
    476 F. 2d 1327
    HEAVEN HILL DISTILLERIES, INC. v. THE UNITED STATES
    [No. 372-68.
    Decided April 13, 1973]
    
      
      David Sachs, for plaintiff; J ohn Tarrant, attorney of record. Myer Gálanter, Paul J. Bschorr and Tarrant, Oornbs, Blackwell & Bullitt, of counsel.
    
      Joseph Kovner, with, wliom was Assistant Attorney General Scott P. Grampton, for defendant. Gilbert E. Andrews and Jane 0. Bergner, of counsel.
    Before CowsN, Ohief Judge, Davis, SkeltoN, Nichols, Kasi-iiwa, EjctNzig, and BeNNett, Judges.
    
    
      
       Defendant prefers to use its private label of “maturation period” for this phase, and to term as "maturation costs” the associated expenses rather than the here synonymous terms of storage or carrying charges. Any of the terms are applicable. Names do not change nature.
    
   PeR Curiam

The ultimate issue is whether plaintiff corporation, a distiller of bourbon whiskey, may currently deduct in its fiscal years 1962-64 the expenses of “carrying charges” for storing the whiskey in barrels in its warehouses while it ages and awaits customers, rather than adding such carrying charges to the cost of its bulk whiskey inventory and deferring recovery of the charges to ultimate sale or disposition. While the plaintiff expensed all such carrying charges, including those associated with the storage of whiskey sold in bulk to others (about 95 percent of its production), the present claim relates only to those carrying charges associated with the whiskey which plaintiff owned, i.e. which it bottled on its own account and under its own labels for wholesale disposition by the case, or which it sold in bulk after the year of production. In deciding this question, the dispositive issue is whether the aging of the whiskey is part of its manufacturing or production process. If it is not, defendant concedes it has no defense.

Since its inception in 1946 tbe plaintiff lias engaged in .distilling, storing during tlie aging period, and selling bourbon whiskey in the State of Kentucky. After distillation the raw (“cistern”) whiskey is entered into 50 or 51 gallon white oak barrels which have been charred on the inside. The barrels are then stored in plaintiff’s warehouses, which have no temperature or humidity controls. While the barrels are thus stored their contents, through chemical interaction between the whiskey and the charred interior surfaces of the barrels, gradually change in color, aroma, and taste. This is the aging process which takes place automatically without human or mechanical intervention, except for routine checking of the barrels for leaks, random sampling before bottling, and sporadic rotation of some barrels in the warehouses whenever time permits, although rotation is not necessary to proper aging and many barrels are not disturbed.

Each barrel in storage bears a separate serial number and the date when it is filled with raw whiskey and placed in the warehouse. That is the production date. Similar data is carried in plaintiff’s inventory records. Because of the progressive chemical change that occurs in the barreled whiskey while aging in storage, each age acquires a distinctive quality with respect to its color, aroma, and taste that differentiates it from other barreled whiskey which has been in storage for a lesser or greater period of time. Whiskey stored for 2 years is called straight whiskey, and for 4 years or more it is called bonded whiskey when bottled and labeled.

Approximately 95 percent of plaintiff’s production is sold in bulk to purchasers, some of it being bottled for them. The rest is retained and bottled by plaintiff under its own labels for wholesale case disposition. Heaven Hill labels are applied only to whiskey which is at least 4 years of age. The bulk whiskey is salable from the moment it is barreled and stored. During the tax years in suit from 67 to 77 percent was sold to customers during the first year of storage, and kept in storage for the customer until it reached the age desired, whereupon it was delivered in that form to the customer or, at the customer’s direction and cost, bottled for him by plaintiff. The customer pays plaintiff storage charges from the date of purchase, which yields plaintiff a profit over its storage costs.

When plaintiff offers its bulk whiskey for sale the quoted prices vary according to the posted age of the product. Generally the price increases with the product’s age. The difference in price approximates the accumulated storage charges for the longer period. But the chief determinant of price is the competitive factor of market supply and demand. Over the years there has been wide fluctuation in the price of bulk whiskey. Older bourbon whiskey is assessed an ad valorem tax by the State of Kentucky at a higher value than younger whiskey. The State determines the value for tax purposes, which increases for each year of age, but whiskey of the same age and type by all producers in the State is assessed the same value. There is no necessary correlation between the assessed value of the whiskey for state tax purposes and its market value.

Since its incorporation in 1946 the plaintiff has consistently accounted for its bulk whiskey inventories by recording the average production cost of each barrel produced. Plaintiff’s recorded production cost has included everything except the warehouse cost for the aging period, which warehouse cost the plaintiff has charged off to ordinary and necessary business expense under section 162 of the 1954 Code, or its predecessor counterpart. The warehouse cost per barrel is known. Only the warehouse costs attributable to the bulk whiskey inventory which plaintiff owns and bottles for its own account are in issue here, as stated before. The warehouse costs for bulk whiskey owned by plaintiff’s customers and left to age in plaintiff’s facilities are also currently deducted as expense on plaintiff’s books, but these deductions are not part of our problem.

Plaintiff’s certified public accountant has certified its financial statements, which expensed the warehouse costs, as being in accordance with generally accepted accounting principles and fairly presenting the results of plaintiff’s operations, i.e., its net income. The approval of plaintiff’s consistent practice of expensing its warehouse costs rather than adding them to inventory was based on the assumption that the storing of bulk whiskey while it aged was not part of the production or manufacturing process of bourbon whiskey, but represented only storage costs of a finished, salable product.

On audit of plaintiff’s Federal income tax returns for fiscal years 1962 through 1964 the Commissioner of Internal Eevenue determined that the storage costs were costs of production not to be deducted as period costs but deferred until sales of the inventory by capitalization or additions to inventory costs incurred in the year for goods held for future sale. Deficiencies were assessed and paid as itemized in findings 36 and 37, infra, claims for refund duly filed and disallowed, and this suit followed.

The plaintiff does not consider the storage interlude of its bourbon whiskey business to be manufacturing, or production, primarily because the product becomes salable the moment it is barreled and placed in the warehouse, two-thirds of total production being sold in the first year before it is matured enough to please the palate. Defendant contends that the storage phase (which it terms “maturation period,” the costs of which are accordingly “maturation costs”) is a continuation of the manufacturing process because whiskey of a particular age is a separate and distinct production from whiskey of any other age, and this distinction is recognized by the trade, the public, and by plaintiff in its pricing and record-keeping. The theory being, it is supposed, that older whiskey appeals to the more lucrative carriage trade, while greener whiskey has a less exacting constituency. Under the circumstances peculiar to this plaintiff’s method of doing business, which may not necessarily apply to other members of the bulk bourbon industry whose procedures may differ in significant respects for all the record shows, we hold that the period from the deposit of the 'barreled bourbon whiskey in the plaintiff’s warehouses to the time of its withdrawal therefrom constitutes storage rather than manufacturing, even though the whiskey is maturing the while. The necessary consequence of this conclusion is that the whiskey is a finished, salable (though not appetizing) manufactured product at the commencement of its storage.

