Opinion ID: 423650
Heading Depth: 1
Heading Rank: 1

Heading: the government's appeal--the cost-floor alternatives

Text: 8 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. 1 9 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. 2 Regulations issued pursuant to the statute provide that in the absence of an established bona fide practice of selling articles to wholesale distributors, 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. 10 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. 3 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 counterclaim 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. 11 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. 12 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.