343 F. Supp. 408

CONTINENTAL TRUCK INDUSTRIES, INC., Plaintiff, v. UNITED STATES of America, Defendant.

No. 68-C-1291.

United States District Court, E. D. New York.

March 2, 1972.

*409Shea, Gallop, Climenko & Gould, New York City, for plaintiff.

Robert A. Morse, U. S. Atty., E. D. of New York, Brooklyn, N. Y., for defendant.

MISHLER, Chief Judge.

This is an action for refund of taxes paid. Plaintiff is and was at all times relevant to this action a corporation organized under the laws of the State of New York and having its principal place of business at 61-50 Maurice Avenue, Queens, New York, within the Eastern District of New York. Plaintiff seeks the recovery of $10,094.49, principal and interest, that amount having been assessed against plaintiff as unpaid manufacturer’s excise taxes for the period beginning on October 1, 1961 and ending December 31, 1966. Payment of the assessment was made in 1967 and a claim for refund was duly filed in 1968 on which no action has yet been taken by the Internal Revenue Service. Jurisdiction in this court is proper under 28 U. S.C. § 1346(a) (1).

The ease comes to this court on stipulated facts, the only issue being one of law.

The Facts

Plaintiff makes and sells truck bodies. The bodies are made to order for plaintiff’s customers, who purchase truck chassis and have them delivered to plaintiff’s place of business in Queens. Plaintiff then builds the body, attaches it to the chassis, and delivers the finished truck to the customer.

Plaintiff has three classes of customers: 1. Consumers — these are individuals or firms who use the truck purchased from plaintiff in their trade or business; 2. Retailers — (Dealers)— these are firms which resell the trucks purchased from plaintiff to others who actually use the trucks; 3. Renters— these are individuals or firms which are in the business of renting or leasing trucks to other individuals or firms who use the trucks in their trade or business.

Plaintiff sells the same type of truck to each of the above classes of customers at the same price. 1

In computing the excise tax due on its sales of truck bodies pursuant to 26 U. S.C. §§ 4061, 4216, plaintiff used as its tax base, during all the period in question, 100% of its sales price on sales to retailers and 75% of its sales price on sales to consumers and renters. The government denied the taxpayers’ claim of 75% of the sales price to renters as its tax base and computed the assessment on 100% of the sales price to renters as the tax base for the imposition of the manufacturer’s excise tax.

The Arguments

Plaintiff argues that the sales it made to renters were sales at retail within the meaning of 26 U.S.C. § 4216 and that it was thus allowed to use a constructive sales price in computing its excise tax liability on those sales. Plaintiff further argues that where there are no sales to wholesale distributors, as in its case, the proper constructive sales price to be used is 75% of the retail price.

*410Defendant admits, for the purposes of this suit only, that the sales to renters were sales at retail. (Defendant’s Trial Brief, p. 4). However, defendant resorts to a complex argument to the effect that, even where plaintiff’s sales to renters characterized as “retail” sales, the tax base for excise tax purposes should still be 100% of the sales price. Alternatively, defendant argues that if a constructive sales price is warranted, it should be established by the “cost plus 10 percent” rule.

The question presented to this court is thus how to establish a constructive sales price pursuant to 26 U.S.C. § 4216(b) (1) where the price of the goods to consumers is the same as it is to retailers (i.e., at wholesale), and where there is no established course of trade between the manufacturer and wholesale distributors.

The Law

Since 1932 there have been provisions in the various revenue statutes and codes for a manufacturers’ excise tax to be placed on sales by a manufacturer of automobile truck bodies.2 In the 1954 Code, which is applicable to the instant case, the section which imposes the tax is § 4061(a). The language of this statute is relatively simple:

(a) Automobiles — There is hereby imposed upon the following articles (including in each ease parts or accessories therefor sold on or in connection therewith or with the sale thereof) sold by the manufacturer, producer, or importer a tax equivalent to the specified percent of the price for which so sold,:
(1) Articles taxable at . . . percent, . . .
X- * -X- •X* -X* X'
Automobile truck bodies
******
[Emphasis supplied.]

Although § 4061(a) and its precursors make no mention of any distinction to be made between the treatment accorded manufacturers’ sales at different levels of distribution, it is evident that there was a Congressional intent to regularize the amount of tax payable by a manufacturer on a given item, regardless of the level of distribution at which it was sold by said manufacturer. See Act of June 6, 1932, ch. 209, § 619(a), 47 Stat. 267. That act, and its later analogs 26 U.S.C. § "4216 (Int.Rev.Code of 1954) and Int.Rev.Code of 1939, ch. 29, § 3441, 53 Stat. 416, provide that a manufacturer who sells at retail will only have to pay an excise tax based on “the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof . . .” 26 U.S.C. § 4216(b) (1). [Emphasis supplied.]

