Opinion
CIVIL ACTION NO. 01-2057.
June 9, 2003.
MEMORANDUM
Introduction
Plaintiff, the United States of America, seeks to recover $234,929.89 in unpaid excise taxes, penalties and interest from defendant Norman P. Bachman, Jr. Plaintiff also seeks a declaration that the federal tax liens and judgment lien against defendant's property are valid and that they may be foreclosed upon. From the record adduced at trial, the court makes the following findings of fact and pertinent conclusions of law.
Findings of Fact
1. Defendant, Norman P. Bachman, Jr., obtained a class 6 ATF license to manufacture ammunition for resale and began operating a business he designated as Norman Bachman Custom Ammunition Manufacturing in the first quarter of 1984.
2. Defendant was engaged in the business of manufacturing and reloading ammunition from the first quarter of 1984 through June 30, 1986. During those periods, defendant never filed excise tax returns.
3. Defendant's license to manufacture ammunition was revoked due to a felony conviction and he ceased operating his business on or before June 30, 1986.
4. After defendant's license was revoked, an individual named Connie Stevens obtained her class 6 ATF license, which was then used and displayed at Bachman Custom Ammunition Manufacturing through the end of 1989.
5. At all times from 1984 through 1990, the manufacturing, reloading, and sales of ammunition were done at defendant's residence.
6. At all times from 1984 through 1990, defendant owned all of the equipment used to manufacture and reload ammunition.
7. Defendant kept records of his sales from the first quarter of 1984 until his license was revoked in 1986.
8. In 1989, defendant acquired an interest in the Real Property in Lynn Township, Lehigh County, PA, by devise upon the death of his father, Norman P. Bachman, Sr.
9. On April 21, 1991, a delegate of the Secretary of the Treasury made excise (Form 720) tax, penalty, and interest assessments against defendant for the calendar quarters ending March 31, 1984, through March 31, 1990, inclusive. On June 24, 1991, a delegate of the Secretary of the Treasury made excise (Form 720) tax, penalty, and interest assessments against defendant for the calendar quarters ending June 30, 1990, through December 31, 1990, inclusive.
10. Notice and demand for payment of each of the assessments was given to defendant.
11. As a result of defendant's failure to pay the tax assessments, federal tax liens arose on the dates of the assessments and continue to exist in favor of the United States against all property and rights to property belonging to defendant, including his interest in the Real Property.
12. Notices of federal tax liens against defendant with respect to all of the assessments were filed in the office of the prothonotary of Lehigh County on September 19, 1991, and were duly and timely refiled in March of 2001.
13. On August 1, 1991, defendant, through his attorney, filed excise tax returns for the quarters ending March 31, 1984, through June 30, 1986 and paid excise tax in the amount of $1,153.36. The returns filed by defendant on August 1, 1991, excluded what defendant believed were tax-exempt sales of customer supplied brass and tax-free sales to law enforcement agencies.
14. Defendant reloaded brass supplied by his customers as part of the sales of Bachman Ammunition. However, there was no record or evidence of customers receiving back exactly the identical brass that they provided.
15. Defendant did not maintain records or other evidence of tax-free sales to law enforcement between 1984 and 1986.
Discussion
In a case to reduce tax assessments to judgment, the government makes a prima facie case by showing that it made a timely assessment. United States v. Singer, 2001 WL 964144, *1 (E.D. Pa. Aug. 21, 2001). This can be done by introducing Certificates of Assessments and Payments at trial, which the government did. (Record at 19). Once the government has made a prima facie case, the burden shifts to the taxpayer to prove that he is not liable for the assessments made against him.Singer, 2001 WL 964144, *2. Defendant's liability turns on the resolution of two issues: first, whether any of defendant's sales were tax-free or tax exempt; and second, whether defendant was liable for the excise tax after his manufacturing license was revoked in 1986.
