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
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 ...