Opinion
No. 8437-Y.
June 16, 1939.
Darius F. Johnson, of Los Angeles, Cal., for plaintiff.
Ben Harrison, U.S. Atty., and Armond Jewell, Asst. U.S. Atty., both of Los Angeles, Cal.
Action by Armature Exchange, Incorporated, against United States of America to recover amount paid as manufacturer's excise tax on sale of rewound automobile generator armatures.
Judgment for plaintiff in the sum of $1452.30 with interest.
The Armature Exchange, a corporation, seeks to recover $1452.30 paid by it for the taxable years 1933 to 1936 as a manufacturer's excise tax on the sale of rewound automobile generator armatures, under the provisions of Section 606(c) of the Internal Revenue Act of 1932, 26 U.S.C.A. end of ch. 20, a claim for the refund of which was timely made and rejected, on November 18, 1937. The evidence disclosed these facts:
The plaintiff takes old armatures on which the winding had been worn off and rewinds them.
The process used is this: The armatures are placed in a lathe and the wires leading from the core to the commutator are cut out with a knife as the lathe revolves. The cores are then heated over a gas flame for about twenty minutes, in order to loosen the old wires and old insulation, so that they may be easily removed. After the armatures are laid out on a metal top table and slightly cooled, they are placed in a V-shaped slot, and a steel chisel is driven down between the mass of old wires which have been loosened by heating, and the old wires are pried out. The armatures are then placed in a machine equipped with a small saw which reslots each commutator bar at the place where the old wires were soldered in (i.e., at the end of the commutator closest to the core). This machine operates by suspending the shaft on which the core and commutator are mounted between a clamp, and the saw-blade about one and one-half inches in diameter is moved up to each slot by means of a lever, and the shaft is rotated by hand. Any solder remaining in the slots is removed with a small metal pick. The placement of the commutator on the shaft is checked with a pair of calipers by measuring from the point on the shaft where the bearing rides to the front end of the commutators. The distance from the core to the commutator is measured with a metal rule. Any errors in the mounting of the core or commutator on the shaft are corrected by means of adjusting their respective placements by means of an arbor press. The laminations of almost every core are pressured together on this same press before any further steps are taken, in order to realign any laminations which may have become somewhat separated. To insure that none of the bars on the commutator are grounded to the shaft, or shorted, a test is given by rotating the end of a live wire over the commutator, and at the same time having the shaft grounded. Then each portion of the shaft leading from each side of the core is insulated by approximately five wrappings of paper around the shaft as it protrudes from each end of the core. The insulation is about an inch or so in length. Each slot in the core is also insulated by placing in it a folded insulated paper approximately the size of a cigarette paper; and each surface end of the core is insulated with a heavy pressed cardboard which has been stamp-cut the shape of the surface ending of the core. Approximately 95 per cent of the armatures are rewound on a Chapman winder, designed to rewind armatures with fourteen-slot cores. Those which have a different number of slots must be rewound by hand. This machine has a lathe, in which two jaws hold the laminated core in such a manner that the shaft extends perpendicularly from the axis of the lathe an equal distance in each direction. Two strands of wire lead from two different reels up through the top of the machine, over pulleys and down to the armature in the jaws of the lathe. Two sizes of wire are used in the winding, depending upon the electrical output expected out of the generator; i.e., heavier wire can give a greater output. Each coil is wound with six complete turns. On each turn, the wire in the slot on one side of the core leads into each slot, making, therefore, in the case of a fourteen-slot core, twenty eight coils. Upon the completion of each coil — that is, after six turns — the wire is laid up over the commutator end of the shaft, and, at the conclusion of the next coil following, that particular wire is cut near the commutator-end of the shaft and the lead end of the wire folded back. However, the lead ends on the top coils of the half of the core that is lastly wound are not cut by the winder operator, because there is no necessity of cutting them, but are left suspended in a loop over the commutator end of the shaft. The only reason for cutting the other wires is because they are from coils that are underneath and, if they were not cut, the wire from the top coil would bind them down to the shaft. The armature is then placed in a lathe-like clamp, called a bench center, which clamp suspends the armature by holding it at each end of the shaft. Then all the wires which were not previously cut by the operator on the winding machine are cut. This leaves fifty-six leads, with two leads to each coil, and two coils to each slot. To hold the wires in the slots, wooden wedges are then driven over the top of the wires and into each slot of the laminated core. The leads are pulled down in three equal groups and the ends of the leads inserted into an electrically driven machine with two wire rollers operating in opposite directions, which cleans all of the insulation from the leads for a distance of about two inches from the ends of the leads. These leads extend approximately four inches out of the slots of the core. The leads from