Court Opinion

ID: 4475484
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:33.278249+00
Date Added: 2024-06-11T14:53:53.498320
License: Public Domain

Murdock, J., dissenting: The petitioner manufactured and sold a type of drilling machines prior to 1935 which was not self-powered. The purchaser of one of those machines had to supply a separate power plant to cause the machine to operate. That power plant was not a part of the machine as manufactured and sold by the petitioner. The petitioner had been working on a machine which would include its own power plant m the form of an electric motor mounted on the top of the machine. The petitioner actively marketed those machines for the first time in 1935, and further improvements were made on them during the base period. Also, the petitioner pioneered in the development of a special-purpose machine for drilling deep holes and actively marketed such a machine for the first time in 1937. The findings indicate that no similar machine had been marketed previously. Improvements continued through 1939. The petitioner expended over $67,000 in developing the machine which included its own power plant, and it expended between $40,000 and $50,000 in developing the deep-hole drilling machine. No similiar changes in its products occurred between 1920 and 1949. Patents were obtained on the machines. The designing and building of the new-type machines required ma'ny changes in manufacturing methods and the employment of electrical engineers and technicians not previously employed in the business. The machines had important advantages over the old ones. New-customers were obtained. Sales of the new machines increased as improvements were made on them during the base period. Section 722 (b) (4) provides that the .tax without the benefit of section 722 shall be considered excessive and discriminatory if the average base period net income is an inadequate standard of normal earnings because the taxpayer either during or immediately prior to the base period changed the character of its business and the average base period net income does not reflect the normal operation of the business for the entire base period. It further- provides that a change in the character of the business includes a difference in the products furnished. Those relief provisions should be interpreted in the light of the general purpose which Congress had in mind in enacting them. Furthermore, as Congress has suggested, they should be administered sympathetically in order to carry out' the general purpose. Gongress intended that the high excess ’profits taxes which-it imposed during the war years should apply only to the excess of income of each year over the portion of its income for that year which might fairly be regarded as normal. One method of determining what was normal was to compute a credit based upon the average excess • profits net income for the years 1936 through Í939. Congress recognized that there would be some cases in which that base peroid would not be a fair means of determining normal income of the business actually in operation during the later tax year. One of the exceptions, as set forth in section 722 (b) (4), is where the sales during the high-tax war year include sales of a product which the sales of the base period do not adequately reflect, due to' the fact that immediately prior to the base period or during the base period a difference occurred in the products furnished. The Commissioner by his regulations and this Court by opinions have pointed out that not every difference in the products furnished is sufficient to bring a taxpayer within section 722 (b) (4). But obviously the provision should not be written out of the statute, and neither the Commissioner nor this Court should take a narrow view of what is a difference in the products furnished, within the meaning of section 722 (b) (4). The prevailing opinion interprets the word too narrowly. It seems to find something against the petitioner’s contention in the fact that, not only the petitioner, but other members of the industry, in order to survive and to meet competition, had to keep up with the demands of their customers. It holds that the change must be a substantial departure from the preexisting nature of the business and describes the new machines as mere improvements, since they “served the same purpose as the old and, generally, were sold to customers in the same industry as before.” I do not agree with those reasons, and believe that they have led the majority to find incorrectly as a fact that no change in the business occurred. The majority would distinguish 7-Up Fort Worth Co., 8. T. C. 52, and Lamar Creamery Co., 8 T. C. 928, because here “the change in the product was an improvement, and not a radical change in the function or addition of a new and different product.” That is a distinction without any substantial difference. The taxpayer in the first case began to sell a new beverage, but it “served the same purpose as the old and, generally, [was] sold to the same customers in the same industry as before.” The situation in the other case was similar in principle. The deep-hole drilling machine actually served a purpose which was not served by any prior machine. A parallel to the introduction of the self-powered machine is furnished by the advent of the automobile. Studebaker, for example, had long manufactured vehicles, the purpose of which was to transport persons and things from one place to another. However, they would not fulfill that purpose until the purchaser supplied a power plant, usually in the form of a horse or. a mule. It was later found that a power plant in the form of a gasoline motor or electric batteries could be incorporated in the vehicle so that it would move under its own power. Studebaker began manufacturing and selling such vehicles. But even the majority must concede that they were a different product. Yet there, as here, the product first manufactured and sold was just a machine which had no power plant incorporated in it and would not operate until outside power was applied, whereas later the thing manufactured and sold was a machine which had as an integral part of it the power plant to make it operate. There was in both not a mere improvement, but a real, substantial difference in the products furnished, although they “served the same purpose as the old and, generally, were sold to customers in the same industry as before.” Here, normal sales of neither of the new products, the self-powered drills and the deep-hole drills, are reflected over the base period years ; the average base period net income does not reflect the normal operation of a business, including the sale of such machines, for the entire base period; and this seems a proper case in which to hold that there was a change in the character of the business due to a change or difference in the products furnished. Whether its constructive average base period net income would be sufficient to give it any relief is another question. Keen, J., agrees with this dissent.