E. Albrecht & Son v. Landy

• Decision Date: 19 April 1939
• Docket Number: No. 2953.,2953.
• Citation: 27 F. Supp. 65
• Court: U.S. District Court — District of Minnesota
• Parties: E. ALBRECHT & SON, Inc., v. LANDY, Collector of Internal Revenue.

27 F. Supp. 65

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

No. 2953.

District Court, D. Minnesota, Third Division.

April 19, 1939.

Oppenheimer, Dickson, Hodgson, Brown & Donnelly, of St. Paul, Minn., for plaintiff.

Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., for defendant.

SULLIVAN, District Judge.

This suit is brought to recover payments of excise taxes alleged to have been erroneously exacted under Section 604 of the Revenue Act of 1932, 26 U.S.C.A. end of c. 20.

The plaintiff and its predecessors in interest, for approximately seventy-seven years prior to June 20, 1932, were engaged in manufacturing and selling articles made of fur. Plaintiff's sales during said period of time were divided into the following branches:

(a) As a manufacturer;

(b) At wholesale;

(c) At retail;

(aa) Through retail stores in St. Paul and Minneapolis, Minnesota;

(bb) Through mail orders solicited by advertising.

In anticipation of the passage of an excise tax act for the year 1932 upon articles made of fur, the officers, directors and stockholders of the plaintiff company (hereinafter referred to as the manufacturing company), on June 16, 1932, caused to be organized under the laws of the State of Minnesota, the E. Albrecht & Son Company (hereinafter referred to as the sales company), its purpose being generally the sale at wholesale and retail of fur garments and articles. On June 20, 1932, but as of February 1, 1932 (that being the commencement of the fiscal year for the manufacturing company), the manufacturing company sold, assigned and set over to the sales company its retail stores and business, and its (1) merchandise inventory of finished articles; (2) articles of wearing apparel in the process of manufacture, and as to which all necessary furs had been definitely and specifically allocated; (3) all repair items, so-called, finished or in the process of completion, and as to which all necessary furs had been definitely and specifically allocated; (4) all of its wholesale and retail business; (5) all accounts and bills receivable, and any security given therefor, and accounts receivable on account of all wholesale or retail sales, furs, storage, repairs; (6) the right to use the firm name, "E. Albrecht & Son" in the wholesale and retail fur and allied business. The sale price was the inventory value of stock and materials, and was paid by the issuance and delivery of all of the shares of the stock of the sales company to the manufacturing company, and nothing more. The officers of the sales company are identical with those of the manufacturing company, as are its stockholders. Each company, however, keeps and maintains its own books and records, and although the manufacturing company and the sales company occupy the same building in St. Paul, space, rental and maintenance expense thereof are allocated between the two companies. The executive officers of the companies are the same, and many of the employees are in the service of both companies, but the salaries of the officers and employees are allocated to the respective companies.

The fur industry (aside from the growing or trapping of furs, or the sale of raw furs, or the tanning thereof) normally divides itself into three classifications:

(1) The manufacture of articles of wearing apparel and the like, the same being sold at a manufacturer's price to the wholesaler, or jobber;

(2) The wholesaler, or jobber, who sells at a wholesale price to the retailer;

(3) The retailer, who sells at a retailer's price to the ultimate customer.

However, some manufacturers may sell some articles to wholesalers at the manufacturer's price, some of the same articles to retailers at wholesaler's prices, and some of the same articles to the ultimate customer at the retailer's price. Previous to the organization of the sales company, the plaintiff conducted all of the above branches of the fur business, save and except that it did not sell at a manufacturer's price to any wholesaler, but each division of its business was carried on separately.

From and after June 20th, 1932, the manufacturing company sold all of its manufactured products to the sales company at what is contended by the plaintiff to be a manufacturer's price, and, in any event, at prices lower than those at which said articles were sold in the ordinary course of trade by manufacturers or producers thereof. The manufacturing company does not sell to persons other than the sales company; that is, the entire product of the manufacturing company is sold to the sales company, to the exclusion of other business which it might obtain ordinarily as a manufacturer selling on the market generally at manufacturers' prices.

