People's Outfitting Co. v. United States

Full title: PEOPLE'S OUTFITTING CO. v. UNITED STATES

Court: Court of Claims

Date published: May 2, 1932

58 F.2d 847 (Fed. Cir. 1932)

Opinion

No. K-78.

May 2, 1932.

Action by the People's Outfitting Company against the United States, in which the government filed a counterclaim.

Decree in accordance with opinion.

This case having been heard by the Court of Claims, the court upon the evidence adduced, makes the following special findings of fact:

Plaintiff is a corporation existing and operating under the laws of the state of Michigan, with its principal place of business located at Detroit in that state. During the period from July 2, 1924, to and including February 27, 1926, plaintiff was engaged in the business of selling at retail (among other things) articles commonly known as jewelry. The business was conducted on a "cash or credit" basis. All credit sales were made under the terms of an instrument in form as follows:

"Uniform form of lease adopted by Detroit Retail Furniture Dealers' Association and approved by Michigan Supreme Court in 206 Michigan 555:

"Lease

"I, the lessee, hereby rent from People's Outfitting Co., as lessor, the goods described and on the terms of rental shown, on other side hereof until all rental is paid when this lease expires.

"I agree to keep said goods in first-class condition, surrender possession of same at expiration hereof, whenever I am in default of rent, or shall remove said goods from my present address or otherwise endanger the interest of lessors, and to pay all legal or other expenses which said lessors may necessarily incur in regaining their possession of said goods.

"I agree to pay rent to lessors at 150 Michigan Avenue, Detroit, Mich.

"Rentals accepted after the terms of this lease shall be considered by both parties hereto as only payments of arrearage hereon, and possession of above goods shall thereafter be only at will and pleasure of lessor.

"We, lessors, agree that if at the end of the term of this lease, lessee has fulfilled above covenants to convey a free and clear title of articles shown on the other side hereof to the lessee.

"I further understand, in case said goods or chattels, or any portion thereof are stolen, or destroyed by fire, or otherwise rendered unavailable, that the entire unpaid balance of rent on this lease becomes due and payable at once to lessors, whether or not notice thereof is given to me, the lessee.

"__________________ (Lessee's signature.) "People's Outfitting Co., "Per _____________. "Date _____, 192__. ----------------------------------------------------------------- "Date _____, 19__.

"I hereby agree, that the goods leased this date, the description and terms being on the back hereof shall become a part of the lease dated _____, 19__, previously signed by me with the People's Outfitting Co., and the rentals on the said lease, with said additions thereto, shall be as shown on opposite side hereof. That said lease as hereby supplemented now is the lease between the parties.

"__________________ (Lessee's signature.)

"Approved: People's Outfitting Co.,

"Per _____________. "____________"

Upon the execution thereof, these instruments were sent to the bookkeeping department where all the necessary information was posted to a ledger card, which became the books of original entry. As payments were made they were credited on this card, and, if the customer made additional purchases, they were charged on said card, and such charges became part of the unpaid balance of the whole account. In such cases a customer did not get a receipt for any one of his purchases so long as any part of the whole account remained unpaid. As between the company and the customer, the several transactions were treated as one, and the lien created by the original transaction as attaching to everything sold, irrespective as to time, so long as the account remained open. Under no circumstances was the original instrument ever surrendered to the customer. It became part of the permanent records of the plaintiff company. In making its excise tax returns at the end of each month, plaintiff treated each sale as a transfer of title to the purchaser.

At the end of each of the several months here involved, plaintiff filed with the collector of internal revenue for the first district of Michigan what purported to be a return of all sales of articles subject to an excise tax of 5 per cent., as provided by section 604 of the Revenue Act of 1924 (26 USCA § 886 note). All of the tax computed on the basis of these returns was duly assessed and paid in due course.

An internal revenue agent or inspector called to the attention of plaintiff that its monthly returns should not have included the installment sales under the above instrument until the purchase price had been paid in full and the title had passed to the purchaser; and he suggested that plaintiff make this change in its future returns but such suggestion was not followed.

These returns were on an excise tax form furnished by the Bureau of Internal Revenue. In all of these returns except one, under the heading "Character of tax," there appeared on the face thereof the following: "Section 604. Jewelry, real or imitation; precious and imitation stones; clocks, watches; etc.," and on the same line, under the heading "amount of tax," the number of dollars thereof as computed by the plaintiff or its agent. On the back thereof was printed under the heading "Instructions" a portion of the regulations issued by the department with reference to sections 602 and 604 of the Revenue Act of 1924. The other return was on a blank made for taxes paid under section 905 of the Revenue Act of 1921 ( 42 Stat. 293), which read the same as section 604 of the act of 1924, and on the back of this return were printed the regulations issued by the department with reference to sections 902 and 905 of the Revenue Act of 1921.

