ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Before: SEITZ, Chief Judge; SLOVITER, Circuit Judge; and SAROKIN, District Judge*fn*
The cross appeals before the court in this matter involve when the federal manufacturer's excise tax should be imposed and the proper method for computing the tax. Appellant and cross-appellee Strick Corporation ("Strick") appeals from a judgment of the district court which denied its claim for a refund of an alleged overpayment of the excise tax, plus interest, during all calendar quarters of 1974 through 1978. The taxpayer claimed below that transfers of its products between itself and a related corporation for a fair market price were not sales within the meaning of section § 4061(a) of the Internal Revenue Code of 1954 (the "Code"). Appellee and cross-appellant United States appeals from that part of the same judgment which invalidated the so-called "cost-floor alternative" method of computing the excise tax and upheld Strick's claim of a tax credit for overpayment of tax, plus interest, from the beginning of 1972 through the first quarter of 1978.
We affirm the decision of the district court denying the taxpayer's refund claim in connection with transfers to the related corporation, but on a ground different from that relied upon below.We reverse the determination of the court below that the cost-floor method of computation is invalid.
I. THE GOVERNMENT'S APPEAL -- THE COST-FLOOR ALTERNATIVES
Strick is a Pennsylvania corporation which engages principally in the manufacture of truck and truck trailer chassis and bodies. As such, pursuant to section 4061(a) of the Code, it is subject to a manufacturer's excise tax of 10% of the price for which it sells its products.*fn1
During the years 1972 to 1978 inclusive, Strick sold substantially all of its truck and trailer bodies directly to user-consumers ("at retail"). Under these circumstances, the manufacturer's excise tax is computed on a constructive wholesale sale price, "as determined by the Secretary."*fn2 Regulations issued pursuant to the statute provide that in the absence of an established bona fide practice of selling articles to wholesale disttributors, "a fair market price will be determined by the Commissioner." 26 C.F.R. § 148.1-5 (1982). The price thus determined may not exceed the actual retail price of the article. Id. In a revenue ruling issued in 1954, the IRS determined that the constructive wholesale price would be the higher of 75% of the retail price of the truck or trailer body or the manufacturer's costs of manufacturing ("the cost-floor alternative"). Rev. Rul. 54-61, 1954-1 C.B. 259. It is undisputed that Strick is a high-cost manufacturer and that during the 1972-1978 period, its manufacturing costs exceeded 75% of the retail price. Strick therefore paid excise tax based on its cost of manufacture during this period.
Section 4216(b) was amended in 1978 to preclude use of the administratively developed cost-floor alternative as a basis for determining a constructive wholesale price. Pub. L. 95-458, 92 Stat. 1255.*fn3 In October 1978, Strick filed claim for a tax credit in the amount of $5,046,096, later reduced to $4,758,957, alleging that the cost-floor alternative method of calculation was invalid. Pursuant to section 6416(f) of the Code, Strick took a credit for this amount on excise tax returns filed for the third and fourth quarters of 1978 and the first quarter of 1979. The government has filed a counter-claim for this amount.The amount of the claimed credit represents the difference between the taxes paid from 1972 through the first two quarters of 1978 and the amount that would have been paid if the tax had been calculated on 75% of the established retail price.The district court sustained the taxpayer's claim. The government appeals from this decision.
The district court held that the cost-floor alternative contained in Revenue Ruling 54-61 was invalid because, contrary to the congressional intent that the constructive sales provisions be administered uniformly, the cost-floor alternative puts a high-cost manufacturer such as Strick at a competitive disadvantage. The government contends that Congress never contemplated perfect uniformity in tax liability and intended only to avoid, insofar as possible, inequalities between manufacturers selling at wholesale and those selling at retail. The government also argues that the taxpayer has not met its burden under section 6416(a) of the Code to demonstrate that it has not passed along the cost of the allegedly excessive tax to its customers.
The evidence below was as follows: the truck and truck trailer manufacturing industry is highly competitive and sales may be won or lost based on as little as a $50 or $100 difference in the price offered by competitors. Strick incurs higher manufacturing costs than do some of its larger, vertically integrated competitors because Strick purchases many component parts from outside sources. Calculating the excise tax against Strick's already higher costs increases the taxpayer's burden relative to others in the industry. The economic disadvantage created by the cost-floor alternative method is exacerbated when the volume of orders is low.During these periods, the cost per unit rises and so therefore does the excise tax. There was also testimony at trial that audit expenses for a manufacturer paying the excise tax on the cost-floor alternative basis were significantly higher. Strick treats the manufacturer's excise tax as a fixed cost and factors it into the price offered to customers. Customers ordinarily do not inquire into the tax component.
