McMartin Industries v. Vinal
| Decision Date | 30 June 1969 |
| Docket Number | Civ. 02505. |
| Citation | 301 F. Supp. 749 |
| Parties | McMARTIN INDUSTRIES, Plaintiff, v. Richard P. VINAL, District Director of Internal Revenue, Defendant. |
| Court | U.S. District Court — District of Nebraska |
John R. Barton, of Crossman, Barton & Norris, Omaha, Neb., and Sutherland, Asbill & Brennan, Washington, D. C., for plaintiff.
James Parker, Dept. of Justice, Washington, D. C., for defendant.
This is an action for a refund of excise taxes paid by the plaintiff, McMartin Industries, Inc., under protest. Defendant, a District Director of Internal Revenue, has counter-claimed for additional excise taxes which the Service has assessed against plaintiff but which have not been paid. In the interest of brevity the parties to this action will be hereinafter referred to respectively as McMartin and the I. R. S McMartin is and was engaged, at all times pertinent hereto, in the business of manufacturing Subsidiary Communications Authorization multiplex receivers S.C.A. receivers. It is with respect to the excise tax levied upon the manufacturing of these receivers that both parties base their claims.
The S.C.A. receivers in question, designated as models TN. and TR. 66, 77, and 88, are tuning devices capable of picking up and demodulating program content transmitted over subchannel radio frequencies by FM broadcasting stations.
At this juncture, it is important to note that S.C.A. receivers are fundamentally different than normal household AM or FM receiving sets. The concept of transmitting programmed material via subchannel radio frequencies was developed in 1948. It was discovered that subchannel or subcarrier radio frequencies could be effectively imposed on main channel broadcasts by radio stations. By use of this "piggyback" system the main channel programs are received by ordinary household radio sets and the subchannel programs are received by specially tuned S.C.A. sets. Shortly after "piggyback" transmission proved successful, its inventors petitioned the Federal Communications Commission to sanction its use. The F.C.C. responded by promulgating a set of regulations known as Subsidiary Communications Authorization. The regulations control, among other things, who may qualify for licensed use, the hours within which subchannel transmissions may be made, and the various types of programming that may be transmitted. Illustrative uses for which subchannel frequencies may be employed are stated in the following excerpt:
47 C.F.R. § 73.293, Revised 1/1/68.
S.C.A. receivers are usually purchased by FM radio stations since they are the only type of stations authorized to transmit subchannel frequencies. These receivers are distributed to the premises of subscribers wishing to tune in special interest programs of the nature described in the regulations, supra.
In 1959, four years after Subsidiary Communications Authorization regulations were developed, McMartin began manufacturing S.C.A. receivers. Mr. McMartin, President of McMartin Industries, testified that from the outset, McMartin receivers were designed to be utilized for any legitimate purpose permitted by the F.C.C. regulations. The primary use of McMartin S.C.A. receivers during the tax years in question was the reception and amplification of functional and background music. It is sufficient, for purposes of this opinion, to state that functional and background music, as opposed to entertainment music, is designed primarily to create a desired environment for a selected audience. Functional music, which is programmed for the special needs of the client, is commonly used in office buildings to bring about a reduction of errors and increased efficiency of office personnel. Hotels are frequent subscribers of background music, particularly for use in lobbies, in an obvious attempt to provide a calm, pleasant atmosphere for their patrons. The second most common use of McMartin receivers has been store broadcasting. "Storecasting" combines background-functional music and intermittant voice messages. The latter is used to entice shoppers at a particular location to purchase specified products. The third most frequent use of McMartin receivers has been what is termed "rebroadcasting." "Rebroadcasting", as we understand it, is the relaying of programmed material from one station to another; sometimes for broadcast use at a later time in the program day by the receiving station.
There are presently also other less common, but significant, uses for S.C.A. receivers. Mobile units, such as taxis, trucks, etc., are often equipped with S.C.A. receivers which enable them to keep in contact with base units. Receivers are also used for educational broadcasts, "educating"; contacting doctors, "doctorcasting"; and for relaying news and weather reports to special interest groups.
There is little doubt, at least from a functional standpoint, that S.C.A. receivers and their accompanying transmitters constitute a point-to-point communications link similar to a telephone. S.C.A. receivers of the type in question have a fixed frequency, with the capability of receiving only programmed material transmitted on the subchannel to which they are lock-tuned. Therefore, the limited segment of the public interested in a particular transmission must subscribe to the service offered by the licensed FM station and have a properly tuned S.C.A. receiver installed in its premises. In many instances, for example, in a chain of super-markets, more than one S.C.A. receiver is tuned to the same transmission. Technically, where more than one receiver is tuned to the same program, the transmission is of a broadcast nature. Reception by more than one S.C.A. receiver of the same program is not, however, "broadcasting" per se since the programs are not disseminated to the general public.
Mr. Halstead, one of the innovators of "piggy-back" broadcasting, stated, as an expert opinion, that the service was the equivalent of a point-to-point communication link. Two letters from the F.C.C., in response to inquiries by McMartin, substantiate Mr. Halstead's opinion. Plaintiff's Exhibit #10.
" xx 20544 May 18, 1964 8843 "McMartin Industries, Inc 605 North 23rd St Omaha, 2, Nebraska. Attention: Ray B. McMartin, President
Gentlemen:—
Reference is made to your letter of May 4, 1964, addressed to Mr. Harold Kassons of the Commission's staff.
Unlike conventional broadcast transmissions, FM multiplex signals transmitted on sub-carrier frequencies under a Subsidiary Communications Authorization SCA are treated as privileged messages not subject to interception and use by persons not authorized by the sender. It follows that programs transmitted under an SCA are not "broadcasts" within the meaning of Section 605 of the Communications Act of 1934, as amended.—see Paragraph 19 of the enclosed Report and Order Docket No. 12517.
Except for the establishment of limits on receiver radiation, the Commission does not regulate the manufacture, distribution and sale of radio receivers, nor do the Commissions' Rules differentiate between broadcast receivers and communications receivers. In common usage, however, "broadcast receivers" are understood to be those capable of receiving main channel AM and FM program transmissions "intended to be received by the public * * *"—Section 3(o), Communications Act of 1934 as amended. By implication, other types of receivers including crystal-controlled SCA multiplex receivers would be properly classified as "communications receivers".
Very truly yours Ben F. Waple Secretary enclosure SIGNED BY ABOVE MAILED BY May 19, 1964 MAIL & FILES " " 20554 November 5, 1963 8843 Eli Roshgold, General Manager Telemusica, Ltd. Room 148 Hotel Statler Hilton 32nd Street and 7th Avenue New York, 1, New York
Dear Sir:—
With reference to your inquiry of November 4, 1963, multiplex receivers placed in subscribers' establishments by an FM broadcast station providing background music or other services under a Subsidiary Communications Authorization, are considered to be communications receivers rather than conventional broadcast receivers.
Unlike broadcast transmissions, FM multiplex transmissions are treated as privileged messages not subject to interception and use by persons not authorized by the sender—see Paragraph 19 of the enclosed Report and Order.
Very truly yours Ben F. Waple Secretary Enclosure SIGNED BY ABOVE MAILED BY NOV 5 1963 MAILS & FILES "
We turn now to the sole question of whether or not S.C.A. receivers, which are designed and manufactured for reception of all transmissions permitted under the Subsidiary Communications Authorization, are subject to the excise tax imposed by section 4141, "Tax on Radio-Receiving Sets, Etc."
Section 4141, as amended by Excise Technical Changes Act of 1958, reads as follows:
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