Ace-Chicago Great Dane Corp. v. U.S., ACE-CHICAGO

• Decision Date: 16 January 1984
• Docket Number: ACE-CHICAGO,No. 83-1298,83-1298
• Citation: 726 F.2d 321
• Parties: 84-1 USTC P 16,412 GREAT DANE CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 321

726 F.2d 321

84-1 USTC P 16,412

ACE-CHICAGO GREAT DANE CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 83-1298.

United States Court of Appeals Seventh Circuit.

Argued Sept. 30, 1983.

Decided Jan. 16, 1984.

Mary L. Fahey, Atty. Tax Div., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Edward C. Rustigan, Mayer, Brown & Platt, Chicago, Ill., for plaintiff-appellee.

Before WOOD and POSNER, Circuit Judges, and GORDON, Senior District Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge.

The United States appeals from the judgment of the district court holding plaintiff-appellee Ace-Chicago Great Dane Corporation (Ace) not liable for manufacturers' excise taxes on the sale of motor vehicle parts and accessories that were assessed against it and collected for the years 1970 through 1975. The district court ruled that the tax liability should be borne by Ace's customers. The government maintains that the district court erred in finding that Ace's customers were the "manufacturers" under the applicable Treasury Regulation rather than Ace. We agree and thus reverse.

I.

The underlying facts are not in dispute. Ace is an Illinois corporation with two divisions. The Chicago Great Dane Division acts as a sales agent for a trailer manufacturer. The Ace Trailer Division repairs and services truck trailers, tankers, and fuel trucks. The repairs are usually made because of accident damage or wear and tear, and include the installation of new tops and floors, painting, and lettering. Body work is usually performed on trucks owned by Ace's customers, with Ace providing the materials used in its repair operations, including new body parts, coils of rolled aluminum, wood, and other miscellaneous materials. Occasionally, however, Ace installs cargo equipment and liftgates provided by the customer and performs work on vehicles owned by Ace's sales division, Chicago Great Dane.

During 1976, the Internal Revenue Service (IRS) audited Ace to determine whether the work Ace performed in its repairs division made it liable for manufacturers' excise taxes for the twenty-four calendar quarters in the years 1970 through 1975. The IRS examined nineteen invoices covering work performed during the period January 1, 1975, through March 31, 1975, and concluded that the work covered by sixteen of the invoices involved the manufacture of a part or accessory subject to the eight percent manufacturers' excise tax of section 4061(b)(1) of the Internal Revenue Code of 1954, I.R.C. Sec. 4061(b)(1) (1976), and that the three other invoices represented work constituting the further manufacture of a truck body or chassis subject to the ten percent manufacturers' excise tax of section 4061(a)(1), I.R.C. Sec. 4061(a)(1) (1976). The IRS computed a tax liability for the first quarter of 1975 in the amount of $582 based on these invoices. By agreement of the parties, the IRS used this figure as the amount of tax liability for each of the remaining twenty-three quarters for a total tax liability of $13,968. Ace paid this amount, plus interest. When its refund claims were denied, Ace sued for a refund in the federal district court.

Following the commencement of its action, Ace stipulated that the work described in the nineteen invoices constituted either the further manufacture of a body or chassis, or the manufacture of a part or accessory within the meaning of the applicable Internal Revenue Code sections and that the amount of $13,968 in liability was correct. The work most frequently done in connection with the sixteen invoices subjected to the eight percent tax on parts and accessories was described by the president of Ace as the replacement of truck tops. The replacement activities involved the removal of the old top cover and the installation of a new top cut from rolls of aluminum. The new sheet of aluminum was attached to the bows and top body rails with rivets and trimmed to complete the operation. Other types of work subjected to the eight percent tax for parts and accessories consisted of the replacement of truck floors and the repair of damaged truck and trailer bodies. The president of Ace stated that these repairs involved the replacement and installation of new floors of wood or the replacement of a worn out or damaged trailer piece with a new part. The work pertaining to the other three invoices, taxed as the further manufacture of a motor vehicle chassis or body, involved the installations of one liftgate and two sliding doors.