There is no fixed all-purpose definition of the term “manufacture.” See Duke Power Co. v. Clayton, 274 N.C. 505, 513-14, 164 S.E. 2d 289, 295 (1968); 55 C.J.S. Manufactures § 1(a) (1948). See also the variety in 26 Woeds ahd Pheases (1953) under “Manufacture.” Etymologically the term compounds from the latin words “manu” and “facere”, literally, to make by hand. Machinery is metaphorically a mechanized extension of the human hand. In an industrial society manufacturing is no longer represented by the handcrafted products of an earlier cottage industry age, but rather is characterized by the production of goods in quantity through the concentrated employment of multiple labor, much material, and relatively large amounts of capital in the form of structures, divers machines, and abundant finances. Manufacture is not a technical word but has a common, ordinary, but elastic meaning. Sharpe v. Hasey, 134 Wis. 618, 620-21, 114 N.W. 1118, 1119 (1908). Its meaning varies too according to the context in which it is employed. For example, where it is used in a statute which extends or denies the benefits of a license or tax exemption to such classification, or in a customs provision applying a different duty to imported manufactures, it becomes important to apply a liberal or a strict construction according to the legislative purpose of the measure. The dictionary definition is of secondary value in the interpretive process. In the present case, the term is not used in the relevant tax statute, but nevertheless is involved in implementation of the statutory intent.

The most comprehensive judicial analysis of the term “manufacturing” exposed by research is found in In re I. Rheinstrom & Sons Co., 207 F. 119 (E.D. Ky. 1913), aff'd 221 F. 829 (C.A. 6), appeal dismissed, 239 U.S. 11 (1915), where in concluding that the elaborate processing of Maraschino cherries constituted manufacturing with regard to establishing creditor priorities under a bankruptcy statute, the court painstakingly sifted and analogized numerous precedents. Written 60 years ago, no case before or since Rheinstrom has made such a major effort. The message of much of the lengthy discussion there is that the processing and manipulation of agricultural or natural products into a form suitable.for sale in the market does not constitute manufacture, so long as the article sold is the processed but recognizable form of the original or natural product, despite the labor and machinery necessary to achieve that result. But where the transformation of the product is too pronounced, and the processing too involved, as in the case of Bhein-strom’s Maraschino cherries, then the end product may become a manufacture, having abandoned its original characteristics en route.

Thus the roasting, grinding and blending of raw coffee beans for commercial sale was held not to be manufacturing, nor the mixing of several varieties of tea into a blend for sale. People ex rel. Union Pac. Tea Co. v. Roberts, 145 N.Y. 375, 40 N.E. 7 (1895). And the purchase, slaughtering and sale of sheep and lambs, with byproducts of wool, hides, and rendered tallow (fat being chemically transformed through heat) was held not to be manufacture. “At most, they were merely prepared for market and preserved until sold.” People ex rel. New England Dressed Meat & Wool Co. v. Roberts, 155 N.Y. 408, 412, 50 N.E. 53, 54 (1898). Grass cut into hay, then dried in the open and stored in a warehouse for a month before baling and shipment, in the course of which processing the native starch converted to sugar through natural forces to make a more nutritive fodder, was held not to be manufacture in the context of a customs law imposing a tariff on manufactured imports. Frazee v. Moffitt, 18 F. 584 (N.D.N.Y. 1882). The court there found that

* * * [T]he drying and any conversion of starch into sugar are mere incidents of the necessary cutting to enable it to be stored for food * * *. Dried apples would not be called a manufactured article, though the apple is peeled and cored and sliced, and dried by exposure to the sun and manipulation. The substance of dried apples is still apples. * * * [18 F. at 587.]

In commenting on this case, Rheinstrom, supra, at p. 142, observed that if there is a change made in converting grass into hay, Bheinstrom repeats this observation in equivalent language at p. 154. Note tlie similarity to the aging of whiskey in storage without manipulation or attention, and through the working of natural forces, quite comparable in principle to the sun-drying of apples or the starch-to-sugar metamorphosis in stored hay.

* * * |-jj£ js natUre and not the farmer that makes the change, and hence the farmer cannot be said to be a maker * * * . He simply manipulates the grass, so that nature can do her work 'better. * * * [S]o far as there is a making, it is nature which does the making. * * *

Even though whiskey in storage is, unlike less animate objects, in a state of internal flux and slow betterment while it rests in its congenial surroundings, nevertheless it at all times remains whiskey, and in plaintiff’s practice at any and all times it is a salable if not an agreeably potable product when first it is distilled and barreled. It need not be ready to imbibe in order to be ready for sale. The distiller aims at the wholesaler as his target of sale, the wholesaler at his retailer, and the retailer at the drinker. (In its later life, whiskey is said in jest to have more public enemies and private friends than any known liquid comestible.) Only to the retailer and the consumer is the readiness of the product for normal consumption a matter of immediate concern, for the wholesaler’s interest is primarily in the potential consumer attributes of the basic product, and he buys from the producer on the strength of that potential whether it is achieved at the moment of sale or not.

In Anheuser-Busch Brewing Ass'n v. United States, 207 U.S. 556 (1908), aff’g 41 Ct. Cl. 389 (1906), in ruling that the extensive chemical processing given to imported corks before their use as stoppers in exported bottled beer was not “manufacture” in the meaning of a statute authorizing the deduction (“drawback”) of the duty paid on imported components of exported products, the Supreme Court said at p. 562:

* * * Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary * * *. There must be transformation; a new and different article must emerge, “having a distinctive name, character or use.” * * * A cork put through the claimant’s process is still a cork. * * *

Bheinstrom, supra, at p. 149, dialectically criticizes this statement in Anheuser-Busch. By transliteration of the cork situation to the whiskey one, whiskey is still whiskey after storage, albeit with a transformation in color, taste and aroma, bnt surely no more of a transformation than occurred to the Anheuser-Busch corks, which were actually given much more manipulation of a “manufacturing” nature than the inert storage treatment accorded the whiskey. Nor was the change made in the corks by manipulation any more pronounced than the transformation in the stored whiskey. In each case the basic substance to which the cork and aging were collateral, namely, beer and whiskey respectively, were manufactured products. In each case the product was changed so it could be used, with this difference: whereas the corks in their pristine imported condition could not be used as corks until thoroughly processed, our plaintiff’s whiskey was usable for the purpose intended by its maker, namely, sale in bulk, at any time after when in raw state it was entered in the barrels, for plaintiff was in the business of bulk sales which did not require the whiskey to be potably aged at the time of sale. Granted that this case is confined to the particular whiskey which the plaintiff did not sell in bulk but held and bottled on its own account for sale in case lots; nevertheless that area of its business was only incidental to its principal business. So far as is disclosed, the plaintiff had no program to set aside a particular portion of its annual production for its own use, but ostensibly left that decision to depend on the amount that was not disposed of to bulk purchasers.