During the year 1932, the retail business of the so-called sales company was approximately $170,000, and that of the wholesale branch of the business was approximately $77,000. Neither the plaintiff nor the sales company paid any customers' excise tax on the completed garments, or garments in process of manufacture, which were transferred by the manufacturing company to the sales company on June 20, 1932. The Commissioner of Internal Revenue determined that this transfer was not a bona fide sale of such garments, and assessed taxes on the same on the basis of the wholesale selling price thereof. On the completed garments, the assessment was $4,228.57, and on articles in process of manufacture, the sum of $1,165.32. However, the Commissioner, in instances where the sales company was required to sell garments at a price less than wholesale, assessed the tax on the basis of twenty per centum less than the selling price.

On articles sold by the manufacturing company to the sales company subsequent to June 21, 1932, the plaintiff paid a tax on a selling price basis of cost plus thirteen per centum. The Commissioner of Internal Revenue determined that this was not the proper basis for the tax, since it was not a bona fide sale and not an "armslength transaction", and that it was not the price for which such articles were sold in the ordinary course of trade by manufacturers or producers thereof. He determined that the proper basis for such tax was the wholesale selling price of such article, and in the event that an article was sold at sacrifice and at less than the wholesale price, then on a selling price basis of twenty per centum less than the actual selling price, and accordingly assessed additional taxes in the sum of $1,386.29.

There was a further assessment against the plaintiff company of $602.87, covering tax on repair items, the necessary materials for such repair items having been transferred to the sales company on June 20, 1932. Upon these items no tax had been paid, and the Commissioner determined that a tax was due and assessed that amount on such items, using as a basis the price paid for the repair job upon the ground that the labor and new fur going into the repair were not billed to the customer as separate items.

Subsequent to June 21, 1932, the Commissioner assessed additional taxes above what the plaintiff had paid, in the sum of $2,278.74, of which $892.45 represents tax on repair items arising after June 21, 1932, in addition to that which the plaintiff had paid in its returns, and such additional tax was due to the fact that the Commissioner used as a basis therefor the price made on the repair job by the sales company to its customers, rather than on the cost of the new fur going into the repair items. On repair items, the Commissioner of Internal Revenue assessed the tax only on such items in which new fur constituted the component material of chief value. The invoice to the customer did not disclose the cost or price of the new fur going into the repair job. However, the books and records of the sales company disclosed such fact, and allocated the different costs going into the repair job.

On January 14, 1936, plaintiff paid said taxes so assessed in the sum of $8,275.50, plus interest, making a total of $11,055.20, and on January 17, 1936, plaintiff duly filed with the defendant as Collector of Internal Revenue of the United States in and for the District of Minnesota, and with the Commissioner of Internal Revenue, its claim for refund of the taxes so paid, and on October 30, 1936, the Commissioner disallowed and denied said claim for refund.

Under Section 604, Revenue Act of 1932, 26 U.S.C.A. end of c. 20, there is "imposed upon the following articles, sold by the manufacturer, producer, or importer, a tax equivalent to 10 per centum of the price for which so sold: Articles made of fur on the hide or pelt or of which any such fur is the component material of chief value."

Section 619(b) of the Revenue Act of 1932, 26 U.S.C.A. end of c. 20, reads as follows:

"(b) If an article is —

"(1) sold at retail;

"(2) sold on consignment; or

"(3) sold (otherwise than through an arm's-length transaction) at less than the fair market price; the tax under this title shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Commissioner."

Regulation 46, Article 15, promulgated under the authority of the Revenue Act of 1932 by the Commissioner of Internal Revenue, reads in part as follows:

"The `fair market price' within the meaning of the Act and these regulations is the price for which articles are sold by manufacturers at the place of manufacture or production in the ordinary course of trade and in the absence of special arrangements. Where, for any reason, a manufacturer's sale price does not properly reflect the price for which similar articles are sold at the place of manufacture or production in the ordinary course of trade by manufacturers and the sale is not an arm's-length transaction, the tax shall be computed upon a fair market price.

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