Chandler Laboratories v. Smith

• Decision Date: 09 February 1950
• Docket Number: Civ. A. No. 8023.
• Citation: 88 F. Supp. 583
• Parties: CHANDLER LABORATORIES, Inc. v. SMITH, Collector of Internal Revenue.
• Court: U.S. District Court — Eastern District of Pennsylvania

88 F. Supp. 583

CHANDLER LABORATORIES, Inc. v. SMITH, Collector of Internal Revenue.

Civ. A. No. 8023.

United States District Court E. D. Pennsylvania.

February 9, 1950.

Edward Stone, Philadelphia, Pa., for plaintiff.

Andrew D. Sharpe, Philip R. Miller, Special Assistants to the Attorney General, and Thomas J. Curtin, Assistant United States Attorney, Philadelphia, Pa., for defendant.

McGRANERY, District Judge.

This is a suit for a refund of taxes upon manufactured sugar in the sum of $58,253.86, assessed by the Commissioner of Internal Revenue under Section 3490 of the Internal Revenue Code, 26 U.S.C.A. § 3490, and paid by the taxpayer, a partnership, in the year 1945. The plaintiff is a Pennsylvania corporation which is successor in interest to the partnership. The Collector moves for a summary judgment under Rule 56, Federal Rules of Civil Procedure, 28 U.S.C.A.

In support of its motion, the Collector has filed the plaintiff's formal admissions made under Rule 36, the depositions of two of the taxpayer's partners, and various other documents, for the purpose of establishing (1) that the taxpayer was the manufacturer of the product taxed, and (2) that the product taxed was sugar. In opposition, the plaintiff has filed the deposition of a chemical engineer, Kreh; an affidavit of one of the taxpayer's partners, Decker (alleging that he believes the product to be syrup of cane juice, and stating further that plaintiff expects to have at the trial of the cause evidence, counter to that of the defendant, sufficient to warrant the submission of the issues in this case to a jury); and a copy of an opinion of Judge Porterie in the case of LeBlanc v. Chandler Laboratories, D.C., 89 F.Supp. 32. The Collector subsequently moved to strike the Decker affidavit and the copy of Judge Porterie's opinion, on the ground that neither document complies with the requirement of Rule 56(e). The motion is granted as to the Decker affidavit, but denied as to the copy of Judge Porterie's opinion since the Court may take judicial notice of the proceedings in other Federal courts.

It is clear from the admissions and the depositions of the taxpayer's copartners alone, that the plaintiff was the manufacturer of the product taxed. The evidence is specific and voluminous and leaves no issue of material fact. The main contention of the plaintiff (set forth in its brief) is that the product was manufactured by four independent mills under a contract arrangement with the taxpayer. The contracts (which were leases), the management contract with LeBlanc, the duties and powers of the fiscal agent Snyder, the duties of the shipping expediter Barrow, the ownership by taxpayer of both raw material and manufactured product, and much additional evidence similar in nature, when examined together, fail utterly to support the plaintiff's contention.

Even if manufacture by independent contractor were established, however (and there is nothing to indicate that it could be), the result would not be altered. "The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute." Higgins v. Smith, 308 U.S. 473, 477, 60 S.Ct. 355, 358, 84 L.Ed. 406. With respect to the purposes of the tax here in question, the position of counsel for the defendant is sound. Section 3490 of the Internal Revenue Code was first enacted as a part of the Sugar Act of 1937, c. 898, 50 Stat. 913, Sec. 402(a). The meaning of the term "manufacturer", therefore, must be understood in accordance with the purposes of the Sugar Act. One of the purposes of the Act was to stabilize the conditions under which domestic sugar cane and beets were produced, by a system of benefit payments to the growers. The funds for these payments were to be provided by taxing the sugar manufacturers upon their finished products. See H.Rep.No.1179 and S.Rep.No.1157, 75th Cong., 1st Sess. It is, under Section 3490(a) of the Internal Revenue Code, the manufactured sugar rather than the act of manufacturing it which is taxed. See also Section 3507(b), which defines sugar as meaning any sugar derived from beets or cane which is not to be further refined or otherwise improved in quality, and Section 3492, which includes as a manufacturer any person who acquires sugar which is to be manufactured into manufactured sugar, but who instead sells or uses it in making other articles for sale without further refining it or improving it in quality. Thus, obviously, the intent of the Congress is that the manufactured product shall not be tax free. Moreover, under Section 3720, manufactured articles upon which taxes are imposed may be seized and forfeited prior to sale if the taxes are not paid. Consequently, it is obvious that Congress did not intend to levy the tax upon someone who merely furnishes plant facilities and physical labor, but who has no proprietary interest in either the raw material or the end product. The conclusion is proper if, in accordance with the intent of the Congress, the sugar is not to be tax free, that the owner of the raw material and the manufactured product may not avoid the tax merely by contracting with another to furnish the labor and plant facilities. The word "manufacturer", therefore, must here be taken to include one who causes his product to be transformed by the actual physical labor and equipment of others. See Carbon Steel Co. v. Lewellyn, 251 U.S. 501, 40 S.Ct. 15, 63 L.Ed. 1193; Allen v. Smith, 173 U.S. 389, 19 S.Ct. 446, 43...