Opinion
4:17-cv-00385
09-17-2019
MEREDITH CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.
Stephen H. Locher, Kelsey J. Knowles, Belin McCormick, P.C., Des Moines, IA, Robert J. Kovacev, Norton Rose Fulbright U.S. LLP, Caitlin Tharp, Lisa M. Zarlenga, Steptoe & Johnson, Washington, DC, for Plaintiff. Martin Morris Shoemaker, Gregory E Van Hoey, U.S. Dept. of Justice Civil Tax Division, Washington, DC, for Defendant.
Stephen H. Locher, Kelsey J. Knowles, Belin McCormick, P.C., Des Moines, IA, Robert J. Kovacev, Norton Rose Fulbright U.S. LLP, Caitlin Tharp, Lisa M. Zarlenga, Steptoe & Johnson, Washington, DC, for Plaintiff.
Martin Morris Shoemaker, Gregory E Van Hoey, U.S. Dept. of Justice Civil Tax Division, Washington, DC, for Defendant.
ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
ROBERT W. PRATT, Judge Before the Court is Plaintiff Meredith Corporation's Motion for Summary Judgment, filed on May 24, 2019. ECF No. 35. The Government filed its resistance to Plaintiff's Motion on June 14, ECF No. 40, and Plaintiff filed its Reply on June 21, ECF No. 44. This Court heard oral argument on the motion on August 16. See ECF No. 48. Therefore, the matter is fully submitted.
I. FACTUAL AND PROCEDURAL BACKGROUND
Founded in 1902, Plaintiff is a publicly held company headquartered in Des Moines, Iowa. ECF Nos. 1 ¶ 2, 35-3 at 26. Plaintiff publishes magazines, books, and other marketing materials, including Better Homes and Gardens magazine (collectively referred to as publications). ECF Nos. 1 ¶ 14, 35-3 at 27. Plaintiff earns revenue by selling advertising space in its publications and by selling the finished publications to customers through subscriptions or newsstands. ECF No. 35-2 ¶ 4–5. In tax years 2006 to 2012, Plaintiff claimed a section 199 tax deduction related to this revenue. ECF No. 35-3 at 32; see 26 U.S.C. § 199 (repealed 2017).
The process from conception to sale for Plaintiff's publications involves numerous stages. ECF No. 35-1 at 7. First, Plaintiff creates the content. Id. ; ECF No. 35-2 ¶ 29. Next, an issue enters the prepress process, which is the window of time between content creation and printing. ECF No. 35-3 at 45. During this stage of publishing, Plaintiff's Prepress Department creates digital pages of the magazine. Id. These pages, containing the content and layout of the publications, are sent as a file to the printers. ECF No. 35-1 at 7. Then, the printers create the cylinders and plates used to actually print the materials and run the printing press during the printing process. ECF No. 40-3 at 59, 169. During this stage, both Plaintiff and the printers remain involved in quality control. ECF No. 35-3 at 46–49.
The Court recognizes the complexity of this initial stage but will not discuss its details here due to confidentiality.
In 1990, Plaintiff began contracting with third-party printers for the printing of its publications. ECF No. 35-2 ¶ 10; ECF No. 35-3 at 76. From 2006 to 2012, Plaintiff's primary printers contracted to print its publications were R.R. Donnelly & Sons, Inc. (RRD), Quad/Graphics, Inc. (Quad), and Brown Printing Company (Brown). ECF No. 35-3 at 71–72. Illinois law governed the RRD agreements, while New York law governed the Quad and Brown agreements. ECF No. 35-3 at 130, 162, 193; ECF No. 35-4 at 24, 73, 94. In 2011, RRD and Brown entered new agreements with Plaintiff, and in 2012 Quad began a new agreement with Plaintiff. ECF No. 35-4 at 27, 76. Plaintiff also used smaller printers for some of its integrated marketing materials. ECF No. 35-3 at 85. Allegedly, negotiation over the terms of these agreements took place, but Plaintiff contends that some of the language was "boilerplate." Id. at 90; ECF No. 40-3 at 24, 32, 49. Regardless, the contracts included various tasks and raw materials to be provided by the printers, including ink and binding, at a price per occurrence or price per X number of copies, subject to price adjustments based on specified indices or negotiated price adjustments due to technology changes. See ECF No. 35-2 Att. A at 41–46. They also specified the printer should carry insurance on all Plaintiff's property, completed work, and work in process. Id. at 41–42. The early agreements specified that invoiced magazines and paper stored by the printer would remain Plaintiff's property but that files, proofs, plates, and work in process would be the printer's property. Id. They also contained risk-of-loss provisions that passed the risk from the printers to Plaintiff f.o.b the printer's plant and passage-of-title provisions that transferred title to Plaintiff at the earlier of shipment (f.o.b. printer's plant) or date of final invoicing. Id. at 42–43. In 2011 and 2012, Plaintiff entered into new contracts with the three printers. ECF No. 35-3 at 166; ECF No. 35-4 at 27, 76. These contracts no longer stated that work-in-process inventory was the printers' property, and the 2012 Brown agreement explicitly stated they intended for Plaintiff to have the benefits and burdens of ownership for the section 199 deduction. ECF No. 35-4 at 91.
