J. I. Case Co. v. Chambers
| Decision Date | 03 July 1957 |
| Parties | J. I. CASE COMPANY, a corporation, Respondent, v. Carl CHAMBERS, Ray Smith, Samuel B. Stewart, State Tax Commission, Appellants. |
| Court | Oregon Supreme Court |
Alfred B. Thomas, Asst. Atty. Gen., argued the cause for appellants. With him on the briefs were Robert Y. Thornton, Atty. Gen., and Theodore W. de Looze, Asst. Atty. Gen.
Virgil Crum argued the cause for respondent. On the brief were Crum, Walker & Buss, Portland.
Phillips, Coughlin, Buell & Phillips, and Alfred H. Stoloff, Sabin, Dafoe & Newcomb, Hart, Spencer, McCulloch, Rockwood & Davies and Frederick H. Torp, Rosenberg, Swire & Coan; and Hutchinson, Schwab & Burdick, Portland, filed a brief as amici curiae, urging affirmance.
This is a proceeding to review an order of the State Tax Commission increasing the assessed value of the machinery and parts inventory of petitioner, J. I. Case Company, for the years 1951 and 1952.
In those years the company filed with the assessor of Multnomah county its returns of personal property as of January 1, 1951, and January 1, 1952, respectively, as required by ch. 342, Oregon Laws 1949 (ORS 308.290). The returns listed the company's Portland branch inventory of machinery and parts at total values which are hereinafter set forth. On the basis of those returns the inventories were assessed, and the company paid the taxes required by such assessments. Thereafter, by letter dated August 31, 1953, the assessor and sheriff jointly notified the company of their intention to add to the assessment roll and the tax roll for those years certain amounts as omitted merchandise inventory, acting under § 110-821, O.C.L.A., ch. 442, Oregon Laws 1949, and ch. 577, Oregon Laws 1951 (now ORS 311.210). The amounts stated in the letter were as follows:
"1952 1951
January 1st January 1st
"Per Books $302,111.00 $201,372.98
Filed Inv. 116,325.00 104,049.81
Omitted Inv. 185,786.00 97,323.17
Assessed Value of
Omitted Inv. 100,320.00 58,390.00" 1
In response to the notice the company appeared and objected to the increase, but the objections were overruled and the additional assessment was made. This resulted in additional taxes for 1951 in the sum of $3,293.20 and for 1952 of $5,407.25, which amounts apparently were paid by the company under protest. The company appealed to the State Tax Commission for relief from the additional assessment, and after a hearing the commission entered its opinion and order dated November 15, 1954 (No. AT-54-85), which denied the requested relief. This proceeding was then commenced in the circuit court to review the commission's order, and by decree entered May 10, 1956, the circuit court set aside the additional assessment and directed refund of the additional taxes paid, with interest at 6 per cent from the date of payment. From that decree the commission has appealed.
The questions presented are:
(1) Is a manufacturer's inventory embraced within the term 'merchandise stock in trade,' as used in ch. 577, Oregon Laws 1951 (ORS 311.210)?
(2) If so, was the commission correct in determining the 'true cash value' of petitioner's inventory to be its factory cost, as shown by petitioner's books, and in assessing the difference between that figure and the reported value as 'omitted property'?
(3) If the commission was wrong, and petitioner is entitled to a refund of taxes paid, will the refund bear interest?
On the first of these questions a brief has been filed by amici curiae, who represent a number of other manufacturing concerns having similar questions pending.
Petitioner, J. I. Case Company, is engaged in the manufacture and sale of farm machinery. Its home office is in Racine, Wisconsin, and it maintains numerous branches throughout the world, including one in Portland, which serves Oregon, Washington, and northern Idaho. The company sells its products to local dealers, who in turn sell to farmers, and generally the machines are shipped from the factories directly to the dealers in carload lots. Besides general supervision, the branch houses serve the dealers by carrying a stock of machinery and parts to supplement those which the dealer obtains from the factory. Generally it is uneconomical for a dealer to order large quantities from the branch, instead of from the factory, because he has to absorb the freight charges, and it costs more to ship from the factory to the branch and then reship to the dealer than it does to ship directly from factory to dealer in the first place. Therefore, the branch stock of machines and parts serves only as a reserve or emergency supply.
