McElhaney Cattle Co. v. Smith
| Decision Date | 03 March 1981 |
| Docket Number | CA-CIV,No. 1,1 |
| Citation | 132 Ariz. 306,645 P.2d 821 |
| Court | Arizona Court of Appeals |
| Parties | McELHANEY CATTLE COMPANY, an Arizona corporation; S & V Cattle Company, an Arizona partnership; and Gary and Carol Oden, individually, Plaintiffs-Appellees, v. Alberta SMITH, in her capacity as Yuma County Assessor; Bill F. Walker, as Treasurer of Yuma County, Arizona; Yuma County, Arizona; and the Arizona Department of Revenue, Defendants-Appellants. 4746. |
This case of first impression in Arizona requires the determination of whether the cattle comprising the "inventory" of a commercial feedlot are exempt from taxation under the "wholesaler" exemption provided by Article IX, § 2 of the Arizona Constitution or the "manufacturer" exemption provided by Article IX, § 13 of the Arizona Constitution.
This action was filed by McElhaney Cattle Company (McElhaney), S & V Cattle Company (S & V) and Gary Oden and Carol Oden (Odens) (collectively referred to as the taxpayers) against the taxing authorities of Yuma County, and the Arizona Department of Revenue. The action sought a determination that feeder cattle owned by the taxpayers during 1975 were exempt from ad valorem taxation and in addition sought a refund for the additional taxes paid under protest because of the disallowance of their claimed exemption. This suit was filed after the Yuma County assessor had denied their claimed exemption and the assessor's action was upheld by the Yuma County Board of Equalization.
After trial, the trial court found that all three taxpayers were entitled to the claimed exemptions under either § 2 or § 13 of Article IX of the Arizona Constitution and that McElhaney and S & V were entitled to a refund of taxes paid under protest in the sum of $1,655.25 and $248.23, respectively. The trial court further found that the taxpayers Oden were not entitled to a refund as they had failed to pay the 1975 taxes under protest. Only the taxing authorities have appealed.
The taxpayers claim they are entitled to an exemption under either § 2 or § 13 of Article IX, of the Arizona Constitution. Section 2 provides, in part:
Stocks of raw or finished materials, unassembled parts, work in process or finished products constituting the inventory of a ... wholesaler located within the state and principally engaged in the resale of such materials, parts or products, whether or not for resale to the ultimate consumer, shall be exempt from taxation.
Section 13 provides:
No tax shall be levied on raw or unfinished materials, unassembled parts, work in process or finished products constituting the inventory of a manufacturer or a manufacturing establishment located within the state and principally engaged in the fabrication, production, and manufacture of products, wares and articles for use, from raw or prepared materials, imparting thereto new forms, qualities, properties and combinations ....
The facts which the trial court found gave rise to an application of both of these constitutional provisions to the taxpayers' feeder cattle are that McElhaney is a corporation which operates a large commercial cattle feedlot in Yuma County, Arizona. Gary C. Oden is the president and general manager of McElhaney. S & V is a partnership comprised of Sam McElhaney and his wife, Vennie McElhaney. S & V was established as a separate partnership to engage in cattle owning and feeding, which partnership is separate and distinct from McElhaney. The Odens also own and feed cattle in their individual capacities. 1
The McElhaney feedlot was established approximately 30 years ago and presently has a capacity of approximately 55,000 head of cattle. The feedlot has an inventory turnover of approximately 1.3 times per year, so that if it operated at capacity year-round, approximately 70,000 head of cattle would be processed through the feedlot. Because of line of credit limitations, the taxpayers at any given time are limited to feeding 20,000 to 25,000 head of cattle owned by them. Because of the fixed costs of the operation, significant economic savings per head of cattle can be achieved by operating the feedlot at full capacity. For this reason, feeder cattle owned by persons other than the taxpayers are fed at the McElhaney lot, thus reducing the taxpayers' unit cost for feeding their own cattle. The testimony indicated that this was the primary purpose for feeding other people's cattle. The taxpayers are only claiming exemption on cattle owned by them.
