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PETERSON PRODUCE COMPANY v. UNITED STATES

May 23, 1962

PETERSON PRODUCE COMPANY, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: John E. Miller, Chief Judge.

  STATEMENT

The plaintiff, Peterson Produce Company, filed its complaint on August 17, 1961, seeking to recover the sum of $110,410.15 income tax paid for the taxable year ending August 31, 1956, by virtue of a net operating loss carryback to 1956 from the taxable year ending March 31, 1959. The plaintiff alleged that the disallowance of the said net operating loss carryback to the taxable year ending August 31, 1956, by the Commissioner of Internal Revenue and the assertion of a tax deficiency for the taxable year ending March 31, 1959, were erroneous in that the defendant disallowed the use of a cash method of accounting in the plaintiff's broiler farming department, which method disclosed a net operating loss.

In its answer filed October 23, 1961, the defendant denied that the disallowance by the Commissioner of Internal Revenue of plaintiff's use of the cash method of accounting in its broiler farming department was erroneous for the reason that the broiler farming operations did not constitute such a new and separate business that entitled the plaintiff to depart from its accrual method of accounting, which it was accustomed to use to reflect the income of all its previous operations. Defendant further alleged that if plaintiff were to use the accrual method of accounting to reflect the operations of its broiler farming department for the taxable year ending March 31, 1959, in harmony with the feed and hatchery departments of plaintiff, which also used the accrual method of accounting to reflect its operations for the same taxable year, that the cost of broiler flocks on hand at the end of the year in question should be included in the plaintiff's closing inventory, which determination would result in the disallowance of a net operating loss carryback from the said year to the taxable year ending August 31, 1956, and would further result in an assertion of an income tax deficiency for the taxable year in question.

The case was tried to the court on February 6 and 7, 1962, and at the conclusion of the presentation of the testimony, it was taken under advisement by the court and the parties were requested to submit briefs in support of their respective contentions. The briefs have now been submitted and the court, having considered the pleadings, the testimony adduced at the trial, the exhibits, and the briefs of the counsel, now makes and files herein its findings of fact and conclusions of law, separately stated.

FINDINGS OF FACT

1.

The plaintiff is a corporation duly organized and existing under the laws of the State of Arkansas with its principal place of business at Decatur in Benton County, Arkansas.

2.

Peterson Produce Company paid corporation income taxes for the taxable year ending August 31, 1956, amounting to $129,926.02. On or about June 14, 1959, plaintiff filed its federal income tax return for its taxable year ending March 31, 1959, and reported a net operating loss of $212,327.22. On or about June 3, 1959, the plaintiff filed with the District Director its claim for refund of taxes for the taxable year ending August 31, 1956, in the amount of $110,410.15, based on the net operating loss from the taxable year ending March 31, 1959, carried back to the taxable year ending August 31, 1956, which refund was paid to the plaintiff.

During 1960, the District Director examined plaintiff's books and records, and after said examination the District Director disallowed the net operating loss carried back to the taxable year ending August 31, 1956, and asserted an income tax deficiency of the $110,410.15 refund paid to the plaintiff along with a further income tax deficiency of $23,183.89 for the taxable year ending March 31, 1959, all of which was paid to the defendant by June 5, 1961.

3.

Plaintiff was incorporated during the year of 1947. Prior to that time plaintiff was a sole proprietorship owned and operated by Lloyd Peterson, which dealt primarily in the sale of feed for livestock and poultry. During the ten years prior to 1947, Mr. Peterson also sold on a limited scale baby chicks to growers. Subsequent to the date of incorporation, plaintiff not only sold feed to local chicken growers, but also entered the hatchery business. The breeding of chickens had been carried on at one of plaintiff's own farms since 1946, and by 1952 the plaintiff had on hand what is called a laying flock for purposes of producing its own eggs to be incubated. Since 1952 plaintiff's feed and hatchery operations have increased considerably.