The issue of whether whiskey aging in barrels subsequent to the distillation process was “work in process” has been considered in three recent cases. The first was Jack Daniel Distillery v. United States, 180 Ct. Cl. 308, 379 F. 2d 569 (1967). The question arose in a somewhat different context than the instant one, specifically 'how the distiller’s inventory of whiskey in barrels was to be valued at the time of sale of all the distiller’s assets. The plaintiff in Jack Daniel contended that, once distilled, the whiskey was a distinct product, and that even while aging the whiskey could not be fairly valued without taking into account the prospective value of the right to bottle the whiskey product under the Jack Daniel label. The Internal Revenue Service contended that the aging whiskey in barrels was still “work in process”; and that until it bad aged the requisite length of time it was not yet the distinct whiskey product identified under the Jack Daniel label. Thus the defendant argued that the tangible asset, aging whiskey in barrels, should be valued without addition of the value of the right to affix thereto the intangible label. The Court of Claims rejected defendant’s contentions. The court agreed that the whiskey in barrels had some characteristics of “work in process”, in that the distiller allowed it to age a certain number of years before bottling it for sale; nonetheless the court found that the whiskey in barrels was unlike “work in process” in many respects. The parties had agreed that Jack Daniel whiskey was, when sold at retail, a distinct product unlike any other whiskeys, including bourbon whiskeys. The court found that the distinct qualities of the Jack Daniel product were generated at the time of the actual distilling process, prior to the barrelling of the whiskey. The aging or maturing of the whiskey was a natural process that did not add anything to the Jack Daniel whiskey that was unlike other whiskeys. The barreled product, while aging, was a “product” that had an ascertainable liquidation value whether or not it had aged to the point at which the distiller normally bottled it. Thus the court found that the whiskey in barrels did not fit the usual concept of “work in process”; and the court agreed with the plaintiff in Jack Daniel that the whiskey was already a distinct product that could not fairly be valued, even on the first day in barrels, without considering the value of the right to use the distinctive Jack Darnel label. It would seem that the factual analysis in Jack Daniel would a fortiori support plaintiff’s position in Heaven Hill, since the instant plaintiff’s whiskey, while it may have its devoted clientele, is not substantially unlike other bourbon whiskeys but is considered a salable product even in the raw state. In Jack Daniel it was not disputed that the distiller held all of its whiskey until aged a specified amount of time, and sold all of the whiskey under its own label as a distinct whiskey product. In the present case, the fact that plaintiff sells almost all of its whiskey in bulk at virtually any point in the time during which the whiskey is aging, two-thirds of it within the first year of storage, and that it holds some whiskey at least 4 years for bottling under its own label, would seem to reflect consumer preferences rather than the distiller’s desire to create a distinct “aged whiskey” product.

A somewhat different result from that of Jack Daniel, was reached by the Tax Court in George L. Schulte, 50 T.C. 688 (1968) aff'd per curiam, 420 F. 2d 490 (3d Cir. 1970), a case relied on here by defendant. In Schulte, the taxpayer purchased as an investment whiskey certificates covering numerous barrels of raw whiskey which fie 'left in tfie possession of tfie distiller, originally planning (by fiis own admission) to leave tfie whiskey in storage until it had aged 4 or 5 years (although he ultimately sold it at a loss somewhat earlier). Tfie court expressed its opinion that tfie storage of tfie whiskey while aging constituted part of the manufacturing process, albeit tfie aging process was a natural one not caused or aided by human instrumentality. Tfie actual holding of tfie Tax Court, however, was that since tfie taxpayer had admittedly originally sought to acquire 4-year old whiskey, the storage and related expenses constituted part of tfie costs of acquisition of the capital asset, i.e., 4-year old (or older) bourbon. Thus, tfie Tax Court field that the storage costs should be capitalized rather than deducted annually as expenses. Despite the assertions of defendant to tfie contrary, tfie Schulte case is readily distinguishable from tfie facts of the instant case. Tfie taxpayer in Schulte was not in the bourbon business or industry, but was an admitted speculator engaged in a limited investment transaction; and his original intent was to hold tfie whiskey until it had aged at least 4 years for sale at that time. Indeed, in affirming in Schulte, the Court of Appeals for tfie Third Circuit stressed that they were affirming on tfie facts of that case. Further, Schulte has since been distinguished as above in a case involving a distributor of bourbon whiskey, see Van Pickerill & Sons, Inc. v. United States, 445 F. 2d 918, 921-22 (C.A. 7, 1971).

An issue closely analogous to ours was considered by the United States Court of Appeals for the Seventh Circuit in Van Piclcerül <& Sons, Inc., supra. There the taxpayer was a wholesale liquor dealer who was also the exclusive distributor in certain counties of southern Illinois of a particular 'brand of bourbon whiskey. Taxpayer would purchase raw or “white” whiskey from the distiller, but the seller-distiller would retain possession of the whiskey in barrels in his warehouse until it had aged 4 or 5 years to conform to consumer tastes. The seller-distiller would pass on the storage costs, insurance charges, and ad valorem taxes assessed by the State of Kentucky, to the buyer-wholesaler on a regular basis. The taxpayer consistently deducted these assessments annually as expenses, but the Commissioner of Internal Revenue determined that this method of accounting did not clearly reflect taxpayer’s income, under section 471 of the Code. The Commissioner argued that the aged whiskey ultimately sold by the taxpayer was a different product from the raw whiskey initially purchased; thus the storage and related costs should be added to the cost of the goods at the time of sale rather than deducted annually. The court rejected the Government’s contentions in affirming the (unreported) decision of the trial court in favor of the taxpayer. There, as in the instant case, the expert accounting testimony on both sides, taken as a whole, supported both accounting methods as clearly reflecting income, without indicating that either was the “best” method.

The court noted that the taxpayer’s method of accounting for these expenditures was widely used in the trade. As for the Government’s “matching” theory, the same as the one urged in the instant case, the court stated:

* * * [I]t appears that the decision by the Commissioner is more an expression of preference for capitalizing these charges rather than a determination that taxpayer’s consistent use of its methods will not reasonably reflect income in the long run. * * * [Id. at 921.]

The court distinguished Schultz, supra, on the basis that that case involved a one-time speculator in bulk bourbon rather than one regularly engaged in the trade. The court concluded:

We realize that taxpayer’s inventory of unbottled aging whiskey has some characteristics of work in progress. Yet, the applicable Code section and regulations appear designed to afford taxpayers the type of flexibility exercised * * * [by this taxpayer]. [Id. at 922.]

