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Greeting Card Company Insists It Is Exempt from UNICAP Rules

OCT. 2, 2000

Suzy's Zoo v. Commissioner

DATED OCT. 2, 2000
DOCUMENT ATTRIBUTES
  • Case Name
    SUZY'S ZOO, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 00-70461
  • Authors
    Shaw, Richard A.
    O'Brien, Bruce M.
  • Institutional Authors
    Higgs, Fletcher & Mack LLP
  • Cross-Reference
    Suzy's Zoo v. Commissioner, 114 T.C. No. 1; No. 9423-98 (January 6,

    2000) (For a summary of this opinion, see Tax Notes, Jan. 17, 2000,

    p. 360; for the full text, see Doc 2000-1101 (24 original pages) or

    2000 TNT 5-9 Database 'Tax Notes Today 2000', View '(Number');

    Suzy's Zoo Appellate Brief see Doc 2000-23086 (67 original pages) or

    2000 TNT 191-58 Database 'Tax Notes Today 2000', View '(Number';

    Department of Justice Appellate Brief, see Doc 2000-25141 (68

    original pages) or 2000 TNT 202-42 Database 'Tax Notes Today 2000', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    capitalization rules, uniform, creative expenses
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-27271 (41 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 221-21

Suzy's Zoo v. Commissioner

 

=============== SUMMARY ===============

 

In a reply brief for the Ninth Circuit, a greeting card company has argued that it is exempt from the uniform capitalization rules because it is a "small reseller" of property produced under contract.

Suzy Spafford was the majority owner of Suzy's Zoo, which sold greeting cards and paper products with cartoon characters. Spafford was responsible for creating the cartoon characters. Zoo didn't sell its original cartoon drawings or any items not bearing images of its cartoon characters. The company used independent printing companies to produce its products. Zoo would send an original cartoon drawing to a printer, who created proofs of a paper product as required in Zoo's specifications. The printers weren't allowed to sell any of the cartoon characters or paper products. For fiscal year 1994, Zoo reported gross receipts of $5.9 million. The IRS determined that Zoo was subject to the UNICAP rules under section 263A and, thus Zoo overstated its cost of goods sold because the company had not changed its accounting method to account for the UNICAP rules.

The Tax Court, agreeing with the IRS, held that Suzy's Zoo did not qualify for any statutory exceptions because it produced its paper products. The court determined that the printers' reproduction process was mechanical and that the company's ownership interest in the paper products attached at the first stage of their production -- when the cartoon characters were developed and created. The court also held that the year that ended June 30, 1994, was the year in which Zoo was required to change its accounting method to conform to the UNICAP rules for section 481 purposes. (For a summary of this opinion, see Tax Notes, Jan. 17, 2000, p. 360; for the full text, see Doc 2000-1101 (24 original pages) or 2000 TNT 5-9 Database 'Tax Notes Today 2000', View '(Number'.)

Suzy's Zoo asserts that it is in the business of reselling goods purchased from third parties, which bear its logo designs. It maintains that it is a producer only because section 263A provides that the taxpayer shall be treated as producing any property produced for the taxpayer under a contract. Suzy's Zoo further insists that it was not subject to UNICAP because it wasn't a producer or engaged in production under a contract. The company argues that a design is printed on a manufacturer's product and that is no more than a de minimis modification to the product. Zoo contends that it is entitled to rely on reg section 1.263A-2(a)(1)(ii)(B)(2)(ii) that provides for a routine purchase order exception.

Suzy's Zoo also denies that it can't simultaneously be a producer and a reseller. The company maintains that it need not be engaged primarily in the business of purchasing goods for resale to qualify and be eligible for the small reseller exemption. Finally, Suzy's Zoo argues that if the uniform capitalization rules are applicable, a section 481 adjustment should have been made for the first taxable year beginning after December 31, 1986 as required by section 803(d)(2)(B) of the Tax Reform Act of 1986.

 

=============== FULL TEXT ===============

 

UNITED STATES COURT OF APPEALS

 

FOR THE NINTH CIRCUIT

 

 

Agency No. 9423-98

 

Northern California

 

(San Francisco)

 

 

ON APPEAL FROM THE UNITED STATES TAX COURT

 

HONORABLE DAVID LARO, PRESIDING

 

 

APPELLANT'S REPLY BRIEF

 

 

Dated: October 2, 2000

 

 

Richard A. Shaw, Esq.

 

(SBN 044037-0)

 

 

Bruce M. O'Brien, Esq.

