Auto-Ordnance Corp. v. U.S., AUTO-ORDNANCE
| Decision Date | 02 July 1987 |
| Docket Number | AUTO-ORDNANCE,No. 86-1569,86-1569 |
| Citation | 822 F.2d 1566 |
| Parties | -6169, 87-2 USTC P 16,458 CORP., Appellant, v. The UNITED STATES, Appellee. Appeal |
| Court | U.S. Court of Appeals — Federal Circuit |
Samuel S. Yasgur, Hall, Dickler, Lawler, Kent & Friedman, White Plains, N.Y., argued for appellant. With him on the brief was Morton A. Smith, New York City.
Douglas Coulter, Dept. of Justice, Washington, D.C., argued for appellee. With him on the brief were Roger M. Olsen, Asst. Atty. Gen., Michael L. Paup and Gary R. Allen, Washington, D.C.
Before MARKEY, Chief Judge, FRIEDMAN, Circuit Judge, and RE, Chief Judge. *
Plaintiff, Auto-Ordnance Corp., a manufacturer of semi-automatic carbines, sued to recover excise taxes assessed pursuant to 26 U.S.C. Sec. 4181 on the "added value" of adjustable rear sights and front sight and compensator units sold with certain carbines that it manufactured. Auto-Ordnance appeals from an order of the United States Claims Court, which granted the defendant's motion for summary judgment and dismissed its complaint.
The questions presented on this appeal are whether the Claims Court erred in finding that the adjustable rear sights and front sight and compensator units, manufactured and sold with the Auto-Ordnance carbines, were component parts of a complete firearm and subject to the excise tax imposed by 26 U.S.C. Sec. 4181, or whether the sights and compensators were tax-exempt "accessories" of firearms. This is a question of first impression for this Court.
Since we hold that the adjustable rear sights and front sight and compensator units are "accessories," they are exempt from the tax imposed on their "added value" pursuant to 26 C.F.R. Sec. 48.4181-1(a)(2) (1986). Accordingly, the judgment of the Claims Court is reversed.
The Auto-Ordnance carbines were sold with two types of rear sights: (1) a plain, nonadjustable rear sight, and (2) a deluxe, adjustable rear sight. The carbines were also offered for sale with or without a front sight and compensator unit. In essence, Auto-Ordnance maintains that the applicable statute, 26 U.S.C. Sec. 4181, and the pertinent treasury regulation, 26 C.F.R. Sec. 48.4181-1, impose a manufacturer's excise tax on firearms, but specifically exempt "accessories of firearms." 26 C.F.R. Sec. 48.4181-1(a)(2). Auto-Ordnance contends that the sights and compensators are clearly accessories because the articles or units are readily removable, merely enhance the utility or appearance of the gun, and are not required to enable the carbine to fire a bullet.
The defendant maintains that the adjustable rear sights, and the front sight and compensator units, are component parts of the carbines, and, therefore, are subject to the excise tax imposed pursuant to 26 U.S.C. Sec. 4181 and 26 C.F.R. Sec. 48.4181-1. The defendant asserts that the items are component parts of the firearm because the deluxe carbine, with the adjustable rear sight and front-sight compensator unit attached, was marketed and sold as a "discrete" model. Also, defendant reasons that the items in this case "serve a major, and not a secondary, purpose in that they enable the 'Deluxe Model' carbine to resemble more closely the original Thompson gun." Moreover, defendant contends that the Treasury Regulations do not state that the component parts of a firearm are limited to those parts that are necessary to fire a bullet.
The parties submitted the case to the United States Claims Court on the following stipulated facts. Auto-Ordnance manufactured and sold two models of semi-automatic carbines. These carbines, one a "standard" model and the other a "deluxe" model, were patterned after the Thompson submachine gun. The models were offered for sale with two types of rear sights: a plain, nonadjustable sight, and a Lyman-type adjustable sight. The carbines are designed to accept either the standard rear sight or the adjustable rear sight, and, in about 5 minutes, using standard tools, each can be exchanged for the other.
The carbines were also offered for sale with a plain front sight, or a "front sight and compensator" unit. The front sight and compensator of the deluxe model are two pieces specially designed to be fitted together. A compensator is a tube-like device which is screwed onto the muzzle. It contains holes to vent gases, and "could have an effect on muzzle rise" or recoil of the firearm to which it is attached. There was no proof, however, that, other than appearance, the compensator sold by Auto-Ordnance had any actual effect on the carbines. Using standard tools, the standard front sight can be exchanged for the compensator unit in about 20 minutes.
