Before GOODRICH, STALEY and HASTIE, Circuit Judges.
We are asked to decide whether, in the particular circumstances of this case, Section 41 of the Internal Revenue Code justified the Commissioner of Internal Revenue in making "adjustments" of the Fort Pitt Brewing Company's gross income for 1942 and 1943, adding to income the amount of the net increase during each taxable year of the taxpayer's accounting "Reserve for Returnable Containers".
Section 41 provides that "if the method [of accounting] employed [by a taxpayer] does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income." 26 U.S.C., 1946 ed., § 41. Also in force at the times in question and implementing Section 41 was Section 29.41-1 of Treasury Regulation 111 which required that "The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such manner as clearly reflects the taxpayer's income." The Regulation provided further that where this is not accomplished by taxpayer's regular method of accounting, "the computation shall be made in such manner as in the opinion of the Commissioner clearly reflects * * * [income]."
Taxpayer, a Pennsylvania corporation, produces and sells large quantities of malt and brewed beverages. It maintains its accounts on the accrual basis. It provides returnable containers - bottles, kegs and barrels - in which it packages and distributes its products. A regulation of the Pennsylvania Liquor Control Board requires a stipulated minimum deposit on all returnable original containers of gallon size or less in which brewed beverages are sold. All of the taxpayer's invoices contain the following stipulation:
"Deposit for return of package is as follows: Barrels $8.00, Half Barrels $6.00, Quarter Barrels $4.00 and Eighth Barrels $1.00 each, Cartons of 2 Dozen Small Bottles 50, Case of 2 Dozen Small Bottles 75, Bottles short in cases returned will be charged at rate of 2 for small bottles. Purchaser buys only the beer delivered and billed. Bottles, Cases, Kegs, Etc. containing the products delivered therein are never sold but remain absolute property of Brewing Company. Deposit for return of packages repaid purchaser for number delivered only on return of packages to Brewing Company. Purchaser agrees to these conditions."
No time limit is specified for the return of containers. During 1942 taxpayer received deposits of almost $5,000,000 on containers. During 1943 the figure approached $6,000,000. Refunds in 1942 were nearly $100,000 less than deposits, and in 1943 over $200,000 less. A year by year picture of deposits, refunds and consequent bookkeeping accumulations is provided by the following table, with the taxable years italicized:
Fiscal Year Deposits Deposits Excess of Balance in
Ended Oct. 31, Received Refunded Deposits Over Reserve
1937 842,464.25 832,179.75 10,284.50 28,247.00
1938 1,214,122.75 1,184,063.25 30,059.50 58,306.50
1939 2,381,485.50 2,335, 750.65 45,734.85 104,041.35
1940 3,063,054.00 3,035,347.75 27,706.25 131,747.60
1941 3,998,938.27 3,910,821.23 ...