 

(SBN 108495)

 

 

HIGGS, FLETCHER & MACK LLP

 

401 West "A" Street, Suite 2600

 

San Diego, CA 92101

 

(619) 236-1551

 

 

Attorneys for Appellant, SUZY'S ZOO

 

 

TABLE OF CONTENTS

 

 

I. INTRODUCTION

 

 

II. ARGUMENTS

 

 

A. The Applicable Issues For Review Are Legal Issues To Be

 

Reviewed De Novo, And Are Not Errors Of Findings Of Fact

 

 

B. Commissioner Misapplies Facts To The Case

 

 

C. Both The Commissioner And Suzy's Zoo Agree That Taxpayer

 

Was A Producer Under Contract

 

 

D. The Old Manufacturers Excise Tax Cases Do Not Set An

 

Appropriate Standard For Testing Production Under Contract

 

Cases Under UNICAP

 

 

E. Suzy's Zoo Was Not Subject To UNICAP Because It Was

 

Neither A Producer Nor Engaged In Production Under A

 

Contract

 

 

F. Commissioner Wrongfully Asserts That The Taxpayer Cannot

 

Simultaneously Be A Producer And A Reseller

 

 

G. Internal Revenue Service Notice 88-86 Is Particularly

 

Relevant

 

 

H. Suzy's Zoo Need Not Be Engaged Primarily In The Business Of

 

Purchasing Generic Goods For Resale In Order To Qualify As

 

A Reseller And Be Eligible For The Small Reseller Exemption

 

 

I. The Commissioner Also Misinterprets Treasury Regulation

 

Section 1.263a-3(A)(3) In Its Attempt To Misread The Word

 

"Incident" To Mean "Incidental" Or De Minimis

 

 

J. The Taxpayer Was Entitled To Treat Property As Property

 

Produced Under A Contract, Rather Than Directly Produced By

 

The Taxpayer, Even Though A Special Design Or Special

 

Application Was Required In The Production Contract And It

 

Was Not Intended For Self Use By The Manufacturer Of The

 

Product

 

 

K. The Tax Court And Commissioner Failed To Apply Their Own

 

Prior Determination That Golden Gate Litho Was Already The

 

Owner Of Inventory Property Sold To Suzy's Zoo And

 

Therefore, It Is Inconsistent To Treat Suzy's Zoo As Also

 

The Owner Of The Same Inventory Prior To The Sale From

 

Golden Gate Litho To Suzy's Zoo

 

 

L. The Commissioner Errs in Arguing That The Year Of Change

 

For Making An Administrative Adjustment Under Section 481

 

Was 1994, Instead Of 1988, When UNICAP Was Required To Be

 

Applied To Suzy's Zoo, If Applicable

 

 

III. CONCLUSION

 

 

CERTIFICATE OF SERVICE

 

 

CERTIFICATE OF COMPLIANCE

 

 

TABLE OF AUTHORITIES

 

 

CASES

 

 

Allen v. Smith 173 U.S. 389, 19 Sup. Ct. 446, 43 L.ed 741

 

 

Boise National Leasing, Inc. v. United States 389 F.2d 633 (9th Cir

 

1968)

 

 

Carbon Steel Co. v. Lewellyn 251 U.S. 501, 40 S. Ct., 283, 64 L.ed.

 

375

 

 

Chandler Laboratories, Inc. v. Smith DC 88 F.Supp 583 (E.D. Pa 1950)

 

 

Charles Peckat Mfg. Co. v. Jarecki 196 F.2d 849 (7th Cir. 1952)

 

 

Exmoor Country Club v. United States 119 F.2d 961 (7th Cir. 1941)

 

 

Golden Gate Litho v. Commissioner 75 T.C.M. (CCH) 2312 (1998)

 

 

Indian Motorcycle Co. v. United States 283 U.S. 570, 574, 51 S.Ct.

 

601, 603, 75 L.ed. 1277

 

 

Lozier v. Auto Owners, Co. 951 F.2d 251, 254 (9th Cir. 1991)

 

 

Okin v. Commissioner 808 F.2d 1338 (9th Cir.) cert. denied, 484 U.S.

 

802 (1987)

 

 

Pullman-Standard v. Swint 456 U.S. 273, 289 n19 (1982), 102 Sup. Ct.