While the decision in Van Picherill is not binding on this court, the reasoning of that case is entirely persuasive, and is not distinguished merely because that taxpayer was a wholesaler and the instant plaintiff is a distiller.

With this preface as background, three principal reasons occur why the storage of plaintiff’s whiskey did not amount to manufacture or production. In the first place, during its storage the whiskey was having nothing done to it to promote or create its aging; instead it was doing something to itself through natural forces. If this is an epigrammatic formula it is also true, and it corresponds to the situation of the hay which, during storage, is through natural forces converting its starch into sugar to enhance its utility. As with the hay, no manipulation by labor or material occurs to the whiskey during storage which is the efficient cause of the chemical change taking place in the product. The pot is being stirred by the invisible hand of nature.

Second, in the plaintiff’s scheme of things the storage phase is intermediate between the distillation and barreling stage on the one end, and the sale or disposition stage on the other. This intermediate aging stage is more closely identified with the sales phase than with the manufacturing phase, for when the plaintiff places its newly filled barrels of raw whiskey in its warehouses it is symbolically placing its merchandise on the shelves of its shop for sale as a finished product. Once it is barreled and stored it awaits sale, and various factors may affect its salability, including supply and demand, age, source, quality, reputation of its maker, etc. These are only selling factors. With the plaintiff the sale of non-potable raw whiskey in bulk is its business raison d'etre, and its bottling of its own whiskey on its own account is a minor sideline.

Third, is the concept expressed in Van Picherill & Sons, Inc., supra, that where, as in this case, the correct tax status of the disputed costs is closely in balance and they can reasonably be considered not to be part of production or manu-factoring, and the taxpayer has consistently so treated them, the Code and the applicable regulations authorize that treatment.

As a general proposition, a taxpayer is not restricted to using any particular method of accounting. Section 446(a) of the Internal Eevenue Code of 1954, 26 U.S.C. §446 (a) (1970). However, section 446 (b) of the Code provides in pertinent part:

* * * [I]f the method [of accounting] used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income.

With particular reference to inventories, section 471 of the Code provides:

Whenever in the opinion of the Secretary or his delegate the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary or his delegate may prescribe as conforming as nearly as may be to the best accounting -practice in the trade or business and as most clearly reflecting the income, (emphasis added).

Turning to the regulations prescribed by the Internal Eeve-nue Service, section 471 of the Code is discussed at 26 C.F.E. §1.471-2 (1972). Subsection (a) of the regulation reiterates that inventory accounting must conform “as nearly as may be” to the best accounting practice in the industry, and must clearly reflect income. Subsection (b) provides the following guidelines:

It follows, therefore, that inventory rules cannot be imi-form but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order clearly to reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any partimlar method of inventorying or basis of valuation so long as the method or basis used is substantially in accord with §§ Ufl 1-1 through 1.1$ 1-9. An inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer can, as a general rule, be regarded as clearly reflecting bis income, (emphasis added).

Of the regulatory provisions cited in the above quoted paragraph, defendant relies on 36 C.F.K.. § 1.471-3 (c) (1972), which provides in general terms that the cost of an inventory includes “(1) the cost of raw materials and supplies entering into or consumed in connection with the product, (2) expenditures for direct labor, (3) indirect expenses incident to and necessary for the production of the particular article * *

The statutory scheme strongly reflects a congressional intent to allow flexibility to taxpayers in accounting for expenditures, especially where, as here, the expenditure cannot with assurance be described as a production cost. If the substantial expert accounting testimony presented by both parties at trial shows anything, it shows that highly qualified professional accountants can differ radically as to the “best” method of accounting for the costs at issue here. 'It is undisputed that plaintiff has consistently followed its present practice of expensing the storage costs since its incorporation in 1946. Section 1.471-2 (b) of defendant’s own regulations, quoted supra, explicitly provides that consistency is to be given the greatest weight in determining whether a particular method of inventorying clearly reflects income. The expert testimony on both sides conceded that either method here, plaintiff’s or that urged by defendant, is in accord with generally accepted principles of accounting. That plaintiff’s method does conform to generally accepted accounting principles is entitled to at least some probative weight. See John Wanamaker Philadelphia, Inc. v. United States, 175 Ct. Cl. 169, 177, 359 F. 2d 437, 441 (1966). It is also undisputed that defendant accepted plaintiff’s method of accounting for these expenditures on its returns from 1946 through 1961. As this court stated in Kennecott Copper Corp. v. United States, 171 Ct. Cl. 580, 628, 347 F. 2d 275, 303 (1965).

The fact that the Commissioner of Internal Eevenue is not estopped by previous action in relation to similar expenditures from applying a different treatment to the expenditures in the instant case does not mean that his earlier action or similar outlays is wholly without significance.
* * * The question is not estoppel of the Commissioner, hut the persuasi/oeness of prior experience in determining the classification of the * * * expenditures [at issue] as expenses * * *. (emphasis added).

It has also been squarely held in this court that storage expenditures similar in nature to those at issue here can be deducted as expenses rather than added to inventory costs or costs of acquisition of capital assets. Higgins v. United States, 110 Ct. Cl. 204, 75 F. Supp. 252 (1948) (storage costs of turpentine).

Taken as a whole, the expert accounting testimony on behalf of plaintiff does not urge that plaintiff’s method of accounting for the costs is the only or the best method of treating these expenditures; rather it indicates that both methods are in accord with generally accepted accounting principles; that both methods are widely used in the bourbon distilling industry; and that either or both methods will clearly reflect income over a time if consistently applied. The testimony on behalf of the defendant does not undermine these basic propositions, but rather urges that adding the costs to inventory costs is better under the “matching” theory, which in turn reflects a “trend toward realism.” Yet the latter testimony seems to reflect not what the best accounting practice in the industry actually is, but rather reflects the preference of the defendant’s accounting witnesses, and the Internal Eevenue Service, for what the best accounting practice should he. Fairly considered, there is not much to choose from between these opposing points of view, and the determination defendant urges be made would not seem to be appropriate for this court based only on a preference of the Internal Eevenue Service. This being so, the better view is to rely on the flexible approach evidenced in the Code, and resolve the issue in favor of the instant plaintiff since, if there is doubt as to the production-related status of the expenses involved, the plaintiff’s position is certainly reasonable and substantial and has been long and consistently maintained. Cf. Cincinnati, New Orleans and Texas Pac. Ry. v. United States, 191 Ct. Cl. 572, 424 F. 2d 563 (1970).

The mere fact that, as our findings show, “each bourbon whiskey of a different age, or year’s production, is a qualitatively different and unique product”, does not contradict this conclusion. Many products which, are the same for common-sense, over-all, and tax purposes can be called “qualitatively different and unique” for marketing or chemical purposes. Proper tax treatment need not be dominated by such a description. The equi-balance of the accounting evidence, the reasonableness of plaintiff’s position, and the consistency of its treatment of the disputed costs outbalance this simple characterization of each year’s bourbon as different.