Some of the branch stock is 'fast-moving' and of current models, so that if a dealer's stock is temporarily depleted he can obtain a machine or part quickly, without waiting for a factory shipment. And some of the branch stock is 'slow-moving' and of older models, for which there would not be enough current demand to justify the dealer in keeping a complete stock.
When a particular model of a machine is discontinued, or replaced by a newer one, the older models are sold to the dealers at a discount; or if they prove unsaleable, they are eventually scrapped for junk. When a model is changed, the branch house is usually 'stuck' with the old ones left on hand. So long as some of the older models are in use in the field, however, it is necessary to maintain a supply of replacement parts for them. Therefore, before a given model is discontinued, the factory makes up a supply of parts sufficient to service the outstanding machines during the remainder of their expected life. The future need for such parts cannot be estimated accurately, so the quantity made may be large than is ultimately required. This reserve of parts for older models is maintained at the branch warehouses, and as the number of the older machines in use in the area gradually dwindles, the company adjusts its parts inventory by moving the parts to other branches where there may be more demand, or by scrapping the parts for junk. Some of such parts are carried for as much as 20 or 30 years against a need that may never materialize.
While these parts are sold at current prices, fixed by the factory, they have little market value in the ordinary sense, because of the limited market. They are saleable only when one of the old machines breaks down. Mr. Wickwire, petitioner's Portland branch manager, testified that it costs more to carry the inventory of parts than the actual profit made on sales. The only purpose of maintaining the parts inventory at the branch is to promote good will by being able to service the old machines in case of emergency.
The evidence indicates that a substantial portion of the branch inventory consists of items which are out of date, and for which there is little or no demand. For example, the 1951 parts inventory was checked against the sales of parts for the five years from 1949 to 1953, inclusive, and it was found that of the 8,580 items on hand in 1951, 2,771 items, or approximately 33 per cent of the total inventory, were obsolete or slow-moving. Of these, there were 1,436 items (or 52 per cent of the 2,771 classed as slow-moving or obsolete) of which no sales at all were made during the five-year period. A similar analysis of machinery obsolescence showed that of 374 different items, comprising 8,876 units on hand in 1951, 103 different items (27 per cent), comprising 1,977 units (22 per cent), were slow-moving or obsolete. Of these 1,977 units, the company sold 576 units (or 29 per cent) during the threeyear period 1951-1953, inclusive; and in 1954 it still had on hand 1,401 units, or 71 per cent, of those that were inventoried in 1951. There were 41 items (40 per cent of the 103 classed as slow-moving or obsolete) of which no sales were made during the 1951-1953 period.
Of the parts and machines listed on the 1951 inventory, items totalling $85,153.82 were either scrapped or returned to the factory during the three years 1951-1953. Likewise during that period sales allowances were credited to dealers' accounts on sales by them of certain older machines in the amount of $40,037.50; and certain price reductions were made on machines sold from the branch stock totalling $20,438. These figures are based on dealers' prices, which are the prices at which all items are carried on the branch books, as distinguished from the factory cost price. While it is true, as pointed out by the commission in its order, that goods returned and scrapped during the year, or sold from the branch stock, are reflected in a diminishing of the year's ending inventory, and that sales allowances on machines in dealers' hands have no effect on other machines in the branch stock, still these figures tend to corroborate petitioner's claim that there is a substantial factor of obsolescence to be considered with respect to items in the branch stock.
In making the original returns, petitioner took the branch inventory, at dealers' cost, and reduced the total by a certain percentage reflecting obsolescence. It did not attempt to determine obsolescence with respect to each particular item; and the record does not show either the total amount of the inventory, at dealers' cost, nor the percentage used for obsolescence. It did not take into account any scrap value as such. However, Mr. Wickwire testified that in his opinion the resultant figure represented the true cash value of the inventory.
The county, on the other hand, requested from the factory a certificate as to the book value of the inventory, and the factory supplied the figures as to book value quoted above from the letter of August 31, 1953. These book value figures represented the original factory cost of the inventory (which is lower than dealers' cost), and it is undisputed that...
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