 

1781, 72 L.ed. 2nd 66 (1982)

 

 

Reichelderfer v. Johnson 63 App. D.C. 334, 72 F.2d 552

 

 

United States v. Gamble-Skogmo, Inc. 91 F.2d 372 (8th Cir. 1937)

 

 

United States v. McConney 728 F.2d 1195, 1204 (9th Cir. 1984)

 

 

United States v. Page 302 F.2d 81, 82 (9th Cir. 1962)

 

 

Vinal v. Peterson Mortuary, Inc. 353 F.2d 814 (8th Cir. 1965)

 

 

CODES

 

 

Internal Revenue Code, 26 U.S.C.:

 

 

Section 263A

 

Section 263A(a)

 

Section 263A(a)(1)

 

Section 263A(b)

 

Section 263A(b)(1)

 

Section 263A(b)(2)

 

Section 263A(b)(2)(A)

 

Section 263A(b)(2)(B)

 

Section 263A(g)

 

Section 481

 

Section 6501

 

 

RULES AND REGULATIONS

 

 

Treasury Regulations, 26 C.F.R.:

 

 

Section 1.263A-2(a)(1)

 

Section 1.263A-2(a)(1)(ii)(B)

 

Section 1.263A-2(a)(1)(ii)(B)(1)

 

Section 1.263A-2(a)(1)(ii)(B)(2)(i)

 

Section 1.263A-2(a)(l)(ii)(B)(2)(ii)

 

Section 1.263A-3

 

Section 1.263A-3(a)(1)

 

Section 1.263A-3(a)(2)

 

Section 1.263A-3(a)(2)(i)

 

Section 1.263A-3(a)(2)(ii)

 

Section 1.263A-3(a)(3)

 

Section 1.471-1

 

Section 1.481-1(a)(1)

 

 

OTHER AUTHORITIES

 

 

American Heritage Dictionary of the English Language, 3rd Ed, (1992)

 

Internal Revenue Service Notice 88-86, 1988 C.B. 401

 

Internal Revenue Service Notice 88-78, 1988-2 C.B. 394

 

1 Merten's, Law of Federal Income Taxation, Section 3.101

 

Tax Reform Act of 1986 (P.L. 99-514, 100 Stat. 2085)

 

 

Section 803(d)

 

Section 803(d)(2)(B)

 

 

I.

INTRODUCTION

[1] It is the primary position of Suzy's Zoo that it is a "small reseller" entitled to exclusion from UNICAP under section 263A(b)(2)(B), 1 Regulation section 1.263A-3(a)(1), and Regulation section 1.263A-3(a)(3). 2 Suzy's Zoo also asserts that it is not subject to UNICAP at all because it is the non-owner of merchandise purchased from others pursuant to routine purchase orders under which no more than minimal modifications were made. Therefore, it is excluded under Regulation section 1.263A-2(a)(1)(ii)(B)(2)(ii). Appellee does nothing to dispel Appellant's position. 3

[2] The Commissioner repeatedly acknowledges in its Brief that the products that Suzy's Zoo resells have been produced under contract. Having admitted this several times, the Commissioner then errs in treating Suzy's Zoo as the "owner" from the beginning of the production process. The Commissioner and lower court have misapplied the regulatory concepts for "production," " ownership," "reseller" and "small reseller," as defined in the statute and the Regulations, to the stipulated facts. In doing so, the Tax Court and the Commissioner deprive the taxpayer of the very benefit Congress intended. It intended that small businesses which primarily buy goods, either fungible goods or goods produced under contract, should not be burdened with the complex and difficult Uniform Capitalization Rules adopted for other large businesses, or other businesses which are the direct producers of goods within their own shops or manufacturing facilities.

[3] The simple fact is that Suzy's Zoo fits within the direct intent of Congress as interpreted in the Regulations. It goes to the market place and purchases various products suitable for resale in gift stores or department stores around the Country. It adds further value to the products by having its designs placed on them so that the ultimate products are sold under the Suzy's Zoo trademark and design. The Regulations recognize that Suzy's Zoo is entitled to exclusion as a small reseller, even though it requires that its own designs be applied to the purchased products, and even though the manufacturer is prohibited from using those products for its own use. Here, the lower court erroneously adopted the Commissioner's aggressive position that violates its own published Regulations and Public Notice 88-86. It treats Suzy's Zoo as the deemed owner of the goods, even though it is the acquirer of property for resale under production contracts under UNICAP and is thereby entitled to rely on the small reseller exemption.

[4] Appellant believes that its Opening Brief explains the deficiencies in the Commissioner's Brief, however, some areas warrant further comment.

II.