It was also stipulated that the front sight enabled an average marksman to aim the carbine more accurately than without the front sight, and that the combination of the front and rear sight enabled an average marksman to aim more accurately than with no sight or one sight. The record does not indicate whether the adjustable rear sight would enable a person to aim more accurately than when using a plain rear sight. The carbines can be fired and used without any sights.
Auto-Ordnance paid an excise tax on the value of the standard version of the front and rear sights on all carbines that it sold from January 1, 1976 through December 31, 1978. Upon reviewing Auto-Ordnance's tax returns, the Internal Revenue Service (IRS) assessed an additional tax in the amount of $44,038.58, 1 plus interest, on the "added value" of the adjustable rear sights and the front sight and compensator units of the deluxe model carbines.
After paying this additional tax, Auto-Ordnance filed a claim for a refund with the IRS, contending that the sights and compensators were "accessories" to firearms. Plaintiff sought a refund for the tax imposed on the difference in value of the standard sights and the adjustable sights and compensators. Upon rejection of its claim by the IRS, Auto-Ordnance filed suit in the United States Claims Court.
In dismissing Auto-Ordnance's complaint, the Claims Court held that the "statutory language, the relevant Treasury Regulations, and the IRS administrative practice confirm that the sights of a portable weapon capable of discharging a bullet by means of an explosive are not excluded from the definition of a firearm." Auto-Ordnance Corp. v. United States, 10 Cl.Ct. 281, 286 (1986). In interpreting treasury regulation 48.4181-1(a)(2), the Claims Court stated: "Items which are component parts or accessories ... when included in a complete firearm, even when in a knockdown condition, are taxable." The Claims Court also concluded that the items "were necessary to promote the appearance that the carbine included copies of the components that made up the original Thompson submachine gun," and that "the Deluxe Model could not be a complete firearm without the items at issue." Id. at 286.
Section 4181 of the Internal Revenue Code imposes a tax of 11 percent "upon the sale by the manufacturer, producer, or importer" of firearms, other than pistols and revolvers. 26 U.S.C. Sec. 4181 (1982). The applicable treasury regulation defines firearms as "any portable weapons, such as rifles, carbines, machine guns, shotguns, or fowling pieces, from which a shot, bullet or other projectile may be discharged by an explosive." 26 C.F.R. Sec. 48.4181-2(c). Regulation 48.4181-1(a)(2), however, specifically exempts from taxation "parts or accessories of firearms." Another regulation provides that "[w]here a taxable article and a nontaxable article are sold by the manufacturer as a unit, the tax attaches to that portion of the manufacturer's sale price of the unit which is properly allocable to the taxable article." Id. Sec. 48.4216(a)-1(e).
The questions presented in this case pertain to the meaning of the term "accessory" as used in the regulations, and whether the "deluxe" items of the Auto-Ordnance carbine are accessories under this definition. The parties agree that the question is one of "classification," that is, whether the articles are "accessories" or component parts of firearms. If the added items are accessories, the existing regulations exempt them from tax, even if the accessories are sold with a complete firearm. 26 C.F.R. Sec. 48.4181-1(a)(2).
Regulation 48.4181-1(a)(2) provides:
(2) Parts or accessories. No tax is imposed by section 4181 on the sale of parts or accessories of firearms, pistols, revolvers, shells, and cartridges when sold separately, or when sold with a complete firearm. Thus, no tax attaches to the sale of telescopic mounts, rubber recoil pads, rifle sights, and similar parts for firearms when sold separately, or when sold with complete firearms for use as spare parts or accessories. The tax does attach, however, to sale of complete firearms, pistols, revolvers, shells, and cartridges, or to sale of such articles which, although in a knockdown condition, are complete as to all component parts.
26 C.F.R. Sec. 48.4181-1(a)(2) (1986) (emphasis added).
The plain language of section 4181, and the first sentence of the regulation, would seem to resolve the questions presented. The statute imposes a tax on firearms, and the regulation expressly states that "[n]o tax is imposed by section 4181 on the sale of parts or accessories of firearms ... when sold with a complete firearm." 26 C.F.R. Sec. 48.4181-1(a)(2). It may be noted that the Claims Court was in error when it stated that "[i]tems which are component parts or accessories ... when included with a complete firearm ... are taxable." 10 Cl.Ct. 281, 286 (1986).
The Claims Court was in error because the pertinent regulations make clear that, if the added items are accessories, they are exempt from tax. The Claims Court was also in error when it determined that "the Deluxe Model could not be a complete firearm without the items in issue." This statement would seem to inject or introduce into the existing...
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