed. (2d) 906; Fairfield Steamship Corporation v. Commissioner (CCA-2), 157 Fed. (2d) 321; certiorari denied, 329 U.S. 774">329 U.S. 774.
Whether the sale was made by petitioner or by its stockholders is a question of fact. Each case must be determined upon its own peculiar facts.
The rules applicable in determining*122 such question are stated in Commissioner v. Court Holding Co., supra, as follows:
* * * The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.
The respondent argues that an analysis of the entire transaction leads to the inevitable conclusion that petitioner's representatives had an understanding with Schenley relative to the purported dividend before the corporate resolution declaring the dividend was adopted. Respondent's position is untenable in view of the uncontradicted testimony*123 of petitioner's general counsel and of Tilford L. Wilson, its secretary and director, both of whom participated in the negotiations in New York in June 1943, that no discussion was had during such negotiations or thereafter with the representatives of Bernheim or Schenley with respect to the distribution of the warehouse receipts. They testified further that no officer or agent of petitioner participated in the sale of the receipts for or on its behalf, and that Skaggs in such transaction acted, not as general counsel for petitioner, but as agent for the stockholders.
On November 5, 1943, the warehouse receipts for the 1,152 barrels of whiskey were delivered to Skaggs as the agent of and for the account of the stockholders of petitioner. Under the terms of the *340 warehouse receipts the whiskey was held at the warehouse for the account and subject to the order of petitioner. Petitioner had endorsed such receipts in blank prior to delivery to Skaggs. Sec. 358.380, Ky. Rev. Stats. By delivery of the receipts so endorsed the stockholders acquired title to the goods covered thereby, subject to the terms of any agreement with the transferor. Sec. 358.420, Ky. Rev. Stats. The*124 receipts were delivered as a dividend in kind, without any restriction. The receipts so endorsed could then be negotiated by delivery without further endorsement. Sec. 358.370, Ky. Rev. Stats. It is true that the stockholders, not holding licenses for the sale thereof, could not gain actual possession of the whiskey. This is immaterial. The receipts were negotiable. As holders therof, they or Skaggs, as their agent, could lawfully sell the same to Schenley or Bernheim or other person licensed to sell whiskey and permitted to withdraw the same from the warehouse. This the respondent does not dispute. When Skaggs sold the receipts to Schenley or Bernheim he was acting as agent for the stockholders and not as general counsel or agent for the petitioner. That Skaggs was general counsel of petitioner and made no charge for his services to the stockholders is not important.
The fact that petitioner breached its contract in distributing the receipts and Schenley and Bernheim did not sue petitioner is not indicative of an understanding between petitioner and Schenley or Bernheim. It is true that under the contract petitioner agreed not to dispose of whiskey manufactured for its *125 own account prior to January 1, 1945. Bernheim's or Schenley's option to purchase such whiskey was not exercisable at any time, but was conditional upon the exercise of the option to renew the agreement for an additional five-year period or the exercise of its option to purchase petitioner's distillery. Unless it exercised one or the other option petitioner was not required to sell such whiskey to either Schenley or Bernheim. Neither Schenley nor Bernheim had exercised either option and they were not required to do so until sixty days prior to January 1, 1945. Petitioner was operating full time in the manufacture of alcohol for war purposes. Whiskey was scarce. Those dealing in that commodity were anxious to buy. In our opinion Schenley's purchase and failure to sue petitioner was due rather to other circumstances, such as suggested by respondent on brief, as follows:
* * * Whiskey was at a premium in 1943 and Schenley was desirous of obtaining all the whiskey possible regardless of the circumstances involved. * * * It is logical to assume under the circumstances that Schenley was more desirous of obtaining whiskey during this period even if it cost more than its contract with*126 petitioner called for, than becoming involved in litigation with the petitioner for breach of contract. * * *
*341 As stated in United States v. Cummins Distillers Corporation (CCA-6), 166 Fed. (2d) 17, where the corporation had not negotiated with the party to whom the sale was made, and:
* * * where the corporation declares and pays a dividend in kind to its stockholders and the stockholders upon their own responsibility dispose of corporate assets so assigned, a gain realized from this sale may result in income to stockholders but none to the corporation. Howell Turpentine Co. v. Commissioner, 162 Fed. (2d) 319 (C. C. A. 5). * * *
In that case warehouse receipts covering barrels of whiskey were distributed to stockholders in liquidation.
It is our conclusion, and we have so found, that the warehouse receipts involved were sold by petitioner's stockholders through their agent and not by petitioner. The amount of $ 39,233.34, therefore, is not includible in the gross income of petitioner for the year ended June 30, 1944.
Decision will be entered under Rule 50.
Footnotes
*. The correct figure is $ 39,233.24 ($ 65,463.56 - - $ 26,230.32).↩