Plaintiff purchases and provides the paper for its publications. See ECF No. 35-2 ¶ 88, at 41–46. Plaintiff selects this paper and tests its quality. ECF No. 35-3 at 63-64. Plaintiff also assumes the quantity and quality risks associated with maintaining the supply of paper. ECF No. 35-4 at 98. The blank paper is owned by Plaintiff. ECF No. 35-2 at 41–46. There is debate over whether Plaintiff remained the owner of the paper throughout the printing process or not. ECF No. 40-1 at 22. The early RRD printing agreements specified that "paper stored by Printer for [Plaintiff]" remained Plaintiff's property while "work in process" remained the printer's property. See ECF No. 35 at 40. The print agreements do not contain amounts to be charged for the paper. ECF No. 35-4 at 100.
Plaintiff claimed a section 199 domestic production deduction for its publications in tax years 2006 to 2012. ECF No. 35-3 at 33-34. The deduction was in the amount of $2,269,273 in 2006; $3,855,155 in 2007; $7,564,811 in 2008; $1,797,380 in 2009; $2,833,377 in 2010; $5,913,653 in 2011; and $1,511,571 in 2012 for a total deduction over the relevant taxable years of $25,745,220. Id. During that time period, one of the contracted printers also claimed the deduction. ECF No. 35-1 at 12 n.3. In 2016, the IRS issued Statutory Notices of Deficiency to Plaintiff for the 2006 through 2012 tax years. ECF No. 1 ¶ 37. The IRS disallowed the section 199 deduction because it believed Plaintiff did not have the benefits and burdens of production during the printing process and assessed additional tax in the amount of $12,164,383.41. ECF No. 1 ¶¶ 37–39. On September 21, 2016, Plaintiff paid the additional tax. ECF No. 1 ¶ 40. Then on April 26, 2017, Plaintiff filed claims for a refund of the additional amount paid. ECF No. 1 ¶ 41. Six months passed without IRS action on the refund claims, and then on October 30, 2017, Plaintiff filed its Complaint asserting the IRS adjustments were erroneous and therefore Plaintiff should be entitled to a refund. ECF No. 1 ¶¶ 1, 43.
This figure is obtained from Defendant's Responses to Plaintiff's First Set of Requests for Admissions, ECF No. 35-3 at 33, however, the Court notes Plaintiff's Complaint alleges it claimed a § 199 deduction in the amount of $2,269,276 in 2006, ECF No. 1 ¶ 34.
II. SUMMARY JUDGMENT STANDARD
"[S]ummary judgment is an extreme remedy, and one which is not to be granted unless the movant has established his right to a judgment with such clarity as to leave no room for controversy and that the other party is not entitled to recover under any discernible circumstances." Robert Johnson Grain Co. v. Chem. Interchange Co. , 541 F.2d 207, 209 (8th Cir. 1976). The purpose of summary judgment is not "to cut litigants off from their right of trial by jury if they really have issues to try." Poller v. Columbia Broad. Sys., Inc. , 368 U.S. 464, 467, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962) (quoting Sartor v. Arkansas Natural Gas Corp. , 321 U.S. 620, 627, 64 S.Ct. 724, 88 L.Ed. 967 (1944) ). Rather, it is designed to avoid "useless, expensive and time-consuming trials where there is actually no genuine, factual issue remaining to be tried." Anderson v. Viking Pump Div., Houdaille Indus., Inc. , 545 F.2d 1127, 1129 (8th Cir. 1976).
Rule 56(a) provides, "A party may move for summary judgment, identifying each claim or defense—or the part of each claim or defense—on which summary judgment is sought." Rule 56(a) mandates the entry of summary judgment upon motion after there has been adequate time for discovery "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Summary judgment is proper when the record, viewed in the light most favorable to the nonmoving party and giving that party the benefit of all reasonable inferences, shows there is no genuine issue of material fact and the moving party is therefore entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a) ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Harlston v. McDonnell Douglas Corp. , 37 F.3d 379, 382 (8th Cir. 1994). A disputed issue is "genuine" when the evidence produced "is such that a reasonable jury could return a verdict for the nonmoving party." See Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is considered "material" if it "might affect the outcome of the suit under the governing law." See id. "[T]he substantive law will identify which facts are material .... Factual disputes that are irrelevant or unnecessary will not be counted." Id.
