Boise National Leasing, Inc. v. United States

• Decision Date: 01 February 1968
• Docket Number: No. 21331.,21331.
• Citation: 389 F.2d 633
• Parties: BOISE NATIONAL LEASING, INC., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

389 F.2d 633 (1968)

BOISE NATIONAL LEASING, INC., Appellant, v. UNITED STATES of America, Appellee.

No. 21331.

United States Court of Appeals Ninth Circuit.

February 1, 1968.

R. B. Kading, Jr. (argued), of Richards, Haga & Eberle, Boise, Idaho, for appellant.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Jeanine Jacobs, Howard M. Koff (argued), Attys., Dept. of Justice, Washington, D. C., Sylvan A. Jeppesen, U.S. Atty., Boise, Idaho, for appellee.

Before JOHNSEN,^* BARNES and ELY, Circuit Judges.

JOHNSEN, Senior Circuit Judge.

Taxpayer, Boise National Leasing, Inc., of Boise, Idaho, has appealed from the District Court's dismissal on the merits of its suit for refund of some manufacturer's excise taxes, § 4061(a), Int. Rev.Code of 1954, 26 U.S.C.A. § 4061(a). The tax amounts involved were $10,463.19 for the year 1962 and $1,000.49 for the year 1964.

We agree with the trial court's findings and conclusions, 257 F.Supp. 614, except as to the correctness of the computations or amounts of the taxes involved. To enable the court to deal with this aspect, as later discussed, the judgment will be vacated and the case remanded.

Taxpayer's contentions here are in general, as they were in the court below, (1) that no manufacture had occurred as a basis for the excise taxes imposed; (2) that if a manufacture was involved then another and not it had to be held to be the manufacturer; and (3) that the taxes imposed were in any event incorrect in their computations or amounts.

Taxpayer was engaged in the business of leasing equipment. The excise taxes were imposed in relation to a reconstruction of six used White logging trucks, which taxpayer had done in 1962, and to a reconstruction of a used Sterling truck, which it had done in 1964. The trucks were reconstructed for use by taxpayer in its leasing business.

The basis on which the Internal Revenue Service imposed the taxes was that the extent and nature of what had been done created in each instance a new vehicular article, so that the reconstruction was on its elements, processes and results a production or manufacture of trucks; that while taxpayer had had the reconstruction contractually done by another party, it had furnished major materials or components therefor and retained title thereto, so that, under § 316.4 of Treasury Regulations 46 (1940 ed.), it was entitled to be considered, for excise tax purposes, the manufacturer of the trucks; and that as a manufacturer its use in its own business of a truck produced by it, instead of making a sale thereof, was under I.R.C.1954 § 4218(a), as amended, 26 U.S.C.A. § 4218(a), made subject to the excise tax of § 4061 "in the same manner as if such article were sold by it".

As to the six White trucks, these were bought by taxpayer from a lumber mill in 1962 for $53,700 (in round numbers), or an admitted price of $8,950 each. They were purchased with the intention of having them reconstructed and added to taxpayer's leasing equipment. Taxpayer contracted for the reconstruction to be done by Kenworth Motor Truck Co., of Seattle, Washington, at a price of $6,900 for each truck. We agree with the District Court that what was done constituted on its form, substance, and result, not a repairing or reconditioning of the old truck structures or entities with an incidental replacement of some existing part or parts thereof, but the creating of other structural assemblies and functional entities.

Kenworth was to make new steel frames of certain specification and to combine and coordinate thereon certain components from the old truck and certain other components to be supplied by it. The old trucks as such were not to come into Kenworth's hands. As related to Kenworth's undertaking, these had ceased to have any identity as truck structures or entities. Taxpayer had had them completely dismantled immediately after their purchase. As noted, Kenworth was merely to be furnished with certain of the then-separated components; it was to provide other specified components necessary to make a completed truck; and all these elements were to be combined and coordinated by it, on the frame which it was to make, into an operable truck unit.

