Dayton Brass Castings Co. v. Gilligan

• Citation: 267 F. 872
• Decision Date: 23 September 1920
• Docket Number: 37.
• Parties: DAYTON BRASS CASTINGS CO. v. GILLIGAN, Internal Revenue Collector.
• Court: U.S. District Court — Southern District of Ohio

267 F. 872

DAYTON BRASS CASTINGS CO. v. GILLIGAN, Internal Revenue Collector.

No. 37.

United States District Court, S.D. Ohio, Western Division.

September 23, 1920

McMahon & McMahon, of Dayton, Ohio, for plaintiff.

James R. Clark, U.S. Dist. Atty., of Cincinnati, Ohio, for defendant.

SATER District Judge.

The plaintiff is a corporation 'formed for the purpose of manufacturing and selling brass, bronze, aluminum, white metal, and all other kinds of metal castings, machining same and doing all things incident thereto. ' The Recording &amp Computing Machines Company (hereafter called the Recording Company) had a contract with the Canadian Car & Foundry Company for delivery of a large number of time fuses for shrapnel shells for the Russian government. Each fuse, when assembled and completed, consisted of 45 parts. On May 27 and 29, 1915, plaintiff entered into contracts with the Recording Company to make for use in fuses, from ingots and patterns to be supplied by such company, certain rough castings, to be paid for by the pound and to be delivered at such company's plant.

Plaintiff performed its contracts. The work done by it concerned but 4 of the 45 parts entering into a completed fuse. None of such 4 parts was at the time of their delivery fitted for insertion into fuses. On the contrary, the Recording Company was required to subject such parts to numerous mechanical operations, varying according to circumstances from 16 to 29 before they were perfected for use. The castings made by plaintiff, if not used in fuses, were serviceable only as scrap, and would have to be melted and properly treated to be utilized for other purposes. Down to the date of the above-mentioned contracts, plaintiff had practically at all times used its own raw material in its manufacturing business and sold its own product; but in its 12 years' experience it had sent out castings which were thereafter to be finished by machine work. Such subsequent finishing is a common practice, for the reason that castings are seldom ready for use after coming from the molds.

The plaintiff, being advised by counsel of unquestioned ability and standing that it was not subject to the war munitions tax imposed by the act of Congress approved September 8, 1916 entitled 'An act to increase the revenue, and for other purposes' (39 Stat. 756, 781, 782 (Comp. St. Secs. 6336 1/4a-6336 1/4m)), made no return to the internal revenue collector under such act. In the latter part of June, 1917, the plaintiff was duly notified to make a return. The Commissioner of Internal Revenue, after a hearing before him, requested that the return be filed under protest, without prejudice to the rights of the parties. A return was filed with the defendant, accompanied by plaintiff's formal protest as to liability. Following a hearing on such protest, plaintiff was directed to pay as a tax the sum of $18,860.83, and a penalty of 50 per cent. additional ($9,430.42) for failure to make a return within the statutory time. The tax and penalty so assessed were paid under protest on December 8, 1917. A claim was at once preferred for a refunder of the tax and penalty, on the ground that the plaintiff was not subject to such tax and was wrongfully required to pay it. The Commissioner of Internal Revenue ordered a repayment of the penalty on the ground that there was reasonable cause for plaintiff's failure to file a return, but otherwise rejected its claim.

Plaintiff thereupon sued to recover interest on the amount of the exacted penalty from December 12, 1917, to June 20, 1918, the date on which it was repaid, and also to recover the sum of $18,860.83, with interest from December 8, 1917. The stated grounds for recovery are that the articles cast and delivered by it were not parts of fuses, that in the performance of its work under the provisions of the contract it was not engaged in manufacturing and was not a manufacturer, and that in delivering the castings in the manner provided for in the contract it did not sell or dispose of them within the terms of the above-mentioned act. A jury was waived and trial was had to the court. There are no controverted facts.

The rule for the construction of revenue laws is thus stated in Cliquot's Champagne, 3 Wall. 114, 145 (18 L.Ed. 116):

'Revenue laws are not penal laws in the sense that requires them to be construed with great strictness in favor of the defendant. They are rather to be regarded as remedial in their character, and intended to prevent fraud, suppress public wrong, and promote the public good. They should be so construed as to carry out the intention of the Legislature in passing them and most effectually accomplish these objects.'