On September 1, 1958, plaintiff created a broiler farming division, which made a total of three divisions comprising the plaintiff corporation, the original two being the feed and hatchery divisions, or, as they are sometimes referred to, "departments."

4.

The effect of the creation of this new department by the plaintiff has been characterized as being both external and internal. The external effect is reflected in the plaintiff's dealings with the various chicken growers with whom it contracts. Prior to September 1, 1958, the plaintiff had two basic forms of growing contracts, which it utilized in the broiler farming operations carried on by local growers. One form of contract was called a "profit sharing" type of arrangement whereby the plaintiff guaranteed the grower a minimum price per pound per chicken marketed plus a conversion incentive per head, if any, and any profits above this price were shared equally by both parties. The essential provisions of this agreement (DX B), entitled "Contract for Raising Poultry," are as follows:

    "The Party of the First Part [Peterson] agrees
  to sell to the Party of the Second Part [Grower],
  chicks, feed, litter, fuel, and medication
  required to raise the poultry and pay the Party
  of the Second Part on the following basis:
    "The Party of the First Part agrees to pay the
  Party of the Second Part two cents per pound for
  all poultry sold, plus one-half the profit, when
  the conversion is under 42 pounds. Also, the
  Party of the First Part agrees to pay the Party
  of the Second Part conversion incentive as
  follows:
 
  42 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 1/4¢ per bird.
  43 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 1/2¢ per bird.
  44 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 3/4¢ per bird.
  45 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 1¢ per bird.
  46 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 11/4¢ per bird.
  47 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 11/2¢ per bird.
  48 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 13/4¢ per bird.
  49 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 2¢ per bird.
  50 lbs. meat per 100# feed -grower will receive 2¢ per lb.
                              plus 21/4¢ per bird.
    "The amount paid the Party of the Second Part
  per pound plus the conversion incentive per head,
  if any, will be charged to the Party of the
  Second Part's account. All profits above that
  will be divided equal.
    "The Party of the Second Part agrees to furnish
  one square foot for each bird, one stove for each
  500 birds, one 3-gallon waterer for each 125
  chicks, or one 4-foot water trough for each 250
  chicks (or the equivalent with a combination of
  the two), and three 4 or 5-foot feeders with
  reels for each 100 chicks.
    "Fuel cost in the excess of 2¢ per head will be
  paid by the Party of the Second Part.
    "It is further agreed that the Party of the
  Second Part will contact the Party of the First
  Part prior to the sale of the poultry and get
  their consent to the sale of the same."

Another form of contract was called a "conversion" contract, whereby the plaintiff agreed to pay the grower a price per bird sold based on a sliding scale which was governed by the weight of meat produced per 100 lbs. of feed consumed. The essential provisions of this second type of agreement (DX A), also entitled "Contract for Raising Poultry," are as follows:

    "The Party of the First Part [Peterson] agrees
  to sell to the Party of the Second part [grower],
  chicks, feed, litter, fuel and medication
  required to raise the poultry, and pay the Party
  of the Second Part on the following conversion
  basis:

40 Conversion- Grower will receive 5¢ per bird sold.

39 1/2   "   - Grower will receive 4 1/2¢ "    "    "
39       "   - Grower will receive 4¢ "    "    "
38 1/2   "   - Grower will receive 3 1/2¢  "    "    "
38       "   - Grower will receive 3¢ "    "    "
37 1/2   "   - Grower will receive 2 1/2¢  "    "    "
37       "   - Grower will receive 2¢ "    "    "
36 1/2   "   - Grower will receive 1 1/2¢  "    "    "
36       "   - Grower will receive 1¢ "    "    "
    "The Grower will also receive all of the profit
  after the conversion guarantee has been applied
  against the account.
    "If a loss occurs, it will be the obligation of
  the Party of the First Part.
    "The Party of the Second Part agrees to furnish
  one square foot for each bird, one stove for each
  500 chicks, one 3-gallon waterer for each 125
  chicks or one 4-foot water trough for each 250
  chicks (or the equivalent with a combination of
  the ...

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