Masao Hirasuna v. McKenney

• Decision Date: 17 May 1957
• Docket Number: No. 14995.,14995.
• Citation: 245 F.2d 98
• Parties: MASAO HIRASUNA, doing business as Mike's Auto Top Shop & Upholstery Shop, Appellant, v. S. V. McKENNEY, District Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

245 F.2d 98 (1957)

MASAO HIRASUNA, doing business as Mike's Auto Top Shop & Upholstery Shop, Appellant, v. S. V. McKENNEY, District Director of Internal Revenue, Appellee.

No. 14995.

United States Court of Appeals Ninth Circuit.

April 12, 1957.

Rehearing Denied May 17, 1957.

Shiro Kashiwa and Genro Kashiwa, Honolulu, Hawaii, for appellant.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Walter R. Gelles, Washington, D. C., Louis B. Blissard, U. S. Atty., Charles B. Dwight, III, Honolulu, Hawaii, for appellee.

Before ORR, FEE, and HAMLEY, Circuit Judges.

HAMLEY, Circuit Judge.

The question presented on this appeal is whether the federal manufacturers' excise tax applies to automobile seat covers which were custom-made and installed on the order of used car dealers. The trial court held that the tax applies, and dismissed this suit for a tax refund. Plaintiff appeals.

The essential facts are not in dispute. During the years here in question, appellant taxpayer, Masao Hirasuna, operated a business under the style of "Mike's Auto Top and Upholstery Shop," in Honolulu. A good part of his business, and the only part with which we are here concerned, consisted of the making and installing of automobile seat covers on the order of used car dealers.

Appellant covered the seats of from two to five cars a day, his business coming from about a dozen used car dealers in the area. The procedure on each car began with the taking out and measuring of the cushions. The cloth was then cut to an approximate length and laid on top of the cushion. It was next pulled tight, pinned, and marked with chalk. The facing cloth was then pinned on and chalked. The cloth was next taken off and cut, the piping was sewed, and the cut portions were sewed together. The seats were then vacuum cleaned, and, if necessary, the springs were replaced. The factory seat covers were not removed, but rips in them were repaired by sewing. The corners of the seats were wadded with cotton, after which the new covers were installed with tacks or hog rings. Variations in the operation were required according to the construction of the back cushion and the presence or absence of movable arm rests.

The prices appellant charged car dealers for sets of custom-made seat covers were eighteen dollars for fibre, twenty-eight dollars for plastic, and thirty-five dollars for leatherette. These prices included all material and labor, but did not include any allowance for a federal excise tax. Appellant testified that about two thirds of the price represented the cost of material.

Early in 1953, agents of the district director of internal revenue for the Hawaii District made an assessment against appellant in the sum of $1,766.70 for excise taxes due as the manufacturer of automobile parts and accessories. This assessment covered the years 1949 to 1952, and up to September, 1953. It was stipulated that $374.78 of this sum was properly assessed on sales not here in question. This left in dispute, as the tax claimed to be due on the manufacture and sale of seat covers on the order of used car dealers, the sum of $1,391.92. The sum so assessed excluded from consideration that portion of the price which, in the view of the district director, represented a reasonable charge for installing the covers after they had been made. Appellant paid the tax as assessed, and regularly filed his claims for refund, which preceded the bringing of this action.

The taxing statute in question is § 3403(c) of the Internal Revenue Code of 1939, 53 Stat. 410, as amended, 26 U.S. C.A. (I.R.C.1939) § 3403.¹ This statute is applicable here only if these seat covers were automobile "parts or accessories" which appellant, as the "manufacturer" thereof, "sold" to the used car dealers. Appellant contends that the trial court erred in holding that these specified conditions were met with respect to the transactions which have been described.

First to be considered is the question of whether these custom-made seat covers are "parts or accessories," within the meaning of the taxing statute. Section 316.55 of Treasury Regulation 46 (1940 ed.), promulgated under the Internal Revenue Code of 1939, defines this term.² A substantially similar definition of the term has been held to be reasonable and proper. Universal Battery Co. v. United States, 281 U.S. 580, 50 S.Ct. 422, 74 L.Ed. 1051.

