E. Albrecht & Son v. Landy

• Decision Date: 19 August 1940
• Docket Number: No. 11598.,11598.
• Citation: 114 F.2d 202
• Parties: E. ALBRECHT & SON, Inc., v. LANDY, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

114 F.2d 202 (1940)

E. ALBRECHT & SON, Inc., v. LANDY, Collector of Internal Revenue.

No. 11598.

Circuit Court of Appeals, Eighth Circuit.

August 19, 1940.

William H. Oppenheimer, of St. Paul, Minn. (Robert F. Leach and Oppenheimer, Dickson, Hodgson, Brown & Donnelly, all of St. Paul, Minn., on the brief), for appellant.

Milford S. Zimmerman, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to the Atty. Gen., and Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., on the brief), for appellee.

Before GARDNER and SANBORN, Circuit Judges, and COLLET, District Judge.

COLLET, District Judge.

Appeal from a judgment in favor of the Collector of Internal Revenue for the District of Minnesota, on a claim for refund of manufacturers' excise taxes.

By Section 604 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 609, effective June 21, 1932, there was imposed a manufacturers' excise tax on articles made of fur equivalent to ten per cent of the selling price.¹ Section 619 of the same Act, 26 U.S.C.A. Int.Rev.Code, § 3441, provides that if such an article is sold at retail, on consignment, or at less than the fair market price, the tax shall be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers. Such price to be determined by the Commissioner of Internal Revenue.²

For seventy-seven years prior to June 21, 1932, the business now owned by E. Albrecht & Son, Inc., had been engaged in manufacturing garments made from fur. In 1915 a wholesale department was established for the purpose of promoting and handling sales to retailers. From that date forward the business was divided into three departments, consisting of (1) manufacturing, (2) wholesale, and (3) retail. All departments of the business are and were housed in the same building in St. Paul, Minnesota, with the exception of one additional retail store in Minneapolis, Minnesota. Early in 1932, it became apparent to those interested in the fur business that Congress would soon pass the manufacturers' excise tax heretofore referred to. In an effort to avoid the payment of that tax, after the act had been passed and approved and only five days before its effective date, a new corporation was created by the owners of the existing corporation to be utilized for that purpose. In order to avoid confusion, the original corporation, appellant here, will be referred to as the Manufacturing Company. The corporation created in 1932 will be referred to as the "Selling Company". On June 20, 1932, the day before the effective date of the act, by formal bill of sale all of the finished articles owned by the Manufacturing Company, together with all orders for articles uncompleted, completed but not delivered, and all orders for repair work on hand at the time, were transferred to the Selling Company. No consideration passed from the Selling Company to the Manufacturing Company other than the transfer of the entire capital stock of the former to the latter. No profit was made by the Manufacturing Company on the transaction. It is admitted by appellant Manufacturing Company that the transfer was for the purpose of effecting a sale and transfer of all fur stock from the Manufacturing Company to the Selling Company prior to the effective date of the taxing statute thereby avoiding the tax on sales by manufacturers. Subsequent to June 20, 1932, all of the selling operations were performed by the Selling Company which did no manufacturing. The same persons served as officers of both corporations and many of the employees served both. Their salaries were allocated to each on a percentage basis. As was done before the creation of the Selling Company, each of the three departments were strictly segregated, but after the formation of the Selling Company a separate set of books was kept for that company covering the wholesale and retail operations, which operations were shown as the business of the Selling Company alone. The president of the Manufacturing Company testified that if it had not been for the passage of the excise tax act the Selling Company would probably not have been created. The public generally was not advised of its creation and merchandise continued to be sold under the trade-name of "E. Albrecht & Son" and under the trademark "Albrecht Furs." No changes were made in bills or invoices and the use of shipping tags containing the legend, "From E. Albrecht & Son, Manufacturers of Albrecht Furs, Founded 1855", continued.

The Commissioner of Internal Revenue and the trial court disregarded the sale of June 20, 1932, upon the ground that the transaction was not a bona fide sale. The court entered judgment applying the tax to all articles (1) completed and in the stock of the Manufacturing Company and transferred by it to the Sales Company prior to June 21, 1932, but not actually sold and delivered prior to that date; (2) articles in the process of manufacture, together with all necessary furs and materials for the completion thereof; (3) repair jobs transferred by the June 20th conveyance which were not completed until after the effective date of the Act; and (4) repair items completed before June 21, 1932, but which were not delivered or invoiced to the customer until subsequent to that date.

Although a parent corporation and its wholly-owned subsidiary may for certain purposes and under proper circumstances be treated as separate entities,³ the finding of the trial court that the Selling Company was merely the adjunct and instrumentality of the Manufacturing Company, organized in an attempt to avoid the excise tax applicable to manufacturers, is amply supported by the foregoing facts. The conclusion reached by the trial court that under such circumstances the parent corporation will not be permitted to use its subsidiary as a device by which it may evade its responsibilities, is the well-established rule.⁴ The trial court properly ignored the creation and existence of the Selling Company in applying the manufacturers' excise tax. The determination of the proper amount of those taxes remains.

The Commissioner of Internal Revenue computed the tax assessment against the Manufacturing Company upon the price at which completed garments were sold by the Selling Company to retail merchants. That action was approved by the trial court. The application of the price at which the Selling Company sold the garments as the basis for the computation of the tax is assailed upon the ground that this price did not represent the price at which the garments would sell, "in the ordinary course of trade, by the manufacturer (s) or producer (s) thereof," which latter price is asserted to be the price contemplated by the statute as the basis for determining the amount of the tax.⁵

By its finding of fact the trial court found that the alleged sales made by the Manufacturing Company to the Sales Company on June 20, 1932, and subsequently, were not made in the ordinary course of business, were not "arms-length transactions", were at prices less than the fair market price and less than similar articles were sold in the ordinary course of trade and business. It further found that the fair market price of the goods sold by the Manufacturing Company through the Selling Company subsequent to June 20, 1932, was the market price determined by the Commissioner of Internal Revenue in his assessment against the Manufacturing Company, to-wit: where the articles were sold at retail by the Sales Company, the price at which those articles would have been sold at wholesale, shown by the books of the Manufacturing Company; and where articles were sold at wholesale by the Sales Company, the wholesale selling price obtained therefor; and where articles were sold at a sacrifice, and at less than the market wholesale selling price, a price of twenty per centum less than the selling price. If those findings are supported by any substantial evidence they will not now be disturbed on appeal.

As heretofore noted, ample grounds existed for the finding that the sale of June 20, 1932, to the Selling Company was not bona fide. The same facts which justified that conclusion warrant the finding that the sale of all articles transferred by the June 20th transaction and sales subsequently made by the Manufacturing Company to the Sales Company were not "arms-length transactions" made in the ordinary course of business. Whether those sales were at prices less than the fair market price, requires consideration of facts heretofore only incidentally referred to.

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