*2
TREANOR,
KER-
MAJOR,
Before
NER,
Judges.
Circuit
KERNER,
Judge.
Circuit
brought against
is an action
for the United States to
collector
revenue
excise
amount to
of “The
manufacturer’s
recover additional
plaintiff
filed so sold.” Section 603
the Revenue Act
protest. The
paid
taxes
under
requires monthly
excise
return under
tkx
Manufacturer’s
payments,
Act
Revenue
returns
the instant
the law and
seq.,
July,
in controversy
ch.
Secs.
et
ease
tax month
Stat.
*3
Int.Rev.Acts,
seq. 1933.
page 603 et
26 U.S.C.A.
of Internal Rev
Then the Commissioner
Campana Corporation
organized
was
additional
tax and
enue assessed
July
engaged
and
1933 was
protest. Time
taxpayer paid under
tax the
both
the manufacture and the distribu-
ly application
refund of the additional
for a
(including
tion
and
pro-
sales
There
made and denied.
amount
was
motion)
“Campana’s
of
Italian Balm.” On
in the
sued
District
July
a contract
for the exclusive
(sitting without
Court and the Court
Campana’s
and
of
distribution
sale
Italian
taxpayer.
The de
jury)
found for
Balm went
By
into effect.
con-
appealed to this
fendant Collector
Court
Campana Corporation
agreed
tract
seeking
judgment.
of
a reversal
exclusively
product
sell its
to E. M. Oswalt
engaged
(60%
Campana Corporation
Campana Corpora-
in the
stockholder of
tion)
corporate
prepara-
of
his
and
a toilet
transferee. As
manufacture
“Campana’s
agreed
pay
tion
known
Oswalt
or cosmetic
as
Balm,”
principal place
equal
production
its
of
Italian
of the
Batavia,
article
of this
Illinois.
Since
cost. Then
business
39%
organized
(June 21, 1932)
Campana
Oswalt
date of the
taxing
Sales Com-
subject pany
July
has been
and on
this face and
lotion
hand
transferred the
equivalent
excise tax
contract to it.1
ato manufacturer’s
At
plained
was dated June
time
The sales contract
counsel for
ex-
printed
time
was still
1933. At
president
Oswalt
notation was
Campana Corporation.
error on a
few invoices
issued from the
resigned
July 1,
Pacific
Oswalt
that of-
Coast
On
and
this had been
subsequently
Campana
president
explanation
fice and became
corrected. This
day
satisfactory
Company.
was
On that
the Cam-
Sales
District Court
formally
apparently
pana Corporation
also
author-
also to counsel for the
Obviously
Collector
the sales contract.
at the
ized or ratified
time.
in-
operative
typical
voices were
event
contract was
as of
introduced
of all in-
July
July
particular
voices
used
and in
re-
gard
Campana
Corporation
in that
month.
owned
ownership
holdings
persons,
The stock
five
while
were
the two cor-
porations
July 1,
(unless
as of
identical
husband
wife
as fol-
unit)
lows :
the same five
are considered as
Campana
persons
the stock in
Campana
owned all
Campana
Corpora-
Company. As to the husband and
Sales
Sales
testimony
situation,
indicates
wife
purchased
Mrs.
her stock
Oswalt
Oswalt...,
E. M.
60%
45%
25%
money.
testimony
with her own
Mra. Oswalt.
10%
n
R. H. Brandon..
shows that
was the control-
Mr. Oswalt
Mrs. Brandon....
3.33%% 8.33%%
promotion
ling
force
the sales
and dis-
Seymour.
Maisie
6.66%%
6.66%%
Company.
Sales
tribution
pioneer (of
was also the
Mr. Oswalt
Campana'
The officers and directors of
orig-
five) in the hand lotion field and the
Corporation
July 1,
as of
were
purchaser of
inal sole
the trade-mark
follows:
“Campana’s
(purchased
Balm”
Italian
Officers
Directors
firm).
In addition
from a Canadian
corporations
President
R.
Brandon
R. H. Brandon
are the
H.
officers
the two
except
president.
Sappen-
Sappen-
R. G.
same,
Vice-Pres-
R. G.
for the
ident
field
field
during July
invoices used
Some
W. Crull
1. W. Crull
Vice-Pres.
I.
while issued
the name of Cam-
ident
Mrs. Oswalt
pana
Company,
printed
bore the
no-
Sappen-
Treasurer
R. G.
payable
tation,
remittances
“make
Cam-
field
pana Corporation, Batavia,
Illinois.”
