#### EARLE C. ANTHONY (INC.) v. THE UNITED STATES.

[No. 21T-A.

Decided May 1, 1922.]

*On the Proofs.*

*Excise taco; automobile dealer; sale and lease.*— Where a wholesale and retail dealer sells an automobile for $1,100 and delivers possession thereof to the purchaser, and receives in payment $500 in cash and 12 promissory notes for $50 each, payable on the 15th of 12 successive months thereafter, with interest at *260the rate of 8 per cent per annum, the said deferred payments being secured by a so-called lease to run for 12 months, such automobile is not “ held and intended for sale ” within the meaning of section 602 of the act of October 4, 1917, 40 Stat. 317, and the dealer is entitled to recover the additional excise tax paid thereunder, with interest at the rate of 6 per cent per annum to the date of judgment, as provided in section 1324 of the act of November 23, 1921, 42 Stat. 224, 316.

*The Reporter's*statement of the case:

*Mr. Spencer Gordon*for the plaintiff. *Covington & Bwr-ling*were on the briefs.

*Mr. Fred K.*Dyar, with whom was *Mr. Assistant Attorney General Robert IT.*Lovett, for the defendant. *Messrs. Oarl A. Mapes*and *J. G.*Korner, jr., were on the briefs.

The automobiles sold under the lease contracts were “ held and intended for sale” by plaintiff on October 4, 1917, within the meaning of section 602 of the act of October 3, 1917. The so-called lease contract, under which the automobiles were sold, was a conditional sale. The contract makes it clear that it is the title or property which is intended to be sold, for it expressly reserved (held) this title until all the payments under the contract were fully made. This title was so held by the dealer on October 4,1917, with the intention of being conveyed (sold) at a date subsequent to October 4,1917. Ownership is taxed, not possession.

The contract under consideration was in the form of a lease with the stipulation that upon the performance of certain conditions by the lessee the latter might become the purchaser of the property. There were not two transactions contemplated in this contract. The agreement was directed to the conveyance of title to the car, and, pending this event, delivery was made and a stipulation entered into providing for the payment of the purchase price in installments, which were denominated “ rent.”

The mere use of words by contracting parties can not change the legal effect of an instrument. If these contracts are, in law, conditional sales, the parties can not, by the mere expedient of calling them something else, make them such. *Willis ton on*Sales, sec. 336; *Lundy Furniture Go.*v. *White,*60 Pac. 759.

*261Where, in a conditional sale of personal property, the title is reserved in the vendor until the performance of given conditions by the vendee, the transfer of this title to vendee determines the time of the sale and not the delivery of the property.

The contracts further specified that upon the completion of the installments mentioned the vendees might pay to the vendor an additional sum of one dollar, whereupon the vendor agrees to execute a bill of sale for the car. ■ The passing of title is the element essential to the determination of the time of a sale. If the transfer or passing of title is held in abeyance under the terms of a contract, the transaction is executory only. A retention of title in the vendor is perhaps the most frequent condition of conditional sales. *Perkins*v. Mettler, 68 Pac. 384; *Harkness*v. Russell, 118 U. S. 663; *Bailey*v. *Baker lee Machine*Go., 239 U. S. 268; *Holt*v. Henley, 232 U. S. 631; *In re Terrell,*246 Fed. 143; *GoggiTl*v. *Harford, ds New Haven Ry.,*3 Gray 545; *Liver*v. *Mills,*101 Pac. 300; *Oakland Bank*v. *Galif. Brick Go.,*191 Pac. 524; *Bierce*v. Hutchins, 205 U. S. 341; *Van Allen*v. *Frances,*123 Calif. 414.

As said in *Harkness*v. *Russell, supra:*

“ Where the buyer is by the contract bound to do anything as a condition, either precedent or concurrent, on which the passing of the property depends, the property will not pass until the condition be fulfilled, even though the goods may have been actually delivered into the possession of the buyer.”

In the instant case the contract clearly stipulates the title to the cars should remain in the vendor until the full price of each automobile was paid. Every effort was made, as the contract shows, to retain title and control in the vendor. It is unquestionably clear that it was the intent of the lessor that the sale should not take place until final compliance with the contract by the lessee. Under these circumstances a proper case is presented for invoking the doctrine of estoppel. The plaintiff used his utmost endeavor to make the contract appear to be a lease rather than a sale, with the object of reserving title to the property to itself and to prevent the vendee from obtaining any legal or equitable title until the sale was finally consummated. After specifically *262providing in the contract that it is not a sale, the plaintiff now, when charged by the United States with the payment of taxes on the automobile, attempts to show that it did not hold and intend these automobiles for sale on October 4, 1917.

The following are the facts of the case as found by the court:

I. The plaintiff, Earle C. Anthony (Inc.), is a corporation organized under the laws of the State of California and doing business in the State of California, and at the time hereinafter referred to was engaged in the business of dealing in automobiles at wholesale and retail.

