CORY CORPORATION and Mitchell Manufacturing Company, Delaware corporations, Plaintiffs-Appellees, v. Ernest J. SAUBER, Defendant-Appellant.
No. 12479.
United States Court of Appeals Seventh Circuit.
June 8, 1959.
Since the Taxpayers do not have the vicarious status of a lessor, the rule of Burnet v. Harmel, 1932, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199, does not apply. Dragging in the economic interest concept to defeat a claim for deduction for intangibles and depreciation on tangibles—which the Court holds Taxpayers entitled to—ignores the whole nature of that concept, the Texas law of oil and gas, the contracts of these parties, and the actual performance thereunder which we hold to be genuine and for a good business purpose. If the economic interest concept has anything to do with this case at all, then Helvering v. Elbe Oil Land Development Co., 1938, 303 U.S. 372, 58 S.Ct. 621, 82 L.Ed. 904, should be controlling. The transfer of the leases was held to be an absolute sale. The cash consideration received was declared to be capital gains, not depletable income, because nothing was reserved in the thing sold to which the assignor could look for the recovery of his capital investment. Here the 45% was sold absolutely and finally. As owners of the working interest the Faskens were more nearly in the position of a mineral lessee, not lessor, who sells a part (45%) of his lease to another for a cash consideration. In such case the cash payment is treated as capital gains, and not ordinary income subject to depletion. Hammonds v. Commissioner, 10 Cir., 1939, 106 F.2d 420, 425, citing Commissioner of Internal Revenue v. Fleming, 5 Cir., 1936, 82 F.2d 324.
To look through form to substance is one thing. To look through form and substance to find something which is not there, which none of the parties thought was there, which no law considers to have been there, and which no one, until this Court so determined, declared to be there, is quite a different thing. We cannot, as Judge, later Justice, Holmes wrote, merely by saying so, make Bunker Hill Monument into the Old South Church. Goode v. Riley, 1891, 153 Mass. 585, 28 N.E. 228. And “the thing said to be passed off must resemble the thing for which it is passed off. A frying pan cannot be passed off as a kettle.” Becker v. Loew‘s, Inc., 7 Cir., 1943, 133 F.2d 889, 893.
That, too, is a stubborn fact which leads me with like tenacity, but deference, to dissent.
Charles K. Rice, Asst. Atty. Gen., Grant W. Wiprud, Lee A. Jackson, A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., Donald S. Lowitz, Asst. U. S. Atty., Robert Tieken, U. S. Atty., Chicago, Ill., for appellant.
Edwin A. Rothschild, Stanford Clinton, Sidney M. Perlstadt, Chicago, Ill., for appellee.
Before DUFFY, Chief Judge, and SCHNACKENBERG, HASTINGS, PARKINSON, KNOCH and CASTLE, Circuit Judges.
SCHNACKENBERG and HASTINGS, Circuit Judges, on Petition for Rehearing en Banc.
Plaintiffs joined with defense counsel in a stipulation in the district court that
“The air conditioners in suit and similar air conditioners on which assessments have been made are sometimes hereinafter collectively referred to as plaintiff‘s air conditioners.
“* * *
the present civil actions are prototype or test cases to determine whether plaintiff‘s air conditioners are subject to federal excise tax.”
The district court, in finding of fact 7, found:
“It has been heretofore stipulated by the parties and found by this court that the present consolidated civil action is a prototype or test case to determine whether plaintiff‘s air conditioners are subject to excise tax.”
Plaintiffs’ counsel, in their brief, recognized the scope of plaintiffs’ liability in litigation in this case, when they said, at page 4:
“Since the ‘substantially more than $1,000,000 in federal excise taxes’ assessed against plaintiff‘s air conditioners represent 10% of the sales price, this case involves substantially more than $10,000,000 of air conditioners. Even at an average price of $200 a unit (the average price of the units in suit was less than $150), substantially more than fifty thousand air conditioning units are involved.”
