The opinion of the court was delivered by: FORMAN
This action is to recover cotton floor stock taxes exacted under the Agricultural Adjustment Act, which was held to be unconstitutional in United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477, 102 A.L.R. 914.
The procedure by which application may be made for refunds of processing and floor stock taxes imposed under the Agricultural Adjustment Act is set out in 26 U.S.C.A. Int.Rev.Acts, pages 960-965, §§ 902-907 inclusive. 7 U.S.C.A. §§ 644-649. The following conditions are prescribed under which refunds are allowed:
"(a) That he bore the burden of such amount and has not been relieved thereof nor reimbursed therefor nor shifted such burden, directly or indirectly, (1) through inclusion of such amount by the claimant, or by any person directly or indirectly under his control, or having control over him, or subject to the same common control, in the price of any article with respect to which a tax was imposed under the provisions of such Act, or in the price of any article processed from any commodity with respect to which a tax was imposed under such Act, or in any charge or fee for services or processing; (2) through reduction of the price paid for any such commodity; or (3) in any manner whatsoever; and that no understanding or agreement, written or oral, exists whereby he may be relieved of the burden of such amount, be reimbursed therefor, or may shift the burden thereof; or
"(b) That he has repaid unconditionally such amount to his vendee (1) who bore the burden thereof, (2) who has not been relieved thereof nor reimbursed therefor, nor shifted such burden, directly or indirectly, and (3) who is not entitled to receive any reimbursement therefor from any other source, or to be relieved of such burden in any manner whatsoever."
Between August 30, 1933, and November 28, 1933, the plaintiff, a manufacturer of men's socks, paid $10,939.48 to the Collector of Internal Revenue for floor stock taxes based on hosiery in the plaintiff's inventory on August 1, 1933, which had been processed from cotton. Likewise, between the same dates, plaintiff's subsidiary, The Interwoven Mills, Inc., which has since merged into and consolidated with the plaintiff, paid $18,797 to the Collector of Internal Revenue for floor stock taxes based on hosiery processed or to be processed from cotton in its inventory on August 1, 1933. Plaintiff seeks to recover both these sums, totalling $29,736.48, from the defendant.
On June 25, 1937, the plaintiff filed claims for the refund of these taxes with the Commissioner of Internal Revenue who rejected the claims on April 26, 1939.
Plaintiff's complaint contains three separate causes of action, one for each of the aforesaid sums of money and one for the total of the two sums, alleging that it bore the full tax and has not been relieved of, nor reimbursed for it, nor has it shifted that burden to others.
The defendant contends that the subsidiary shifted the tax by passing it on to the plaintiff through manufacturing costs and therefore is not entitled to any refund, the right to which it could transfer to the plaintiff if it had borne the burden of the tax, while the plaintiff contends that it is entitled to recover the tax paid by its subsidiary because it and its subsidiary are but one entity for the purpose of this Act.
The defendant contends that the plaintiff failed to establish that it bore the burden of the payment of the tax and that, in fact, plaintiff passed the tax on by an increase in prices. The plaintiff submitted that no presumption of having passed the tax on arises from the price increases made before the tax went into effect and that it has established by the evidence that plaintiff bore the full burden of the tax and did not shift it to others, although it conceded that it increased its prices before and after the imposition of the tax.
The first proposition urged by the defendant is that the plaintiff cannot recover the tax paid by its subsidiary. The Interwoven Mills, Inc., was wholly owned and controlled by the Interwoven Stocking Company, the parent company, almost all of the stock of which was owned by John Wyckoff Mettler, its president. The subsidiary manufactured goods exclusively for its parent at its parent's direction. There is evidence to show that the subsidiary made no profit and sustained no loss on any of the goods it manufactured. It regularly charged the plaintiff at estimated cost, such cost being established by a standard cost system. The plaintiff and its subsidiary occupied the same principal offices and with a few exceptions had the same directors and officers, who were chosen by the president and principal stockholder of the plaintiff. It is to be noted that the Supreme Court has construed sec. 902 of The Revenue Act of 1936 as limiting the right to a refund of taxes to the real party in interest. United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 54 S. Ct. 443, 78 L. Ed. 859; Anniston Mfg. Co. v. Davis, 301 U.S. 337, 57 S. Ct. 816, 81 L. Ed. 1143. The consumer who would ultimately pay the tax if prices were increased, or the supplier of the raw materials who would ultimately pay the tax if the price he received for the raw materials were reduced, would be the real party in interest, respectively, and not the wholesaler or manufacturer who, although having physically made the payment to the Collector of Internal Revenue, was reimbursed therefor.It was intended by means of sec. 902 to prevent the unjust enrichment of a wholesaler or manufacturer who is in a position to shift the tax to his vendor or to his vendee. The defendant offers the theory that The Interwoven Mills, Inc., (the subsidiary), charged the tax to the plaintiff through manufacturing costs and therefore the plaintiff could not claim the tax by reason of its being the transferee of the right to the claim for a tax refund by The Interwoven Mills, Inc. because the latter itself did not possess the right.
In Roomberg v. United States, D.C. 40 F.Supp. 621, a motion to dismiss the complaint was denied where the sole stockholder of a dissolved corporation sought to recover floor stock taxes paid by the corporation. The court said: "The fiction of a corporation as an entity distinct from the aggregate of individuals comprising it was designed to serve convenience and justice. There is consequently an exception recognized wherever the rule is known, namely that the fiction will be disregarded and the individuals and corporation considered as identical whenever justice or public policy demand it and when the rights of innocent parties are not prejudiced there by nor the theory of corporate entity made useless." 40 F.Supp. at page 624.
Similarly, an assignment by a corporation to its stockholders of a subsequently allowed tax refund prior to its dissolution was held to be a valid assignment where the stockholders were the only parties in interest and already owned the entire beneficial interest. Novo Trading ...