B & M COMPANY v. United States

• Decision Date: 18 January 1972
• Docket Number: No. 71-1320.,71-1320.
• Citation: 452 F.2d 986
• Parties: B & M COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

452 F.2d 986 (1971)

B & M COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 71-1320.

United States Court of Appeals, Fifth Circuit.

December 1, 1971.

Rehearing Denied January 18, 1972.

C. Scott Edmundson, Jr., Meridian, Miss., Roland J. Mestayer, Jr., Pascagoula, Miss., Louis H. Watson, Jackson, Miss., Mestayer & Knight, Meridian, Miss., for plaintiff-appellant.

Fred B. Ugast, Acting Asst. Atty. Gen., Meyer Rothwacks, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D. C., H. M. Ray, U. S. Atty., Oxford, Miss., Jane Edmisten, Richard W. Perkins, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee.

Before BELL, AINSWORTH and GODBOLD, Circuit Judges.

AINSWORTH, Circuit Judge:

Taxpayer, a Mississippi corporation, appeals from a decision by the District Court, sitting without a jury, holding that Taxpayer was not entitled to a refund of manufacturer's excise taxes in the sum of $61,588.09 paid by it during the period July 1, 1966 through June 30, 1969.¹ The Government has conceded that the taxes were erroneously collected and the only issue before this Court is whether the Taxpayer assumed the economic burden of the tax, in which event it would be entitled to a refund, or whether, as the District Court found, it passed the burden on to its customers.

The District Court, in an oral opinion rendered from the bench, found that Taxpayer failed to meet the burden imposed on it by law to show that Taxpayer "has not included the tax in question in the price of the article with respect to which it was imposed, and has not collected the amount of such tax from the person who purchased the article from it." We disagree and, therefore, reverse.

The Government contends, in line with the District Court findings, that Taxpayer adjusted its sales prices upward to include a 10% manufacturer's excise tax.

Taxpayer contends that it paid the tax out of its profits by applying the 10% to the gross sales.

The applicable statute in this case is Section 6416(a) (1) (A) of the Internal Revenue Code of 1954 26 U.S.C. § 6416 (a) (1) (A). The subsection reads as follows:

"§ 6416. Certain taxes on sales and services.

"(a) Condition of allowance.

"(1) General rule.—No credit or refund of any overpayment of tax imposed by chapter 31 (retailers taxes), or chapter 32 (manufacturers taxes) shall be allowed or made unless the person who paid the tax establishes, under regulations prescribed by the Secretary or his delegate, that he—

"(A) has not included the tax in the price of the article with respect to which it was imposed and has not collected the amount of the tax from the person who purchased such article;

. . . ."

Taxpayer, B & M Company, Inc., is a Mississippi corporation, with its principal place of business in West Point, Mississippi. It is in the business of selling bamboo fishing poles and assorted sporting goods to wholesalers and retailers throughout the United States, which items are imported from Japan and other countries. Wilson Simmons and his wife are the sole owners of all the outstanding stock of the corporation. The only items at issue here are certain types of jointed bamboo cane fishing poles which are cut into sections and fitted with metal ferrules, and were sold by the corporation from July 1, 1966 through June 30, 1969.

Taxpayer corporation acquired the business from Wilson Simmons in December 1961 when the corporation was organized. Prior to incorporation, from 1947 through December 1961, the enterprise had been operated under the name of B & M Company, with Simmons as the sole proprietor. Originally, Simmons manufactured the fishing poles himself. However, in about 1958 or 1959 he began importing them from Japan as he "thought it would be cheaper." Under Rev.Rul. 58-425, 1958-2 C.B. 804, the Internal Revenue Service concluded that jointed bamboo cane fishing poles were "fishing rods" within the meaning of 26 U.S.C. § 4161 and subject to manufacturer's excise tax.² Accordingly, in 1959 a federal excise tax deficiency was assessed against Simmons on the poles for the years 1950 through 1957. Part of the assessment was paid by Simmons. Litigation followed in which Simmons was successful (see Simmons v. United States, 5 Cir., 1962, 308 F.2d 938) and the amount paid by Simmons was refunded to him and the unpaid assessments were abated.