Secretary
I. W. Crull
invoices
received
These
in evidence
objection
particular
July 1,
(Prior
1933 E.
M. Oswalt
without
no-
director;
July
president
(printed
in small
letters
tation
invoice)
replaced by
Brandon,
escaped
R. H.
he was
bottom
notice of
business.)
argument
stage.
counsel until
both
active
$300,000
period
1926-
Corporation
(for
from
from
Thereafter
$1,000,000
period
(for
manufacturing 1930)
around
activity solely
its
confined
figure
1930-1933),
assumed
this latter
distribution,
chargeable to-
including adver- over
radio ad-
the risks of
vertising.
promotion. The manufac-
tising
tangi-
all
its
retained
turing
promotion (radio
of'
ad-
form sales
copy-
trade-marks
ble assets
vertising)
mitments,
com-
long
with it
term
carried
corporation soon in-
rights. The
results,
copy-
uncertain
threats
force from 10 salesmen
its sales
creased
infringement
right
invasion
formerly
for the manu-
had worked
(who
instance,
right
privacy.
of
Company
salesmen,
corporation)
facturing
1933sponsored
after
year had
“the
become
by the end of the
“Variety
program
a dramatic
radio
*4
Fair”
field.”
largest
in
hand lotion
advertiser
year
involved one
contractual com-
which
acting profession
mitments with
sepa-
corporations
maintain
These
now
radio
which failed
nine
but
after
networks
space,
separate payrolls.
and
rate office
easy
weeks on the
to see
air.
July
Campana Cor-
Prior
to
large
promotion, to
scale or national sales
product
packaged
poration made and
its
extent based on radio adver-
considerable
tising,
building, and
it in the
stored
and
risky
hazardous and
in
was
this com-
purchasers. After
there
it to
from
in
did
to a
petitive field and
fact
1933,
packaged
and
July 1,
it
made
still
produce
might
gamble
huge
earn-
ready for
product
deposited
there but
its
ings
losses.
or incur disastrous
platform.
shipment
shipping
on the
Then
This chance element
selling corporation (its
naturally
led
to the
vendee which
questioned by
conduct
building)
of
Collec-
officesin the same
course
also maintains
1,
Shortly
July
in
case.
platform tor
this
before
shipping
trucks to the
drives its
Campana Corporation decided
prepared
there hauls the
lotion
from
and
its
ing.
activity
its
in
manufacture and
located
another build-
warehouse
confine
own
its
to an
building
corporate
sale of
exclusive
In this
the manufactured
Campana
Company.
Sales
delivery
distributor —the
pending
orders and
is stored
stock
manufacturing corporation
shipments
continued
this warehouse
are made
tangible
and its
Sales
retain its
assets
trade-
by the
its
copyrights.
Thereafter
marks
purchasers.
corporation
manufacturing
of
was free
Campa.naCorpora-
From 1926
hazards inherent
in
business
nationwide
losing basis,
operated
aon
tion was
sustain-
described,
advertising here
risks which were
average operating
annual
loss
an
of
corporation.
assumed
$31,000. During
period
around
years
July
the four
since
1933 the Cam-
confined to several states
area was
Corporation has
average
an
earned
pana
outlay
advertising
and the
$300,000.
totaled around
$133,000
year,
per
as com-
around
sum of
Then
November of
average profit
pared
of
with its
around
reaching
as a means of
turned to
the
radio
during
year
the three success-
public
enlarging
its
sales area.
years period prior thereto.
ful
years
Thereafter came
three successful
event, starting
July 1,
1933and
July
prior
during
which time
continuing every
thereafter the Sales
profit
average
operating
annual
made
advertising
Company’s
promotion
and sales
$64,000; $28,000
1930-31;
of around
expenditure
annual
accounted for an
of
1931-1932;
$35,000in
$129,000in
1932-
(equivalent
$1,000,000
to the adver-
around
tising
Campana Corporation was the first
period
outlay
the entire
between
competitive
highly
“to take
radio”
chargeable
1933),
in the main
1930 and
preparations,
and toilet
field
cosmetics
magazine advertising
to radio
on a
competitors were not slow to
its
follow.
The record discloses too
nationwide basis.
advertising
race
Once
radio
was
started
selling to an exclusive distributor
was
on,
Campana Corporation
operation
mode of business
the common
position
itself
where extensive
found
preparations
competitive toilet
highly
radio
Already
inevitable.
was
use
field.
years
July
three
during the
competitive
advertising outlay
highly
toilet
had mounted
the same
the officers were
The officers
directors
otherwise
Oswalt,
above;
as of
the directors were E.
M.
W,
president
M.
Crull.
as follows: E.
Oswalt
Mrs. Oswalt
I.
bearing ad-
business such
many lotions
as the value of the trade-
field there are
brands,
name, a
private
manufacturer’s
vertised
fair
brands
commanding-about
approximate
Balm
mar-
Italian
lotion
former
60%
production
controlling
plus
the cost
ket and
latter
about
of cost
40%
Campana’s
production;
Italian
is'
considering
of the
a
against
Balm
but that
market.
the value
nationally
competes
intangi-
of the Italian Balm
advertised brand and
label
private
value,
elements
contract
the other advertised
ble
Plainly
“very
brands.
advertised brands
fair market
is main-
great
price.”
value and
value
vigorous advertising.
In the in-
tained
Company plays
is to be noted
while
stant case it
the important
part
economic
in the evidence
Campana Corporation continued to own the picture
important
this case.