Since plaintiff has established the correctness of its position, it follows that it is entitled to recover a tax refund in the full amount of its claim ($65,071.76), with interest thereon as provided by law.

FINDINGS of Fact

The court, having considered the evidence, the report of Trial Commissioner O. Murray Bernhardt, and the briefs and arguments of counsel, makes findings of fact as follow:

1. Heaven Hill Distilleries, Inc. (plaintiff) is a corporation which was incorporated on February 20,1946, under the laws of the State of Kentucky. Its principal place of business is Bardstown, Kentucky. Plaintiff’s accounting records and Federal income tax returns are on a fiscal year basis ending April 30. This case involves claims for refund of Federal income taxes and interest paid by plaintiff with respect to its fiscal years ending April 30,1962,1963 and 1964.

2. Since its incorporation in 1946, plaintiff has been, and is now, engaged in the business of distilling, storing during the aging period, bottling, and selling whiskey both in bulk, in barrels and in bottles by the case. Plaintiff’s principal product is the type of whiskey known as bourbon whiskey, which is the type of whiskey which the issue in this case involves. Bourbon whiskey is sometimes hereinafter referred to as “whiskey.” All bourbon whiskey which plaintiff sells is not the same or interchangeable; each bourbon whiskey of a different age, or year’s production, is a qualitatively different and unique product. Plaintiff separately identifies, both on price lists circulated to customers and on its financial statements each age, or year’s production, of the bulk bourbon whiskey which it offers for sale and it charges a different price for each age. Likewise, plaintiff separately identifies on its bottle labels, in its advertising circulars, and on the price lists circulated to customers, the ages of the bottled case goods which it offers for sale; and it charges a different price for each age in an ascending order, which difference roughly represents plaintiff’s storage charges. While case goods are sold by plaintiff in only small amounts, and the treatment of case goods is not directly relevant to the issues herein concerning bulk whiskey storage, the stated facts concerning bottled whiskey sales reflect that age is a factor in price as well as quality.

3. In order to be called bourbon whiskey, whiskey must be distilled from a mash including a minimum of 51 percent corn at not more than 160 degrees proof. Whiskey which has not been entered into new charred white oak barrels is called cistern room whiskey, or bourbon whiskey designate, and it must be entered into such barrels in order to be called bourbon whiskey. The distillate may be reduced in proof by the addition of distilled water when entered into the barrels. Just before the new charred white oak barrels are filled, the production is gauged, or measured, by plaintiff and a Government officer to determine the number of original proof gallons. Each barrel of whiskey is separately and specifically identified by a serial number which is stamped on the barrel head after the whiskey has been entered, as well as by the name of the producer of the whiskey and the date that the whiskey was entered into the barrel, known as the whiskey’s production date, also stamped on the barrel head. After being-filled, the barrels are placed in plaintiff’s warehouses. Each barrel of whiskey in plaintiff’s warehouses is identified in the bulk inventory records of plaintiff by serial number and month and year of production.

4. The character and quality of bourbon whiskey are affected and determined by certain variables in the course of its manufacture, such as the quality and quantity of the grain, type of yeast for fermentation, yeasting method, and control of fermentation. The proof of the whiskey being distilled determines the quantity of remaining congeners, i.e., chemical substances formed during fermentation and maturation which affect taste and aroma of the product. The higher the proof the fewer the congeners.

5. Aging of the bourbon in white oak barrels contributes to its taste, color and aroma, since chemical changes occur due to the contact of the whiskey with the charred interior surfaces of the barrels as the whiskey matures.

6. Changes in ambient temperature and humidity in the storage warehouses also affects the character and quality of whiskey stored there during maturation in barrels.

7. Plaintiff has 24 warehouses. Each has a concrete floor and contains 7 floors of racks. There are runways between the racks, but no solid floors so that one can see from top to bottom. The sides are clad with metal sheeting, and there are a roof and windows. The warehouses have no equipment for heating, cooling or controlling humidity.

8. The whiskey is stored in the barrels in the warehouses for the period during which it is aged before it is bottled. Some bulk whiskey in barrels is purchased by plaintiff and stored in a like manner.

9. The steps in the production, or manufacture, of bourbon whiskey are: (1) purchase of the grain; (2) fermentation of the grain; (3) distillation of the fermented grain mash; and (4) entry of the distillate into new charred white oak barrels. Whether or not maturation of the whiskey in the barrels is a step in its manufacture or production is considered in later findings. The whiskey is a salable product when barreled. It is actually held for sale and is sold from that moment. The greater proportion is sold in the year of production.

10. Maturation is a two-fold process which is important to the development of the taste and aroma of different ages of bourbon whiskey. It involves the removal of objectionable elements which first occur during the fermentation process, are subsequently carried over to the distillate, and which remain in the cistern room whiskey. Although these objectionable elements could also be removed by distilling the whiskey at a higher proof, distillation at a higher proof would destroy the congeners, or flavorful elements, also formed during fermentation and carried over to the distillate. The second process taking place during the maturation of bourbon whiskey is the development of additional congeners and the enhancement of congeners already present in the distillate which give the 'bourbon whiskey its taste and aroma. This second process results from the extraction of materials from the charred layer of the ¡barrels and is directly related to the time the bourbon whiskey is in the barrel. However, bourbon whiskey is bourbon whiskey as soon as it enters the barrel. Age is more important to the salability of bottled goods than it is to the salability of bulk whiskey. Plaintiff sells the overwhelming proportion of its production in bulk. Plaintiff is willing to sell its product at any time after it is entered into the barrel.

11. During the period while the whiskey barrels are in storage in the warehouses and their contents maturing nothing is done to them, except that the location of the barrels on the first and second floors sometimes are interchanged or rotated with those on the sixth and seventh floors, when the warehouse staff has the time. The maximum number of times this rotation might be done while a barrel is in a warehouse would be once. Rotation is desirable but not important. It affects the color and proof of the whiskey, makes a more uniform product, and mitigates evaporation. A distiller needs to do nothing to a barrel of bourbon whiskey to cause maturation to occur. Whether the barrels are rotated or not, the whiskey would mature in a similar fashion. While the whiskey is in storage, plaintiff’s employees check for and repair 'leaks when they have time, and take some samples. Sampling is not done on a regular basis. Generally a single one-ounce sample is taken from one barrel of a day’s production during the entire aging period.