Following the tax deficiency assessment against Simmons, he, as sole proprietor of the business, voluntarily paid excise taxes through 1961. When the business was incorporated in December 1961, the corporation continued these payments through the second quarter of 1969. Thereafter, Taxpayer discontinued paying taxes and filed this present suit for refund in 1970. Refund for taxes paid prior to the third quarter of 1966 was not claimed because of the applicable statute of limitations. During the pendency of the suit, the Commissioner of Internal Revenue, by Rev.Rul. 70-548, 1970-2 C. B. 265, reversed his previous position expressed in Rev.Rul. 58-425, supra, and concluded that Section 4161 does not apply "to sales of bamboo cane poles regardless of whether they are merely straightened, scraped, and varnished, or whether, in addition, they are cut into sections and fitted with ferrules or other means whereby they may be joined together." As already stated, the Government concedes that the taxes were erroneously collected, but contends that Taxpayer, having passed the economic burden of the tax on to its customer, is not entitled to a refund because of alleged unjust enrichment to Taxpayer.

At the trial four witnesses testified on behalf of Taxpayer—Mr. and Mrs. Wilson Simmons, president and secretary of appellant corporation, respectively; John T. Watkins, accountant and notary, who had been engaged by Taxpayer for the five preceding years to prepare its income tax returns and perform related services; and William E. Sullivan, Internal Revenue agent, employed in the Excise Tax Division as a specialist. The Government called no witnesses.

Mr. Simmons testified to the manner in which the corporation conducts its business. About once a year he travels to Japan to purchase merchandise for the following season. Upon his return, he tentatively determines sales prices. These prices are usually those used the previous year, adjusted for increase or decease in suppliers' prices. At Trade Shows held in late summer, Simmons exhibits and compares his merchandise with that of competitors and adjusts his prices to meet those of competitors on identical items. The prices are listed in printed catalogs which are sent to potential purchasers. The sales price of the fishing poles was not increased in 1959 when the deficiency assessment was made against Simmons as sole proprietor,³ nor was the price decreased after the corporation discontinued filing excise tax returns in 1969. No adjustments were ever made in the sales price to reflect the manufacturer's excise tax during the period when the corporation paid the excise tax. There was no overall or across-the-board increase in prices since 1957. No mention of manufacturer's excise tax was made either in the catalog or the invoices sent to customers. In 1961 the corporation voluntarily began paying excise taxes, having been advised by counsel to do so, but Simmons felt that the tax would eventually be refunded because of his belief that the fishing poles in question were not taxable. On cross-examination Simmons said that the corporation realized a greater profit by importing the poles instead of manufacturing them, because of the increase in volume. He reiterated, however, that the price structure did not change as a result of the importation.

Mrs. Simmons testified that at all times during the period at issue, the corporation sold its articles at the list price shown on the catalog sheets. The sheets show the suggested list price and a discount of 50% and 10% of the list price allowed prospective purchasers. The gross profit on the merchandise is computed by deducting the list price shown in the corporation's catalog from the cost sheets of the supplier in Japan.

John Watkins, a member of the American Institute of Certified Public Accountants and the Mississippi Society of Certified Public Accountants, testified that he examined the Taxpayer's records for the period in question to determine the manner in which the excise tax was computed. This tax account is classified as "other expenses" on the account chart and in the general ledger of the corporation. The excise tax was computed by applying the appropriate rate against the gross sales price, that is, by taking 10% of the amount charged. It was his conclusion that the excise tax had not been passed on to the customers. It was significant to him in reaching this conclusion that the excise tax was not shown on the invoices and that the records of the corporation reflected no accounts for excise tax liability. If the tax had been passed on to the customer it would have been included in the sales price. In preparing Taxpayer's federal income tax returns for the period in question, Watkins said that he considered the excise tax to be a tax borne by Taxpayer. When asked what he believed would have been the proper accounting method if he had considered the excise tax to have been collected from Taxpayer's customers, he said:

"If it had been included in the invoice separately stated thereon, and if the liability account had been established at the time the entries were recorded, then it would not appear at all on the income statement of the corporation. If it is considered as being passed on, then, in my opinion, the proper classification would be to deduct it from the gross sales of the corporation in arriving at net sales."

William Sullivan, an Internal Revenue agent and federal excise tax specialist, testified that at the request of the United States Justice Department he made an examination of Taxpayer's records...