Of course, the decision of this court in this case is binding only on the parties to this case, subject to their right to seek a review of the correctness of our holding, by applying to the United States Supreme Court.
Those who seek to intervene in this court as amicus curiae1 are not bound by either the stipulation of the parties in this case or our opinion and judgment. In other words, this is plaintiffs’ lawsuit, and not that of the amicus curiae. When and if the government attempts to apply our holding in this case to the amicus curiae, they have a right to litigate their case, and to seek what they consider to be a proper result for them. While our decision might be cited as a precedent in such subsequent litigation, the same as any other case holding, it would not
Notes
The principal issue in the District Court was that the Government contended the rulings referred to rated horsepower under NEMA standards. The plaintiffs contended the rulings referred to actual horsepower. The District Court found as a fact that plaintiffs’ air conditioners had not only an actual but also a rated horsepower of one horsepower. Thus, the court below found that plaintiffs’ air conditioners were not taxable. However, on this appeal we disregard the District Court‘s finding and decide the case on the basis of invalidity of a long established ruling which has been relied on by all members of the industry.
I agree with the statement in a recent decision of the Ninth Circuit in Evans v. Commissioner, 1959, 264 F.2d 502, 511, wherein the court said: “Taxpayers had a right to file their returns in reliance upon the Commissioner‘s long-continued interpretation of his own Regulations. * * * Common justice requires that it (the new regulation) be given a prospective construction only.”
I think it is no light matter to hold invalid a ruling which has stood for years. The ruling in question was made in 1948. Congress reenacted the excise statute without change in 1954. Congress was expressly advised in 1956 that the horsepower test was devised to separate household from commercial types “in accordance with legislative intent.” Congress made no change in the excise tax on air conditioners when it revised the code in 1958.
Our decision will have a serious effect on the air conditioning industry which had no previous notice that the Government would attack its own long-established ruling. Many thousands of air conditioning units have been sold. Our decision might result in attempts to collect retroactively 10% on each air conditioner sold which might be placed in the vague classification “made to meet the needs of a household.”
The tax is on the seller and can only be passed on to the buyer by the terms of a contract of sale. Any opportunity to recover such a tax is no longer available to the manufacturers. I believe our decision makes for confusion more confounded. The situation is so serious I think it should have the attention of our Court sitting en banc.
DUFFY
Chief Judge, dissented.
We have voted to deny plaintiffs’ petition for rehearing en banc.
DUFFY, Chief Judge, on Petition for Rehearing en Banc.
I concurred in the opinion of the Court herein with some reluctance. Further study and research has convinced me that I was wrong in so doing.
The matter now before us is a petition for rehearing before the full court sitting en banc or, in the alternative, for the recall of our order of March 20, 1959, for a modification of our judgment so as to affirm the judgment of the District Court. I am voting to grant the petition for a rehearing en banc. I feel I should state my reasons for so doing.
The statute taxes self-contained air conditioners of the household type,
Congress has authorized the Commissioner to promulgate rules and regulations to fill in the details in the Internal Revenue Code. Congress has authorized the Commissioner to make all necessary interpretations of the statutory language of said Code.
In our opinion herein we held revenue rulings which have been consistently in force since 1948 to be void 1) because the Act makes no reference to horsepower, and 2) the horsepower test is “inconclusive,” “uncertain” and “impracticable.” The opinion then describes a household type appliance as one “made to meet the needs of a household.” One may ask—a large household or a small one? Also, must a manufacturer in some way be able to certify what was the ultimate use of each of the thousands of air conditioners which he has manufactured? It seems to me that the test laid down in the opinion of this Court qualifies under the terms used by the Court, viz., “inconclusive,” “uncertain” and “impracticable.”
For decades the Commissioner of Internal Revenue has defined the word “household.” He has defined household type refrigerators by cubical content (S. T. 845, 1936-2 C.B. 340); household type electric fans by the length of blades