Balm,”
“Italian
trade-mark
much of the economic
performed
function
formerly
intangible
inherent in
trade-mark
value
manufacturing
but on a
greatly
due
increased
much smaller scale.
To
cor-
Company.
outlay
assigned
poration
the vast nationwide
process
marketing by
distribution
Taxpayer introduced three witnesses who
Campana’s
Balm,
Italian
manufac-
experience
possessed wide
in the manu-
consumption,
ready
tured
is adver-
*5
goods.
facture
of toilet
These-
and sale
men
tised and
in the channels of trade.
goods by
testified that
a manufacturer to an
sale of toilet
a
actually
distribution
brings
This
mechanism
distributor
exclusive
manufacturer and
togeth-
the consumer
.the
ordinary
was a sale in the
course of trade
process
during
er
the
the selling
and
cor-
and that the distributor is the manufac-
poration in effect
Italian Balm
sells the
lo-
turer’s “trade.”
These witnesses
stat-
wholesalers,
tion
times—once to
three
the
and
to
may
ed that a “sale
the
trade”
con-
dealers,
to the retail
‘once
once to the
in
following
summated
the
trans-
consumers.
(1)
may
actions:
The
sell
manufacturer
to
distributor; (2)
its exclusive
the distributor
beginning
selling corporation
At the
the
may
wholesaler;
sell
(3)
to a
and
the
magazine
prepares
radio
literature and
may sell
wholesaler
to
retailer. Oswalt
promotional plans.
sales
Then the
also testified to the
in
same effect and
addi-
selling
task of
to the wholesalers and to
tion stated that
in
common sales method
(in
outlets
the retail
behalf of the whole-
goods
by
the toilet
field was a sale
selling corpora-
salers)
commences.
to its
manufacturer
exclusive distributor.
supplies
with Italian
wholesalers
Balm, in
supply
turn the
ap-
small de-
According
the inter-incorpora.tion
to
60,000
stores,
proximately
drug
Campana
contract
stores,
partment
general
stores and
pay
equal
to
agreed
amount
to the cost
supply'
retail
turn these
outlets
the con-
plus
the article
producing
(cid:127)of
of this
only
suming public.
exception
There is
one
Using the same
cost.
volume of business
system:
distribution
the selling
to this
cor-
three
ás
preceding years,
over the
supplies
syndicate
poration
stores
profit accruing to the
Corporation
directly,
large
operators
chain-
which in
equal
-under this sales contract
supply
public.
turn
$77,000.
signifi-
annual
of
the
amount
view of
cant in
fact that
selling corporation
Cor-
its
sends out
poration’s
profit
preceding the
visit
salesmen
wholesalers with
'
only $35,000.
(cid:127)sales contract was
taking
to
orders
the hand
view
n connection
hypothetical question
based
selling
lotion.
face
used
present-
the evidence
the case
on all
“sell
will
ed to the
to
three witnesses referred
buys.”
above.
wholesaler
As
as
what
soon
These
testified that
their opin-
witnesses
are obtained these
these orders
salesmen
plus
outlets,
ion the contract
of cost
retail
mail
circulars
visit
.a fair
manufacturer’s market
These
inform
generally
pric-
them
them
proceeded
theory
on the
witnesses
es,
promotional plans.
discounts and
-fair manufacturer’s market
salesmen are
wholesalers’ own
Often
goods
equal
field was an
-toilet
visit the retail
and to obtain
outlets
used
production
-the
a reasonable
from
sources. When this
cost
orders
occurs,
these
corporation
upon
selling
the value of the properties
return
de-
reimburses
in,
production.
particular
expenses
One
voted
wholesalers for
commis-
stat-
excluding
intangible
.ed
of sions
made
their own
assets
salesmen.
(33%),
goods sold
reflected cost of
are sent
retail dealers
Orders
(16%).
profit
(51%),
mails cost
then
in the retail
district wholesaler
Finding. Campana Corporation filed its
district,
credit-
time
the same
dealer’s
return
manufacturer’s excise tax
by the dealer
quantity ordered
ing the
July,
showing its
month
total sales
the whole-
purchased by
stock
against
$14,652.70, paying
tax of
the Collector a
saler.
$1,465.27
thereon.
Commis-
Thereafter
assessed an
tax amount-
additional
sioner
Campana Sales
way that
is in this
$3,121.72
theory
ing to
Campana’s Italian Balm
Company sells
manufacturer’s
should be
excise
meas-
at once that
over. We observe
three times
prices
own sales
ured
separate
is as
process
distribution
Compana
Company.
manufacturing
important as the
and as
The statute does not authorize the Com-
fact,
the record stands
process itself.
the tax
missioner
measure
or toilet
undisputed
cosmetics
other than the manufacturer’s sales
industry,
advertising and
preparations
radio
(the manufacturer)
unless
sells at less
expenses
advertising
similar
than
fair market
and otherwise
costs”
“selling
known
than
an arm’s
transaction.
manufacturing costs.
and are not
Nor does it confer
the manufac-
process marketing
nation-wide
of this
right
turer a
to refund
it has
if
not borne
expenses
high
(1)
incurred
and covers
illegal
Accordingly
the burden of the
wholesalers,
the ex-
taxpayer’s
complaint alleges,
refund
selling to the retail
penses attached to
out-
denies,
and the Collector’s answer
the fol-
lets,
expenses relative to the
lowing propositions:
(1) The additional
radio,
promotion-
magazine and other sales
tax assessment
unauthorized and hence
plans necessary
public demand
al
to create
illegal,
because
Corporation’s
for the manufactured
The cost for
article.
