Singer Company v. United States
| Decision Date | 15 October 1971 |
| Docket Number | No. 344-64.,344-64. |
| Citation | 449 F.2d 413 |
| Parties | The SINGER COMPANY v. The UNITED STATES. |
| Court | U.S. Claims Court |
John J. Boland, New York City, attorney of record, for plaintiff. William W. Karatz and Hugh M. Dougan, New York City, of counsel.
Theodore Peyser, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller, Washington, D. C., of counsel.
Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.
This is an action to recover alleged overpayments of Federal income taxes paid by plaintiff for the tax year of 1954. The amount in controversy involves a refund of $510,762.73, plus statutory interest on the amount of recovery. The determination of whether or not plaintiff is entitled to recover said amount is based on sections 170 and 162(b)1 and whether, pursuant to section 170,2 plaintiff is entitled to claim a deduction for charitable contributions made in the form of discounted sales of its most famous product, i. e., sewing machines.
The resolution of the above posed issue will be made in reference to what will be hereinafter referred to as the (1) school discounts and (2) discounts to charities other than schools. As for the school discounts, it is our holding that the benefits to be derived from such discounts were substantial enough to supply the plaintiff with a quid pro quo for the discount which, in turn, effectively destroyed the discounts charitable nature. However, as for the discounts to charities other than schools, we hold that the benefits derived from such discounts were merely incidental to the making of the transfer and not substantial enough to destroy the charitable contribution characterization.
As has already been noted, plaintiff is, among many other things, a manufacturer and supplier of sewing machines to both the domestic and foreign markets. It was originally formed in 1863 as "The Singer Manufacturing Company," a New York corporation, the state in which it operated until moving across the river to New Jersey. In 1873, the time of moving, the New York corporation was dissolved and a New Jersey corporation was formed under the same name as was used in New York. It was not until much later, in 1963, that plaintiff's name was changed to "The Singer Company" as it appears in this case.
Today, and during the year in issue, plaintiff is a thoroughly integrated corporation which handles all phases of its sewing machine business. However, it did not always operate in its present format. For example, during the year in question, 1954, plaintiff distributed its product through a wholly owned subsidiary, called "Singer Sewing Machine Company" (hereinafter referred to as "SSMCo" or "Singer"), a New Jersey corporation. It is this subsidiary that sold and distributed the machines here in question and consequently all further references to The Singer Company, as plaintiff, will be to this portion of a much more diversified corporation.
During the year in question plaintiff, through SSMCo, sold 584,740 Singer sewing machines in the United States which produced a gross sales figure of $120,853,921, of which 491,005 were new machines. Of the new machines, 93.7 percent, or 460,191 were sold to the general public at plaintiff's established retail price. An additional 1,450 machines were sold in the normal course of plaintiff's business but at a price which was 10 percent less than retail. The remaining 29,364 new machines (6 percent of the year's total) were sold to purchasers, not in plaintiff's ordinary course of business and to purchasers who received various discounts. Those purchasers, along with the percentage of discount, were as follows:
Discount from
Category Published List price
(a) Employees of the Singer organization with 30 percent
more than six months of service
(b) Foreign diplomats ----------------------- 20 percent
(c) Clothing manufacturers using Singer industrial 15 percent
machines
(d) Home economics (sewing) teachers -------- 20 percent
(e) Churches and charitable organizations (other 25 percent
than governments, schools, hospitals, and
Red Cross.)
(f) Red Cross -------------------------------- 45 percent
(g) Government and nonprofit hospitals ------- 45 percent
(h) Government agencies (federal, state, county, 45 percent
and municipal)
(i) Public and parochial schools (i. e., schools and 45 percent
colleges under federal, state, county, municipal
and parochial administration)
(j) Salaried county home demonstration agents 45 percent
and 4-H girls club leaders who devote entire
time to extension service and need portable
machines for use in their work (limited
to portable machines).
(k) Army PX's and Navy Ship Stores ------------- 20 percent
The total amount of machines that were sold to charitable type organizations listed above was 25,309.3 Of that total, 21,070 new machines were sold to public and parochial schools at prices aggregating $2,733,750 or $818,535.11 below the then fair market value. These sales were made at break even prices and resulted in no over-all immediate net profit or loss to plaintiff. As can be seen from the chart, the discount for the school group was 45 percent. The plaintiff also sold 4,239 machines to charities other than the aforementioned school group. This included (1) churches and charitable organizations (other than governments, schools, hospitals, and the Red Cross); (2) the Red Cross; (3) government and non-profit hospitals; and (4) government agencies (Federal, state, county and municipal). Discounts received, as shown by the chart, were all 45 percent except for category (1) above, which received a 25 percent discount. The total moneys received from the non-school charity discount sales amounted to $529,875 which was $127,321.80 below the then fair market value of the machines. Thus, the total discounts allowed to those organizations enumerated by section 170(c) for the taxable year 1954 aggregated $945,856.91 which would produce a reduction in taxes paid of $510,762.73.4 Said reduction would occur if plaintiff were allowed to deduct these discounts on its amended return.
The original Federal income tax return, a consolidated return, filed by plaintiff, included SSMCo within plaintiff's affiliated group. Said return was timely filed with the District Director of Internal Revenue at Newark, New Jersey and made pursuant to the provisions of sections 1501 and 6012(a) of the 1954 Code which provide for the privilege and responsibility of filing a consolidated return.
Subsequent to the filing of said return, the Commissioner of Internal Revenue conducted an audit which resulted in the assessment of certain income tax deficiencies (with interest thereon) which are not here in issue.5 Thereafter, on December 17, 1962, and within two years from the date on which plaintiff had paid said income tax deficiencies, plaintiff filed a claim for refund (Form 843) for the taxable year 1954 in the amount of $525,640.43, plus interest, or such greater amount as may be legally refundable. Of this total, $14,878.20 related to foreign tax credits which are no longer in issue. The balance of plaintiff's claim was based on the discounts to charitable organizations heretofore described and not theretofore claimed as a charitable contribution deduction on any of plaintiff's income tax returns. The amount of the claimed deduction, $945,856.91, plus that amount of charitable contributions made by plaintiff's affiliated group other than the amount here in issue, does not exceed five percent of plaintiff's 1954 taxable income, as computed under section 170 (b) (2) of the Code.6
Following the denial of the above noted claim for refund, suit was instituted in conformity with the provisions of sections 6532 and 7422 of the Code and jurisdiction of this court was invoked under Title 28 U.S.C. § 1346 and § 1491 (1954). Upon the filing of suit, our Commissioner Willi, after hearing testimony and considering all the evidence, submitted his findings of fact under Rule 134(h) of this court. Because of those findings, which we substantially adopt, and the nature of the case, the opinion will deal first with the issue in terms of the school discounts and secondly in reference to the discounts to charities other than schools.7
However, before proceeding to resolve the issue, it should be noted that the parties have agreed that the organizations to which the discounts here in question were made are within section 170(c). Furthermore, there will be no further discussion concerning the question of the fair market value of plaintiff's machines as it relates to the bargain sales here in question. We are not persuaded by the defendant's argument that the sales in question were not made at a bargain and therefore no deduction should be allowed. We arrive at this conclusion by referring to Treasury Regulation 1.170-1(c) (1) of the Internal Revenue Code of 1954 dealing with the contribution of property and describing the method for determining the value of property contributed. That regulation states, in its pertinent part, that:
(c) Contribution in property — (1) General rules. If a contribution is made in property other than money, the amount of the deduction is determined by the fair market value of the property at the time of the contribution. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. If the contribution is made in property of a type which the taxpayer...
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