Section 4181 of the Internal Revenue Code (the "Code"), 26 U.S.C. § 4181, imposes an eleven (11) percent excise tax on the manufacturer, importer, or producer of shells and cartridges. This excise tax is not applicable where the manufacturer merely reloads shells belonging to his customer and is paid for his labor and materials. Rev. Rul. 56-209, 1956-1 C.B. 511. However, for this exemption to apply, "there must be a return to the customer of the identical shells tendered by the customer for reloading." Id. It is not applicable "[i]f, instead of a return of the identical shells, an equivalent number is withdrawn from the inventory of the reloader." Such an exchange is regarded as a taxable sale. Id.
At trial, defendant testified that his customers supplied the brass approximately eighty (80) percent of the time. (R. at 34). However, he also testified that "a lot of times it was their brass, but many times it was an exchange." (R. at 39). Defendant was unable to produce any records or other evidence of specific transactions in which he returned to customers the identical brass they had provided.
Section 4221(c) of the Code, 26 U.S.C. § 4221(c), provides that sales by a manufacturer to a state or local government for the exclusive use of a state or local government are not subject to the excise tax imposed by § 4181. Treasury Regulation § 48.4221-5(c) requires evidence to be retained in support of tax-free sales under § 4221, in the form of a certificate executed and signed by an authorized officer or employee of the relevant state or local government. Defendant testified at trial that approximately five (5) to ten (10) percent of his sales between 1984 and 1986 were tax-free sales to law enforcement agencies. (R. at 34-35). However, he was unable to produce any substantiating evidence of tax-free sales to law enforcement agencies between 1984 and 1986. The only evidence he produced on this issue were two accounting statements from Fort Meade, Maryland, detailing purchases made in 1989 and 1990.
The government argued at trial that defendant was responsible for the excise tax from the time Bachman Custom Ammunition Manufacturing opened in 1984 until it ceased to exist in January of 1990. Defendant argued that his excise tax liability ended after his license was revoked and Connie Stevens obtained a license that was displayed and used at the business.
Defendant testified that after his license was revoked, his then-girlfriend Connie Stevens obtained a license and took over the business, with defendant remaining as an employee. He testified that she maintained the business' records from 1987 onward, and that she took those records with her when she left the business after they split up sometime in late 1989. Defendant testified that he retained ownership of the machinery and the equipment (R. at 57), but that after his license was revoked, Connie Stevens was the only person whose signature was authorized on the bank account for Bachman Ammunition. (R. at 59-60). Defendant testified that after his license was revoked, the business' bank account was in the name of "Bachman Ammunition Company with Connie Stevens as the Owner." (R. at 59). Based on the evidence presented, the court cannot conclude that defendant was responsible for the excise taxes after his license was revoked in 1986.
Conclusions of Law
1. The court has jurisdiction of this matter pursuant to 28 U.S.C. § 1340 and 28 U.S.C. § 1345.
2. The government made a prima facie case against defendant by making a timely assessment against him and presenting the Certificate of Assessments and Payments at trial.
3. Defendant has not maintained records or other evidence sufficient to substantiate any of his claims of tax-free or tax exempt sales.
4. Defendant was not liable for the excise tax after June 30, 1986, when he ceased operating his business.
5. Defendant is liable for unpaid excise tax, penalties, and interest from the first quarter of 1984 through June 30, 1986.
6. An assessment of the amount of tax, penalties, and interest due will be made by the court upon further submissions from the parties.
It is unclear from the record whether the IRS retained the $1,153.36 that defendant paid in 1991. If this money was retained, it should be credited against any tax assessed.
7. The tax liens and the judgment lien, in an amount to be determined by the court upon further submissions from the parties, are valid and subsisting liens that attach to defendant's interest in the real property inherited from his father, to the extent necessary to satisfy the judgment against the defendant.
8. A final order will be entered by the court upon further submissions from the parties.
ORDER
AND NOW, this day of June, 2003, IT IS HEREBY ORDERED that the government shall within ten (10) days of this Order submit an assessment of tax, penalties, and interest owed by defendant from the first quarter of 1984 through June 30, 1986, consistent with the court's findings of fact and conclusions of law. IT IS FURTHER ORDERED that defendant shall respond within ten (10) days thereafter with an assessment of tax, penalties, and interest owed from the first quarter of 1984 through June 30, 1986, consistent with the court's findings of fact and conclusions of law.