12. Plaintiff sells most of its whiskey in bulk in barrels to its wholesale customers, but, after the sale of the whiskey in bulk, plaintiff generally continues to store the whiskey barrels at its warehouses for the duration of the aging period, for which it is paid a monthly charge per barrel by the wholesalers who then own the whiskey. Upon sale of the whiskey in bulk to its customers, plaintiff issues whiskey warehouse receipts to them indicating the serial numbers of the barrels which have been sold to each customer, and the rate per barrel to be charged for storage. Plaintiff also retains ownership of some bulk whiskey in barrels, which it bottles and sells at different ages by the case for consumption, after it has been aged. Plaintiff also bottles bulk whiskey owned by its wholesale customers, upon receipt of instructions from them. Prior to bottling, all whiskey is filtered to remove any residue which remains in it from the barrel.

13. The sale of whiskey in bulk is the major objective of plaintiff’s business, constituting at least 90 percent of plaintiff’s business. About one-third of the whiskeys produced by plaintiff are eventually bottled under the Heaven Hill label and the balance under private labels owned by customers. Bourbon whiskeys of varying known ages produced by plaintiff are available for sale in bulk at any time. No barrels in storage are earmarked to be retained, and plaintiff has in certain instances practically depleted its inventory of a year’s production, as where plaintiff acquires a new distributor and must sell him a continuity of line of different ages of bulk whiskeys. Continuity of line of bourbon whiskeys is important to plaintiff’s customers in order to bottle bourbon whiskey every year.

14. No whiskey is bottled by plaintiff under its Heaven Hill label, either for sale by plaintiff by the case or for plaintiff’s wholesale customers who have purchased the whiskey in bulk, unless it is at least 4 years of age. No bourbon whiskey is bottled by plaintiff under any label unless it is at least 2 years of age. Different ages of bottled bourbon whiskey generally bear different labels on their bottles. Straight whiskey is 2-year old bourbon whiskey. Bottled in bond bourbon whiskey must be at least 4 years old and 100 proof.

15. In the 18-year period from the fiscal year ended April 80,1947, through the fiscal year ended April 30,1964, plaintiff produced 81 percent and purchased 19 percent of the aggregate number of barrels of bulk whiskey which it acquired during this period. In this same period, plaintiff sold in bulk (in barrels) 91 percent and bottled for its own account 9 percent of the aggregate number of barrels of bulk whiskey which it removed from its inventory.

16. In the fiscal years 1962, 1963, and 19.64, plaintiff produced or purchased the following percentage of the aggregate number of barrels of bulk whiskey which it acquired during said fiscal years:

Fiscal Fiscal Fiscal
1962 1963 1964
Produced-. 94% 87%
Purehased-12% 6% 13%
Total-100 % 100% 100%

In these 3 fiscal years, plaintiff sold in bulk (in barrels), bottled for its own account, or redistilled the following percentages of the aggregate number of barrels of bulk whiskey which it removed from its inventory:

Fiscal Fiscal Fiscal
1962 1963 1964
Sold in bulk. 97% 95% 95%
Bottled_ 3% 5% 4%
Redistilled-_ 1%
100% 100% 100%

17. Of the whiskey produced by plaintiff in fiscal 1962, 1963, and 1964, the following percentages were sold in bulk (in barrels) in the fiscal years of production and in each of the 3 fiscal years succeeding the respective fiscal years of production:

Production of
Fiscal Fiscal Fiscal
1962 1963 1964
Sold in bulk:
In fiscal year of production_ 67. 4% 73. 5% 77. 2%
In 1st succeeding fiscal year_ 6.5% 9.3% 12.9%
In 2nd succeeding fiscal year-_ .5% 3.0% 1.8%
In 3rd succeeding fiscal year_ -9% 3.4% 4.0%
Totals sold in bulk' — -1st four
years- 75.3% 89.2% 95.9%

18. A purchaser, who purchases plaintiffs bulk bourbon whiskey in a year following its production, must pay plaintiff the standard storage charges (plaintiff’s cost plus profit) which he would have paid had he purchased the whiskey from plaintiff in the year of production. Thus, the cost of the bulk bourbon whiskey purchased is the initial charge for the whiskey plus the incremental storage charges from the time that the whiskey was entered into the barrel until the time it is sold to plaintiff’s customers. Because incremental storage charges must be paid, older bourbon whiskey is more expensive to the purchaser than bourbon whiskey which has matured for a shorter period of time.

19. There is an active nationwide market for bulk bourbon whiskey of any age. Market prices of different ages of bulk whiskey fluctuate, or swing. During the period from 1960 to 1970 4-year old whiskey sold from a high of $3 to $4 a gallon to a low of $.30 to $.40. This fluctuation was representative generally of the price fluctuation of bourbon whiskeys of different ages. As inferred in the schedule in finding 21, infra, age is a factor in determining the market value of bulk bourbon whiskey. The significant determinant, however, is supply and demand, which of course subsumes, inter alia, the preference for older whiskey, other things being equal. Older whiskey may sell for the same price as younger, and the same whiskey may sell for a lesser price in a later year. The fickle market controls.

20. The Kentucky a/1 valorem state tax is a property tax levied on whiskey maturing in barrels in the state. It is based on the state’s determination of the value, which is the same for whiskeys of all producers of the same age or type. It is assessed annually. The value base of the state tax increases for each year of storage, but the proof is not sufficient to find that the increase in value base for state tax purposes represents the increased market value of older whiskey, even if that reason has a theoretical appeal. Age affects but does not control the market value of the whiskeys competitively sold in bulk, which the evidence shows fluctuates according to supply and demand factors.

21. Based upon the records of whiskey broker Harold Laden, quantities of bulk whiskey produced by Heaven Hill in the years 1956 through 1961, and the year 1970, were offered for sale in the bulk market by their owners at the following prices in the years 1961 through 1966 (parenthetical references below are to pages of plaintiff’s exhibit 1) :

Offered for Sale in 1961
Year of Production Price
1956 _$1. 60 (la)
1957 _ 1. 50 (la)
1958 _ 1.40 (la)
1959 _ 1. 30 (la)
Offered for Sale in 1962
1958 _$1. 75 (lb)
Offered for Sale in 1963
1957 _$1. 60 &$1. 75 (lc)
1958 _ 1.75 (lc)
1959_$1. 60 & 1.65 (lc) & (a)
1959 _ 1. 60 (lc)
Offered for Sale in 1964
1957 _$1. 70 (Id)
1958 _ 1. 50 (Id)
1959 _ 1.40 (Id)
1960_$1. 30 & 1.35 (Id)
1960_ 1. 30 (Id)
Offered for Sale in 1965
1957 _$1. 50 (le)
1959 _ 1. 35 (le)
1960 _ 1. 50 (le)
1961_ 1. 50 (le)
Offered for Sale in 1966
1956 _$1. 60 (le)
1957 _ 1. 55 (le)
1959 _ 1.45 (le)
1960 _ 1. 35 (le)
1961_ 1. 30 (le)
Offered for Sale in 1970
1964_$1. 75 (If)
1965_ 1. 75 (If)
1966_ 1.65 (If)

With some exceptions there seems to be a correlation in the above figures reflecting that during the referenced years the plaintiff’s offerings of bulk whiskey for sale generally quoted slightly higher prices for its older whiskey. That difference in price primarily represents storage charges (see finding 18, supra), which in turn includes a profit to plaintiff over its actual storage costs.