the top coils are folded back over the core, and then the leads from the bottom coils are similarly folded back, so as to make them easily available to the operator when he is connecting them with the commutator. There are four sets of leads, corresponding with the sets of coils in the armature. Those leads are inserted firmly in place by means of a small chisel. As the leads are connected, the operator rotates the armatures. A connection of a set of leads is completed with each rotation. As each complete rotation is made, the wires which now lead from the core to the commutator are insulated by wrapping with insulating paper approximately one and one-half inches in width. Since there are four complete sets of leads, this makes three sets of insulation, the top leads being exposed. Twine is then wrapped around just behind the commutator with about seven turns, so that should the soldering holding the leads into the commutator become hot, the cord will still keep the leads in place. Solder flux is painted around the commutator where the wires have been tapped into the slots. The whole commutator is then immersed into solder, the solder only adhering to the banks where the flux has been applied. The armatures are then placed on end into a tray and the tray is lowered into an insulating varnish, where it remains for about fifteen or twenty minutes, so that the cotton insulation of the wire will be completely saturated. The tray is then raised, and the armatures drained for approximately thirty minutes. The armatures are placed in an electric oven, and baked overnight at a temperature of about two hundred and fifty degrees. The total day's production is generally dipped and baked at one time. The armature is taken from the oven and placed in a lathe where the commutator is planed down sufficiently to true the brush surface of the commutator. The end of the shaft of the armature is placed into a chuck and is rotated, and, by applying an abrasive cloth to the surface of the laminated core, the shaft and the commutator, they are polished and all the excess varnish is removed from the metal. The armature is then placed between centers and a small saw blade, approximately one-quarter inch in diameter, cuts the level of the mica insulation between the commutator bars to a level below that of the surface of the bars of the commutator. The armature is tested for shorts, by placing it onto a magnetic growler (that is, by setting the core part on the magnet) and if there is a short in the armature, a thin metal blade will be attracted to the core. The armature is tested to see if it is grounded by touching one wire to the shaft and the other to the commutator, and if it is grounded, the connection is made and a light attachment is illuminated. The shafts are then checked for undersize with a micrometer. If the shaft is too far undersize, it has to be knurled or sleeved. The shaft is roughened so that it will fit snugly with a bearing. If the shaft is too small to be knurled, it must be turned down on a lathe and a metal sleeve driven over it. About fifty per cent of the shafts must be knurled, and about fifteen per cent must be sleeved. The armatures are then finally checked by rotating the commutators under a micrometer, to insure that every bar of the commutator is of approximately the same height, otherwise proper contact with the generator brushes will not be made. The ends of the shafts are then rethreaded and the armatures are ready for boxing.
The boxes bear the legend: "Armex Rebuilt Armature. `A Quality Product'. Armex Code (giving number)."
The rebuilt armatures are sold, in most instances, to jobbers who bring in old armatures in exchange — the plaintiff's charge being merely for the rewinding, and ranging from $2.50 to $22.50. If a sale is made to one who does not bring in an old armature, an added small charge of from fifty cents to a dollar is made for the core.
The plaintiff also buys up outworn armatures from dealers in secondhand automobile parts. Additional facts appear in the opinion.
It is the contention of the plaintiff that, as it is not "a manufacturer" or "producer", as these designations are used in Section 606(c) of the Revenue Act of 1932, it is not liable for the tax collected.
In Section 606(c) of the Revenue Act of 1932, the Congress provided:
"There is hereby imposed upon the following articles, sold by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the price for which so sold:
* * *
"(c) Parts or accessories (other than tires and inner tubes) for any of the articles enumerated in subsection (a) or (b), 2 per centum."
This is followed by certain definitions and enumerations of specific articles, which do not concern us.
The Government, in insisting that the tax on rewound armatures was collected rightfully, relies on the preamble of this subdivision, and mainly on the words "manufacturer" or "producer."
The verb "manufacture" is thus defined in Webster's Unabridged Dictionary, latest (1937) edition: "Manufacture. To make (wares or other products) by hand, by machinery, or by other agency; as, to manufacture cloth, nails, glass, et cetera."
A manufacturer, of course, is "one who manufactures. A factory operative. An employer of operatives in manufacturing; the owner of a manufactory."
The verb "produce" is almost synonymous with "manufacture." I think, in a certain sense, a thing may be produced, although it is not manufactured, because it may be the result of the assembling of various parts; but, ordinarily, the words are the same. The same dictionary gives this definition of "produce": "To give being or form to; to manufacture; make; as, he produces excellent pottery." And the definition of producer is "one who produces, brings forth, or generates."