*6
prices
were fair market
and
July
1933, the
the month
of
first month
of
inter-corporation
sales were
arm’s
1933-1934,
fiscal year
of
around
length transactions;
(2)
and
the burden of
$30,000
of this
was de-
around 60%
passed
additional tax
not
on.
advertising.
voted to radio
This cost for
the fiscal
1933-1934
to At
amounted
trial evidence was adduced to
$700,000
around
and since that
time
prove
disputed
the above
propositions.
annual costs have maintained themselves This
of
testimony
evidence consisted
oral
figure
$1,000,-
at a
between
documentary
upon
material and
such
evidence the District Court made its find
ings of fact. Now counsel for the tax
and, using
These then are the facts
payer
informs
findings
us
these
are
dime size of Italian Balm lotion as an ex-
appeal
clearly
binding
unless
erroneous.
ample,
present
these
in
facts
essence
Procedure,
Rule
Federal1 Rules
Civil
of
following
situation to
Prior to July
us.
following
28 U.S.C.A.
section 723c. On
Corporation
the Campana
manufac-
the other hand counsel
the Collector
dime
tured its
lotion
size
and then dis-
argues
findings
binding
that these
are not
trade,
tributed it to
in the first
appeal
“legal
because
are
conclu
instance to
approximately
wholesalers at
sions” or
most “ultimate
at
facts” or the
(.0525) per
5 cents
This
article.
in
“issues
the case.”
reflected cost
goods
(32%),
of
sold
cost of
(57%),
profit
(11%).
application
profit
In the
Federal
This
of
Rule
represented a
following principle
return
guides
of around
of
the 52
it
production
cost
(cost
of
goods
reviewing
of
sold).
court
not
Court:
does
this
July
After
1933
Corpora-
original
as an
the evidence
fact
review
tribunal;
tion manufactured its
finding
attempt
dime size lotion
it does not
to set
exclusively
then sold it
to
evidence
to determine
Sales Com-
conflicts
tle
pany
approximately
credibility.
Duvall,
at
2
In re
(.0229),
questions
cents
of
7
653, 655;
Cir.,
turn the Sales
sold
Guilford Const.
this article
103 F.2d
Co.
approximately
Cir.,
Biggs,
wholesalers
102 F.2d
Of course
cents. v.
require
manufacturing corporation price
Rule'
us
Federal
does
re-
unsupported
findings
by the evi
accept fact
(70%),
flected cost of
sold
cost of
require
this
Nor
Rule
us
(7%),
profit (23%).
profit dence.
does
which do not
respect conclusions
law
around
return of
so found.
on the facts
properly
selling corporation
production.
rest
giving the above The District Court
evidence
principle
that the
found that the
certain
taxpayer’s
weight
court’s find-
allegation
described
to the trial
established
fact,
ings
compel
regard.
the review-
does not
weight
give any specific
ing court to
In
Corporation
law,
yet
court’s
as
re-
trial
conclusions of
products
Com-
duty
appellate court
mains the
pany,
price amounting to
the total sales
rule of
decide whether
law
correct
$14,652.70.
Company paid
.
applied
been
to the facts
found.
has
$1,465.27
as
The Cam-
amount
special
supported by
findings
Whether
are
Corporation
tax re-
pana
filed its excise
req-
they give
evidence
whether
sales,
$14,652.70
paid
showing
turn
as
uisite
rendered
to conclusions
$1,465.27
Ira
the Collector
tax thereon.
as
thereon,
questions open
to considera-
these
this month
the Sales
sales,
here.
products to wholesalers at a total
$50,456.89.
Com-
for the Col
Later on the
connection counsel
points
lector
tax
to three cases. United States missioner assessed the additional
Pugh,
265, 270,
$3,121.72
pro-
under
L.Ed.
is,
United States v.
Electric
That
Commissioner measured
test.
Jefferson
Co.,
$50,-
Mfg.
386, 406-410,
total sales
S.Ct.
tax
$4,586.99..