Included in the returns filed for the period of July, 1924, to February, 1926, plaintiff reported and paid a tax on installment sales under said instrument made during that period the final payments on account of which were neither due and payable nor paid prior to February 27, 1926, the effective date of the repeal of section 604 of the Revenue Act of 1924. The total tax paid on such sales amounted to $2,129.15. As to the sales mentioned in this finding, none of said sales had been charged off by any method of accounting before completion of the payments; none of the contracts were discounted for cash or otherwise; and the plaintiff had not transferred its title to another in the articles sold by a transfer or assignment of said instrument.

During the same period, plaintiff included in its returns and paid a tax on installment sales, the final payment on which had not been made before February 27, 1926, but would have been made had the customer complied with, or the plaintiff enforced, the strict provisions of the instrument under which the sale or sales were made. The total tax paid on such sales amounted to $339.12. Some of these accounts that should have been paid out prior to February, 1926, were still open in August, 1929.

As to such installment sales, the terms of which were not fully carried out, plaintiff, to enforce payment, resorted to the sending out of a series of collection form letters, followed by the personal call of a collector, and, in some instances, a suit in replevin for repossession of the goods sold, and in exceptional instances to attachment of the salary of the vendee.

As to these sales, the purchase price was not paid in full until after February 26, 1926; the sales were not charged off by any method of accounting before completion of the payments; none of the instruments were discounted for cash or otherwise; and the plaintiff did not transfer its title to another in the articles sold by a transfer or assignment of said instrument.

An examination of the records of the plaintiff made by agents of the defendant in checking the amount claimed in this suit disclosed that a number of sales of articles subject to a tax of 5 per cent. under the section of the act upon which this suit is based (section 604, act of 1924) were never reported nor any tax paid thereon. Defendant's agents were advised by the employee of plaintiff charged with the duty of preparing the monthly returns that, while failure to report some articles of jewelry was due to an oversight, the failure to report sales of clocks and pearls was due to the fact that sales of these articles were never included in the returns upon which the excise tax was paid because of the belief of said employee of plaintiff that these articles were not taxable. Only items appearing in the installment sales agreements were checked by the defendant's agents. No effort was made to determine whether any other sales were not reported.

The tax due on such sales, together with interest accrued thereon up to March 31, 1930, computed in accordance with the statutes relating thereto, has been stipulated by counsel for the parties to be as follows: "Sales listed, $4,463.88; tax at 5%, $223.35; interest accrued to March 31, 1930, $130.13, making a total amount due on such sales, as of the later date, $353.48."

Under date of October 11, 1926, plaintiff filed with the collector of internal revenue a claim for refund of taxes paid during the period July, 1924, to January, 1926, on said installment sales; the final payment of which had not been paid prior to February 27, 1926. This claim was rejected in its entirety by the Commissioner of Internal Revenue on October 12, 1927. Whereupon plaintiff filed its petition in this cause under date of March 13, 1929.

All of the articles upon which the tax was paid by plaintiff and on which plaintiff's claim for refund is based and the articles on which no tax was paid, as above stated, were what are commonly or commercially known as jewelry, or of such a nature and description as to make the sales thereof taxable at the same rate, under the same provisions of the law.

Lucien H. Mercier, of Washington, D.C. (Frank F. Nesbit, of Washington, D.C., on the brief), for plaintiff.

Bradley B. Gilman, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (James A. Cosgrove, of Washington, D.C., on the brief), for defendant.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, and WILLIAMS, Judges.

GREEN, Judge.

Plaintiff seeks to recover $2,468.27 excise taxes paid under the provisions of section 604 of the Revenue Act of 1924 (26 USCA § 886 note) which imposed an excise tax of 5 per cent. on sales of jewelry, real or imitation, precious and imitation stones, clocks, watches, etc. Section 604 was repealed by section 1200 of the Revenue Act of 1926. Of the amount for which suit is brought, $2,129.15 represents taxes paid on credit sales, the final installment of which was neither due nor paid prior to February 26, 1926. The remaining sum of $339.12 represents taxes paid on credit sales, the final installment of which had not been paid but was due prior to February 26, 1926. The theory of plaintiff's action is that the transactions in question were conditional sales, and that, as the final payment for the articles sold had not been made when the tax was repealed, no sales had been consummated at that time. This theory is in accord with the regulations of the department, if the transactions are found to be conditional sales. The defendant contends that the contract between the parties made the transaction a lease and not a sale, and that, under the provisions of the statute imposing a tax on the lease of articles, the fact that the final payment was not made is immaterial. The defendant also called attention to a regulation providing that in the case of lease, which includes a so-called conditional sale agreement purporting to be a lease, the tax attaches, notwithstanding full payment has not been made.

The defendant on its part presents a counterclaim for taxes alleged to have been due under the same provision, but of which plaintiff made no report, amounting to $223.35. Both plaintiff and defendant ask for interest on the sums respectively claimed to be due from the other party.

The evidence shows that the plaintiff was, at the time involved in the case, engaged in selling at retail on credit articles described in the section of the law referred to above. When the goods were transferred by the plaintiff to the other party (whom for convenience we shall call the vendee, although the term may not be strictly accurate), a contract was entered into between the parties evidencing the transaction. This contract is set forth in the findings and was entitled "lease." It recited, in substance, that the vendee leased certain goods which were described, the terms of the rental, and contained a further provision that if these covenants were fulfilled the plaintiff would convey title to the described property. The instrument does not specify to whom the property was to be conveyed, but presumably it was to the vendee.