"In considering a motion for summary judgment the court does not weigh the evidence, make credibility determinations, or attempt to discern the truth of any factual issue." Great Plains Real Estate Dev., L.L.C. v. Union Cent. Life Ins. Co. , 536 F.3d 939, 944 (8th Cir. 2008) (quoting Morris v. City of Chillicothe , 512 F.3d 1013, 1018 (8th Cir. 2008) ). Rather, the court only determines whether there are any disputed issues concerning the existence of material facts and, if so, whether those disputes are genuine. See Anderson , 477 U.S. at 251-52, 106 S.Ct. 2505 ; see also Wilson v. Myers , 823 F.2d 253, 256 (8th Cir. 1987) ("Summary judgment is not designed to weed out dubious claims, but to eliminate those claims with no basis in material fact."). Summary judgment is appropriately entered against a party who has failed to make a showing sufficient to establish a genuine dispute as to the existence of an element essential to its case and upon which the party will bear the burden of proof at trial. See Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
When a summary judgment motion is filed, the moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact based on the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any. See id. at 323, 106 S.Ct. 2548 ; Anderson , 477 U.S. at 248, 106 S.Ct. 2505. If the moving party has carried its burden, the nonmoving party must then go beyond its original pleadings and designate specific facts showing that there remains a genuine issue of material fact that needs to be resolved by a trial. See Fed. R. Civ. P. 56(c). This additional showing can be by affidavits, depositions, answers to interrogatories, or admissions in the record. Id. ; Celotex , 477 U.S. at 322–23, 106 S.Ct. 2548 ; Anderson , 477 U.S. at 257, 106 S.Ct. 2505. "[T]he mere existence of some alleged factual dispute between the parties will not defeat a motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson , 477 U.S. at 247–48, 106 S.Ct. 2505. Indeed, "[t]o survive a motion for summary judgment, the nonmoving party must substantiate his allegations with sufficient probative evidence [that] would permit a finding in [his] favor based on more than mere speculation, conjecture, or fantasy." Barber v. C1 Truck Driver Training, LLC , 656 F.3d 782, 801 (8th Cir. 2011) (second and third alterations in original) (quoting Putman v. Unity Health Sys. , 348 F.3d 732, 733–34 (8th Cir. 2003) ). Mere "self-serving allegations and denials are insufficient to create a genuine issue of material fact." Anuforo v. Comm'r , 614 F.3d 799, 807 (8th Cir. 2010).
Courts do not decide whether to grant a motion for summary judgment by conducting a paper trial. Rather, a "district court's role in deciding the motion is not to sift through the evidence, pondering the nuances and inconsistencies, and decide whom to believe." Waldridge v. Am. Hoechst Corp. , 24 F.3d 918, 920 (7th Cir. 1994). In considering a motion for summary judgment, the court's task is merely to decide, based on the evidentiary record that accompanies the filings of the parties, whether there really is any genuine issue concerning a material fact that still requires a trial. See id. (citing Anderson , 477 U.S. at 249, 106 S.Ct. 2505 and 10 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2712 (3d ed. 1998)); see also Fed. R. Civ. P. 56(c)(3).
There was much discussion in the parties' briefs and at oral argument about the appropriateness of summary judgment in this case. The discussion was not only about what the disputed or non-disputed facts were but also whether summary judgment is appropriate for Plaintiff when it bears the burden to prove by a preponderance of the evidence that it has the "benefits and burdens" of production. The Court believes it sufficient to say here that summary judgment may be granted to either party regardless of where the burden of proof may lie. It may be true as a practical matter that as Chief Judge Arnold wrote, "[s]ummary judgments in favor of parties who have the burden of proof are rare, and rightly so." Turner v. Ferguson , 149 F.3d 821, 824 (8th Cir. 1998). But it is clear from the Eighth Circuit that summary judgment is nonetheless a procedural rule applicable to both parties in any civil case. See Torgerson v. City of Rochester , 643 F.3d 1031, 1042–43 (8th Cir. 2011) (en banc).
