International Business Machines Corp. v. United States

• Decision Date: 16 April 1965
• Docket Number: No. 36-61.,36-61.
• Citation: 343 F.2d 914
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

343 F.2d 914 (1965)

INTERNATIONAL BUSINESS MACHINES CORPORATION v. The UNITED STATES.

No. 36-61.

United States Court of Claims.

April 16, 1965.

Daniel M. Gribbon, Washington, D. C., for plaintiff. William H. Allen, Robert L. Randall, Charles W. Wolfram and Covington & Burling, Washington, D. C., of counsel.

C. Moxley Featherston, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant. Lyle M. Turner, Washington, D. C., was on the brief.

Before COWEN, Chief Judge, and LARAMORE, DAVIS and COLLINS, Judges.

DAVIS, Judge.

International Business Machines Corporation (the taxpayer) and Remington Rand were, in the years 1951-1958, the two competitors in the manufacture, sale, and leasing of larger electronic computing systems. Before mid-April 1955, both companies paid on these articles the ten percent excise tax imposed by Section 3406(a) (6) of the Internal Revenue Code of 1939 and its replacement, Section 4191 of the 1954 Code, for the sale or lease of "business machines"¹. On April 13, 1955, Remington Rand requested a ruling from the Commissioner of Internal Revenue that certain of its computing devices (including the Univac 120 and 60) were not subject to this tax. Two days later, April 15th, the Commissioner issued such a private ruling in the form of a short telegram to Remington Rand. Having learned through its customers of this determination, the taxpayer sought, on July 13th, a similar ruling for its competing computer (Type 604) which was identical in all significant respects with the Univac systems. Plaintiff's letter was captioned "Urgent! Please Expedite", and it closed with this sentence: "In view of the extreme urgency of this matter, your immediate ruling, wire collect, is respectfully requested." The information submitted with this letter was at least as extensive as that in Remington's application of April 13th. Shortly after making this request, plaintiff also filed, on July 29th, a refund claim (in the amount of $5,832,444.41) for the excises paid from June 1, 1951, to May 31, 1955. Late in September 1955, Remington filed a comparable refund claim (of $300,000) for similar taxes paid from January 1, 1952, to April 30, 1955.

The Commissioner did not act on the taxpayer's request for a ruling, or on its refund claim, for well over two years. During this period he did not seek more information from, or communicate with, the taxpayer which continued to pay the excise taxes on its computers. In July 1956, however, Remington received a refund of over $86,000 on its refund claim for the period from 1952 to April 1955; and, of course, that company did not pay the excise taxes on the transactions completed after issuance of the private ruling of non-coverage in April 1955.

On May 1, 1957, the Internal Revenue Service wrote to Remington that, having "had occasion to give further consideration to the question of the taxability of electronic calculating or computing equipment", the Service had concluded that such devices were taxable as business machines and therefore it proposed to revoke, prospectively, "our telegraphic ruling to you of April 15, 1955." But, the Service continued, "we will withhold further action on the matter for a period of thirty days from the date of this letter in order to afford you an opportunity, should you so desire, of submitting a protest or requesting a hearing in the case." On May 31st Remington asked for a conference, which was held on June 25th. A month later, on July 25th, Remington summarized in writing its arguments against revocation of the favorable decision of April 1955. It was not until December 3, 1957, that the Service wrote Remington that it had finally concluded the Univac 120 and 60 machines were taxable, but that this new ruling would apply only to sales made and leases in effect "on and after the first day of the first month which begins thirty days after the date of this letter", i. e., the machines would not be deemed taxable until February 1, 1958. As a result of this ruling and the refund made in 1956, Remington was permitted to dispose of its Univac computers, for the six-year span from the beginning of January 1952 to the end of January 1958, without paying the excise.

Some days before the letter to Remington revoking the earlier ruling, the Service informed the plaintiff, on November 26, 1957, that, "after extensive study of the question of the taxability of electronic calculating or computing equipment," it had decided that the plaintiff's equipment "herein involved and similar equipment" were taxable as business machines. The Service's letter observed that "the manufacturer of the machines which compete with and are similar to the taxable machines herein involved i. e., Remington Rand * * * is being appropriately advised by us regarding the taxability of such machines of its manufacture." This letter of November 26, 1957, constituted the Service's response to IBM's application of July 13, 1955, for a ruling freeing its computers from the tax.