What is now the first sentence of 26 U.S.C. § 4216(b) (1) remained substantially the same from, 1932 to 1958, and was the entire provision relating to constructive sales price. In 1958, Congress amended this sub-section by adding substantial new matter. Act of September *4112, 1958, Pub.L. 85-859, §§ 115, 116, 117(b), 72 Stat. 1279-81,. amending 26 U.S.C. § 4216. This new matter being highly relevant to the case at hand, the entire first two paragraphs of sub-section 4216(b) are set out below, the non-underlined matter being the text of the constructive sales price provision as it read from 1932 to 1958, and the underlined portion being the new additions of 1958:

§ 4216(b) Constructive sale price-—
(1) In general. — If an article is—
(A) sold at retail,.
(B) sold on consignment, or
(C) sold (otherwise than through an arm’s length transaction) at less than the fair market price,
the tax under this chapter shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate. In the case of an article sold at retail, the computation under the preceding sentence shall be on whichever of the following prices is the lower: (i) the price for which such article is sold, or (ii) the highest price for which such articles are sold to wholesale distributors, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate. This paragraph shall not apply if paragraph (2) applies.
(2) Special rule.- — If an article is sold at retail or to a retailer, and if—
(A) the manufacturer, producer, or importer of such article regularly sells such articles at retail, or to retailers, as the case may be,
(B) the manufacturer, producer, or importer of such article regularly sells such articles to one or more wholesale distributors in arm’s length transactions and he establishes that his prices in such cases are determined without regard to any tax benefit under this paragraph,
(C) in the case of articles upon which tax is imposed under section 4061(a) (relating to automobiles, trucks, etc.), the normal method of sales for such articles within the industry is not to sell such articles at retail or to retailers, or combinations thereof, and
(D) the transaction is an arm’s length transaction, the tax under this chapter shall (if based on the price for which the article is sold) be computed on whichever of the following prices is the lower:
(1) the price for which such article is sold, or
(ii) the highest price for which such articles are sold by such manufacturer, producer, or importer to wholesale distributors (other than special dealers).

Both the original provision and the current subsection evidence an intention on the part of Congress not to tax manufacturers on the sales price of the goods sold at retail, but rather to erect an artificial “constructive sale price” more nearly approximating the manufacturer’s ordinary sales price, and to compute the tax on the latter price. The difficulty experienced by the current parties arises when they differ over how one arrives at that constructive sales price.

The old constructive price provision, i. e., the first sentence of the current § 4216(b) (1), made no mention at all of how the constructive price was to be arrived at, save the mention given to “the price for which such articles are sold, in the ordinary course of trade . . .” The problem was solved by the adoption of regulations under the 1939 Code, which stated that where a manufacturer had an established practice of selling his goods at wholesale, that price would be *412the constructive sale price for the goods which he sold at retail.3

The problem with the solution arrived at by the Secretary in the Regulations just cited is that it provides for only two levels of distribution, wholesale and retail. This is in disregard of the fact, of which judicial notice is taken by this court, that sales “at wholesale” can be subdivided into sales to retailers and sales to jobbers. Different prices may or may not be charged to each. Nevertheless, Congress may be said to have ratified the use of these ambiguous terms, “retail” and “wholesale,” by reenacting, until 1958, the statutory provisions to which they apply several times after their initial promulgation, without changing the law.

There can be no doubt, however, that the language added by Congress in 1958 was intended to change the situation to the end that the base price used in arriving at a constructive sale price would be the price charged by the manufacturer to jobbers or “wholesale distributors” and not the price charged by the manufacturer to retailers having a direct sales relationship with the manufacturer. This conclusion is reinforced not only by the plain meaning of the additions to sub-section 4216(b) but also by the legislative history of the amendments and the temporary regulations issued in regard thereto.

The Senate Report on the legislation which would become, without any substantial amendments, the additions to § 4216(b), commented as follows (S.Rep. No. 2090, 85th Cong., 2d Sess., as cited in 3 U.S.Code Cong. & Admin.News [1958] p. 4418):

(d) Where manufacturers sell to consumers
As indicated above, paragraph (1) of section 4216(b) as it appears in the bill is the constructive price provision in existing law except for one modification.
In the case of a sale to consumers, existing law has generally been interpreted as requiring the constructive price to be determined by reference to the price for which such or similar articles are sold by manufacturers to retailers. .
This provision [the new second sentence in § 4216(b) (1)] will not result in the establishment of a constructive price in any new cases, but rather will provide that where a constructive price is already required by existing law, the price generally will be established at the price to wholesalers, rather than at the price to retailers.
[Emphasis supplied.]