III. ANALYSIS
Prior to repeal, section 199 of the Internal Revenue Code provided a tax deduction for "[i]ncome attributable to domestic production activities." 26 U.S.C. § 199 (repealed 2017). Before section 199 was enacted, Congress made several attempts to incentivize American exports through export tax benefits, but the World Trade Organization found that these attempts violated international trade agreements. H.R. Rep. No. 108-755, at 262 (2004) (Conf. Rep.). Fueled by concern over the "adverse competitive impact" U.S. manufacturers faced in the international market due to foreign tax regimes, Congress passed the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418. H.R.Rep.No. 108-755, at 275. This legislation replaced the latest failed export-benefit with a new income tax deduction for domestic production activities designed to increase domestic manufacturing. H.R. Rep. No. 108-755, at 265, 275.
The section 199 deduction was calculated as a percentage of the lesser of the taxpayer's "qualified production activities income" (QPAI) or "taxable income ... for the taxable year." 26 U.S.C. § 199(a). QPAI is defined as "the taxpayer's domestic production gross receipts" (DPGR) for the taxable year, less the cost of goods sold allocable to those receipts and other direct and indirect expenses allocable to the same receipts. § 199(c)(1). DPGR means the taxpayer's gross receipts "derived from ... any lease, rental, license, sale, exchange, or other disposition of ... qualifying production property [ (QPP) ] which was manufactured, produced, grown, or extracted [ (MPGE) ] by the taxpayer in whole or in significant part within the United States." § 199(c)(4)(A). The applicable deduction percentage was three percent for 2005-2006, six percent for 2007-2009, and nine percent for subsequent years, § 102, 118 Stat. at 1424, until its repeal for tax years beginning after January 1, 2018, Budget Fiscal Year, 2018, Pub. L. No. 115-97, § 13305, 131 Stat. 2054, 2126 (2017).
The parties to this suit do not dispute that the physical publications qualify as QPP or that the QPP was manufactured within the United States. They also agree that Plaintiff earned gross receipts for the sale of their publications. But they disagree over whether the QPP was produced "by the taxpayer." 26 U.S.C. § 199. Only one taxpayer may claim the deduction for qualifying activity. Treas. Reg. § 1.199-3(f) (2008). In situations where "one taxpayer performs a qualifying activity ... pursuant to a contract with another party, then only the taxpayer that has the benefits and burdens of ownership of the QPP ... under Federal income tax principles during the period in which the qualifying activity occurs" can claim the QPAI. Id. Because the publications at issue were produced subject to a contract manufacturing agreement, determining which party had the benefits and burdens of ownership during the period of qualifying activity will determine whether Plaintiff was entitled to the section 199 deduction.
Therefore, the Court must determine whether there is any genuine issue of material fact to be tried in deciding who had the benefits and burdens of ownership at the time of the qualifying activity. Courts evaluate who has the benefits and burdens of ownership for tax purposes by considering "the written agreements read in light of the attending facts and circumstances." Grodt & McKay Realty, Inc. v. Comm'r , 77 T.C. 1221, 1237 (1981) ; see also Upham v. Comm'r , 923 F.2d 1328, 1334 (8th Cir. 1991). And, as required at the summary judgment stage, the Court will view the record in the light most favorable to the Government as the nonmoving party.
Plaintiff suggests that the Eighth Circuit's decision in Upham , 923 F.2d 1328, allows the Court to circumvent the traditional benefits-and-burdens test. In Upham , the Eighth Circuit, in reviewing a decision of the U.S. Tax Court following a trial on the matter, concluded that, "in the specific context of the sale of a movie, ... both the negative and all substantial rights" to the film needed to be transferred for ownership to transfer for tax purposes. Id. at 1334. Without such a complete transfer, there was no sale of the movie, for the negative without the related copyrights had no value. Id. The Court recognizes that Plaintiff's publications at issue contain intellectual property with accompanying copyrights, which Plaintiff retained at all times. But the trial court in Upham did not abandon the benefits-and-burdens test; instead it engaged in a "complete analysis of the purchase and distribution agreements" and concluded there was no sale of the film in light of the surrounding facts and circumstances. Id. at 1334 (affirming tax court's evaluation process and findings). The Eighth Circuit has extended Upham 's reasoning to payphones and ATM equipment, but again based the decision on a complete evaluation of the benefits and burdens of ownership. Snyder v. Comm'r , 373 F. App'x 642, 643, 643–44 (8th Cir. 2010) (considering revenue, control, insurance payments, legal title, and other factors). As such, the Court will not neglect a complete evaluation of the benefits and burdens of ownership.
Nor will the Court decline to engage in an evaluation of the facts and circumstances surrounding the printing contracts based on the argument that they constitute bailments. A bailment relationship involves the transfer of personal property from one person to another for a specific purpose with an inherent requirement that the property be returned once that purpose is accomplished. 8A Am. Jur. 2d Bailments § 1. As the Government highlights, many of the factors courts consider in determining which party had the benefits and burdens of ownership can weigh in favor of either the bailee or bailor depending on the underlying agreement. Therefore, even if the Court could determine there was no genuine issue of material fact as to whether the agreements were bailments, the Court would need to complete the facts-and-circumstances test to determine who had the benefits and burdens of ownership during the qualifying activity.
