Brown & Williamson Tobacco Corp. v. United States

• Decision Date: 09 March 1973
• Docket Number: Civ. A. No. 6789.
• Citation: 369 F. Supp. 1283
• Parties: BROWN & WILLIAMSON TOBACCO CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Kentucky

369 F. Supp. 1283

BROWN & WILLIAMSON TOBACCO CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 6789.

United States District Court, W. D. Kentucky, Louisville Division.

March 9, 1973.

Robert L. Maddox, Ernest C. Pepples, Jr., DeBaun Bryant, Wyatt, Grafton & Sloss, David A. Schechter, Louisville, Ky., for plaintiff.

George J. Long, U. S. Atty., Stephen Csontos, Dept. of Justice, Tax Div., Washington, D. C., for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND OPINION

ALLEN, District Judge.

This tax refund action was tried before the Court without a jury on January 26, 1973. The Court has reviewed the evidence, which was transcribed, the deposition of Joseph Honeycutt, who died prior to trial, the stipulations of the parties, and the exhibits attached thereto, as well as the briefs.

This action is brought by plaintiff, Brown & Williamson Tobacco Corporation, a Delaware Corporation with its principal office in Louisville, Kentucky, seeking refunds of income taxes paid for the years 1963, 1965, 1966, 1967 and 1968, claims having been made to the District Director of Internal Revenue at Louisville, Kentucky, in a timely manner. Each claim was based on plaintiff's determination that the cost of construction of certain tobacco storage sheds incurred by it during the years in question entitled it to an investment credit, pursuant to Section 38 of the Internal Revenue Code of 1954, as amended, and related sections of the Code. The construction costs incurred by the plaintiff and the amounts of the investment credit claimed for each year are set out on pages 3 and 4 of the stipulation and made a part of this opinion as fully as if copied herein.

The litigation involves 14 tobacco storage sheds in Petersburg, Virginia, and 4 tobacco sheds in Louisville, Kentucky. Details and dates of the building of the sheds in question and photographs thereof are made a part of the record by stipulation and are incorporated into this findings of fact and conclusions of law.

All of the sheds in question both the 14 in Petersburg and the 4 in Louisville, were built and are being used by plaintiff solely for the storage and aging of its tobacco. Each shed is depreciable property and has an economic life in excess of eight (8) years. None of them is insulated. None has heating or plumbing facilities. Each is equipped with bug traps for infestation control, lighting and fire protection devices, including sprinklers. Each is constructed to provide for ventilation through the roof and through the side walls, either by means of a ventilation band or by means of louvers. The dimensions of each shed are approximately 150 feet in width, 154 feet in length and 22 feet in height. Each shed has two access doors with a connecting aisle to permit the loading and unloading of the hogsheads, and, except for the 4 Louisville sheds and the turkish tobacco shed, the floors are gravel or dirt with a 13½ foot wide aisle to allow for the movement of fork lift trucks. Several sheds are usually attached to one another, separated by a brick fire wall 12 inches thick. Unless otherwise described herein, the sides are constructed of overlapping corrugated steel siding sheets, bolted together to form a continuous wall.

Tobacco is purchased by the plaintiff at auction and delivered to plaintiff's leaf processing plants, sometimes referred to as redrying plants. At the leaf processing plant, the tobacco is cleaned, stemmed, dried and placed in hogshead containers in preparation for an aging process. The hogshead containers are delivered to tobacco storage sheds, including the sheds which are the subject of this litigation. Each hogshead contains approximately 1,000 pounds of tobacco. There are approximately three to four thousand hogsheads stored in each shed. The tobacco is stored and aged in these sheds from 15 to 30 months, after which it is delivered to the manufacturing division for further processing into cigarettes and other tobacco products.

During the 15 to 30 months spent in the storage sheds, the tobacco ages. As the tobacco ages, it goes through a "sweating" process, which process accompanies the changes in seasons. It is by going through this sweating process that the tobacco becomes aged. The aging process is an essential and integral part of the entire process of manufacturing tobacco products.

The storage sheds in issue were specially designed and built to be used for the purpose of storing and aging the tobacco, and are being used by the plaintiff solely for this purpose. Employees enter the sheds only for the purposes of maintenance and/or to bring in and remove the hogsheads. No other work is done within the sheds. The sheds contain only storage space, and except for fork lift trucks, no equipment or machinery is located in the sheds.

The turkish leaf storage shed, Anchor Shed No. 38, built in 1968, is of a different design from the other sheds. Turkish tobacco is more susceptible to molding than other types, and therefore special precautions are necessary during the aging process. It is a one story, concrete block structure with permanent ventilation in the roof and an all-concrete floor. There are 32 plastic dome skylights permanently installed within the roof to admit light to prevent mold from forming on the turkish leaf tobacco. Also located in the roof are 4 powered fan ventilators circulating air to prevent molding on the tobacco. Turkish tobacco is not stored in hogsheads, but in bales of approximately 150 pounds each, with each bale being wrapped in burlap.

Louisville No. 10, consisting of four connected tobacco storage sheds, is also of a slightly different design from the other sheds. Due to requirements of the Louisville and Jefferson County Planning and Zoning Commission, the front of the facility, fronting on Algonquin Parkway in Louisville, Kentucky, has a brick veneer, and the sides are of concrete masonry, rather than corrugated steel. The sheds have concrete floors installed for the purpose of allowing greater movement of the fork lift trucks within the sheds. This greater movement allows for a significant decrease in labor costs to the plaintiff in the loading and unloading of the hogsheads.

As each hogshead is filled it is tagged with the following information: crop year, type of tobacco, grade of tobacco, a process number, the processing date and the weight of tobacco in the hogsheads. The plaintiff attempts to keep different types and different grades of tobacco in each shed so as to minimize the risk of loss from a fire or other similar disaster.

The plaintiff uses all of the tobacco stored in the sheds for its own tobacco products, and none of the tobacco is sold to other manufacturers.

Eight sheds in Petersburg and three in Louisville, which are not the subject of an investment credit claim, were originally constructed and used for the purpose of storing tobacco but have since been converted to the storage of manufacturing supplies. Details of the original construction dates, conversion dates and cost of conversion are listed in Exhibit 15 which is made a part hereof, as well as the photographs thereof contained in Exhibit 17.

Paragraphs 17 and 18 of the stipulation refer to Louisville No. 3 and Louisville No. 5, which consist of a total of 7 storage sheds originally constructed for the purpose of storing tobacco, but which have been converted for use to a manufacturing facility and a heated supply warehouse respectively. The total conversion cost of Louisville No. 3 was $1,313,959 and of Louisville No. 5 was $401,775.

In addition to the facts contained in the stipulation, the testimony given at the trial indicate that the Louisville Public Warehouse Company, which is engaged in the general storage of goods, has converted 10 tobacco warehouses located in Louisville from their use as a storage facility for tobacco to a storage facility for general merchandise goods, at an approximate price of 81 cents per square foot. These conversions took place between 1950 and 1958, and Mr. Marcus C. Stuart, Jr., an executive of the Louisville Public Warehouse Company, estimated that it would have required between $3.50 and $5.00 per square foot to have built new buildings at that time. He estimates that now the cost of conversion would be at least twice as much as it was then, and also that the cost of building new construction would almost double.

Mr. Stuart was of the opinion...