 

 

ARGUMENTS 4

 

 

A. THE APPLICABLE ISSUES FOR REVIEW ARE LEGAL ISSUES TO BE

 

REVIEWED DE NOVO, AND ARE NOT ERRORS OF FINDINGS OF FACT.

 

 

[5] Both Suzy's Zoo and the Commissioner concur that legal conclusions are reviewed de novo and factual findings are reviewed for clear error. In this case, the facts were all stipulated. Commissioner now asserts that a determination of whether Suzy's Zoo is a producer or a reseller is a simple question of fact. However, none of the facts in this case are at issue. The issue on appeal is whether, in applying the stipulated facts regarding the operation of Suzy's Zoo's business, it is concludable as a matter of law that the property was "produced for the taxpayer under a contract," under section 263A(g) and Regulation section 1.263A-2(a)(1)(ii)(B), and whether it was a "reseller" or "small reseller" under standards defined in Regulation section 1.263A-3(a). The legal determination of whether taxpayer is an "owner" of purchased products, and whether the property is "produced under a contract," are specifically dependent on legal definitions in Regulation section 1.263A-2(a)(1). The issue is whether the lower court properly applied the legal standards set forth in the Regulations in its determination that as a matter of law, Suzy's Zoo was a "producer" and that it was not a "producer under a contract," eligible for the "Small Reseller" exemption.

[6] These interpretations and the application of the law are subject to de novo review by this Court. See Okin v. Commissioner, 808 F.2d 1338 (9th Cir.), cert. denied, 484 U.S. 802 (1987).

[7] Should the Court determine that the issues are not pure questions of law, then the issues are at least mixed questions of fact and law which must reviewed de novo. They require consideration of legal concepts and correct application of the law to the facts determined by the Trial Court. The United States Supreme Court has defined a mixed question as one:

". . . in which the historical facts are admitted or

 

established, the rule of law is undisputed, and the issue is

 

whether the facts satisfy the statutory standard, or to put it

 

in another way, whether the rule of law as applied to the

 

established facts is or is not violated."

 

 

Pullman-Standard v. Swint, 456 U.S. 273, 289 n19 (1982).

[8] The Ninth Circuit Court of Appeals reviews mixed questions of fact and law de novo. United States v. McConney, 728 F.2d 1195, 1204 (9th Cir. 1984); United States v. Page, 302 F.2d 81, 82 (9th Cir. 1962); Lozier v. Auto Owners, Co., 951 F.2d 251, 254 (9th Cir. 1991). 5

[9] Should the Court determine that the issue on appeal is whether there was a clear error as to findings of fact, it is Suzy's Zoo's contention that the lower court committed numerous clear errors fact. It erred in treating Suzy's Zoo as the "owner" of the various products (mugs, paper products, magnets, and other items). It also committed error in treating the creation of the cartoon images as part of the manufacturing process. It erred in failing to distinguish actual production from production under contract, in order that taxpayer could obtain the benefits of the $10 Million Small Reseller exclusion.

B. COMMISSIONER MISAPPLIES FACTS TO THE CASE.

[10] The first issue on appeal is whether the Tax Court erred in finding that the taxpayer was the actual producer of the VARIOUS PRODUCTS which are manufactured by third parties for Suzy's Zoo simply because Suzy's Zoo owns and controls the cartoon image printed on the products.

[11] Throughout its Brief, Commissioner attempts to focus entirely on the single line of greeting cards as the product of Suzy's Zoos. In fact, greeting cards represent only 38.81% of Suzy's Zoo's business. Suzy's Zoo's also purchases balloons, tote bags, magnets, calendars, mugs, lunch bags, books and many other products under contract. The issue is not just the appearance of Suzy's Zoos's design on a greeting card, but on all of its products. Commissioner appears to emphasize greeting cards because, apparently in its judgment paper products have no intrinsic value separate from the design. 6 However, the utilitarian purpose of the card is to communicate a message to someone, in the same sense that a mug is to hold a beverage or a lunch bag is to hold food. It is important to recognize that the Suzy's Zoo designs are imprinted on many different types of products and the imprint of a "Ducken" or a turtle on a coffee mug or tote bag is just as important as an imprint on the corner of a notepad or a calendar. In each instance, the retail consumer is buying the product for some other practical use and the Suzy's Zoos private label design is added to identify the product with Suzy's Zoos.

[12] In the trial court, the taxpayer and the Commissioner agreed to use the printing process as an exemplar of how the manufacturing was done. However, the issue before the Court was whether the attachment of the taxpayer's logo or design to its various purchased products is a sufficient basis by itself to require the taxpayer to use the Uniform Capitalization Rules.