No permanent regulations have yet been issued under the amended code section. Temporary regulations were issued, however, and these too support the conclusion that Congress meant what it said when it altered the usual manner in which a constructive sale price was arrived at. Thus, 26 C.F.R. § 148.1-5(d) (1) defines the term “wholesale distributors,” which is used in the text of the statute, as follows: “The term ‘wholesale distributors’ means persons who customarily resell to others who in turn resell.”

In light of the preceding evidence, and the plain meaning of the words of the statute, this court must conclude that where the special rule of § 4216(b) (2) does not apply, and the manufacturer has made retail sales to consumers, the constructive sale price for use in computing taxes will be either (a) the price charged to wholesale distributors if the manufacturer “has an established bona fide practice of selling *413such articles in substantial quantities to wholesale distributors,” or, (b) if the manufacturer has no sales to wholesale distributors, a fair market price to be determined by the Commissioner. However, a ceiling is set on the constructive sale price determined under either (a) or (b), in that in no event can the constructive sale price be higher than the price at which the goods were actually sold at retail. See 26 C.F.R. § 148.1-5(b) (1).

In the instant case, plaintiff concededly does not sell its products to wholesale distributors. Thus, a fair market price is to be determined by the Commissioner. This “fair market price,” must, by the intendment of the statute, be determined with regard to the market between manufacturers and wholesale distributors, and not with regard to the manufacturer-retailer or manufacturer-consumer markets. Such a determination has not been made by the Commissioner.

Plaintiff asserts the contrary. It points to Revenue Rule 54-61, 1954 Cum.Bull. 259, and deduces therefrom that the Commissioner has determined that the constructive sale price on truck bodies is to be 75% of the retail price.4 *414It is true that the ruling cited by plaintiff does decide on 75% of the retail price as the correct constructive price for truck bodies where the manufacturer sells at retail. However, that ruling was promulgated pursuant to the 1939 Code and the regulations issued thereunder. Accordingly, the ruling assumes that only two levels of distribution exist. In this regard it is nullified by the amendments made to the statute in 1958. Dixon v. United States, 381 U.S. 68, 74, 85 S.Ct. 1301, 1305, 14 L.Ed.2d 223 (1965); Manhattan General Equipment Co. v. C.I.R., 297 U.S. 129, 134, 56 S.Ct. 397, 400, 80 L.Ed. 528 (1936). The ruling, and the regulations prior to the amendment of the statute, assumed that the constructive price should equal the price to retailers. This assumption may have been correct prior to 1958, but it is no longer so by reason of the changes made in that year.5

The Commissioner’s prior ruling having been rendered a nullity by the passage of the amendments in 1958, no present percentage guideline exists for the computation of the constructive price. Defendant argues that in this event the cost plus ten percent method ought to be used to determine the constructive price. As to the “cost” element, this court can see no harm in its use, it having been sanctioned by Congressional committee reports, court decisions, and revenue rulings which are still effective.6 This court does not reach the questions concerning the components of “cost,” however, because of the difficulties it finds with the ten percent profit calculation.

The ten percent profit allocation originated under the old law.7 There is no reason to doubt that the figure was set with relation to the usual profit margin in sales to retailers, rather than sales to wholesale distributors, as directed by the then-current interpretation of the law. This leads us to doubt that ten percent is the correct figure to be used nowadays, when the relevant sales price is that to the wholesale distributor rather than the retailer. In such circumstances it is again up to the Commissioner to determine a new figure.

The Secretary of the Treasury or his delegate has failed to determine a constructive sales price in this instance where the manufacturer does not have significant sales to wholesaler-distribu*415tors. Without it the plaintiff’s tax liability pursuant to 26 U.S.C. § 4216 cannot be determined. The defendant is directed to seek a retroactive regulation or ruling, 26 U.S.C. § 7805, setting forth the manner in which a constructive sales price is to be determined under the facts of this case, which regulation or ruling shall be in accordance with the opinions expressed herein.

The court will hold in abeyance its final determination pending the promulgation of the regulation or ruling and the results of the tax assessment pursuant thereto.

Meanwhile, the court retains jurisdiction of this case for any further or different application with reference to the determination of the issue.

So ordered.

Continental Truck Industries, Inc. v. United States
343 F. Supp. 408

Case Details

Name
Continental Truck Industries, Inc. v. United States
Decision Date
Mar 2, 1972
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343 F. Supp. 408

Jurisdiction
United States

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