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December 23, 1992


The opinion of the court was delivered by: Richard Mills, District Judge:


The question: "Is fetal calf blood a constructive dividend?".

The vehicle: Cross motions for summary judgment.


This action arises out of a dispute between the Plaintiffs and the Defendant regarding the proper classification of income derived from the sale of fetal calf blood for income tax purposes. The McCabe Packing Company is a slaughterhouse located in Taylorville, Illinois that was started in 1942 as a sole proprietorship. In 1972, following many years of growth, the business was incorporated, and Joseph McCabe was named as president, Agnes McCabe was vice president, and John McCabe served as secretary/treasurer. The board of directors consisted of Joseph McCabe, Agnes McCabe, and John McCabe.

In 1974, the Company was approached by Riggs Biochemical Corporation (now known as the Metrix Company) to determine whether the McCabe Company would be interested in selling fetal calf blood to Riggs. Fetal calf blood is usually a worthless byproduct of the slaughtering process that is sold to a rendering company for a very nominal amount along with all of the other refuse left after the meat, organs, and hide have been extracted from the cow. However, a process was developed whereby the blood could be extracted from a calf fetus and used for various pharmaceutical research purposes. The McCabe Company had in the past attempted, with no success, to extract fetal calf blood and develop it as a byproduct. The process at that time was a difficult one that required considerable skill and training. Being a relatively small slaughterhouse, the McCabe Company decided that it did not wish to pursue this line of business. However, the McCabe Company informed John McCabe that he could extract fetal calf blood for resale if he so desired.

Consequently, John McCabe began to learn the process of extracting fetal calf blood, and he developed it into a business of his own, selling the blood he extracted to Riggs Biochemical. All of the equipment used by John McCabe in extracting the fetal calf blood was supplied by Riggs. John McCabe — since 1974 — performed the extraction of the blood outside of his duties as a manager of the McCabe Company, and all of the sales revenue from the blood was deposited into his personal bank account, with all of the income being reported to the Internal Revenue Service. John McCabe continued to extract and sell the blood to Riggs with the full knowledge of the McCabe Company until July 1, 1987. Following the death of Joseph McCabe in 1986, John McCabe became executive vice president of the McCabe Company, and at a meeting of the board of directors of the McCabe Company on June 6, 1987, the board decided that, as of July 1, 1987, the McCabe Company would begin selling the fetal calf blood as a byproduct of the slaughtering process.

Following audits conducted after 1987, the Internal Revenue Service filed notices of deficiencies for John and Camille McCabe and the McCabe Packing Company for tax years 1986 and 1987 in the amounts of $10,088 and $8,797, and $40,045 and $75,273, respectively, for improper classification of income. The Internal Revenue Service argued that the income from the fetal calf blood sales for the years 1986 and 1987 should have been reported as corporate income, rather than as personal business income. The McCabes and McCabe Packing Company paid the deficiencies and filed claims for refunds.

When the Internal Revenue Service failed to respond to the claims for refunds, the Plaintiffs filed suit for the refunds in this Court, pursuant to 28 U.S.C. § 1346(a)(1). Both parties have moved for summary judgment regarding the proper reporting of the income from the fetal calf blood sales for the years 1986 and 1987.


Under Fed.R.Civ.P. 56(c), summary judgment shall be granted if the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Black v. Henry Pratt Co., 778 F.2d 1278, 1281 (7th Cir. 1985). The moving party has the burden of showing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). A genuine issue of material fact exists when "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). In determining whether a genuine issue of material fact exists, the evidence is to be taken in the light most favorable to the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). Once the moving party has met its burden, the opposing party must come forward with specific evidence, not mere allegations or denials of the pleadings, which demonstrates that there is a genuine issue for trial. Posey v. Skyline Corp., 702 F.2d 102, 105 (7th Cir. 1983).


Based on a review of the record, there are really no disputed facts in this case, and the entire controversy appears to revolve around a disagreement between the parties regarding the proper classification of the income derived from the fetal calf blood sales. Therefore, the dispute is a legal one, which this Court is capable of resolving by means of summary judgment.

The tax deficiency determinations of the Commissioner of the Internal Revenue Service are subject to a rebuttable presumption of correctness. Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 291, 79 L.Ed. 623 (1935). Therefore, the taxpayer has the burden of demonstrating that the determination of the Internal Revenue Service was in error. Based on the arguments presented and a ...

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