The Internal Revenue Bureau, in Regulations 46, relating to excise taxes under the Revenue Act of 1932, gives a different interpretation to the word. Article 4, page 3 of the Regulations states: "As used in the Act, the term `producer' includes a person who produces a taxable article by processing, manipulating, or changing the form of an article, or produces a taxable article by combining or assembling two or more articles."
Doubts arising in the interpretation or the application of a taxing statute to a particular set of facts are resolved against the taxing body. Erskine v. United States, 9 Cir., 1936, 84 F.2d 690; Commissioner v. Bryson, 9 Cir., 1935, 79 F.2d 397, per Denman, J.; Miller v. Standard Nut Margarine Company, 1932, 284 U.S. 498, 52 S. Ct. 260, 76 L.Ed. 422; General Petroleum Corp. v. United States, D.C., 1938, 24 F. Supp. 285.
The problem, then, is whether a product, which has been known to the trade and has been on the market for over fifteen years and which is designated by the person who makes it as a "rebuilt armature", is taxable as a "manufactured" article. In a sense, of course, any transformation, resulting from the labor of man, may be considered manufacturing. And where, as in the Bankruptcy Act, 11 U.S.C.A. § 1 et seq., the legislative intent is to subject the largest group of persons or corporations to its provisions, courts have given to the word "manufacture" its broadest sense. Friday v. Hall Kaul Co., 1910, 216 U.S. 449, 30 S.Ct. 261, 54 L.Ed. 562, 26 L.R.A., N.S., 475.
However, in taxation statutes, it has been given its narrower meaning — that of production of articles for use from raw and prepared materials by giving them new forms, qualities and properties or combinations. This excludes repairing or processing aiming to complete an article or to restore it to its former condition. State v. J.J. Newman Lumber Company, 1912, 102 Miss. 802, 59 So. 923, 45 L.R.A., N.S., 851; 4 Words and Phrases, Second Series, page 272; 6 Words and Phrases Third Series, page 707.
Thus in Hartranft v. Wiegmann, 1887, 121 U.S. 609, 615, 7 S.Ct. 1240, 1243, 30 L.Ed. 1012, the court held that persons engaged in the business of cleaning shells by acid and grinding them on an emery wheel and then etching them, sometimes by acid, so that they might be sold as ornaments, were not "manufacturers of shells", saying: "We are of opinion that the shells in question here were not manufactured, and [appellees] were not manufacturers of shells, within the sense of the statute imposing a duty of 35 per centum upon such manufactures, but were shells not manufactured, and fell under that designation in the free list. They were still shells. They had not been manufactured into a new and different article, having a distinctive name, character or use from that of a shell. The application of labor to an article, either by hand or by mechanism, does not make the article necessarily a manufactured article, within the meaning of that term as used in the tariff laws. Washing and scouring wool does not make the resulting wool a manufacture of wool. Cleaning and ginning cotton does not make the resulting cotton a manufacture of cotton." (Italics added)
Before a "manufacture" may be said to exist, the change made in an article must result in a new and different one. As said in Anheuser-Busch Ass'n v. United States, 1908, 207 U.S. 556, 562, 28 S.Ct. 204, 206, 52 L.Ed. 336: "The words of the statute are indeed so familiar in use and of meaning that they are confused by attempts at definition. Their first sense as used is fabrication or composition, — a new article is produced of which the imported material constitutes an ingredient or part. When we go further than this in explanation we are involved in refinements and in impracticable niceties. Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor, and manipulation. But something more is necessary, as set forth and illustrated in Hartranft v. Wiegmann, 121 U.S. 609, 7 S.Ct. 1240, 30 L.Ed. 1012. There must be transformation; a new and different article must emerge, `having a distinctive name, character or use.'" (Italics added)
These cases have been followed consistently. The quotations just given were adopted by the Court, in 1931, in interpreting the word "manufacture" in the patent statute, in American Fruit Growers, Inc., v. Brogdex, 1931, 283 U.S. 1, 11, 12, 51 S. Ct. 328, 75 L.Ed. 801. And see, In re McKee, Cust. Pat. App., 1935, 75 F.2d 636, 638.
Applying this principle, the following processes have been held, among others, not to constitute "manufacturing": Automobile repairing (Cate v. Connell, 1 Cir. 1909, 173 F. 445); house construction (In re Kingston Realty Co., 2 Cir. 1908, 160 F. 445); replacement of automobile bodies (Thurman v. Swisshelm, 7 Cir. 1929, 36 F.2d 350).