Deciding who had the benefits and burdens of ownership as required under section 199 requires the Court to evaluate the written agreements between Plaintiff and the contract manufacturers (the printers). The Government argues the Court should confine its analysis to within the four corners of the printing agreements, urging the Court to adopt Danielson , which would prevent Plaintiff from disavowing the terms of its agreements except in cases where proof would be admissible to alter its construction or show its unenforceability due to fraud, mistake, duress, etc. Comm'r v. Danielson , 378 F.2d 771, 775 (3d Cir. 1967). In the alternative, the Government suggests the Court should require adherence to the strong-proof doctrine, which would require strong proof in order to disavow the contract term. Ullman v. Comm'r , 264 F.2d 305, 308 (2d Cir. 1959).
But these heightened standards of proof do not apply to the issue at hand. Both the Danielson rule and the strong-proof rule were developed in order to hold taxpayers to their own contractual purchase price allocations. Danielson , 378 F.2d at 778 ; Ullman , 264 F.2d at 307-08. Here, "neither [Plaintiff] nor this Court is attempting to vary the terms of the written agreement; we are simply trying to determine the tax consequences that flow from the agreement[s] entered into by [Plaintiff and the printers]." Strutzel v. Comm'r , 60 T.C. 969, 975 (1973) (holding that a written agreement constituted a sale, not a lease). The Eighth Circuit recognizes "the substance of the transaction as revealed by the evidence as a whole controls over the form employed." David E. Watson, P.C. v. United States , 668 F.3d 1008, 1017–18 (8th Cir. 2012) (quoting Haag v. Comm'r , 334 F.2d 351, 355 (8th Cir. 1964) ). Additionally, the benefits-and-burdens test requires a determination "based on all the facts and circumstances," not based on only the written agreements. ADVO, Inc. v. Comm'r , 141 T.C. 298, 325 (2013).
Thus, in deciding whether to grant or deny Plaintiff's Motion for Summary Judgment, the Court will consider whether a reasonable factfinder could conclude that the printers had the benefits and burdens of ownership during the time period of qualifying production activity in light of both the written agreements and appropriate extrinsic evidence.
A. Time Frame of MPGE Activity
When a party engages in contract manufacturing, the taxpayer must have the benefits and burdens of ownership "during the period the MPGE activity occurs" for gross receipts related to the QPP to qualify as DPGR. Treas. Reg. § 1.199-3(e)(1). The parties dispute whether that period included only the printing process or the entire publishing process. Because this decision is a question of law for the Court to decide and the answer will inform the benefits and burdens analysis that must be conducted to determine the propriety of Plaintiff's domestic production activities deduction, the Court will address this dispute first.
MPGE activity "includes manufacturing, producing, growing, extracting, installing, developing, improving, and creating QPP." Treas. Reg. § 1.199-3(e)(1). The Court recognizes that Plaintiff invests considerable time and resources into the creation of the content that fills their physical publications and the prepress process in which they design the layout and print instructions for each publication. Yet QPP is defined as "[t]angible personal property," "[c]omputer software," and "[s]ound recordings." Treas. Reg. § 1.199-3(j)(1). The regulation goes on to define tangible personal property as "any tangible property other than land, real property" and computer software, sound recordings, qualified films, electricity, natural gas, or potable water. Treas. Reg. § 1.199-3(j)(2)(i). Tangible property does not include intangible property, or "property in a form other than in a tangible medium." Id. § 1.199-3(j)(2)(iii). The regulation even offers the example that mass-produced books are tangible property while the rights to their underlying manuscripts or an online version are intangible property. Id.
Although Plaintiff's content creation and preprint processes create valuable assets, the Court concludes that these are intangibles until the physical printing process begins. As intangible assets, they fail to qualify as QPP and should not be considered in the determination of who bears the benefits and burdens of production. See Treas. Reg. § 1.199-3(j)(1). But it does not necessarily follow that these non-MPGE activities should be disregarded when calculating the section 199 deduction. According to Example 5 of Treasury Regulation § 1.199-3(e)(5), when a taxpayer also MPGE's the QPP (the physical publications in this case), then these non-MPGE activities are considered part of the MPGE "because [the taxpayer] MPGE the QPP." Therefore, if the Court concludes that Plaintiff bore the benefits and burdens of ownership during the printing period, Plaintiff "is treated as engaging in the qualifying activity," Treas. Reg. § 1.199-3(f)(1). In other words, the entire publishing period would be considered part of the MPGE activity in the calculation of the deduction amount. See Treas. Reg. § 1.199-3(e)(5) example 5.
