Helvering v. Insular Sugar Refining Corp.

GRONER, C. J.

This is a petition by the Commissioner of Internal Revenue to have us review and reverse a decision of the Processing Tax Board of Review, determining that respondent is entitled to a refund of the sugar processing tax paid by it in the period September 12, 1934, to January 6, 1936, to the extent of $230,511.31. The case is this:

Respondent, which we shall call “claimant”, was at the time in question a Philippine corporation, with its office and refinery in the Islands. It purchased there its raw sugar, processed it, and sold its product as to about fifteen per cent (15%) locally and the remainder, or about eighty-five per cent (85%), in the United States. In the period in question it paid a tax amounting to $549,561.24. When later the tax was held illegal, Congress promptly passed an act to provide the manner and conditions of refund.¹ By its terms, if the Commissioner denied refund, the taxpayer might have recourse to a statutory Board, with right of review in a Circuit Court of Appeals. In the latter case the court is authorized to affirm, reverse, or modify, if the decision of the Board “is not in accordance with law”.

In this case claim for refund was first made in the amount of approximately $550,000 and denied by the Commissioner, after which claimant filed an amended claim with the Commissioner and later with the Board (on review) in the amount of $426,247.16.² Extensive hearings were held; many witnesses testified, including Government auditors and accountants; claimant’s books, records and invoices were examined by Treasury accountants, as were also the books, records and invoices of claimant’s sales agent in the United States. The hearings extended over a considerable period of time, and the Board thereafter made findings of fact and decided (three members dissenting) that claimant was entitled to a refund in the amount of $230,511.31 for processing taxes paid, the burden of which the Board found claimant had not shifted to others “in any manner.” The Commissioner thereafter moved for rehearing and for additional findings, which after consideration the Board denied. The Commissioner then applied to this court for review.³

The procedural part of the Act makes the decision of the Board “final in the same manner that decisions of the Board of Tax Appeals become final under section 1005 of the Revenue Act of 1926, as amended.” ⁴ And of the finality of decisions of the Tax Board (now Tax Court), the Supreme Court has recently said:⁵ “All that we have said of the finality of administrative determination in other fields is applicable to determinations of the Tax Court.”

No more sweeping statement of finality could be made, for an examination of the cases in which the Supreme Court has applied the rule in “other fields” leaves nothing to the imagination, and is a clear and definite mandate to the courts not to reweigh the evidence or pass upon the credibility of witnesses. Due respect for the rule—which, in duty bound, we have imposed upon ourselves in circumstances when we thought its relaxation would have better met the ends of justice—requires us, we think, to accept without interference findings of a Board which, as is the case here, have support in the evidence. Hence, it has seemed to us that since it can not be doubted that the issue here is wholly factual, and the thirty-one separate findings cover the case like a blanket, a proper regard for the rule requires its application. But we also think that there are other factors in the case which, given fair consideration, compel the same result.

The Act of Congress we are considering provides that it shall be prima facie evidence that the burden of the tax was borne by the claimant, to the extent that the average margin per unit of commodity processed, figured by a formula which the Act prescribes, was lower during the tax period than the average margin was during the period before and after the tax period. On the other hand, if the average margin during the tax period was not lower, that fact is made prima facie evidence that no part of the tax was borne by the claimant, but was shifted. “Average margins” are comparative operating profits, ascertained by deducting the cost of the raw sugar from the market price of the refined sugar and eliminating from consideration overhead and other expenses of operation. Here the Board expressly found, and the fact is not only not disputed, but is admitted, that the average margin per unit (one pound of sugar) of the commodity processed was $.002244 lower during the tax period than the average margin per unit processed during the period before and after the tax.

We have, therefore, here a statutory prima facie case on which alone claimant is entitled to rely for refund until it is rebutted “by proof of the actual extent to which the claimant shifted to others the burden of the processing tax.” ⁶

Careful examination of the record wholly fails to show—except as to sugar sold in the Islands, as to which the Board found claimant had not borne the burden of the tax—and except as to a few inconsequential sales in the United States—one jot or tittle of proof of the extent, “actual” or otherwise, to which claimant, as to all the other sales, aggregating in value more than four million dollars ($4,000,000), and on which a tax was paid in excess of five hundred thousand dollars ($500,000), had shifted the burden, or been reimbursed therefor. And this was also the conclusion of the Board. Viewed in this light, the Board found that the statutory formula should be applied and this resulted in an order of refund of about one-half the tax paid.