C. BOTH THE COMMISSIONER AND SUZY'S ZOO AGREE THAT TAXPAYER IS A PRODUCER UNDER CONTRACT.

[13] Suzy's Zoo has consistently maintained that it is in the primary business of reselling goods purchased from third parties specifically for resale, which bear its logo designs. These purchases are defined in Regulation section 1.263A-2(a)(1)(ii)(B)(1), which states:

"Property produced for the taxpayer under a contract with

 

another party is treated as property produced by the taxpayer to

 

the extent the taxpayer makes payments or otherwise incurs costs

 

with respect to the property."

 

 

[14] Time and time again in its Brief, the Commissioner acknowledges that the products at issue are properties produced under contract. For example, at page 11, the Commissioner states, ". . . . WHERE, AS HERE, PROPERTY IS PRODUCED UNDER CONTRACT . . . ." At page 32, Commissioner states, "HERE, THE PRODUCTS AT ISSUE WERE PRODUCED FOR TAXPAYER UNDER CONTRACT . . . ." At page 36, the Commissioner states, "CLEARLY, CONTRACTING FOR THE PRODUCTION OF ITEMS THAT FEATURE ITS CARTOON IMAGES IS TAXPAYER'S PRIMARY ACTIVITY . . . ."

[15] Suzy's Zoo may be deemed a producer of the products which it has purchased under contract, but it is a producer only because Congress has deemed in section 263A to provide that "the taxpayer shall be TREATED as producing any property produced for the taxpayer under a contract with the taxpayer . . . ."

D. THE OLD MANUFACTURERS EXCISE TAX CASES DO NOT SET AN APPROPRIATE STANDARD FOR TESTING PRODUCTION UNDER CONTRACT CASES UNDER UNICAP.

[16] The Commissioner attempts to make hay in its Brief at pages 19 through 22 by string-citing a series of cases under the old manufacturers excise taxes, e.g., 26 U.S.C. 3406, et seq. (Internal Revenue Act of 1941). As the United States Supreme Court has stated, the excise tax is "intended to be no more than a comprehensive and convenient mode for reaching all first or initial sales, and . . . it does not reflect a purpose to base the tax in any way on manufacture, production or importation." Indian Motorcycle Co. v. United States, 283 U.S. 570, 574.

[17] The purpose of the excise tax was very clearly set forth by the United States Supreme Court in Carbon Steel Co. v. Lewellyn, 251 U.S. 501 (1920). In that case, the United States imposed a tax on every person "manufacturing" munitions under the Munitions Tax Act, Section 301. Carbon Steel contracted with three companies for the manufacture and delivery of high explosive shells, which it then sold to the British government. In affirming the imposition of munitions manufacturers tax on Carbon Steel, the Supreme Court rejected the taxpayer's contention that in order for a person to be a "person manufacturing," the person must perform the various manufacturing operations. The Supreme Court explained that it was contemplated that a 'person 'manufacturing' would use other aid and instrumentalities, machinery, service and general agents . . . ." 7 The Supreme Court further explained that it is a "sufficient answer to say that the tax here in issue is a tax on the profits of the petitioner, and not on the profits of the subcontractors." Carbon Steel, at 506.

[18] The manufacturer's excise tax was driven by the aim to tax the maximum value prior to the first retail sale. The cases cited by the Commissioner support this conclusion.

[19] In Polaroid Corp. v. United States, 235 F.2d 276 (1st Cir. 1956), Polaroid was taxed under the Excise Tax Act when it contracted for the production of cameras by a third party and all materials, labor and supervision was conducted by the third party.

[20] In Chandler Laboratories, Inc. v. Smith, DC 88 F.Supp 583 (E.D. Pa 1950), a taxpayer purchased sugar for resale from four independent mills. The District Court enforced the sugar tax on Chandler Laboratories as the manufacturer, and explained: "It is . . . the manufactured sugar rather than the act of manufacturing it which is taxed." Id. at 584. Later the Court determined that "the word 'manufacturer' therefore, must here be taken to include one who causes his product to be transformed by the actual physical labor and equipment of others." Id. at 584. To support its rationale, it explained: "As between the owner of the sugar who procured its manufacture and the one who directly performed the manufacturing, the former and not the latter would be in a position to furnish the required information." Id. at 584.