As the district court recognized, it is settled law that administrative rules contained in treasury regulations are not to be disturbed unless they are plainly contrary to statute. Commissioner v. South Texas Co., 333 U.S. 496, 501, 92 L. Ed. 831, 68 S. Ct. 695 (1948). This deference extends to revenue rulings. Whattoff v. United States, 355 F.2d 473, 478 (8th Cir. 1966); Commissioner v. O. Liquidating Corporation, 292 F.2d 225, 231 (3d Cir.), cert. denied, 368 U.S. 898, 7 L. Ed. 2d 94, 82 S. Ct. 177 (1961).
In assessing whether a treasury regulation is consistent with the congressional mandate, the Supreme Court has stated that the court must look to whether the regulation harmonizes with the plain language of the statute, its origin and its purpose. National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, 477, 59 L. Ed. 2d 519, 99 S. Ct. 1304 (1979). The regulation will have particular force if issued contemporaneously with the governing statute. Id. Other relevant considerations are the length of time the regulation has been in effect, the reliance that has been placed on it, the consistency of the interpretation expressed and the degree of scrutiny that Congress has devoted to the regulation during the time it has been in effect. Id. These considerations also appear relevant where the challenged administrative interpretation is expressed in a revenue ruling.However, the court recognizes that although a revenue ruling may provide some guidance, it is not entitled to the same deference which is extended to a treasury regulation.
Although Strick emphasizes the competitive disadvantage in which it is placed by virtue of the cost-floor alternative and although the district court made a factual finding to that effect, the issue is whether this competitive disadvantage makes the method plainly contrary to section 4216(b). The parties concede that this issue is purely a question of law and is fully reviewable. See Joseph Lupowitz Sons, Inc. v. Commissioner, 497 F.2d 862, 864 (3d Cir. 1974). It is also clear that, despite the rejection of the cost-floor alternative by Congress in 1978, the validity of the ruling must be examined as of the time of its issuance and at each point of significant amendment to the statute thereafter. The legislative history accompanying Public Law 95-458 expressly states that no inference is to be drawn from the amendment "with regard to controversies between taxpayers and the Service concerning either the validity of the cost-floor rule or determinations of cost for taxable transactions which occurred before the effective date of the legislation." S. Rep. No. 95-1127, 95th Cong. 2d Sess. 3, reprinted in 1978 U.S. Code Cong. & Ad. News 2904, 2907. See also United States v. Price, 361 U.S. 304, 313, 4 L. Ed. 2d 334, 80 S. Ct. 326 (1960); F.W. Fitch Co. v. United States, 323 U.S. 582, 586, 89 L. Ed. 472, 65 S. Ct. 409 n.2 (1944).
Based upon a careful review of the prior versions of section 4216(b), the relevant legislative history and the relevant case law, we conclude that the promulgation of the cost-floor alternative was a valid exercise of the Commissioner's discretionary authority under the statute.
We note initially that the plain language of the governing statute expressly grants discretionary power to the Secretary to determine a constructive sales price. Thus, if an article is sold at retail, the tax imposed by section 4061(a) is to 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." 26 U.S.C. § 4216(b)(1) (Supp. V 1981). This discretionary grant may be traced back to section 3441(b) of Chapter 29 of the Internal Revenue Code of 1939, which also provided that in the case of a manufacturer who sold only at retail, the excise tax imposed by the chapter would ". . . 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 Commissioner." Internal Revenue Code of 1939, c.29, § 3441(b), 53 Stat. 1, 416 (repealed, 1951). The plain language of the statute, therefore, reveals a consistent and expressly stated congressional policy to accord the Secretary broad discretion in fixing a constructive sales price.
The legislative history of the constructive sales price provision reflects an origin and purpose to create an artificial wholesale selling price for manufacturers who sold only at retail. Because the excise tax is ordinarily levied against the wholesale selling price, a constructive price was needed for manufacturers selling at retail so that the tax burden on these manufacturers would approximately the norm. See Continental Truck Industries, Inc. v. United States, 343 F. Supp. 408, 410-11 (E.D.N.Y. 1972). Thus, the report of the House of Representatives accompanying the Revenue Act of 1932, which first imposed the manufacturer's excise tax, stated:
It is of utmost importance that the tax be imposed and administered uniformly and withou discrimination. Each member of a competitive group must pay upon substantially the same basis as all his competitors, even though his sales methods may differ. Consequently, the bill requires that every effort be made to ascertain the manufacturers' or producers' price at the place of manufacture or production. In the case of those commodities which are ordinarily sold at wholesale, this price will be the price at which the manufacturer sells to the wholesaler, even though the particular sale is at retail. This price may be established with respect to any particular sale or class of sales, ...