To protect its interests, the taxpayer filed (in April 1958) a second refund claim for the subsequent period from June 1, 1955 to January 31, 1958. On February 3, 1959, the Service disallowed both of the taxpayer's refund claims. Plaintiff was thus held liable for the excise tax for the full period from June 1951 through January 1958 — roughly the same period for which Remington had been relieved of the tax. This suit was timely brought on February 1, 1961, to recover $13,335,762.11, said to have been paid during those six and one-half years. Plaintiff does not deny that its computers are "business machines" under Section 3406 of the 1939 Code and Section 4191 of the 1954 Code. Its position is that the Internal Revenue Service's conduct toward it, in contrast to the treatment of Remington Rand's identical machines for the same period, invalidates the excise taxes levied under those Code sections on the IBM equipment.

I

The Government denies that the plaintiff has standing to sue for any but a small portion of the claimed refund. Section 6416(a) (1) of the 1954 Code specifies that "no credit or refund of any overpayment of" the manufacturers' tax shall be allowed or made unless the claimant establishes either that he has not passed on the tax or has repaid the tax to his purchaser or has filed with the Internal Revenue Service the "written consent" of the ultimate purchaser to the allowance of the credit or the making of the refund. (Section 3443(d) of the 1939 Code sets forth similar requirements.) When this suit was begun on February 1, 1961, plaintiff did not file or have such customer consents; but it did assert that it would submit the necessary papers once its claim had been allowed. The Government moved to dismiss on the ground, among others, that the taxpayer could not sue for taxes passed on to its vendees unless it had their consents on hand before the expiration of the two-year limitation period for refund suits (February 3, 1961). The court denied the motion without prejudice and remanded the case for a development of the facts on this issue, as well as on the merits.

It has now been determined that, of the total sum which plaintiff seeks in this litigation, almost $252,000 represents excises paid by plaintiff on computers directly put to its own use; this amount was not passed on to others but was wholly absorbed, and the taxpayer is concededly entitled to sue for its recovery.

After April 30, 1963 (i. e., since the close of the two-year limitations period), the taxpayer obtained and filed 3,190 customer consents representing over $11,000,000 in taxes.² The defendant renews its attack on plaintiff's standing to claim these payments. The contention is that no consent is valid unless obtained prior to the expiration of the statutory period for bringing refund litigation.

There is no impediment, we hold, to plaintiff's right to maintain this suit for all the taxes for which customer consents have been or will be given before the amount of recovery is finally fixed. Section 6416(a) (1) limits the actual refund, to be made if plaintiff prevails, to the excises borne by it or for which it procures consents before final judgment, but the statute does not condition plaintiff's right to sue on its having received customer permission prior to suit or before the two-year limitations period expires. Congress was obviously concerned that the manufacturer not fall heir to a windfall by recovering taxes, already passed on to its vendees, which it could withhold from them against their will. For this end, the important moment would be the time of actual refund, not the institution of the action. There is no hint in the phrasing of the statute that Congress wished the assurance against a windfall to be firmly established before suit was or could be brought; and there are good reasons why that requirement should not be superimposed. In this case, for example, there are upwards of 3,000 separate customers to whom taxpayer passed on the tax during the critical years. It is sensible to insist that, if plaintiff wins, no refund for any particular tax be given until the necessary consent is filed, but it is less sensible to demand that the taxpayer undertake the burden of gathering all the consents before the tribunal has even had a chance to decide whether there can be any recovery at all.³ No meaningful interest would be advanced, in a case like this in which the substantive issues will have to be reached (see footnote 3), by a technical demand that the consents which are to be recognized must all have been collected at the time of suit or when the cause of action first accrued.

The Commissioner of Internal Revenue has already accepted the position we adopt. Section 6416(a) (1) applies equally to claims for administrative refunds and to refund actions. See United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 395, 398, 400, 54 S.Ct. 443, 78 L.Ed. 859 (1934). In 1...