Continental Can Company v. United States

• Decision Date: 20 February 1970
• Docket Number: No. 102-64.,102-64.
• Citation: 422 F.2d 405
• Parties: CONTINENTAL CAN COMPANY, Inc. v. The UNITED STATES.
• Court: U.S. Claims Court

422 F.2d 405 (1970)

CONTINENTAL CAN COMPANY, Inc. v. The UNITED STATES.

No. 102-64.

United States Court of Claims.

February 20, 1970.

Robert B. Hodes, New York City, for plaintiff; Thomas N. Tarleau, New York City, attorney of record. Willkie, Farr & Gallagher and Nicholas J. Sheppard, New York City, of counsel.

Joseph Kovner, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant; Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a) since September 1, 1969, Rule 134(h). The commissioner has done so in an opinion and report filed on February 27, 1969. Plaintiff filed no exceptions to the commissioner's findings of fact but did except to his opinion and recommended conclusion of law. Defendant requested adoption of the findings of fact and the recommended conclusion of law. The case has been submitted to the court on the briefs of the parties and oral argument of counsel.

Since the court agrees with the commissioner's opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case.^* Therefore, plaintiff is not entitled to recover and the petition is dismissed.

OPINION OF COMMISSIONER

GAMER, Commissioner:

Plaintiff seeks recovery of over $3,150,000 as claimed overpayments of federal income and excess profits taxes, and interest paid thereon, for plaintiff's calendar year 1951, plus statutory interest.¹

Plaintiff (hereinafter sometimes referred to as "Continental") has long been a manufacturer of can containers for food, beverages, and other products.

For over 35 years prior to January 1, 1951 (i. e., ever since its incorporation in 1913), plaintiff, as an incident of the sale of cans to its customers (canners), installed in their plants certain equipment which effected proper closure of the cans. During that period, plaintiff leased the equipment to its customers at nominal rentals under an arrangement, however, whereby the user of the equipment was obliged to purchase its can requirements from plaintiff. Plaintiff leased the equipment only to its container customers. Plaintiff's can-closing machines were not held for sale and (except for a few isolated and immaterial instances) were not sold.

In August 1946, the Government instituted an action in the District Court for the Northern District of California against Continental for alleged violation of the Sherman and Clayton Acts. The action was in part based upon Continental's restricted sales policy and its practice of tying the sale of containers into the leasing of the closing equipment. The Government sought either (a) divestitute of the closing-machine part of Continental's business, or (b) a judgment declaring Continental's arrangement with its customers to be illegal and requiring it to either sell or lease its closing machines to any applicant on nondiscriminatory terms.

The American Can Company, the country's largest manufacturer of food and beverage containers (Continental being the next largest) had engaged in substantially the same practices. At the same time that the Government instituted its action against Continental, it also brought a similar action in the same court against American Can.

In September 1949, the Government and Continental entered into a stipulation whereby further proceedings in Continental's case were suspended pending a final decision in the American Can case. Continental agreed that, if a decree would be entered against American Can in its case, a similar decree could be entered against Continental at the same time, with the proviso, however, that Continental's decree would contain no provision requiring divestiture of the closing machine portion of its business even though American Can would be ordered to divest. If American Can were ordered to divest, Continental was left free to litigate such question in its case.

On November 10, 1949, American Can's activities were found to be in violation of the Sherman and Clayton Acts. United States v. American Can Co., 87 F.Supp. 18 (N.D.Cal.). In the subsequent proceedings to determine the appropriate remedy, the Government urged divestiture. In opposing such divestiture, American Can offered to undertake a closing equipment sales program as part of its business operations. The court approved this proposal. Accordingly, divestiture was not ordered. See American Can Company v. C. I. R., 317 F.2d 604 (2d Cir. 1963), cert. denied, 375 U.S. 993, 84 S.Ct. 632, 11 L.Ed.2d 479 (1964).

After negotiations between Continental and the Government with respect to the wording of the final judgment and decree to be entered against Continental, the court, on June 26, 1950, entered such a judgment and decree. In accordance with the provisions of the stipulation, divestiture was not ordered. Continental was directed, however, to cease its discriminatory closing equipment sales and leasing practices. The effective date of the injunctive provisions and the provisions concerning nondiscriminatory sales and leasing was January 1, 1951.

The decree stated, under the heading "Policy," that it was its purpose "to assure to those interested in owning container closing machines * * * the opportunity to purchase such machines * * * owned or controlled by defendant as of January 1, 1951," and that, with respect to equipment manufactured after such date, Continental was "to adopt a policy of affording to all those desiring such machines or equipment every available economic incentive to purchase such machines and equipment." Under the heading "Closing Machines — Sale," Continental was directed to sell, for a ten-year period, "to any applicant * * * in accordance with and subject to the provisions of this Judgment, any container closing machine which it owns on the effective date of this provision, or thereafter manufactures or acquires." The decree further provided that existing lessees should, by a special communication, be advised of their prior right to purchase, at prices calculated in accordance with a formula established in the decree, the closing machinery then in their possession. Further, plaintiff was ordered in the future to sell or lease to any applicant machinery that it was then selling or leasing to its container customers. In order to insure that plaintiff complied with these and other provisions of the decree a special master was appointed to supervise such compliance, gather information regarding plaintiff's actions, and report to the Attorney General. (The master was the same one appointed pursuant to the corresponding portion of the American Can decree.)

Thereafter, plaintiff developed a program, including advertising materials, circulars, and specially prepared letters, to promote the sales of the equipment. Among other things, it furnished all of its lessees information concerning the methods, terms, and advantages of owning the equipment.

After January 1, 1951, plaintiff, in compliance with the decree, granted each of its closing equipment lessees an option to purchase and, further, embarked upon a general sales program designed to sell the machines.

Substantially all of the lessees then in possession thereafter proceeded to purchase the equipment. During the year 1951, plaintiff realized gross receipts of $4,005,899 from such sales of closing equipment which plaintiff had owned for more than six months prior to January 1, 1951. Net gains in the amount of $1,720,639 were realized from such sales.

In its 1951 tax return, plaintiff reported such sum of $1,720,639 as gains from the sale of capital assets held for more than six months. Section 117(j) of the 1939 Internal Revenue Code provides capital gains treatment for sales of "property used in the taxpayer's trade or business," which is defined, insofar as is here pertinent, as property (a) of a character that is subject to a depreciation allowance, (b) is held for more than six months, and (c) is not "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

However, when, in 1951 and the years thereafter, plaintiff sold closing equipment manufactured or acquired prior to 1951 to those not lessees-in-possession, or sold equipment manufactured or acquired after January 1, 1951, either to lessees-in-possession at the time of the sale or to those who were not leasing the purchased equipment at such time, it reported the gains derived from such sales as ordinary income.

After an audit of plaintiff's said 1951 tax return (by the District Director of Internal Revenue, Manhattan, New York), defendant made a determination that the $1,720,639 gain did not qualify for capital gains treatment because, in its opinion, the closing equipment constituted "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" under section 117(j). Accordingly, plaintiff's tax was recomputed on the basis of such gain's constituting ordinary income. On this basis, such amount also became includable in plaintiff's excess profits net income and was so included in defendant's recomputation of plaintiff's excess profits tax for such year.

After payment of the claimed deficiencies, with interest, plaintiff filed a claim for refund of income taxes (plus interest) in the amount of $3,157,721, or, in the alternative, for refund, even if the gain were held to constitute ordinary income under section 117(j), of the assessed deficiency with respect to the excess profits taxes (plus interest), in the amount of $1,327,518, such alternative claim being based on a contention that income of the type herein involved falls within the "abnormal...