puting the cost of Hinds products manufactured and sold in foreign countries was actual cost. Beginning January 1, 1934, under the amendments to the contracts, A. S. Hinds Co. paid to Lehn & Fink, Inc., a commission of 25 per cent of standard costs of manufacture. After the dissolution of A. S. Hinds Co. on January 29, 1936, and until April 15, 1936, Lehn & Fink Products Co. paid this commission to Lehn & Fink, Inc. The amendment to the contract to which we have referred was a direct result of the abolition of consolidated Federal income tax returns by the Revenue Act of 1934. The domestic corporations in the Lehn & Fink group had filed consolidated returns for the years prior to 1934, and all intercompany charges were eliminated in such returns. After January 1, 1934, separate returns were required for. each corporation, and it then became important to the several interests of the corporations to put their intercorporate transactions on such a basis as would properly reflect the separate income and expenses resulting from their operations. The amendment providing for the payment of a commission of 25 per cent was adopted. The Pebeco contract was similarly altered. The amendments were adopted in formal proceedings by the directors of the corporations affected, in proper session. The minutes show the action to have been taken pursuant to advice of legal counsel and recite the provision for the payment of the 25 per cent commission as compensation for the use of Lehn & Fink, Inc.'s, plants and for the manufacture of the products. Commissions of this type, in amounts ranging from 20 per cent to 50 per cent, are usual in this field. Under the Lysol contract, in the negotiation of which minority stockholders not otherwise interested in any Lehn & Fink enterprise were represented, manufacturing commissions ranging from 31.51 per cent to 40.9 per cent of standard costs were paid Lehn & Fink, Inc. The payment of the manufacturing commission resulted in a profit to Lehn & Fink, Inc., of about 20 per cent out of the 25 per cent received, the 5 per cent representing certain expenses of handling, clerical work, and overhead not included in the cost of manufacturing. The manufacturing commission provided for by the amended contract was reasonable in amount. At the time Lehn & Fink Products Co. bought A. S. Hinds Co., in 1925, Hinds Honey & Almond Cream was the outstanding lotion on the market. In 1929 its net sales reached their highest point. Thereafter, the sales and profits decreased steadily. This resulted partly from the appearance of aggressive competition in the hand lotion field, chiefly from Jergen's Lotion, Campana's Italian Balm, and Frostilla. These products were extensively advertised by costly and popular nation-wide radio programs, and this medium was employed 294 7 TAX COURT OF UNITED STATES REPORTS. (287) to an increasing extent through 1935. In 1933 Campana Corporation increased its advertising to $1,000,000 per year, compared with a total of $300,000 for the four years 1926-1930. The hand lotion market is extremely responsive to advertising, and Hinds Honey & Almond Cream felt the impact of its competition. It increased its proportionai advertising outlay from 21.32 per cent of its net sales in 1930 to 38.75 per cent in 1935. It changed advertising agencies in 1931 and again in 1932. It changed its formula to meet consumer complaints in 1933 and 1934, and again in 1935. It introduced a new package and different sizes of bottles. It engaged in various promotion activities and, finally, in 1935, it employed a new dispenser package, designed to meet the specific competition of Jergen's and Campana. In 1930, when the sales of Hinds Honey & Almond Cream were at a high point, several new cosmetic products, including cold cream, cleansing cream, and texture lotion were introduced, bearing the Hinds name. The results of this activity are indicated by the following tabulation: |