Cherokee Textile Mills v. Commissioner of Int. Rev., 10334

• Decision Date: 24 March 1947
• Docket Number: 10335.,No. 10334,10334
• Parties: CHEROKEE TEXTILE MILLS v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. CHEROKEE TEXTILE MILLS.
• Court: U.S. Court of Appeals — Sixth Circuit

160 F.2d 685 (1947)

CHEROKEE TEXTILE MILLS v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. CHEROKEE TEXTILE MILLS.

Nos. 10334, 10335.

Circuit Court of Appeals, Sixth Circuit.

March 24, 1947.

Scott P. Crampton, of Washington, D. C. (George E. H. Goodner and Scott P. Crampton, both of Washington, D. C., on the brief), for Cherokee Textile Mills.

I. Henry Kutz, of Washington, D. C. (Sewall Key, Helen R. Carloss, and F. E. Youngman, all of Washington, D. C., on the brief), for the Commissioner.

Before HICKS, ALLEN, and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

The claim of petitioner, Cherokee Textile Mills, for refund of $105,198.80 of processing taxes, was reduced to an award of $1,070.06 by the Tax Court of the United States. The Commissioner of Internal Revenue, who rejected the claim in entirety, has also petitioned for review, praying this court to modify the decision of the Tax Court by holding that the taxpayer is due no refund whatever.

The case has been here before under the style of Cherokee Spinning Co. v. Commissioner of Internal Revenue, 6 Cir., 143 F.2d 587, the petitioner having since then changed its corporate name to Cherokee Textile Mills. On the previous hearing, this court was called upon to review the award to petitioner of a refund of $25,467.25 by the Processing Tax Board of Review. The record was found to be incomplete and unsatisfactory, the findings of fact inadequate, and the basis of decision not apparent; all of which necessitated a remand. The remand was to the United States Tax Court, inasmuch as the Board of Review had been abolished and its jurisdiction vested in the Board of Tax Appeals by the Revenue Act of 1942, Ch. 619, 56 Stat. 798, section 510(a), et seq., 26 U.S.C.A. Int. Rev.Acts, page 359 et seq. As is well known, the Board of Tax Appeals soon thereafter became the Tax Court of the United States.

In our per curiam opinion, we ordered that the record already made before the Processing Tax Board of Review should be permitted to be augmented by additional evidence, if guiding light might be shed upon the controversy by such course. We directed further that the Tax Court should permit reargument of the case as if it had not been previously tried, should "file appropriate findings of fact and conclusions of law, and render decision upon the full record in accordance with the law and the evidence." We suggested that an opinion by the Tax Court revealing the rationale of decision "would be most helpful here should a review be again sought." In our judgment, the Tax Court has faithfully performed its onerous task in disentangling an unusually complicated mass of confusing factors, which generally enter, but in lesser degree, into the decision of a processing tax case.

During the tax period involved, from August 1, 1933, to April 6, 1935, and for many years prior thereto and thereafter, the petitioning taxpayer had been engaged in operating a mill in Knoxville, Tennessee, for the first domestic processing of cotton. Its processing operations were recognized as subject to the taxing provisions of the Agricultural Adjustment Act, 7 U.S. C.A. § 601 et seq. Petitioner, accordingly, paid processing taxes during the period involved to the extent, principal and interest, of $105,198.80. In December, 1935, the Agricultural Adjustment Act was held unconstitutional in United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914, and in Rickert Rice Mills v. Fontenot, 297 U.S. 110, 56 S.Ct. 374, 80 L. Ed. 513. Shortly thereafter, by the Revenue Act of 1936, Ch. 690 49 Stat. 1648, section 902 et seq., 26 U.S.C.A. Int.Rev. Acts, page 960 et seq., refunds of processing taxes collected under the Agricultural Adjustment Act were authorized; subject, however, to definite and stringent conditions and limitations which are relevant in the present litigation.

Section 902 of the Revenue Act of 1936 provides that no refund shall be made or allowed of amounts collected under the Agricultural Adjustment Act, unless the claimant establishes to the satisfaction of the Commissioner, in accordance with the regulations prescribed by him, or to the satisfaction of the trial court or the Board of Review, as the case may be, that he bore the burden of the tax and has not been relieved thereof nor reimbursed therefor, nor shifted it directly or indirectly through the methods specified;¹ or that he has repaid unconditionally the amount of the tax to his vendee,² under the conditions stated in the statute.