407 the fact that which the passed this on whole- turn the Sales July salers and after admission before Without this wholesalers. ; e., (i. $8.80) remained the he states impossible obtain from be contemplates “the obviously all tax at July, invoices that taxpayer collect the will tax from passed to the wholesalers. collecting its vendees and it had been so plainly accounting- records disclose 1, 1933”; prior to he sub- tax Corporation’s regard Campana this logical infer- mits that “the natural and (which expressly included ence” which would drawn the whole- Company’s be tax) Campana Sales 13$5 upon looking July, in- salers at the 1933, in- July, goods cost sold. The cent of the voices “would only represented that the $8.80 voices represented price still tax.” price, represented but figure accounting records a matter of fact is certain that evidence invoice show taxpayer’s admission does establish that the tax collected wholesalers, original instance) in this does (or nor refute tax testimony accounting oral records Nor from the wholesalers.3 collected the effect that adduced represented that could invoices was never the additional tax collected. represented figure the $8.80 in- that can be said about the most tax, (670 additional for the tax permits conflicting is that voice evidence instance) until two assessed was not following: inferences such as hence not have been could years later and represented figure still invoice $8.80 that time. before collected longer desig- tax, although the tax was no Collector contends Yet counsel thereon; figure still (2) the nated $8.80 fact on the only; selling price represented the e., (i. tax minus additional burden figure still the $8.80 130). in- argument (1), is based His Inference in a different amount. points logical in- he related above: the “natural evidence described as voice beginning July 1, Corporation Elements Corporation products sold its goods Cost $192.000 32% 67% 340,000 Cost of sales. figure represented $427,920.58. This 64,000 Profit . selling price plus tax. For the excise example, instance, item to take $1 Sales . selling price per $1.32, the dozen was figures total of This total approxi- $1.45. in this table are charge only. Cam- articles constituted mate Company’s pana sold. During years July, the four after Company sold to AVhen raw material as much as costs increased original part wholesalers, tax was increased the 100%. *8 necessarily the cost the Company the Sales about Natural- 50%. price in the sales the reflected ly Company's this increased the Sales indirectly original Thus, the wholesalers. goods sold, cost in dollar increase passed on to wholesalers. tax was regard being $369,000. this Be- around competition accounting cause of records and because The disclosed more selling price acquainted instance, trade has become usu- data. ally goods prices, Company with fixed reflects cost the Sales compelled profit. costs; to absorb table below —for the these increased sales beginning is, price what that nev- 1933—shows wholesaler bears to sales: ertheless remained the same. each element oral testimony also indicates that the Sales compelled often was to meet Corporation Company Elements by extending competition cash and extra goods Cost oí sold. ... 70% 33% purchasers. concessions to These sales.. Cost of ... 7% 61% amounted around concessions Profit ... . 23% 16% $58,000 in in 1934-1935 and 1933-1934, $100,000 in These 1935-1936. concessions Sales . reality were reductions in sales in Using corporation’s price. accounting event data available absorbed; taking average figures items were the three these years 30, 1933, remained a to June a similar wholesale trade ta- fixed following charge. show the ble would relation: constant 408 Collector, ference” counsel for the dis- from this that the inter-company sales are appears completely in view the evidence at length. arm’s case; sup- this least is inference at A sale at connotes arm’s ported by representation express an sale parties between eco with adverse figure designates- $8.80 nomic interests. To determine whether article; inference,(3) con- is corporations between two is at arm’s- supported by sistent the other length, necessary it i's to look at stock evidence in case. corporate holders behind the structures. taxpayer here had collected did, This the District this counsel Court If- Company and tax from taxpayer concedes, the Sales this effect 800 represented to then the Sales had permits. Supreme our case-law Court
the wholesalers that the included $8.80 disregard has been known to an estab tax, taxpayer then corporate entity, lished Pacific Southern . portion heard denying that Lowe, 330, 337, .a Co. 38 S.Ct. v U.S. truth 1142; tax. But the Corp. 62 L.Ed. Gulf Oil v. e., (i. matter is that the additional Lewellyn, 39 S.Ct. U.S. instance) neither assessed until this expression" judicial L.Ed. recent years by the two later nor then collected severely possible circumventions- condemns taxpayer Company or tax laws adherence to cor undue oT effect the oral Commissioner, wholesalers. this is porate form, Griffiths v. testimony be the District Court 277, 84 L.Ed. 60 S.Ct. lieved, accounting records and the Smith, Higgins S.Ct. Nor the invoice evidence we believe. is cited, 355, 84 In the last case L.Ed. 406. inconsistent with adduced the Collector U.S., page page of 308 357 of showing evidence S.Ct., emphasized 84 L.Ed. the Court ijts tax in did not the additional include “transactions, vary con which do the amount and did not collect bene change the flow of economic trol or Company or tax from the fits, dismissed from considera are to be the wholesalers. tion.” Counsel for the Collector also relies Our situation comes down to this: testimony by certain Oswalt as supporting persons the same five own the stock in the proposition that the additional tax was corporations. two