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Cones v. United States.

November 18, 1941


Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.

Author: Major

Before MAJOR and KERNER, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

Plaintiff appeals from an adverse judgment, entered February 10, 1941, in an action brought pursuant to the Revenue Act of 1936, U.S.C.A., Title 7, Sec. 644 et seq., to recover a tax assessed and collected by virtue of Section 16(a)(1) of the Adjustment Act, U.S.C.A., Title 7, Sec. 616(a)(1), commonly referred to as the Floor Stock Tax. The tax was paid prior to the decision in United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477, 102 A.L.R. 914, declaring unconstitutional that portion of the act which authorized the levy. No jurisdictional question is raised - in fact, the sole issue here, as in the court below, is whether the burden of the tax was borne by plaintiff.

The District Court made its findings of fact with which the plaintiff finds little, if any, fault. The controversy revolves largely around the proper conclusion to be drawn jfrom such facts. We are convinced that the question for decision is legal rather than factual. We shall shortly refer to the facts as found by the court. Before doing so, it seems pertinent to relate other facts as disclosed by the record so that those found by the court may be better understood.

Plaintiff was and had been for a long number of years engaged in the business of manufacturing overalls, workmens' clothes and like commodities, made largely from cotton products. On August 1, 1933, the effective date of the tax, plaintiff made an inventory of stock on hand, upon which the floor tax was assessed. The inventory disclosed 318,457 pounds of cotton upon which a tax was assessed and paid in the amount of $14,070.70. Pjrior to the hearing, certain adjustments were made.Plaintiff admitted that of the tax paid, it had billed certain vendees for the sum of $171.97 as a separate charge, which it collected, and that in certain other invoices it had included the sum of $333.93 in the invoice price of goods, which it had also collected. Plaintiff received a refund in the amount of $1,835.87 on account of goods manufactured for the Red Cross. Because of these adjustments there is now in dispute the sum of $11,728.93.

Plaintiff's general manager testified unequivocally that no part of this tax was passed on to its vendees - in other words, the burden of the tax was borne by the plaintiff. Certain exhibits were introduced by which plaintiff sought to corroborate the testimony of this witness. It is not disputed but that plaintiff kept or had no records by which it could directly trace the cotton product into manufactured goods represented by plaintiff's selling price; that from an accounting standpoint it was impossible to trace the material from its raw form into the finished product, and that a system by whic hsuch proof could have been made would have been prohibitive in cost. There is no question raised but that defendant's agents, after plaintiff filed its claim for refund, had access to plaintiff's records, correspondence and files, or that plaintiff failed to cooperate with such agents in every possible way.

The taxed inventory was purchased by plaintiff prior to August 1, 1933, some of it several months prior thereto. During the period prior to August 1, 1933, there was a rapid increase in the market price of such products. Defendant's argument is based largely, if not entirely, on the theory that plaintiff's increased selling price was such as to preclude the contention that the burden of the tax was borne by the plaintiff. Defendant, in support of such argument, compares the selling price of the manufactured products with the price paid for the raw material prior to August 1, 1933. If the case is to be decided on this basis, we think the defendant must prevail - in fact, we do not understand plaintiff to argue to the contrary. Plaintiff contends, however, that its selling price must be considered in relation to the actual or market value - in other words, the replacement value of the raw material which it had on hand at the time the tax became effective. More simply stated, shall plaintiff's original cost price of its raw material, or the replacement cost as of the date the tax became effective, be used as a base?

The issue is emphasized by the court's findings of fact. It found that plaintiff's inventory had been purchased prior to August 1, 1933, at a cost of 8› per yard; that on August 1, the market price had increased to 17› per yard; that the increase in the market price was due in part to the incidence of the processing and floor stock tax, and that the market price of 17› included said tax and anticipated labor costs; that the amount of the floor tax paid by the plaintiff was 2 1/4› per yard; that on August 1, 1933, plaintiff increased its price to include the increased cost of labor and the increased replacement cost of material as of August 1; that this increased price included the sum of 6 3/4› per yard to cover the increase in the cost of goods which plaintiff would be required to pay on and after August 1; that the goods upon which the tax was paid were sold within 30 days after August 1; that the increase in the market price did not add to the cost of the graments included in plaintiff's taxable inventory as of August 1; and that by reason of the increase in the price as of August 1, plaintiff increased its margin or profit by the sum of 6 3/4› per yard and that by doing so, the sales value of the inventory upon which the tax was levied was increased in the sum of $62,000. There is no finding as to the price per yard at which plaintiff's product was sold. As we understand plaintiff's contention, which appears not inconsistent with the court's finding, it took 17›, the market price as of August 1, deducted the 2 1/4› processing tax included therein (the processing tax was in the same amount as the floor tax), leaving 14 3/4›. The difference between 8›, the actual cost, and 14 3/4› is 6 3/4›, which represents plaintiff's margin of profit as found by the court. This does not mean that its actual selling price was 14 3/4› per yard, as there was an increased labor cost. This item, however, is comparatively small and we do not regard it as material to the question presented.

The court also found: "That the increased prices fixed by plaintiff on August 1, 1933, were calculated to and designed to, and did, recover all of plaintiff's costs, including the sum of $14,070.00, the amount of the floor stock taxes paid to the defendant."

We are inclined to agree with the plaintiff that this finding is more in the nature of a conclusion than a finding of fact. At any rate it presents the legal question here involved.

Plaintiff advances numerous theories in support of its position. It is argued that a mathematical computation from the court's findings demonstrates that it bore the burden of the tax. For intance, the court found that it increased its profits 6 3/4› per yard over the cost price of 8›. In other words, it would appear that its selling price was 14 3/4› per yard. As the market price of August 1 was 17› per yard, plaintiff's selling price was 2 1/4› (the amount of the floor tax) less than the market price. Another way of arriving at the same conclusion is to take the cost price of 8›, plus the 2 1/4› floor tax, which amounts to 10 1/4›, the amount of plaintiff's actual investment. Increasing this by 6 3/4› amounts to 17›, the replacement cost of the goods.This argument, on its face, appears rather plausible, but it ignores the real question in controversy - that is, whether plaintiff's selling price should be compared with its cost price as defendant contends, or whether it sould be compared with its replacement cost (less processing tax) as plaintiff contends.

Plaintiff also argues that the tax was not passed on because it was not billed as a separate or identificable item. In support of this position it relies strongly upon Cudahy Packing Co. v. United States, D.C., 37 F.Supp. 563, 567, 571. This is a recent decision by the District Court of the Northern District of Illinois, now pending on appeal. To comment on this question now might interfere with its proper consideration in the other case, and, furthermore, as we shall show hereinafter, we do not think a decision of this point is necessary to the instant case.

Plaintiff advances two other theories in support of its position - (1) that the margin test constituted prima-facie proof that the tax was not passed on, and (2) that it was entitled to recover the market value (less tax) of its inventory, and that when given ...

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