Section 903 is most exacting with respect to the filing of claims for refund. Such claims must conform to regulations prescribed by the Commissioner.³ Section 916 of the Revenue Act also authorizes the Commissioner to prescribe such rules and regulations as he deems necessary to carry out the provisions of the title.

In Section 907(a) of the Revenue Act, it is provided that, where the refund claimed is for an amount paid or collected as processing tax, as defined in the Act, it shall be prima facie evidence that the burden of the processing tax was borne by the claimant to the extent (not to exceed the amount of the tax) that the average margin per unit of the commodity processed was lower during the tax period than the average margin was during the period before and after the tax; and that if the average margin during the tax period was not lower, it shall be prima facie evidence that none of the burden of such amount was borne by the claimant but that it was shifted to others. The method for determination of the average margin for the tax period and for the period before and after the tax is set forth in sub-section (b) of section 907.

Sub-section (e) of the same section permits rebuttal by either the claimant or the Commissioner of the presumption established by sub-section (a) by proof of the actual extent to which the claimant shifted to others the burden of the processing tax. What may be included in such proof, but without delimitation, is specified in sub-section (e).

Pursuant to the authority conferred by the Revenue Act of 1936, relating to claims for refund of processing taxes paid under the Agricultural Adjustment Act, Treasury Regulations 96 were promulgated. Article 202 thereof provides: "Facts and evidence in support of claim. Each claim shall set forth in detail and under oath each ground upon which the refund is claimed. It is incumbent upon the claimant to prepare a true and complete claim and to substantiate by clear and convincing evidence all of the facts necessary to establish his claim to the satisfaction of the Commissioner; failure to do so will result in the disallowance of the claim. The provisions of these regulations require that certain specific facts shall be stated in support of any claim for refund. The claimant is privileged to prove those facts in any manner available to him and to submit such evidence to that end as he may desire."

(1) Upon the remand of this case to the Tax Court, the Commissioner of Internal Revenue moved to strike certain evidence offered at the original hearing before the Processing Tax Board of Review. This evidence related to the production and sale by the taxpayer of a combination of cotton and wool cloth known as "mohair." The manufacturer had attempted to rebut the unfavorable presumption permitted by section 907(e) of the Revenue Act of 1936, by offering evidence tending to show that a profitable venture in manufacturing mohair cloth had caused its margin showing to become unfavorable.

No mention of mohair cloth had been made, either in the first claim or the amended claim for refund, in which the amount claimed had been stepped up. We think fair analysis of the refund claim justifies the statement, in the opinion of the Tax Court granting the motion to strike, that the Commissioner had not been apprized by the allegations of the refund claim, or by examination of the taxpayer's books and records in connection therewith, or otherwise, of any contention of the taxpayer based on the ground that it had manufactured mohair cloth during certain periods and not during others.

As reasoned by the Tax Court in its opinion published in 5 T.C. 175, the ground of the claim asserted before the Processing Tax Board not being included in the refund claims as filed, the evidence received by the Board, which the motion sought to exclude, could have relevancy only upon a new and different ground from that set up in the claim for refund. The evidence was, therefore, properly excluded from the record.

The Tax Court was not, as argued by the petitioner, precluded by the mandate of this court from striking the controverted evidence on motion of the Commissioner. In remanding the cause, we indicated no ruling as to the admissibility of evidence of record or no decision on any issue so as to establish it as "the law of the case." Our per curiam, in effect, directed as broad a review as possible by the Tax Court, inasmuch as we had found the findings of fact of the Processing Tax Board of Review inadequate and the basis upon which its decision was rested not apparent. Indeed, the Processing Tax Board of Review had received the evidence in question subject to a subsequent ruling on its competency; and that ruling was never made. Moreover, the Board of Review went out of existence without ever having acted upon the Commissioner's motion for a rehearing.

The action of the Tax Court in excluding the evidence is supported both by sound reasoning and by authority. In Vica Co. v. Commissioner of Internal Revenue, 1947, 159 F.2d 148, the Ninth Circuit Court of Appeals affirmed a decision of the Tax Court denying a claim for refund of processing taxes collected under the Agricultural Adjustment Act. The claim rested upon the same Act now under consideration Chapter 690 of the Revenue Act of 1936. It was held that a necessary part of a proper claim for refund is an adequate statement of the contention of the...