substance trans included in A fair sum- action involved here is a sale five mary testimony witness’s would be persons themselves. To us such a sale original that the tax was included in the length. is not at arm’s Counsel for the but that the additional tax was taxpayer argues that “economic bene excluded therefrom. We conclude there- equal obviously propor fits do flow fore that showing there is evidence * * * tions” wife “husband and unless neither the nor the Sales Com- considered as a unit.” We do not find are pany passed $3,- on the additional tax of neceásary quarrel point, with counsel’s finding 121.72. The District Court’s enough for it interests regard supported by evidence corporations, all represented by finding gives in turn to of the economic benefits flow to the same judgment thereon. persons, and corporate five con Length. Arm’s their District trol hands. Court stat We conclude that ed impressed that: “I am finding District Court’s believe that conclusion- *9 they (the two corporations) separate to the effect that are thereon the inter-com entities,, and distinct pany length both “arm’s transaction,” law and -is an sale * * * fact. I am supported they by convinced that is the dealt not evidence. Counsel length.” Plainly at points arm’s also the record re for to Section 3 of corporations veals these two 1939, the Revenue Act amending distinct of Sec entities, operating vitalized with 1932, business tion 619 of the Revenue Act of energy purpose, recog are so U.S.C.A.Int.Rev.Code 3441 as laying § by nized the income tax statute as such. a standard down reasonable for determin 141(d), 1932, Sec. Revenue Act of See whether length. a transaction is at arm’s 169, 213, Stat. 26 U.S.C.A.Int.Rev.Acts, 53 Stat. 26 U.S.C.A.Int.Rev.Code 533; page 617, 3401; 84, XI-2, Record, p. Congressional p. See S.T. C.B. Vol. § 7802. 513, Ruling, Jufy-Decem Commissioner’s Assuming that the 1939 standard ber, However, applicable case, 1932. does not in the instant our follow price do available to wholesalers. In We our same. the remain position would opinion taxpayer’s our evidence to the effect 1939 standard and the not think price that the manufacturer’s to its exclu- all. at here are inconsistent conclusion price distributor a sive fair and one manufacturing first the At Tax Basis. profits, reasonable is not price aat to wholesalers corporation price sufficient re- to establish that the on tax based the 5 cents ceived market price was the fair stran- between one This sale price. price in the for which an article is .sold sold to incorporation it After gers. ordinary course of trade. of 2 price corporation a at Obviously purpose persons basis of paid the tax on the cents place control here was to Italian controlled Balm be the same interests Since cents. buying public fore the step first corporations, transaction the two this direction was a sale to turn In the wholesale himself. person sold to if one incorporation trade. The transferee corporation did change this purpose. price S cents. incorporation merely provided strangers. Under a con between one sale was trolled medium de- the Commissioner these circumstances wholesalers could be by facilitated. It is measured true tax should cided be that title to the 5 cents. wholesale corporation but the fact remains imposes tax same interests retained the control. Thus- sold, and the is an article price for incorporation by sale the manu sale manufac attaches tax directly facturer was to the wholesaler at 603 of turer. Sec. Revenue Act cents; of 5 incorporation after the Harrison, Cir., 1932; Williams v. the sale the manufacturer was made Motocycle Indian v. United F.2d indirectly to the wholesaler at the same 570, 601, 574, States, S.Ct. price. Under recent tax decisions “trans Generally this is measured L.Ed. actions, vary which do control or price at manufacturer’s actual sales by the change the flow of may economic benefits” production. place See factory or ignored by the Higgins Commissioner. 708, Ways Report and Means No. House Committee; Smith, S.Ct. Report No. Senate 357, 84 L.Ed. Committee; 75, Congressional Vol. Finance Record, Moreover, the legislative pp. 11286 et pp. seq. et history taxing However, sold at re statute adds if an seq. article position Commissioner’s tail, consignment, measuring transaction wholesale appears at less arm’s than at otherwise that where as in our case price, tax is then the market the immediate than fair from the sale manufacturer computed ar at arm’s zvhich such length and is in there evidence the whole are ordinary ticles course of price, legislators trade, intended the producers manufacHtrcrs to be the-basis of The above italicized words thereof. legislative We relate the history. taxing words the exact statute. case the the instant articles were sold in The Manufacturers’ Tax Excise Stat- transactions than arm’s otherwise really ute Title IV of the Revenue Act length, problem and our immediate is to of 1932. 47 Stat. 259-270. As first proper determine basis of proposed the tax. the statute was in the form of a general manufacturer’s excise tax taxpayer’s We with a believe ex- business low rate on wholesale prices. preceding perience incorporation Vol. Record, Congressional p. 12013. As final- Company, had estab- ly enacted it was in the form of lished a manu- Campana’s fair facturers’ excise tax on various enumerat- change Italian Balm. of 1933 no ed articles such as prep- cosmetics or vary had toilet occurred to market conditions. (Sec. arations 603 of the Revenue Act of indicates record *10 Acts, 26 U.S.C.A.Int.Rev. page 608), public Balm the Italian trade and to the matches, furs, only jewelry, candy, change chewing same. remained the had gum corporation energy. electrical selling been the creation the Con- gress these taxes were included in the Rev- willing to which to sell temporary Act of as a