Court Opinion

ID: 4616669
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:34:58.209334+00
Date Added: 2024-06-11T07:59:30.876689
License: Public Domain

MORRISON WOOLEN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Morrison Woolen Co. v. CommissionerDocket No. 9543.United States Board of Tax Appeals10 B.T.A. 8; 1928 BTA LEXIS 4211; January 19, 1928, Promulgated *4211  Goods shipped to fill orders taken on sample were rejected by consignees within the taxable year.  Held, such shipments were not sales and the rejected goods were properly included in petitioner's closing inventory.  Harry A. Fellows, Esq., for the petitioner.  Thos. P. Dudley, Jr., Esq., and Harold D. Thomas, Esq., for the respondent.  ARUNDELL*8  This proceeding results from a notice declaring a deficiency of $15,476.92 for 1918, an overassessment of $6,843.66 for 1919, and a deficiency of $288.17 for 1920.  The errors alleged for the years 1919 and 1920 related to reduction of invested capital on account of prior years' taxes and were waived by petitioner at the hearing, in view of the provisions of section 1207 of the Revenue Act of 1926.  For the year 1918 the only question involved is whether respondent erred in adding to gross income an item of returned sales, amounting to $23,306.83, which the petitioner included in its closing inventory at a market value of $12,579.01.  FINDINGS OF FACT.  The petitioner is a maine corporation engaged in the manufacture of woolen goods at Dexter, Me., and in 1918 kept its accounts on the accrual*4212  basis and filed its return on the calendar year basis.  The petitioner sold its product through F. E. Carpenter, a woolen-goods salesman with an office in New York City, and a majority stockholder and vice president of the petitioner.  H. A. Caesar & Co. of New York City, denominated by Carpenter as his banker or factor, made advances to the petitioner on goods shipped to it to be placed in stock for the account of the owner and guaranteed the payment of all accounts for completed sales.  The full invoice value of goods shipped under orders, less commissions and other charges, was payable to the petitioner upon the shipment of goods by H. A. Caesar & Co. to buyers.  H. A. Caesar & Co. rendered a statement to the petitioner each month showing the debits and credits to its account.  The statements included charges made in the account for returned goods received and added to the petitioner's stock of merchandise on hand.  Carpenter's method of taking orders was to make a note of them in his order book.  All orders for goods had to be accepted by H. A. Caesar & Co. and the petitioner.  If the order was acceptable to both *9  parties the goods were shipped by Caesar from the owner's*4213  stock of goods in Caesar's warehouse.  Buyers were billed for their purchases on invoices of Caesar, which by their terms made the account payable to it instead of to the petitioner.  Complaints made by purchasers were addressed to either Carpenter or H. A. Caesar & Co., since the petitioner was not known to the buyers of its product.  It was the practice of Carpenter, acting for and on behalf of the petitioner, to endeavor to adjust complaints made by buyers because of the inferior quality of the goods either by correspondence with the complainants or through the services of textile adjusters.  Carpenter had authority to, and did, adjust all complaints.  Rejected goods were returned direct to H. A. Caesar & Co., which added them to the petitioner's stock of merchandise in its warehouse and charged the petitioner's account with the invoice value of the returned material.  During the closing months of 1918 merchandise of petitioner having an invoice value of $23,306.83 was rejected by the consignees thereof, and notices of the rejections were sent to either Carpenter or Caesar during the taxable year.  Such goods were taken into the petitioner's closing inventory for 1918 at a market*4214  value of $12,579.01.  Some of the goods had not been manufactured at the time the orders were taken by Carpenter.  On an audit of the petitioner's returns for that year the Commissioner eliminated the item from the inventory account and added the invoice value of the shipments to 1918 income.  OPINION.  ARUNDELL: On the face of the petition filed it appears that for the year 1919 respondent determined an overassessment not arising out of an abatement claim.  We therefore have no jurisdiction for that year, , and even though the question of jurisdiction was not raised by the respondent, it is our duty to dismiss the proceeding in so far as it relates to 1919.  . The Commissioner seems to have proceeded on the theory that when goods were shipped there was a completed sale and that title did not revert in petitioner within the taxable year.  This proposition, on its face, is unsound.  Where goods are sold on sample there is an implied right in the buyer to compare the bulk with the sample and he is not deemed to have accepted them unless and until he has had reasonable*4215  opportunity to examine them.  Sec. 47, Sales Act; Williston on Sales, 1924 Ed., p. 1767; §§ 97 and 128; Personal Property Law, Book 40, McKinneys Consolidated Laws of New York.  Passing of title is largely a matter of the intent of the parties and where, as here, goods were sold on sample and the so-called sale was merely jotted down by *10  the salesman in his memorandum book, it is inconceivable that the buyer intended to take title before an examination of the goods.  Some of the orders were taken for goods not at that time manufactured.  Respecting such transactions, it is said in , that: When the subject matter of a sale is not in existence, or not ascertained at the time of the contract, an undertaking that it shall, when existing or ascertained, possess certain qualities, is not a mere warranty, but a condition, the performance of which is precedent to any obligation upon the vendee under the contract; because the existence of those qualities being part of the description of the thing sold becomes essential to its identity, and the vendee cannot be obliged to receive and pay for a thing different from that for which*4216  he contracted.  Further, it is said in that case (p. 372): And so, when a contract for the sale of goods is made by sample, it amounts to an undertaking on the part of the seller with the buyer that all the goods are similar, both in nature and quality, to those exhibited, and if they do not correspond the buyer may refuse to receive them, or if received, he may return them in a reasonable time allowed for examination, and thus rescind the contract.  ; . The authorities cited sustain this proposition, that when a vendor sells goods of a specified quality, but not in existence or ascertained, and undertakes to ship them to a distant buyer when made or ascertained, and delivers them to the carrier for the purchaser, the latter is not bound to accept them without examination.  The mere delivery of the goods by the vendor to the carrier does not necessarily bind the vendee to accept them.  On their arrival he has the right to inspect them to ascertain whether they conform to the contract, and the right to inspect implies the right to reject them if they are not of the quality required*4217  by the contract.  We think that in view of petitioner's method of handling orders and shipments, the shipments made were not completed sales properly accruable on petitioner's books as income in the year 1918.  The Commissioner makes some point of the fact that it is not shown that the goods were physically returned during the year 1918.  Under both the common law and the sales act a buyer is not bound to return goods which he refuses to accept.  ; Williston, supra, p. 1768; McKinney's New York Laws, supra, § 131. It is further pointed out by the Commissioner that it was not shown that the goods were charged to the petitioner by its factor within the year.  This was but a detail of bookkeeping, and, as we said in : Mere bookkeeping entries can not make sales from transactions which were in fact not sales or income from something which is in fact not income.  See also *4218 . We are of the opinion, from all the evidence, that the shipments of goods in 1918 invoiced at $23,306.83 were not in fact sales.  The *11  amount thereof should accordingly be excluded from sales for that year.  No question is raised as to the figure of $12,579.01 at which the goods were taken into closing inventory for 1918 and we assume that it was correct.  Judgment will be entered on 15 days' notice, under Rule 50.