Because of the stipulation, the only issue for the district court to decide was whether Ace or its customers were liable for the tax. Ace contended that under the Treasury Regulation defining "manufacturer" for purposes of sections 4061(a) and 4061(b), ¹ as that regulation has been interpreted by case law and published rulings of the IRS, if the owner of a truck or trailer (the customer) delivers it to a fabricator (such as Ace) who then repairs or modifies the vehicle, the customer and not the fabricator is the "manufacturer" and thus liable for the manufacturers' excise tax so long as title to the vehicle always remains in the customer. The government agreed that the regulation describes the proper legal test for determining who is the "manufacturer" with respect to the sale of articles taxed under both section 4061(a) and section 4061(b). The government contended, however, that the focus of the test is different with respect to each section. Thus, while the government agreed that Ace's interpretation of the definition of "manufacturer" under the regulation was proper as applied to section 4061(a), which governs excise taxes for the further manufacture of truck bodies and chassis, the government argued that the focus of the proprietary interest test under section 4061(b) should be on the part or accessory being manufactured. Accordingly, the government asserted that the definition of "manufacturer" as it relates to section 4061(b) requires that for the customer to be considered the "manufacturer," the customer must furnish the raw materials necessary to produce the taxable truck parts and accessories at issue and retain a proprietary interest in the furnished materials as well as in the finished part or accessory; the customer's proprietary interest in the vehicle was immaterial.

Applying the "proprietary interest" test described in the regulation, the district court noted that:

while it is true that the applicable Treasury Regulation (316.4) includes the phrase "... furnishes materials and retains title thereto ...[,]" the focus of the appellate decisions relied upon by [Ace] is upon the retention of title, and the element of furnishing of materials seems to be relegated to an inconsequential place in the reasoning process. This observation is critical in this case because in the factual situation before the court the customer has retained title to the trailer being worked upon, but in most instances did not furnish the materials.

Ace-Chicago Great Dane Corporation v. United States, No. 79 C 4198, slip op. at 7 (N.D.Ill. March 16, 1982). Applying this version of the test, the district court concluded:

Because the customer at all times in the instance of the invoices under discussion here[ ] retained ownership and proprietary interest in the vehicle, and because the activities of [Ace] did not constitute the manufacture for attachment to the vehicle, [Ace] is not liable for the 8% tax in the instance of the sixteen invoices.

The circumstance is different in the instance of the three remaining invoices, where the evidence indicates that ownership of the vehicle was in the plaintiff Ace and the work performed was not repair but rather the attachment of separate articles supplied by the customer to the vehicle. The 10% excise tax in these instances is assessable against and payable by the plaintiff Ace.

Id., slip op. at 9. Accordingly, the court entered judgment for Ace in the amount of $12,309.22, plus interest. It is from this judgment that the government appeals. ²

II.

Section 4061(b) of the Internal Revenue Code of 1954, I.R.C. Sec. 4061(b) (1976), imposes an eight percent excise tax on truck parts or accessories "sold by the manufacturer, producer, or importer." ³ Because the parties stipulated that Ace's activities with respect to the sixteen invoices constituted manufacture of a part or accessory, we must decide only whether the district court properly interpreted the applicable regulation in concluding that Ace's customers, rather than Ace, were the "manufacturers" liable for the excise tax. Under the legal test described in the regulation, see supra note 1, the customer, rather than the fabricator, will be considered the manufacturer of an article if the customer furnishes the component materials and retains a proprietary interest in the component materials and in the finished article. The district court relied on several cases interpreting this regulation to conclude that the requirement that the customer furnish the component materials is secondary and that the central analysis is on whether the customer or the fabricator retained title in the vehicle. In reaching this conclusion, the district court overlooked Ace's stipulation that Ace's work in connection with the sixteen invoices involved the manufacture of motor vehicle parts and accessories and not the further manufacture of motor vehicle bodies and chassis. We believe it was this failure to focus on the proper object of the proprietary interest that is at the root of the district court's misinterpretation of both the regulation and the applicable case law construing it.

The three cases relied on by the district court for its interpretation of the controlling Treasury Regulation and by Ace in its arguments before us on appeal are Vinal v. Peterson Mortuary, Inc., 353 F.2d 814 (8th Cir.1965), Boise National Leasing, Inc. v. United States, 389 F.2d 633 (9th Cir.1968), an...