During the 30 years McElhaney has been in the feedlot business, significant technological and scientific developments have occurred in the preparation of cattle for ultimate human consumption. McElhaney's original operation consisted primarily of feeding the cattle hay, cottonseed hulls, grain and cottonseed meal. The only equipment used was a grinder and a wagon to deliver the feed to the cattle. The mixing of the feed was by hand. Under this type of operation, it took two to four years to prepare an animal for market.
The advances made in this business were basically in two areas, nutritional and genetic. On the nutritional front, scientists have isolated the various vitamins and nutrients which underly the metabolic process of the animal. Through research, some 12 or 13 different nutrients have been identified, their functional values determined, and various combinations developed which produce a given end effect in the animal. Among the scientific advances was the discovery of the compound glycogen, which develops the desired "marbling" qualities in meat (the presence of small flecks of fat between the muscle fibers). The marbling quality of meat is the primary standard utilized by the United States Department of Agriculture in grading a meat carcass as prime, choice, or a less desirable grade.
Thus, through the scientific combination of roughage, minerals, proteins, vitamins and additives in a feeder steer's diet, the desired end carcass can be achieved. In order to deliver this highly technical diet to the animal an elaborate and sophisticated system of machinery is now utilized. This consists of mixers, weighing systems, metering devices, electrical control systems, grain flaking equipment, bins and storage elevators.
On the genetic front, research has isolated the female hormone DES and other hormones which can develop the desired characteristics of beef for human consumption. These hormones are either implanted in the steer's ear or mixed with the feed ration. The introduction of female hormones into the feeder steer is important because of the necessity to castrate bull calves (99% of the taxpayers' feeder cattle start as bull calves). Castration is necessary to avoid the heavy front shoulders and neck characteristics of bulls which produce undesirable cuts of meat. However, castration retards the potential rate of weight gain. The use of hormones offsets this loss of gain and allows the steers to "finish" at a more rapid rate than untreated steers. Also, hormones cause heavy development in the rear quarters of the animal, from which come the most desired cuts of meat.
As a result of these scientific and technological advances, the time necessary to produce a marketable animal of 1,000 to 1,100 pounds has been reduced from a period of two to four years to a period of approximately 200 days (starting with a 400 pound calf) or 300 days (starting with a 250 pound calf).
The animals that the taxpayers purchase for feeding, described as "range" or "pasture" calves, weigh between 250 and 400 pounds, have an extremely low fat content and glycogen level and are economically unmarketable for human consumption at time of purchase.
The breed, grade and weight of range calves purchased by the taxpayers are determined for their ultimate sale to the chain store market, such as Safeway. This market requires a "finished" animal which will produce a carcass weighing between 600 and 650 pounds, graded choice with a yield grade (the amount of marketable meat) of two or three (on a one to six scale where one is the highest yield grade).
As the result of the taxpayers' treatment, a substantial transformation of the range calf to the "finished" steer occurs. The shape and contour of the animal is changed, its weight is shifted from the shoulder and neck area to the loin and hip area, the meat has more marbling than occurs in nature and the meat has a more desirable taste. As the taxpayers' expert, Dr. William H. Hall, testified Yes, there have been changes in the morphology in the fact that the muscles are bigger, they are thicker; the back is covered over, and in the case of a bull, he's lost a bull appearance .... You would not recognize the animal in terms of the animal that was originally purchased.
In short, what is produced is an animal with a heifer form on a bull frame.
All of the range calves purchased by the taxpayers (with a minimal exception for home and friend consumption) are ultimately destined for resale, at wholesale, to meatpackers who sell to the chain stores.
The economics of the taxpayers' feedlot operation is that a profit is derived if the finished steer sells for more than the original cost of the animal, plus the expense of producing the finished animal. In this regard, for the years prior to 1973, the taxpayers' proceeds from the sale of steers exceeded their expenses. Following 1973, and in the year in question, because of adverse market conditions, the taxpayers, like other cattle feeders generally, suffered large losses on the sales of cattle raised. During this period, the amount of money...
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McElhaney Cattle Co. v. Smith
...owned by the taxpayers were exempt from taxation under the "wholesaler" exemption provided by Article IX, § 2. McElhaney Cattle Co. v. Smith, 132 Ariz. ---, 645 P.2d 821 (1 CA-CIV 4746, filed March 3, 1981). The court did not determine whether the taxpayers were also entitled to the Article......