The act here in question was under consideration by the United States Supreme Court in the cases of Carbon Steel Co. v. Lewellyn, 251 U.S. 501, 40 Sup.Ct. 283, 64 L.Ed. . . ., Worth Bros. Co. v. Lederer, 251 U.S. 507, 40 Sup.Ct. 282, 64 L.Ed. . . ., and Forged Steel Wheel Co. v. Lewellyn, 251 U.S. 511, 40 Sup.Ct. 285, 64 L.Ed. . . ., all decided March 1, 1920. In the last-named case the rule was recognized that statutes levying taxes should not be extended by implication beyond the clear import of their language. In the Carbon Steel Co. Case the purpose of the act is thus defined:

'It was such profits (i.e., of the contractor) that the act was intended to reach-- profits made out of the war and taxed to defray the expense of the war. Or, as expressed by the Court of Appeals, Congress 'felt that the large abnormal profits incident to these war contracts created a remunerative field for temporary taxation.''

The court refused to accept a construction which would 'reduce the statute to empty declarations.'

The plaintiff did not deliver raw material to the Recording Company. The labor performed by it on the Recording Company's metal changed its form into rough given-shaped castings adapted to use, after further treatment, as essential parts of fuses; but the castings were an advance upon the raw material. The Court of Appeals of this circuit has held that, if the application of labor to an article effects some transformation in the character of the article, and converts it into a new and different article, having a distinctive name, character, or use, such article is a manufactured article, and the person producing it is a manufacturer. City of Memphis v. St. L. & S.F.R. Co., 183 F. 529, 539, 106 C.C.A. 75. In manufacturing, the raw material may be subjected to different steps or processes for the production of a finished article, and each of such steps or processes will involve manufacturing. In Tide Water Oil Co. v. U.S., 171 U.S. 210, 216, 18 Sup.Ct. 837, 839 (43 L.Ed. 139), it was said:

'Raw materials may be and often are subjected to successive processes of manufacture, each one of which is complete in itself, but several of which may be required, to make the final product. Thus, logs are first manufactured into boards, planks, joists, scantlings, etc., and then by entirely different processes are fashioned into boxes, furniture, doors, window sashes, trimmings, and the thousand and one articles manufactured wholly or in part of wood. The steel spring of a watch is made ultimately from iron ore, but by a large number of processes or transformations, each successive step in which is a distinct process of manufacture and for which the article so manufactured receives a different name.'

In harmony with the doctrine of the last-named case is U.S. v. Riga (C.C.) 171 F. 783, in which it was ruled that parts of rough-bored rifles which had been advanced to a condition unfitting them for any other use than in connection with rifles, but which must be subjected to further processes and assembled with other parts in order to be made into a completed article, are manufactured articles.

The insistence in the Worth Bros. Co. Case was that that company's forgings on certain shell bodies made by it for the Midvale Company were not parts of shells, because their development was so far short of the point at which they could be combined with any other component of a shell structure that 29 subsequent progressive steps were necessary on the part of the Midvale Company to complete the manufactured shell. The contention was rejected; it being said by Mr. Justice McKenna:

'Congress did not intend to subject its legislation to such artificialities and make it depend upon distinctions so refined as to make a part of a shell not the taxable 'part' of the law. Besides petitioner understates its work. It did not deliver raw material to the Midvale Company. Certain processes had been performed on the material, giving it a shape adapted to its destination. It was made cylindrical, hollow, with one end closed. It was rough, it is true, but an advance upon the raw material. * * * ' Manifestly,' as counsel for the collector says, 'the shell body was not completely manufactured by either of the companies which were engaged in its production,' but 'by the two acting together,' and each therefore is liable for the profit it made and judgment is affirmed.'

The contention made and conclusion reached in the Forged Steel Wheel Company Case were the same as in that of the Worth Bros. Company. The Forged Steel Wheel Company, a subcontractor, made rough steel forgings for a principal contractor, who had agreed to supply the British government with high explosive shells. It put prepared steel rounds through two forging processes, whereby a hole was pierced from one end of each round to within two inches of the other and the round was then lengthened by drawing it through three successive rings of a hydraulic press. To make the shell form (which weighed about 170 pounds) suitable for use as a shell, the principal...