Custom-made automobile seat covers are used primarily to "improve, repair, replace, or serve as a component part of" automobile bodies. Clause (a). They are designed to be "attached to or used in connection with" automobile bodies, to add to their utility or ornamentation. Clause (b). The primary use of such seat covers is "in connection with" automobile bodies. Clause (c). Hence, it would appear that such seat covers are "parts or accessories," under all three clauses of the first paragraph of § 316.55.

Appellant, however, directs attention to the second paragraph of § 316.55. He argues that, in view of this paragraph, an article is not to be deemed a "part or accessory" unless it has reached such a stage of manufacture that it is "commonly or commercially" known as a part or accessory. According to appellant, custom-made seat covers, prior to installation, cannot be deemed to have reached such a state of manufacture.

In our view, however, the second paragraph of § 316.55 is not meant as an additional requirement to be superimposed on the requirements set forth in the first paragraph. The real purpose of the second paragraph is not to restrict the scope of the first, but to prevent the first from being too narrowly construed in a situation where "fitting operations" are required in connection with installation.

We therefore conclude that custom-made automobile seat covers are "parts or accessories," within the meaning of the statute.

Next to be considered is the question of whether appellant was the "manufacturer" of these custom-made seat covers, within the meaning of the statute.

Appellant advances several arguments in support of his view that this was not a manufacturing process. One of these is that it could not be manufacture because the seat covers are not produced and kept in stock for sale as general articles of commerce. This contention was considered and rejected by the United States Court of Appeals for the Fourth Judicial Circuit in the very recent case of United States v. Keeton, 4 Cir., 238 F.2d 878 decided November 8, 1956.³ We are in accord with the view expressed in the Keeton case.

Appellant's principal contention appears to be that the operation in question could not be manufacture because it constitutes repair work. The operation is repair work, he asserts, because the dominant aspect of the transaction is the performance of work and not the production of material, and because the process is essentially for the purpose of restoring the article of another to its normal condition.

While, as before indicated, this case involves only the installation of seat covers for used car dealers, the record reveals that appellant installs seat covers on some new cars. Other persons engaged in the same business also undoubtedly install such covers in both new and used cars. Appellant's "repair" theory, now under discussion, would not apply as to new cars. If the theory is accepted, it would therefore be necessary for those engaged in the business to set up records differentiating between new and used car transactions.⁴

Turning to the merits of appellant's "repair" argument, it will first be observed that it finds no support in the treasury regulation defining the term "manufacturer." Section 316.4 of Treasury Regulation 46 (1940 ed.), promulgated under the Internal Revenue Code of 1939, reads as follows:

"Sec. 316.4. Who is a manufacturer. The term `manufacturer\' includes a person who produces a taxable article from scrap, salvage, or junk material, as well as from new or raw material, (1) by processing, manipulating, or changing the form of an article, or (2) by combining or assembling two or more articles."

We approved this definition in United States v. Armature Exchange, 9 Cir., 116 F.2d 969, 971, certiorari denied 313 U.S. 573, 61 S.Ct. 960, 85 L.Ed. 1531, holding that it had been given the force of law by subsequent congressional reenactments of the taxing statute.

Appellant's operation constituted manufacturing within the meaning of both clauses (1) and (2) of the quoted paragraph of § 316.4. He processed, manipulated, and changed the form of certain new materials, consisting of covering fabrics, facing cloth, and other items, to produce an automobile accessory, which is a "taxable article." He combined or assembled these materials to produce such "taxable article." It will be noted that this definition does not take into account the use which is to be made of the article after it has been produced.

Counsel for appellant, at the oral argument, urged that this definition of "manufacture" is so broad that, if given full effect, it would include a great many minor mechanical operations performed in the course of repairing machinery, equipment, or almost anything else. If this be granted, it still does not mean that the products of such minor operations will necessarily be subject to the tax. In order to be taxable, the article manufactured must be a "part or accessory," and it must have been "sold" by the manufacturer.⁵ These requirements are sufficient to exclude from the operation of the tax most of the minor operations which appellant had in mind. In any event, the possibility that the definition may, sometime in the future, require limitation to meet the needs of some other case does not argue against application of the definition here.

But, quite apart from this definition, we do not believe that appellant's operations fall within the classification of "repair" transactions to which he makes reference. It is true that, in replacing broken seat springs and...