22. Since its incorporation in 1946, including the fiscal years 1962, 1963, and 1964, for book and tax purposes, plaintiff has been on the accrual basis of accounting and has consistently accounted for its bulk whiskey inventories by taking into account the average “production cost” of each barrel of whiskey produced; this excludes the warehouse expense per barrel incurred during the aging period. Thus, cost per barrel, as accounted for in plaintiff’s bulk whiskey inventory, includes grain, production wages, Kentucky production tax, and distillery expense. The cost of the barrel itself is also included in the inventory cost, and is the largest single cost. Plaintiff’s financial statements, prepared by its certified public accountants and included in its annual reports, contain a schedule entitled “Cost of Bulk Goods Manufactured and Sold” which accounts for these expenses and for the cost of an original proof gallon of whiskey based on these expenses. The financial statements indicate that the unit cost for each barrel of bulk whiskey is separately accounted for and that this cost is charged to cost of goods sold when the bulk whiskey is sold, or to case goods inventory when it is bottled.

23. Since its incorporation in 1946, including the fiscal years 1962,1963, and 1964, plaintiff has consistently deducted for tax purposes as ordinary and necessary business expenses, under section 162 of the Internal Revenue Code of 1954 (the 1954 Code) or under predecessor section 23 (a) of the Internal Revenue Code of 1939, all the warehousing or storage costs incurred during the aging period of the barrels of bulk whiskey held in its warehouses, consisting of such costs attributable to its own inventory and to bulk whiskey stored in its warehouses for others. Since its incorporation, plaintiff has also consistently deducted such costs as current expenses for book accounting purposes. Such warehousing or storage costs, including wages and salaries of the warehouse staff, depreciation, insurance, repairs, taxes, allocated indirect expenses of general plant overhead, and other expenses, are collectively referred to hereafter as “carrying charges.” The aggregate carrying charges incurred by plaintiff in the fiscal years 1962 through 1964 were exceeded by the storage fees received by plaintiff for storage in its warehouses of barrels of whiskey owned by others.

24. Plaintiff’s method of accounting for the bulk whiskey carrying charges by deducting them as current expenses rather than costing them to inventory, is in accordance with generally accepted accounting principles and clearly reflects its income. Its income would be just as clearly reflected by costing the carrying charges to inventory and deferring their recovery to time of sale, which is also in accordance with generally accepted accounting principles. The fact that plaintiff has consistently debited its carrying charges against current expenses ever since it commenced business in 1946 is significant in validating its method of expensing its carrying charges as a clear reflection of its income. Costing such charges to inventory would not reflect its income more clearly. Converting its accounting practices to an inventory costing method for its carrying charges during the tax years in suit would result in “bunching” its income in those years (see finding 35, infra), but over a period of time the aberrations would be roughly compensated if the tax rate remains stable. The theory of “matching” expenses against revenue, which means costing to inventory all expenses directly or indirectly associated with bringing the product to its existing location and condition when sold, is particularly applicable to retail sales, but is not necessarily applicable to all facets of the plaintiff’s business which is primarily the sale of bulk whiskey, two-thirds of which is sold within the first year following its distillation and entry into barrels for storage and sale. The changes which occur to the whiskey while it is in storage as to aroma, taste and color are not continuations of the manufacturing process, because instead of having something-done to it, the whiskey is doing something to itself unaided externally (i.e., the “invisible hand”). Upon being barreled and stored the whiskey is then and there ready for sale, and all of it which is not bottled by plaintiff for its own account (a minor portion) is sold to purchasers who thereafter leave it in storage with plaintiff and pay plaintiff storage charges, which storage charges return a profit to plaintiff over its storage costs. Plaintiff’s price of bulk whiskey to purchasers includes without segregation storage charges to the date of purchase, depending on the prices dictated by supply and demand in the market.

25. Accounting is neither a science nor an art, but — like law — is a profession, and — again like law — involves disputes within the profession over principles and the application of those principles to concrete cases. The “high court” of the accounting profession is the Accounting Principles Board (APB), which is the official spokesman for the American Institute of Certified Public Accountants (AICPA). The Opinions of the APB have the force of generally accepted accounting principles, and financial statements must note any diversion from the practices promulgated by the APB in its Opinions. These Opinions appear in Accounting Research Bulletins. Chapter 4 of Bulletin 43, deals with inventories. Statement 2 of Chapter 4, relating to acceptable inventory costs, reads as follows:

A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues.

Statement 3 of Chapter 4 reads as follows:

The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.

26. The APB has rendered no opinion specifically relating to the proper method of treating carrying charges for a bulk whiskey business such as plaintiff’s. At the trial of this case the parties produced as expert witnesses a series of renowned certified public accountants. They disagreed diametrically on the question as to whether the plaintiff’s method of expensing its carrying charges most clearly reflected its income, as opposed to costing such charges to inventory, although they agreed that either method was in accord with generally accepted accounting principles because both methods have substantial, authoritative support in the profession. Against the arguments of the expert accountant witnesses for the defendant to the effect that costing to inventory is in keeping with an accounting trend towards “realism”, that the warehousing expense of aging confers future benefits to the product sold, and that for that reason older whiskey commands higher prices, the experts for the plaintiff contended that plaintiff’s bulk whiskey is a finished product ready for sale and most of it is sold at or within a year after the moment it is barreled, that the storage costs did not confer a clearly discernible future benefit to the product, that the higher price commanded by older whiskey primarily reflects additional storage charges included in the purchase price, that market supply and demand factors control the price obtained for bulk whiskey at any given time, and that because of the risk at the time the whiskey is barreled as to the price it will eventually command in the market, the carrying charges to bring it to the time of sale should be expensed rather than inventoried.

27. From a practical standpoint the prominent firm of certified public accountants, Price Waterhouse & Company, has a number of distillery clients, most of whom with their professional approval expense the carrying charges of buik whiskey just as plaintiff does. The firm of certified public accountants handling plaintiff’s accounting business has about 20 distillery clients, all of whom with the firm’s approval expense their bulk whiskey carrying charges just as plaintiff does.

28. The conclusion reached from this potpourri of professional opinion, most of which leans toward sanctioning the plaintiff’s method of accounting for its carrying charges, under its particular circumstances, is that unless and until the APB take a firm stand to the contrary, the two methods— expensing or costing to inventory — are acceptable alternatives of equal validity in clearly reflecting income where one or the other method is consistently followed by the partic alar whiskey producer.