The specification contained in the contracts of the individual elements involved serves to emphasize the nature of what Kenworth was to do and the result which would be effected thereby. Detailing in terms of the specification, Kenworth was first of all to construct new truck frames. It was to provide and add to this basic element new cabs, radiators, steering gears, front axles, complete brake systems, electrical systems, instrument assemblies, fuel tanks, and other minor elements and accessories. Taxpayer was to furnish, for incorporation into the assemblies, the engines, generators, starters, compressors, transmissions, clutches, rear axles, Timken spring suspensions, interaxle drive lines, ten wheels and tires, and a few other specified minor elements from the old trucks. Both the elements which taxpayer was to furnish and those which Kenworth was to provide went into effecting the complete entities by regular assembly line processes, as used by Kenworth in its general business, which was the building of trucks to order.

To us it seems clear that such form of construction, such type of process, and such change in entity were involved as to constitute in the situation a production or manufacture of trucks, and not a restoration of the existence and utility of the previous trucks. The old trucks had been permanently stripped of all their form, all their identity, and all their utility as vehicular structures and entities. It might incidentally be interjected, however, that this, of course, is not to say that there cannot occur a dismantling of an old truck, with a repairing, reconditioning, replacing of some parts, and a reassembling of the truck elements, such as not to constitute the manufacturing of another truck.

But what was here done was hardly a disassembling, reconditioning and putting together again of the previous structures and entities, with incidental replacements. The dismantling had as its very purpose the permanent severance from the old truck structures and entities of some of the major components thereof and the incorporation of them as elements in other structures which were to be assembled. Further, these created structures involved such number and significance of new truck elements that neither vehicular form nor vehicular utility could have come to exist without their assembly addition.

Thus, the old truck components had in the situation no different status and relationship than if taxpayer had bought them independently and not in joinder to or as part of the old truck structures. Indeed, on the stipulation in the record, the obtaining of these components for use as elements in the truck structures and entities which Kenworth was to create constituted the only value which the purchase of the used trucks had or was apparently contemplated as being able to have to taxpayer. Taxpayer stipulated that there was no salvage from the dismantling of the old trucks to reduce the purchase price of $8,950 each which it had paid for them. Hence what taxpayer must have desired to obtain, and all that it did obtain by the purchase, was the motors, transmissions, etc., of the used trucks in the value which these could have as components or parts of the structures and entities which Kenworth was to create.

We can accordingly see no need for any further discussion as to a manufacture of truck structures and entities having been involved, and not a repairing, reconditioning and restoring of the old White trucks as purchased by taxpayer. Elements for which taxpayer had been willing to pay $8,950 in dismantling obtainment were to be incorporated by Kenworth into a structural assembly with such new additional substantial elements as were necessary to create a truck entity, at a price to taxpayer of $6,900 for the new elements and the assembling processes required to effect that result. And the result was, of course, no less a manufacture than if the created entity had been made to consist wholly of new elements or materials. Under § 316.4 of Treasury Regulations 46, the producing of a taxable article "from scrap, salvage or junk material * * * (1) by processing, manipulating or changing the form of an article, or (2) by combining or assembling two or more articles" is manufacturing equally with the producing of such an article "from new or raw material".

What has been said as to the six White trucks has application also to what taxpayer had done to the Sterling used truck in 1964. So far as it is possible to tell from the record, this truck was similarly converted into another structure and entity, with a use of the Sterling engine, transmission, etc., as components, just as in the case of the White trucks. The record in any event provides no basis for any distinction to be regarded as existing in this respect between the two situations. The only difference which is made to appear is that in the case of the Sterling truck, instead of having Kenworth do the assembling of the old truck elements and the new elements necessary to be provided to create a truck entity, taxpayer purchased from Kenworth, in packaged or "glider kit" form, all the necessary new elements, including frame, cab, brake system, etc., for a price of $6,478, and then had the structuring and assembling processes done by a third party. But this would not make the result any different as to a new truck entity having been produced, and not a repairing or reconditioning of the old truck structure having been effected, so that no less than in the case of the White trucks was there a manufacture involved as to the Sterling truck.

Taxpayer's next contention is, as previously mentioned, that if a truck manufacture was involved in the situation, then Kenworth and not it had to be regarded as the...