obtaining at lower than it enue emer- had been gency measure to- special from wholesalers. Nor the revenue. was this increase price excise for which sold.” Sec. 619 In 1938 some of these taxes so furs, (b), 26 soaps but eliminated, 3441(b), U.S.C.A.Int.Rev.Code g., toilet e. § provided retail, and cosmetics that if an article is sold at preparations the tax on toilet on 83, Congressional consignment, Rec or less than fair retained. Vol. was ord, price p. otherwise than length transaction, an arm’s then the tax tax bill excise When the manufacturers’ (if price “shall based on for which the Committee reported was Ways out sold) computed article is on the be Means, explained to the such articles are in the floor of the on the many Representatives ordinary trade, by course of manufacturers Crisp, Chairman acting House. Mr. * * producers *And thereof Sec. Committee, tax emphasized that * * provides 619(a) “determining sold, that in levied not tax was a manufacturer’s there for which an article manufacturer’s on the but the retail * * * in- any charge shall be included manufacturer’s price. That the wholesale placing in condition article cident be the was to * * * shipment packed ready .A computation, ap- point tax starting insurance, delivery, instal- transportation, explanation again peared again and lation, required charge (not or other 75, Congressional Vol. See the bill. included) be foregoing sentence to 5693, 5694, Record, pp. * * * from the excluded be shall thing its told the Senate “The manufac- Finance. In interpreting 619(a) Committee Sec. of the stat- levy the is to proposal Treasury tax Department excise ute “charges turer’s tax stated finished in its once, article have no connection with ** * price, not state, wholesale manufacturing at its process are to- #665; Report price.” Senate retail be excluded in computing at the the tax.” Ar- Record, pp. 75, Congressional 12 Regulation 46, ticle Vol. promulgated un- 11361, 11657. der the Revenue Act of 1932. In this connection to be noted that in 1939 However, legislators realized that Congress deleted the second sentence articles manufactured all 619(a) Section and substituted the fol- of the wholesalers be- through the hands lowing: “Whether sold at arm’s public. reaching consuming fore not, transportation, delivery, insur- legislators intended situations the ance, or charge, other and the whole- price if to be the tax basis salesmen’s saler’s commissions costs Nor did established. price could be expenses advertising include costs basis to intend the than the instance, required (not foregoing sentence manufacturing costs. normal included), to be price shall be from the excluded the man- question —“Does * * *53 Stat. contemplated in- price that is ufacturer’s legislative C.A.Int.Rev.Code 3401. No § Crisp commissions?”—Mr. salesmen’s clude explanation comment given for the not in- “selling cost is that the answered change. -75, Congres- Vol. added.” tended to be Record, p. 5693. On sional follows from what has been Report and Senate Report House #708 said that the has failed to com from the indicate that plainly #665 ply with and that statute the Commis any charge hav- excluded to be basis was ing justified sioner was under circumstanc the manu- whatever connection no computing es tax on the wholesale facturing process. price. We conclude therefore -that the District erred Court in holding that legislative history From the above re- price represented inter-company the tax lated, appears a manufacturer’s findings respect basis: do not intended, (2) a tax was which would support the conclusion rendered thereon. manufacturing normal reflect costs was to tax, Selling advertising the basis whole- costs. One more if price adjusted necessary subject to exclude remains be discussed. The sell- costs, non-manufacturing ordinarily expenses ing of the sell- light meaning corporation pertain In this be such exclusive- —-which plain process becomes ly of 603 indeed. Sec. of marketing nation-wide imposes upon distributing cosmetics and toilet and the taxable —are preparations manufacturing “sold- the manufacturer not costs. The evidence * * * equivalent to 10 centum a tax sells to
4H (4) “sell thereon. District Court will As by promising that finding made a of fact did not render buys,” and the wholesaler what very thing, conclusion conclusion as thereon. The does affirmed; three (1) as to is conclusions article selling the taxable effect finding taxpayer’s (2) (3) are The reversed. regard over. times supported by (4) substantial evi- complaint alleges that the “Commissioner dence, at should ren- and the District Court failing reduce erred said thereon. appropriate sold der conclusion Campana Sales which with costs This case remanded advertising is reversed and by articles by proceed said accordance paid or incurred directions to expenses 1933, during July, opinion. Campana Sales sub- articles determining the of Sec- provisions ject to tax under (dissenting). MAJOR, Judge Circuit 1932.” Act of of the Revenue dis- an extensive entering Without into evi- taxpayer adduced At the trial cussion, briefly point what I out I shall showed, and the District dence which of the conclusion regard fallacy as the found, selling and ad- Court so appears to what reached the court Com- of the vertising costs controlling the fundamental and me as $29,792.05 pany amounted question. statute we discussion of the In our specifically District Court found charges non-manufacturing stated plaintiff at which sold computing the be excluded were to product and which contends was the add not more Further discussion proper basis “was less than the not di- the statute there: than what was said prices product fair market of the said selling and ad- of the rects the exclusion plaintiff during and sold manufactured here the character (of vertising costs 1933; July, and said sales