The case turns upon the question of whether the contract executed between the parties is to be considered a lease, or whether it was in fact, when considered in the light of the intention of the parties and the construction that both placed upon it, a conditional sale. If the former, the transaction was taxable regardless of whether the payments provided by the contract had been completed; if the latter, then as we construe the law, if the payments had not been completed at the time the act which imposed the tax was repealed, no tax was due thereon.

We think it is not necessary to enter into any extended discussion as to the nature of the contract. It was a Michigan contract, made in that state and to be performed therein. It was therefore subject to the laws of that state, and it is well settled that the federal courts will follow the rules laid down by the state Supreme Court in construing the statutes of the state for which it acts. Having so construed the contract, it becomes clear that the federal revenue act applies to the transaction.

It was very early held by the Supreme Court in Bank of United States v. Donnally, 8 Pet. 361, 8 L. Ed. 974, that the nature, validity, and interpretation of contracts are to be governed by the law of the country where the contracts are made or are to be performed, and this rule has always been followed by the federal courts. The Supreme Court of Michigan in the case of Owen Co. v. Keller, 206 Mich. 555, 173 N.W. 343, which involved a contract identical with the one under consideration, held that such a contract is in effect a conditional sales contract and not a lease, and we are bound by this holding which we consider determines this point and makes it unnecessary to cite a large number of cases which support the ruling, or refer to some cases which may seem to hold to a contrary rule.

The defendant, however, contends that even if the contract be treated as one for a conditional sale it was taxable under the statute, notwithstanding the regulation to the contrary, which provided, in substance, that the tax only attached when the title to the article sold passed from the vendor to the purchaser, which in this case was only when final payment had been made. Under the directions of the Secretary of the Treasury, the Commissioner was authorized to make all needful rules and regulations to collect the tax imposed, and, as we see nothing in the regulation inconsistent with the statute or intent of Congress in passing the act, we think the regulation was valid. The same provision under which the tax is now imposed was contained in the 1918 and 1921 Revenue Acts. The 1924 Revenue Act made the tax apply also to cases where the same articles were leased, but we think the intention of Congress in adding the words "or leased" was to prevent any doubt or conflict where, under contracts of this nature, although fully completed, a claim was set up that the transaction was in fact merely a lease, and therefore not subject to the tax. If the regulation upon which the defendant relies is not in accordance with this construction of the statute, we think it was not authorized. It follows that plaintiff is entitled to recover on the cause of action stated in its petition.

With reference to defendant's counterclaim, we find that the evidence shows that, in examining the taxpayer's records of its installment sales, the government officials discovered that a number of sales subject to the tax under section 604 had never been reported by the plaintiff, and no tax paid on them. Plaintiff's employee, whose duty it was to prepare the returns, stated that she believed that sales of clocks and pearls were not taxable. On the blank used for the purpose of making the returns was a space for writing in the amount of the tax, which immediately followed on the same line the statement of the articles subject to the tax as "jewelry, real or imitation, precious and imitation stones, clocks, watches, etc." With these words staring her in the face, she inserted the amount of tax on the same line, and it is evident to us that the omission was intentional; but plaintiff says that no recovery can be had of the amount of which the government has thus been defrauded because of the statute of limitations. We cannot concur for two reasons:

First. It is true that a return was filed for each month involved in the case, but this was, as it seems to us, a combined return, for the tax was on each sale, not on the total sales for the month, and while the department, by presenting to the taxpayer these forms, directed that the returns should be combined or consolidated for the month, this was merely for convenience and did not change the law. We think, therefore, that there was no return made of the sales of these articles upon which it is agreed no tax was paid. If no return was made, the statute of limitations does not bar the counterclaim.

Second. We think the report made was a fraud on the government, as in our opinion it was made purposely and with intent to deceive and did deceive the government officials. For this reason also the statute of limitations does not operate as a bar.

The petition asks for judgment in the sum of $3,234.69, with interest thereon from October 9, 1926, but the findings show that plaintiff is not entitled in any event to recover more than $2,468.27, with interest as provided by law. Plaintiff in its brief claims only the last-named amount, and defendant concedes that plaintiff is entitled to recover this amount if entitled to recover anything. From this sum should be deducted the amount of defendant's counterclaim. No penalty is asked to be recovered by defendant, and therefore it can only be awarded the interest imposed by law upon delinquent taxes. This sum will be offset against the amount of plaintiff's recovery, and judgment rendered for the net amount due plaintiff.

Entry of judgment will be withheld, however, in order to give the parties in the case an opportunity to stipulate as to the amount of plaintiff's recovery in accordance with the foregoing opinion, and in event of the failure of the parties to agree the court will make the computation and enter judgment accordingly.

WHALEY, Judge, took no part in the decision of this case.