In the case of the Philippine sales, claimant’s invoices to customers showed as a separate item an amount equivalent to the amount paid by it as processing tax, and the Board held this enough to show that as to these sales the burden of the tax had been shifted. This applies to less than fifteen per cent (15%) of the sales. But the same condition did not apply in the case of American sales and the Board found, and the finding is not disputed, that in no instance did the processing tax appear as a separate item on any of the American invoices. The question then is— is there proof elsewhere that the tax burden was shifted? The Commissioner points to no instance and we find none. The course of business pursued by claimant was to ship its sugar by consignment to an agent in San Francisco, with branch offices and warehouses in various other ports on the Pacific Coast. As a result, claimant was authorized to draw on the agent by sight draft from eighty-five (85) to ninety (90) per cent of the San Francisco market value at time of shipment. These shipments did not begin until more than eight months after the tax became effective in the United States. For a part of the time after the imposition of the tax, claimant’s memoranda to its agent included an item denominated “processing tax.” But the uncontradicted evidence is, and the Board so found, that this item was disregarded in the sale of the sugar by the agent to the public, as well as in the monthly settlements between agent and claimant, and that payment was made to claimant on the basis of the actual sales price of sugar, less expenses and commissions, and that any excess or deficiency in the amount drawn by draft from Manila was adjusted by appropriate bookkeeping entries. In the light of this evidence, the answer to the question in what degree, if any, the price of sugar sold by the agent was increased solely by reason of the tax, does not appear, and as nearly as we can tell from anything that does appear, the question can be answered only by inference and guess. It does, however, appear that the current San Francisco market price for sugar in the effective month (June 8, 1934) was higher than the preceding month by approximately the amount of the tax, and this price, with fluctuations, held for some time. It may not be unreasonable, in this circumstance, to assume that the advance was due to the tax and that claimant got the advantage of this increased price, or some of it, to the extent that its sugar was sold in that period. But it is a fact and not a surmise that claimant did no processing and paid none of the tax involved in this case until February, 1935, nearly eight months after the tax was effective in the United States, and in that period the San Francisco market price had changed by a number of advances and by a number of recessions. The Board’s finding on this subject is that the market price of sugar on the Pacific Coast is seasonable and is “determined entirely” by competitive conditions,⁷ and by reference to the schedules made a part of the Board’s findings, it appears that the price scale during the winter months of the year preceding the tax was about as high as in similar months after the tax became effective, and these were the months in which claimant’s sugar was processed. In any case, the decision of the Board in reducing claimant’s refund to fifty per cent (50%) of the amount of the tax paid, for reasons which we shall hereafter state, may very well have taken care of any assumed advantage it enjoyed as a result of the market advance. But however this may be, the burden of showing “the extent” of the shifting—if indeed shifting is shown by selling in a current market as to which claimant had no part in making or controlling—is, in the admitted facts of this case, by the statute put on the Commissioner, and it is perfectly clear he has not met it, and in that case the statutory average marginal formula must be applied if the Act of Congress is to be given effect.

How much of claimant’s sugar in storage in San Francisco, or other Western ports, on June 8, 1934—the American date of the tax—was sold on the market advance at that time is of no consequence here, since the “floor tax” paid on that sugar is not in issue. As to it claimant asks no refund. But it is significant that, on the average, claimant’s sugar processed after the effective day of the Act, sold considerably under the market prices prevailing when the tax became effective in the United States. And this is recognized by the Board in the finding that “petitioner [claimant] has proved that the actual proceeds derived from the sale of * * * sugar were substantially less than the theoretical gross sales value [i. e., market value] used in the computation,” in determining the statutory average margin. All of this tends to show that claimant, whatever its anticipations may have been, was unable to increase its sales price over the increased cost of production, by reason in part of the increased cost of the raw sugar (some Twelve Cents ($.12) a bag), anywhere near the amount of the tax. As a result claimant sustained an actual out of pocket loss on every bag of sugar processed during the tax period. These various factors the Board considered in weighing the rebuttal evidence of the Commissioner. Nor does it by any means follow that the Commissioner’s assumption, which we have said may be indulged, that the June 1934 advance in the market was attributable solely to the tax, is true. For, by the same process of reasoning, it would follow that when the tax was withdrawn, the market would decline. And this, as the record shows, it not only did not do, but instead, it actually advanced. In this aspect, it would be just as reasonable to ascribe the advance to the limitation of the supply under the quota system which the Act imposed; and this would be in accordance with the Board’s finding that the price was largely competitive and dependent upon supply and demand. If, therefore, the case is to be decided on assumptions, the application should not be one-sided. But be that as it may, in the tax period as a whole, the actual price received by claimant per bag of sugar was equal to an advance of only a little more than one-half the amount of the tax, and when to this is added the additional price rise in the same period in the cost of the raw sugar, which Congress directed should be taken into account,⁸ it seems to us to show that the advance in the market price for refined sugar did not by more than half absorb the tax. All of this indicates that if there was a shifting, it was certainly no greater than the amount by which the application of the “formula” reduced the amount of the refund. And this conclusion seems justified when it is borne in mind that in 1933, preceding the tax, claimant’s profits were over $350,000, and for the half year after the tax, $130,000, whereas in the twelve months of the tax it sustained an out of pocket loss of over $55,000.