II. By the war revenue act approved October 3, 1917, 40 Stat. 300, it was provided:

“ Sec. 600. There shall be levied, assessed, collected, and paid—

“ *(a)*Upon all automobiles, automobile trucks, automobile wagons, and motor cycles, sold by the manufacturer, producer, or importer, a tax equivalent to three per centum of the price for which so sold: * * *

*“*Sec. 602. That upon all articles enumerated in subdivisions *(a),*(5), («), (/), *(g), (h),*(*), or *(j)*of section six hundred, which on the day this act is passed are held and intended for sale by any person, corporation, partnership, or association, other than (1) retailer who is not also a wholesaler, or (2) the manufacturer, producer, or importer thereof, there shall be levied, assessed, collected, and paid a tax equivalent to one-half the tax imposed by each subdivision upon the sale of the articles therein enumerated. This tax shall be paid by the person, corporation, partnership, or association so holding such articles.

í$í í[í «í». í»

“ Nothing in this section shall be construed to impose a tax upon articles sold and delivered prior to May ninth, nineteen hundred and seventeen, when the title is reserved in the vendor as security for the payment of the purchase money.

“ Sec. 1005. That the Commissioner of Internal Bevenue, with the approval of the Secretary of the Treasury, is hereby authorized to make all needful rules and regulations for the .enforcement of the provisions of this act.”

Pursuant to the authority contained in section 1005, the Commissioner of Internal Be venue, with the approval of the Secretary of the Treasury, made certain rules and regu*263lations for the enforcement of the provisions of said act, known as Regulations No. 44, which provided in part as follows:

“Art. X. *Automobiles: Articles not taxable.*— Used or second-hand automobiles are not subject to the tax. * * * ”

III. On October 4, 1917, the day on which the war revenue act became effective, certain Reo automobiles were in the physical possession of various persons in the State of California under the following circumstances:

The plaintiff, Earle C. Anthony (Inc.), was a wholesale and retail dealer in Reo automobiles. During the period between May 9, 1917, and October 4, 1917, eighty-foür Reo automobiles were sold and delivered by the plaintiff to various persons in the State of California under a form of agreement which purported to be a lease. Physical possession of the automobiles was given to the various so-called lessees when the respective agreements were made, at different dates between May 9, 1917, and October 4, 1917, and payments were made in each case in accordance with the terms of the contracts. The said automobiles were put into service by the various so-called lessees on the dates of the various so-called leases and were being run by them on October 4,1917. They were not in the physical possession of Earle C. Anthony (Inc.) on that date.

IV. On October 4,1917, when the war revenue act became effective the payments on the above-mentioned contracts, under which the automobiles were delivered, had not been completed and the same were not completed until after that date. The total factory cost of said automobiles was $67,-369.67;.the total sale price of said automobiles was $104,-438.23, of which $51,954.31 had been paid and $52,483.92 remained unpaid on October 4, 1917. Earle C. Anthony (Inc.) did not include the automobiles hereinbefore referred to as automobiles “ held and intended for sale ” under section 602 of the war revenue act in computing its tax liability.

V. On or about August 20, 1918, the collector of internal revenue, Los Angeles, California, made demand on the plaintiff for $1,010.55 additional assessment which had been made by the Commissioner of Internal Revenue on the *264theory that it was a tax of l-J per cent on $67,869.67, the total factory cost of said automobiles.

YI. Earle C. Anthony (Inc.), on or about August 23, 1918, filed with the collector of internal revenue, 'Los Angeles, California, a claim in abatement. Said claim for abatement was rejected by the Commissioner of Internal Eevenue by letter of November 5, 1918.

VII. Thereafter, upon demand by the collector of internal revenue at Los Angeles, California, and under duress and protest, the plaintiff, on March 29, 1920, paid said collector said taxes, amounting to $1,010.55, with penalty of 5 per cent, amounting to $50.53, and interest amounting to $192.09, in all $1,253.17.

VIII. The whole of said sum of $1,253.17 was duly turned over to the United States by the said collector in the usual course of his duties, and the whole of said sum of $1,253.17 is, on the date of filing of this petition, now retained and held by the United States.

IX. On or about October 26, 1920, the plaintiff filed with the collector of internal revenue, Los Angeles, California, a claim for refund. Said claim for refund was in due course forwarded to the Commissioner of Internal Eevenue and was by him rejected by letter dated December 29, 1920.

X. The plaintiff has at all times borne true allegiance to the Government of the United States and has not in any way voluntarily aided, abetted, or given encouragement to rebellion against said Government; the plaintiff is the sole and absolute owner of the claim herewith presented; it has made no transfer or assignment of said claim or any part thereof.

Graham, Judge,

delivered the opinion of the court:

This case involves the construction and meaning of sections 600 and 602 of the act of October 3, 1917, 40 Stat. 300, 317, 318, entitled “An act to provide a revenue to defray war expenses, and for other purposes.” These sections are part of Title VI of this act dealing with “ war excise ” taxes. The articles mentioned therein and made subject to tax are new and by way of addition to the miscellaneous subjects of tax contained in the act of September 8, 1916, 39 Stat. 756, under the title therein of “Miscellaneous articles.” *265The subject matter and wording of these sections were after-wards to some extent changed by the act of April 24, 1918, under Title IX of said act dealing with “excise taxes.” An inspection of these two sections discloses that the tax fundamentally was intended to be and was what is known as a sales tax; that is, a tax on the selling price of the article taxed.

