United States v. Ingredient Technology Corp.

Ingredient Technology Corporation (Ingredient) (defendant) was a sugar refiner. In 1974, when the cost of raw sugar began to increase significantly, Ingredient implemented a last-in-first-out (LIFO) accounting method for its sugar inventory. Under this accounting method, Ingredient calculated its cost of inventory based on the price of its most recently purchased materials. Given the increasing cost of raw sugar, this method increased Ingredient’s costs of goods sold, which decreased Ingredient’s income tax liability. In this first year of LIFO accounting, Ingredient bought an unusually large supply of raw sugar to have on hand as its “LIFO base.” To maintain this LIFO base, in subsequent years Ingredient reached an ongoing agreement with Czarnikow-Rionda Company (Rionda), one of its operators, under which Rionda would sell to Ingredient the amount of sugar Ingredient needed to maintain its LIFO base, and then Ingredient would immediately sell the sugar back to Rionda. Under this agreement, Ingredient took temporary title to the sugar without taking physical possession. Ingredient could have maintained its LIFO by buying sugar on the open market, but doing so would have involved spending capital and market risk. The government (plaintiff) charged Ingredient with conspiracy to evade tax obligations. The district court convicted Ingredient, and the company appealed.