month only nec- tax basis. shown) from the included all elements value hold, conclude, and we so essary to plaintiff’s name and trade both power had Commissioner although the tangible intangible.” record fur- this case circumstances under only not but well near nishes substantial whole- established compute tax on the By finding. conclusive to this exclude failing price, he erred in law, we bound there- well established advertís-. selling and described the above escape by. opinion the ef- seeks to employed. basis costs by reasoning that finding such fect of this spoken courts situations Other legal conclusion. To finding amounts to Bourjois, one at similar to bar. Inc. As a reasoning is not tenable. such me D.C., McGowan, 787; Id., F.Supp. v. is reached the conclusion result 510, denied, Cir., certiorari 85 F.2d received, tax basis 885; 753, 81 In 57 S.Ct. L.Ed. corpo- by plaintiff, but D.C., ecto, Higgins, F.Supp. Inc. v. corporate separate ration, recognized as a Cir., Corp. Mfg. Higgins, v. Concentrate any entity, without contention denied, certiorari 90 F.2d establishing thereby agent, plaintiff’s 551; Luzier’s, 82 L.Ed. 58 S.Ct. price re- vastly higher than a basis 608; Id, Nee, D.C., F.Supp. v. Inc. ceived, be the fair found to & Cir, 130 and Albrecht Son 106 F.2d Section The Revenue Act D.C., Landy, F.Supp. other U.S.C.A.Int.Rev.Acts, page Title prevail. In the did not cases equivalent to ten for a tax provides prevail case the instant does taxable for which the centum do points. We to two that our believe provides Section 619 two sold. article is with the decisions decision conflicts basis, establishing (a) the tax modes exist, ifBut does cases. conflict (b). By (a) the basis is determined disposed to follow we are the other excluding including designat- certain courts. necessarily refer ed items “the pleadings in this taxable article is case raised four sold.” ' incidence; points: (1) (2) arm’s if the article sold (b) Tax becomes material transaction; basis; (1) one three conditions: (3) under retail, (2) consignment, expenses. to sold selling and As (otherwise than (1), (2) (3) the District arm’s Court made the fair length transaction) less than findings fact and rendered conclusions *12 price. Concededly (1) (2) market plaintiff success of both the application. have no is material if (3) sales company was largely due to the ex- pensive fair article is sold than at less extensive done price ordinary latter, market course of in the the of which reached the total amount upon finding trade. Predicated one million dollars annum. The court that price articles taxable were wholesale plaintiff’s made the .basis of price at a than fair “not less tax liability market cost of includes price” appears provision no goods that this has 33%, 51%, cost of sales application. profit words, In other than more 16%. price half of my opinion, is basis advertising and other incurred costs plaintiff at which sold its corporation, plain- sales over which the corporation, including excluding supervision, tiff had no con- direction or such items as are designated 619(a). As trol. the fair market result If correct, this view is only portion plaintiff’s product not- remained 619(b) pertinent instant case is the. withstanding had relieved itself of sales that found in the last clause which reads: * * * costs amounted to than it ac- more “The tax under this title shall tually product. sit- received for its computed for which such ar- respect convincing uation in this alone is ticles are ordinary course ** determining that such a basis for ing price the sell- trade, by *It manufacturers plaintiff’s product is unrea- language would seem this applicable is sonable, not arbitrary. if preceding numerous sections imposing connection, opinion a manufacturers’ In this discusses pertinent phrase out through “otherwise than an arm’s Court, that length transaction,” the District in addition to find- and concludes it was plaintiff’s products were sold at other than such a I transaction. do not with, price, fair their found take conclusion, issue although ordinary regard “sold in the course I were of trade.” it as a question. debatable As I opinion recognizes “that point out, however, an have endeavored to question exclusive distributor common solution of is not decisive operation.” fact, mode of business —in premise it is immaterial in view of accept which I products that the Assuming, however, 619(b) .(3) is not sold at “less than the fair market applicable, plaintiff was entitled to re- price.” cover establishing either, both, conditions, of two (1) It must not be its sales overlooked plain that the tiff charged is not were at not less formulating a than the fair market scheme or evading device with purpose were made taxation. arm’s-length Cases such as Griffiths words, Commissioner, transactions.1 In other v. condition 60 S.Ct. (2) is immaterial established, Smith, if 84 L.Ed. Higgins vice-versa. S.Ct. 84 L.Ed. application. no. On the contrary, opinion, understand, Ias holds that- little, any, record if room leaves for doubt the wholesale company plaintiff’s product that the sale of constitutes the plaintiff, tax basis for the fide and that bona notwithstanding received ‘ the course of conduct perhaps compelled by dictated and former was fair market To the. necessity economic me, this is a strained and unreasonable deception. taint of fraud without construction of the statute —never intend- by Congress little, further, ed any, discussing finds if Without the matter —and legislative history my judgment conviction of the it that thé pointed enactment. opinion, As out in the District Court should be affirmed. .the contemplates, course, plaintiff require met ion that has plaintiff and, my has not therefore, the addition ment omit it from dis- al tax or collected thereof eussion. agree opin from its I vendees. with the