The taxpayer, which was a member of a joint venture which produced iron pellets, had agreed with its shareholders to sell them its share of the pellets produced by the joint venture for a sales price equal to the greater of the fair market value of the pellets and the cost of producing those pellets. In the years in question, in which the costs of production exceeded the fair market value of the pellets produced, it treated only the fair market value of the pellets as sales revenue for purposes of computing its income for purposes of the Act, and treated the balance as a contribution of capital, notwithstanding that its financial statements had treated the full amount received from its shareholders as sales revenue.
In finding that the full amounts received by the taxpayer were income to it, Paris, J. noted that although one of the motivating factors behind the sales agreement was to provide financing for the taxpayer's joint venture operations in order to protect the bondholders, the means chosen by the parties to achieve this purpose was a guaranteed purchase price (so that the legal character of the amounts received was sales price) and that the fact that the shareholders agreed to defray the taxpayer's costs of production even if production was interrupted was not inconsistent with their interests under the agreement being as purchasers. Furthermore, even if the amounts in excess of fair market value were intended as a reimbursement to the taxpayer for any shortfall between its revenue and its share of the net operating expenses of the joint venture, these amounts were received by it as part of its ordinary business operations so that they were received on income account even if they were not sales revenue.