29. On audit of plaintiff’s Federal income tax returns for the fiscal years 1962,1963, and 1964, the District Director of Internal Kevenue (hereafter DD) determined that carrying charges applicable to plaintiff’s inventory of whiskey in barrels (not including barrels stored for others) should be capitalized as part of the inventory cost of such whiskey instead of being deducted from income currently as ordinary and necessary business expenses. The amounts of carrying-charges to be capitalized and added to plaintiff’s closing inventory of bulk whiskey each fiscal year was determined by the DD by computing the average carrying charges per barrel for each year during which any barrel included in the closing inventory had been stored, aggregating such carrying charges for the number of years each group of barrels (grouped by year of production) had been stored, multiplying such aggregate per barrel carrying charges by the number of barrels in each group, and totaling the carrying charges so attributed to each group.

30. In accordance with this determination, the DD required that there be added to plaintiff’s bulk whiskey inventory cost accounts the amount of $129,124.74 at the close of its fiscal year 1962, the amount of $151,042.74 at the close of its fiscal year 1963, and the amount of $170,853.54 at the close of its fiscal year 1964.

31. As a result of the capitalization of bulk whiskey carrying charges the DD disallowed deductions of carrying charges and thereby increased the taxable income of plaintiff in its fiscal years 1962, 1963, and 1964 in the respective amounts of $68,002.59, $21,318, and $19,810.80.

32. The $68,002.59 increase in plaintiff’s taxable income for the fiscal year 1962 was determined by the DD by deducting $61,722.15 from the $129,724.74 aggregate amount of capitalized carrying charges attributable to bulk whiskey inventory at the end of said fiscal year. The amount of $61,722.15 represented the amount of carrying charges attributable to plaintiff’s bulk whiskey inventory (in accord-anee with the method of accounting initiated by the DD) at the close of plaintiff’s last fiscal year before the 1954 Code became applicable.

33. The deduction of $61,722.15 in determining the increase in plaintiff’s taxable income for fiscal 1962 was made pursuant to section 481(a) (2) of the 1954 Code, which provides that the amount of income adjustment attributable to taxable years to which the 1954 Code was not applicable may not be taken into account when there is a change in a method of accounting which is not initiated by the taxpayer. Since the DD initiated the change in the method of accounting for carrying charges, he did not take such amount into account in computing the adjustment to plaintiff’s taxable income for the fiscal year 1962, the year of the change.

34. The increases in plaintiff’s taxable income of $21,318 for the fiscal year 1963 and $19,810.80 for the fiscal year 1964, resulting from disallowed deductions for carrying charges, were determined by the DD by computing the amounts by which capitalized carrying charges, at the close of each such fiscal year, increased from the amounts capitalized at the close of the immediately preceding fiscal year. That is, the amount disallowed in the fiscal year 1963 was determined by subtracting $129,724.74 from $151,042.74; and the amount disallowed in fiscal 1964 was determined by subtracting $151,042.74 from $170,853.54.

35. A summary of the effect on plaintiff’s taxable income of applying to carrying charges the capitalization method proposed by respondent is as follows for the fiscal years 1962 through 1969:

Increase in Decrease in Cumulative
Fiscal Year Taxable Income Taxable Income Increase in
Taxable Income
1962_ $68, 002. 69 - $68, 002. 59
1963_ 21, 318. 00 - 89, 320. 59
1964_ 19, 810. 80 - 109, 131. 39
1965. 30, 809. 27 - 139, 940. 66
1966_ 6, 611. 40 - 146, 452. 06
1967_ $31, 441. 33 115, 010. 73
1968_ 93, 567. 18 21, 443. 55
1969___ 11, 745. 76 9, 697. 79

36.On August 13, 1965, plaintiff paid to the DD an income tax deficiency of $117,677.40 with respect to its fiscal year 1962 and an income tax deficiency of $75,073.36 with respect to its fiscal year 1963. On September 24, 1965, plaintiff paid to the DD an income tax deficiency of $73,740.12 with respect to its fiscal year 1964. Such income tax deficiencies included taxes in the following respective amounts attributable to the aforesaid increases in plaintiff’s taxable income as a result of capitalizing carrying charges:

Fiscal Year
Amount of Tax Attributable to Carrying Charge Issue
1962___ $35, 361. 35
1963___ 11, 085. 36
1964_ 10, 170. 61

37.On August 18,1965, plaintiff paid to the DD interest of $21,491.44 with respect to its fiscal year 1962 and interest of $9,206.25 with respect to its fiscal year 1963. On September 27, 1965, plaintiff paid to the DD interest of $4,618.35 with respect to its fiscal year 1964. Such interest payments included interest in the following respective amounts on the tax deficiencies attributable to the aforesaid increases in plaintiff’s taxable income as a result of capitalizing carrying charges:

Fiscal Year
Amount of Interest Attributable to Carrying Charge Issue
1962___ $6, 458. 05
1963_ 1, 359. 40
1964__ 636. 99

38.On July 18,1967, plaintiff duly filed claims for refund of income taxes for the fiscal years 1962, 1963, and 1964 in the respective amounts of $37,493.61, $12,889.28 and $12,292.-77, and for interest as provided by law. Notices of disal-lowance of such claims were mailed to plaintiff by certified mail on January 7,1969.

39. Thereafter, another issue raised in this case, involving medical expenses, was settled by agreement of the parties. Thus, the amounts remaining in controversy are those solely attributable to the maturation costs issue, as set forth supra.

40. Plaintiff is and always has been the sole and absolute owner of the claims made by it in tins proceeding and has made no assignment of such claims or any part thereof. No other suit or process by plaintiff or any assignee is pending in this or any other court against the United States or any person for or in respect to such claims.

CONCLUSION OE Law

Upon the foregoing findings of fact, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover and judgment is entered for plaintiff in the amount of $65,071.76 with interest thereon as provided by law. 
      
       This opinion incorporates the greatest part of the opinion prepared by Trial Commissioner C. Murray Bernhardt, with modifications and additions by the judges.
     
      
       The Third Circuit stressed that the entire transaction had to be considered, that storage and like charges are normally deductible as ordinary expenses but “they are not deductible where they are incurred as an integral part of a capital transaction”, and that the Tax Court’s determination “that the pre-payments here made were incurred as part of a capital transaction is essentially a factual determination” which was not clearly erroneous.
     
      
       Presumably tlie price was per gallon, with 50 to 51 gallons per barrel, depending on evaporation.
     
      
       Eor example, in 1970 whiskey produced in 1964 and 1965, was offered at the same price of $1.75, despite the difference in age.
     
      
       Defendant prefers to call these “maturation costs” instead of warehouse or storage expense in order to connote their being part of the manufacturing process. Whichever term is used, findings elsewhere herein describe the physical events concerning the bulk whiskey between the time it is entered in barrels and the time it departs the plaintiff’s premises. “Maturation costs” is the defendant’s private label.
     