Like the court in ADVO , the Court finds the Office of Chief Counsel's March 29, 2013 memorandum "enlightening." ADVO , 141 T.C. at 328 n.22. Although the memorandum is in no way binding on this Court, cannot be cited as precedent, and represents the view of only one of the parties, it addresses a similar fact pattern to the one at issue here; the taxpayer discussed in the memorandum publishes books through third-party printers. I.R.S. C.C.A. 201313020 (Mar. 29, 2013). The memorandum states:
Taxpayer's market research, content and layout development, and editing are activities that result in Taxpayer creating an electronic version of a book. Taxpayer's electronic version of a book has the same layout and design as the book would have if printed and bound, but it is not tangible personal property or computer software.
Id. The Court agrees that, for the reasons stated above, the publishing activities outside of the physical printing would be the same activities required to create an online version of the magazine, which is clearly an intangible asset and would not qualify as QPP.
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B. Benefits and Burdens of Ownership
The dispositive issue before the Court on this motion for summary judgment is whether there are genuine issues of material fact as to who—Plaintiff or the printers—had the benefits and burdens of ownership during the printing process. Who bears the benefits and burdens "is a question of fact which must be ascertained from the intention of the parties as evidenced by the written agreements read in light of the attending facts and circumstances." Grodt & McKay Realty , 77 T.C. at 1237 (citing Haggard v. Comm'r , 24 T.C. 1124, 1129 (1955), aff'd , 241 F.2d 288 (9th Cir. 1956) ); see also Smith v. Comm'r , No. 86-1216, 1987 WL 37627, at *7 (4th Cir. 1987) ; Houchins v. Comm'r , 79 T.C. 570, 591 (1982). Clearly, the parties dispute who bore the benefits and burdens, and the fact that one of the printers also claimed a section 199 deduction suggests that the parties to the printing agreements also disagree. Neither party cites precedent suggesting that this facts-and-circumstances test can be completed at the summary-judgment stage. But because "the mere existence of some alleged factual dispute between the parties will not defeat a motion for summary judgment," Anderson , 477 U.S. at 247–48, 106 S.Ct. 2505, the Court will evaluate the individual factors used in the benefits-and-burdens test to decide if a reasonable jury could find for the nonmovant.
Courts have considered the following factors in their evaluation of the benefits and burdens of ownership for tax purposes:
(1) whether legal title passes; (2) how the parties treat the transaction; (3) whether an equity interest was acquired; (4) whether the contract creates a present obligation on the seller to execute and deliver a deed and a present obligation on the purchaser to make payments; (5) whether the right of possession is vested in the purchaser and which party has control of the property or process; (6) which party pays the property taxes; (7) which party bears the risk of loss or damage to the property; (8) which party receives the profits from the operation and sale of the property; and (9) whether [Plaintiff] actively participated in the management and operations of the activity.
ADVO , 141 T.C. at 325 (citing 26 U.S.C. § 936 ; Grodt & McKay Realty , 77 T.C. at 1221 ; Hutchinson v. Comm'r , 116 T.C. 172 (2001) ).
"Generally, ‘an income tax deduction is a matter of legislative grace and ...the burden of clearly showing the right to the claimed deduction is on the taxpayer.’ " Zavadil v. Comm'r , 793 F.3d 866, 869 (8th Cir. 2015) (quoting INDOPCO, Inc. v. Comm'r , 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992) ). When the facts before the Court are viewed in the light most favorable to the Government, it is clear Plaintiff has not met its burden of showing it is entitled to the section 199 deduction. Indeed, a reasonable factfinder could conclude a number of the factors weigh in the Government's favor.
1. Legal Title and Intent
Whether legal title to the publications passes at any point is heavily disputed. Plaintiff contends that legal title to the paper Plaintiff provides never passes to the printers and cites the lack of explicit language transferring title to the paper and industry custom. Plaintiff asserts that because it always owned the paper, it was not necessary for the printers to sell the finished publications to Plaintiff and the printers instead provided a service. Yet, as the Government highlights, many of the agreements contained a clause declaring that work in process belonged to the printers and another clause purportedly transferring title to Plaintiff at the earlier of final invoicing or provision to a carrier, f.o.b. printer's plant. Clearly, this dispute should be resolved by the factfinder at trial.