Instances of repairs or restorations of parts of automobiles, some of the type here involved, others of a different type, which have been declared not to amount to "manufacturing" are: Retreading tires, (Skinner Tire Rubber Co. v. United States, D.C., 1934, 8 F. Supp. 999); rebuilding armatures (Monteith Bros. Co. v. United States, D.C., Ind. 1936, 18 American Federal Tax Reports, 1320); rebabbiting connecting rods (Hempy-Cooper Mfg. Co. v. United States, D.C.Mo., 1937; 19 American Federal Tax Reports, 1313; Bardet v. United States, D.C.Cal. 1938, Prentice-Hall Federal Tax Current Court Decisions for 1938, Par. 5.507); rebuilding generators and armatures (Becker-Florence Electric Co. v. United States, D.C.Mo., 1938, Prentice-Hall Federal Tax Service Current Court Decisions for 1939, Par. 5.161).
The government relies upon two cases which, seemingly, are the other way. Clawson and Bals, Inc. v. Harrison, D.C.Ill. 1938 [no opinion for publication]; Edelmann Co. v. Harrison, 1939 [no opinion for publication]. In the first case, Judge Barnes, admitting frankly that his opinion is contrary to other adjudications, held that rebuilt connecting rods sold on the same basis or on the same warranties as those produced from entirely new materials, involved the process of manufacture. It seems to me that Judge Barnes was influenced by the fact that the company held itself out as a manufacturer and that his determination of the matter was grounded chiefly upon a broad definition of "manufacturing," which has been rejected by our higher courts, when dealing with taxing statutes. His opinion says:
"The situation here seems to be much like the situation in the worn-out tire case. Those worn-out tires look like tires. These worn-out connecting rods undoubtedly look like connecting rods, and one can recognize that they have been connecting rods, just as one can by looking at a worn-out tire recognize the fact that it has been a tire. But in each case, the articles are worn out. A manufacturing process is, in the opinion of the court, required to make a serviceable product; and in the case of the connecting rod, the plaintiff carries on that manufacturing process." (Italics added)
The second case does not contain an opinion, but merely findings. Findings do not always indicate the legal theory of the decision. But it is evident that the court there was dealing with a concern which was manufacturing armatures and generators, sometimes from new materials and sometimes from a combination of new materials and worn-out parts. One can readily see that where it is hard to segregate newly manufactured articles from rebuilt articles, the taxpayer is not entitled to the benefit of the doubt as to the application of a taxing statute to him. In any event, I believe that the definition of "manufacturing" which I have adopted is more in line with the rulings of the higher courts on the subject.
The evidence shows that the business of the plaintiff here is that of reconditioning or restoring armatures, on which the wiring has been worn out, to their original state. By a process which is described fully in my introductory note to this opinion, there is produced a rebuilt armature, which, in shape, form, function, and performance, is identical with that of the original new armature before the wiring had been worn down or burned out by use. In the process of rewiring, the central part of the armature, the core, i.e., the shaft, the laminated core, and the commutator, made of copper, are retained. There is no change in form. The restored article can be used only in the type of automobile for which it was originally designed.
Because the plaintiff engages in the business on a large scale — instead of giving individual service to each person who brings in a worn-out armature for the purpose of having it rewound — it is its practice to require jobbers to turn in, in exchange, worn-out armatures. And when a person comes in to purchase a rewound armature, instead of being given back his own core, he is given a different core of the same kind, upon which the rewinding has been done.
Ninety per cent of the sales are to purchasers who bring in original cores in exchange.
The central component parts, the shaft, the laminated core and the commutator, are not replaced when they are damaged beyond repair. When this is the case, the cores are thrown away.
So that, in the last analysis, we have here merely a process of repair and restoration, aiming to restore an article, a portion of which has been worn away by use. And the article, which is the result of this repair or restoration, is a rebuilt article in which there is no change of form, no new combination, or assembly, but merely the replacement of a worn-out part of a standard article of commerce.
I do not think the Congress of the United States intended this to be considered a "manufacture", or the person who engages in this process a "manufacturer" or "producer", and thus subject the same article to taxation in its rebuilt form, after it had already been taxed in its new form.
If a person with mechanical skill were asked to rewind an armature, by one who paid him the value of his labor and materials, would the process be one of manufacturing? I do not think so. The fact that this company does this on a large scale does not alter the situation. In neither case are we dealing with a "manufacturer" or "producer".
Judgment will, therefore, be for the plaintiff for the amount sued for, with interest to be computed according to the amounts and the dates of payments.