On the whole case, it is apparent that when Congress authorized the refund of the proscribed tax in such a way as to provide on the one hand proper reimbursement for money illegally exacted, and on the other hand to avoid unjust enrichment to any taxpayer, it was mindful of the difficulties of the task, for in the Report of the Senate Committee on the Bill it is said—“The question as to whether processing taxes were passed on, however, involves extremely complicated economic and accounting considerations.”⁹ In recognition of this fact Congress provided a simple formula which should apply in those cases in which complicated accounting considerations made it impossible to determine the precise question with reasonable certainty; and it constituted a Board of Treasury experts to apply the formula in a proper case.

No one reading the evidence and exhibits in the present case can doubt that here the Congressional anticipation was realized and the wisdom and fairness of the statutory formula vindicated. For certainly, on this record it would be but conjecture and surmise to say that the tax burden was shifted, or if it was, to what extent it was, and that was obviously the conclusion of the Board when it said:

“The decision of the Board is based upon the presumption which arises under section 907(a) of the Revenue Act of 1936. Both parties submitted evidence which may be considered to be in the nature of rebuttal of this presumption. It was admitted that the processing tax was billed separately with respect to sales of sugar made in the Philippine Islands, and the respondent adduced evidence which clearly shows that in certain other instances the processing tax was included in the sale prices; however, this showing is insufficient to account for the difference between the processing tax paid and the amount of refund as found under the provisions of Section 907(a). Moreover, the petitioner has proved that the actual proceeds derived from the sale of processing tax-paid sugar were substantially less than the theoretical gross sales value used in the computation of the margin for the tax period in accordance with the statutory formula. Because of factors such as these, and upon considering all of the rebuttal evidence, the Board is unable to find any ‘proof of the actual extent to which the claimant shifted to others the burden of the processing tax’ (Sec. 907(e)) sufficient to warrant a change in the amount of refund found due according to the statutory presumption.”

Clearly, this language must be accepted as reflecting the Board’s consideration and weighing of the Commissioner’s and claimant’s evidence, and of the application thereto of its expert knowledge; so that we have a case in which the Government illegally collected from claimant over $500,000, which in law and conscience it was obligated to repay to it, or to whoever had borne the burden of the payment. To determine the question, Congress adopted a formula, the application of which in doubtful cases it considered was sufficient to identify the loser and fix the amount of his recovery—unless the Commissioner should go forward and by satisfactory evidence show that his loss had been recouped. This the Commissioner has done only to the extent of showing a rise in the market price of the taxed product, equal to the tax, on or about the tax month in the United States; and on this showing he .rests. This the Board considered and, applying its special knowledge and experience, held insufficient on the weight of the evidence. And its conclusion, as our brother Hand recently remarked, “inevitably supersedes” that of a court not similarly endowed. Whether the reason of the rule assumes more than is true—ordinarily —opinions may differ, but in the “complicated economic and accounting considerations” recognized to exist in this case, two members of this court feel that its application here is altogether proper.

Affirmed.

1 Title VII of the Revenue Act of 1936, Sec. 906, 49 Stat. 1648, 1748, 7 Ü.S.C.A. §648.

2 The tax was effective in the United States from June 8, 1934, but in the Philippines only from September 12, 1934.

3 Sec.' 906 of the Act of 1936, supra.

4 Sec. 906 of the Act of 1936, supra.

5 Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 246.

6 Sec. 907(e), Act of 1936, 7 U.S.C.A. § 649(e), supra.

“Either the claimant or the Commissioner may rebut the presumption established by subsection (a) of this section by proof of the actual extent to which the claimant shifted to others the burden of the processing tax. Such proof may include, but shall not be limited to—

“(1) Proof that the difference or lack of difference between the average margin for the tax period and the average margin for the period before and after the tax was due to changes in factors other than the tax. * * *

“(2) Proof that the claimant modified existing contracts of sale, or adopted a new form of contract of sale, * *

7 Finding 17 of the Board.

8 Revenue Act of 1936, § 907 (b) (1) “ * * * From the gross sales value of all articles processed by the claimant from the commodity during such month, deduct the dost of the commodity processed dui’ing the month and deduct the processing tax paid with respect thereto. The sum so ascertained shall be divided by the total number of units of the commodity processed during such month, and the resulting figure shall be the margin for the month.” (Italics added.)

9 Senate Report 2156, 74th Congress, 2nd Sess.