The dispute involving legal title goes hand in hand with the dispute of the intent of the parties to the contracts or treatment of the transaction. Here again, Plaintiff argues that it and the printers treated the transaction as the provision of a service and not the production of a product. Plaintiff then goes on to cite two cases as evidence that printing contracts are normally interpreted as services, not sales. The Court agrees that the decision in each of these cases was that the printing contracts at issue were for the provision of a service and not the sale of goods. See Wm. H. Wise & Co. v. Rand McNally & Co. , 195 F. Supp. 621, 626 (S.D.N.Y. 1961) ("The essence of this contract was one of service. Rand was not selling books as books but rather was engaged to print and bind, pursuant to a contract. The contract was one of work, labor and materials and not one of sale."); H.G. Adair Printing Co. v. Ames , 364 Ill. 342, 4 N.E.2d 481, 481–82 (1936) ("The appellees are not engaged in the business of selling tangible personal property but in the business of printing-one of the graphic arts.").
But despite these holdings, this is a matter of contract interpretation and each agreement should be interpreted according to its own surrounding facts and circumstances. See Wise , 195 F. Supp. at 625 n.3. The Government argues that one of the printer's exercise of the section 199 deduction suggests that the printer believed and intended that it had the benefits and burdens of ownership throughout the printing process and that most of the printing agreements stated that the printer would either produce or manufacture the copies. But despite the use of the word produce or manufacture, the language of the contracts is frequently ambiguous. For instance, the description of the work in the 2005 agreement with that printer reads as follows:
Printer will print and produce the entire editions of the magazine, such printing and production to include ... certain preliminary operations and all platemaking ... and any other mutually agreed upon work necessary to complete the manufacture of the Magazines (the "Work").... Publisher agrees to pay for Printer's services in accordance with the terms, conditions, and prices set forth herein.
ECF No. 36-1 at 9 (emphasis added). The parties also dispute other facts relevant to title and intent: whether terms were standard or negotiated, whether Plaintiff and the printers could have renegotiated around section 199 at any time, and whether Plaintiff owned the paper or not. They offer extrinsic evidence related to these issues in forms including but not limited to lay and expert witness testimony.
A question of interpretation of an integrated agreement is typically a question of law unless the interpretation depends on the quality of extrinsic evidence or on a choice of inferences to be drawn from extrinsic evidence. Restatement (Second) of Contracts § 212 (Am. Law Inst. 1981) ; Mallad Constr. Corp. v. Cty. Fed. Sav. & Loan Ass'n , 32 N.Y.2d 285, 344 N.Y.S.2d 925, 298 N.E.2d 96, 100 (1973) ; see Gomez v. Bovis Lend Lease, Inc. , 387 Ill.Dec. 119, 22 N.E.3d 1, 6 (Ill. App. Ct. 2013) ("If determination of the parties' intent requires resorting to facts in dispute, then the contract must be construed by the trier of fact."). That is the situation here because the parties present extrinsic evidence including witness testimony that must be weighed by the factfinder at trial. The Court concludes that because a reasonable factfinder could find that the legal title and intent factors favor either party, genuine disputes of fact remain.
2. Equity Interest and Property Taxes
The parties also dispute whether the printers acquired equity in the publications during the printing process and who paid property taxes on the goods. The Government claims the printers acquired an equity interest not through purchase but by manufacturing the goods with their materials and machinery. Plaintiff claims that because they owned the paper and the publications throughout the printing process, there was never a transfer of equity to the printers. Plaintiff further argues its payment of Kentucky personal property taxes supports the claim that only it had an equity interest, but the Government contests whether Plaintiff was the only party to pay those taxes and offers evidence that one of the printers believed it was responsible for the personal property taxes for at least the ink and labor components of any work-in-process inventory.
Deciding who held equity in and paid property taxes on the QPP will require the factfinder to weigh relevant evidence. In ADVO , the court determined that both of these factors were neutral. 141 T.C. at 327–28 (finding that the equity factor was not relevant and no evidence that anyone paid the property taxes). Here, at least one entity paid property taxes, and the equity interest in the property is not clear; the record may support a finding that they weigh in favor of either party. These issues involve many of the same questions as the transfer of legal title and the intent of the parties to the contracts: does the contract involve the provision of a service or the sale of a product, and who held legal title of the QPP during the actual printing process? Therefore, the Court concludes there are genuine disputes of fact for both of these factors as well.