The question involved here is whether a retailer who is also a wholesaler is liable for a tax on machines sold at retail under said sections 600 and 602.

Section 600 levied a tax on the sale price of the articles sold by the manufacturer, producer, and importer. The section covered 10 subdivisions, relating to different classes of articles, including automobiles, automobile trucks, automobile wagons, and motor cycles in one subdivision; piano players and graphophones, etc., in another; moving-picture films in another; and in other subdivisions are athletic articles, toilet articles, jewelry, cameras, pills, and chewing gum. As stated, this tax was payable by manufacturers, producers, and importers. Section 602 levied an additional tax upon all of these different articles, except moving-picture films, of one-half of the tax imposed by each of the said subdivisions upon the sale of the articles mentioned therein where the articles at the time of the passage of .the act were “held and intended for sale by any person, corporation, partnership, or association other than (,1) a retailer who is not also a wholesaler, or (2) the manufacturer, producer, or importer thereof.”

It will be seen that this additional tax is on what the marginal note of the statute denominates “floor stock” which is “ held and intended for sale.” It thus appears that in order to be subject to this tax the article must be “held and intended for sale ”; that is to say, if it has already been “ sold ” it is not subject to the tax, whether in the hands of a retailer, or a retailer who is also a wholesaler, or a wholesaler, or manufacturer, producer, or importer. So that the first question to be determined is whether under the contract of sale used by the plaintiff in transferring these machines *266to the individual purchasers thereof they are to be treated as “ sold ” or as “ held and intended for sale.”

Before discussing the contract specially it is to be noted as indicative of the purpose and intention of Congress that the subsequent revenue act of February 24, *1919,*in dealing with this same question of “ excise taxes ” and sales of automobiles, provides that upon articles “sold or leased ” by the manufacturer, producer, or importer a tax shall be levied, indicating that “leased” articles were to be treated as “sold” articles.

The conclusion from the foregoing would be that cars sold and delivered under a lease where the vendor retained title were not “ held and intended for sale ” within the meaning of section 602, and that the plaintiff, therefore, was not liable for a tax on articles leased. However, attention has been directed to the concluding paragraph of said section 602, which reads as follows:

“Nothing in this section shall be construed to impose a tax upon articles sold and delivered prior to May ninth, nineteen hundred and seventeen, where the title is reserved in the vendor as security for the payment of the purchase money.”

This paragraph conveys the suggestion that it was the intention of Congress to treat a sale and delivery of a car “ where the vendor retained title ” not as a sale, and that if the car was transferred to a lessee under a lease similar to that in question here, it was to be treated as a car “ held and intended for sale.” It is not possible to reconcile this suggestion as to the intention of Congress with the apparently plain purpose of the act as hereinbefore stated, as it is in substance treating an article sold and delivered under a so-called lease as not a “ sold ” car. This, it will be seen, would exempt from tax manufacturers, producers, and importers where the cars had been sold and delivered under a so-called lease as not being “ sold ” cars.

The provision hereinbefore quoted with regard to moving-picture films and the provision of the act of February 24, 1919, seem to clearly indicate that Congress intended to *267treat *“*leased ” articles as “ sold ” articles. We therefore reach the conclusion that an article sold and delivered under a so-called lease, even where the vendor retains the title, is a sold article, and that being a “ sold ” article it is not an article “ held and intended for sale,” and consequently the vendor is not liable for the tax imposed by section 602.

The character and purpose of the so-called lease which was used in the sales in this case are not to be judged by the name applied to it. It was clearly in the nature of a conditional sale, but a sale nevertheless, and the instrument was intended as a mere security for deferred payments. Nearly half of the purchase price had been paid by the purchaser upon the delivery of the machine. His notes had been given for the balance and doubtless were promptly discounted at some bank by the vendor with the so-called lease attached as security, thus enabling the vendor to at once get the entire purchase price. So long as the vendee complied with the terms of the sale the vendor could not interfere with his possession and use of the machine, and for all practical purposes it was the vendee’s machine. It could not be taken from him and sold and delivered by the vendor to a third party. The very purpose of the parties in making this arrangement was clearly to accomplish a sale and purchase under which there was a delivery which is inconsistent with the view that the machine was held and intended for sale by the vendor. He could only sell it upon default by the vendee. It was unquestionably a sale, and after the machine had been delivered to the purchaser to say that it was still “ held and intended for sale ” by the vendor because of the terms of the sale would be a purely technical and strained construction which it seems plain Congress did not intend should be given it.

Judgment will be entered for the plaintiff in the sum of $1,263.17, together with interest thereon at the rate of 6 per cent per annum from the date of payment by plaintiff, March 29,1920, to wit, the sum of $1,410.23. It is so ordered.

Hay, *Judge;*DowNey, Judge, and Booth, Judge, concur.