3. Control of the Process and Active Management of the Activity
While the printers clearly exercised the right of possession over the QPP during the printing process, the parties dispute the level of control Plaintiff asserted. For instance, the parties disagree on whether Plaintiff had complete control over the prepress process or whether printers participate in this process through their creation of plates and cylinders used in printing. ECF No. 40-1 ¶ 57. The parties agree Plaintiff performs quality reviews during the printing process and provides specific printing instructions. They also agree the opinion of Raymond Prince, Plaintiff's expert witness, is that Plaintiff exercised more control over the printing process than ADVO did. However, the Government does not concede the truth of that opinion and maintains that the factor should still favor the printers because, like ADVO, they owned and operated the printing presses and maintained their own quality review system. ADVO , 141 T.C. at 327–28.
Any attempt by the Court to resolve the weight of this factor would require the Court to weigh the evidence presented and to make credibility determinations about the competing evidence offered by the parties. Therefore, the Court concludes genuine issues of fact remain relating to these two factors.
4. Risk of Loss and Potential for Profit
Finally, the parties dispute the extent of the risk for loss and potential for gain born by Plaintiff and the printers. While the parties appear to dispute the likelihood of certain eventualities that would result in losses to Plaintiff or the printers, they seem to generally agree that Plaintiff bears the risk of cost fluctuations for the paper and the risk of loss of customers, advertising income, and profit absent intentional acts or gross negligence by the printers. They also agree the printers are required to carry insurance on the materials they store in their plants under the relevant contracts and may be liable for the cost of the paper or publications. The Government also highlights that the printers risked losing Plaintiff's business.
But despite those agreements, they actively dispute the potential for profit and the categorization of the printing contracts as cost-plus or fixed-cost contracts. Plaintiff claims that only it receives a profit from the sale of QPP as the printers never had legal authority to use or sell any of its content or publications. Plaintiff acknowledges it paid the printers but maintains that these payments were for services and not purchases of QPP. On the other hand, the Government claims the printers enjoyed potential economic gain and potential economic loss resulting from the difference between the fixed-contract prices they charged Plaintiff and their actual production costs.
The main dispute over risk is whether the contracts should be categorized as fixed-price or cost-plus contracts. A fixed-price contract is "[a] contract in which the buyer agrees to pay the seller a definite and predetermined price regardless of increases in the seller's cost or the buyer's ability to acquire the same goods in the market at a lower price." Contract , Black's Law Dictionary (11th ed. 2019). A cost-plus contract is "[a] contract in which payment is based on a fixed fee or a percentage added to the actual cost incurred." Id. Plaintiff argues the agreements reflect cost-plus arrangements while the Government argues they are fixed-price contracts.
This is a relevant distinction because the Treasury Regulation examples highlight the type of the contract before making their determination on who is treated as the manufacturer of the QPP. See Treas. Reg. § 1.199-3(f). In the case where X designs and engineers a machine and then contracts with Y to manufacture the machine, example one finds Y was the manufacturer when there was a fixed-price contract and Y had the benefits and burdens of ownership, but example 2 finds that X was the manufacturer when there was a cost-reimbursable contract and X had the benefits and burdens of ownership. Treas. Reg. § 1.199-3(f)(4).
The price adjustments outlined in the agreements occur annually and adjust the negotiated fixed price to reflect the economic state by using price indices or industry adjustments. While these adjustments help to spread some of the risk for price changes across the parties to the agreements, they leave the printers responsible for negotiating costs, except for paper. The Government argues that because these adjustments are based on a fixed price and not on the printer's actual costs, the agreements are fixed-price contracts. Cf. 48 C.F.R. § 16.203-1. However, each agreement also contains the requirement of price negotiations due to technology updates, and an adjustment in prices to reflect increased or decreased cost of production due to technology changes. Since these adjustments are cost driven, they suggest risk allocation for technology updates more like a cost-plus model. There is also some debate about whether these technology adjustments result in mandatory cost sharing or only mandatory negotiations. Plaintiff contests the Government's position and claims that both types of adjustment reflect a cost-plus model.
Thus, the Court concludes there are genuine disputes on these two factors. In order to determine in whose favor these factors weigh, the Court will need to resolve these issues of contract interpretation, including whether the contracts are for sale of goods or services and whether they are fixed-price or cost-plus, through the use of extrinsic evidence. This will involve exactly the sort of fact finding and weighing of evidence the Court cannot undertake to remain true to the summary-judgment standard and the Seventh Amendment.
Because there are numerous genuine disputes on various factors, the Court concludes that, in the aggregate, these are disputes of material fact. In other words, a reasonable factfinder could find that either Plaintiff or the printers had the benefits and burdens of ownership at the time of MPGE so as to be entitled to the section 199 deduction. Therefore, Plaintiff is not entitled to judgment as a matter of law.
IV. CONCLUSION
Plaintiff's Motion for Summary Judgment (ECF No. 35) is DENIED.
IT IS SO ORDERED.