[21] Likewise, in Charles Peckat Mfg. Co., the taxpayer was found to be the manufacturer even though the item was produced entirely by a third party. In Charles Peckat Mfg. Co., the Seventh Circuit emphasized that "it is not unusual in taxing statutes for the term 'manufacture' to include one who has contracted with others to actually fabricate the product." 8 The Court also emphasized that:

"In the design of the federal excise tax, sales of the product

 

are all-important, and serve a dual purpose. First the amount of

 

the tax is measured by the sales price, and, second, a person

 

incurs a liability for the tax, not by manufacturing the article

 

but having manufactured or produced it, by selling it.

 

Admittedly, either the plaintiff (taxpayer) or Davis (the actual

 

manufacturer) made the initial sales as the manufacturer of the

 

sun visors." Id. at 851 (parentheticals added).

 

 

The aim of these manufacturers excise taxes was to tax the maximum value at the time of the first retail sale.

[22] Other cases cited by the Commissioner as similar are clearly distinguishable on the facts. For example, in Vinal v. Peterson Mortuary, Inc., 353 F.2d 814 (8th Cir. 1965), the taxpayer bought two Chrysler automobiles and retained a company to convert one automobile into an ambulance and the other into a hearse. In Boise National Leasing, Inc. v. United States, 389 F.2d 633 (9th Cir 1968), the taxpayer bought six trucks, with the intent of having them torn down and reconstructed into lumber trucks. As the Court stated, the trucks "ceased to have any identity as truck structures or entities." Id. at 635. These cases are instances where the taxpayer had a clear and active role in the destruction and reconstruction of vehicles owned by the taxpayer.

[23] When these manufacturing excise tax cases were decided, there was no need for distinguishing between direct production and production under contract. Since the aim was to maximize revenue, all goods acquired for sale to the public were subject to the manufacturers tax at the level generating the highest valuation, including goods acquired for resale under production contracts.

[24] Because of the all-inclusive character of manufacturing as envisioned in the excise tax cases, and the failure of the cases to recognize the distinction between actual production and production under contract, they are of little value in resolving the bifurcated production versus production under contract issues before this Court, a important distinction the lower court failed to recognize.

[25] It is evident from the excise tax cases why Congress considered it necessary, in adopting Uniform Capitalization Rules, to expressly distinguish between property produced by the taxpayer and property produced under a contract with a third party. Because "SMALL RESELLERS" of property acquired under production contracts with third parties are entitled to exclusion from UNICAP, it was essential that the distinction be recognized in the Code and the Regulations. The lower court failed to appreciate or recognize this distinction, failed to consider section 263A(g), and as a result, failed to apply Treasury Regulation section 1.263A-3(a)(3) and failed to apply section 263A(b)(2)(B), granting the small seller exemption.

[26] In this case, the Commissioner has repeatedly admitted in its Brief that the products resold by Suzy's Zoo were purchased under production contracts. (CB 11, 32, 36; This Brief 8.) Nonetheless, it also chooses to obfuscate this conclusion by asserting that because the private label design of Suzy's Zoo is affixed to a tote bag, mug, card or other product, it is ineligible for the $10 Million exemption. Appellant's Brief explains at pages 26 through 29 that a cartoon image created by Suzy's Zoo is an independent artwork that is separate from the merchandise subsequently purchased under contract from third parties. Its trademark name and images are used in various ways in its business. They are licensed, used in connection with its 15,000-member fan club, and applied to merchandise purchased under contracts for resale. The application of its design to fungible goods from various manufacturers identifies them as private label goods of Suzy's Zoo. 9 However, this identification is not a part of the production process of making clay mugs, lunch bags, note cards or other such products. These products were purchased under contracts for production and were not manufactured by Suzy's Zoo. To hold otherwise would preclude the application of the "acquisition for resale" exemption in the Code to all goods bought by any business other than mere generic goods which do not have any identity with the ultimate reseller. That is clearly not the intent of Congress or the Regulations.

E. SUZY'S ZOO WAS NOT SUBJECT TO UNICAP BECAUSE IT WAS NEITHER A PRODUCER NOR ENGAGED IN PRODUCTION UNDER A CONTRACT.

[27] In Appellant's Brief, at pages 28 and 29, footnote 10, the Commissioner acknowledges that a taxpayer does not become a "producer" simply by placing a purchase order with a sweatshirt company to stamp a university logo on the company's sweatshirt. In doing so, it relies upon Regulation section 1.263A- 2(a)(1)(ii)(B)(2)(ii). It states in pertinent part:

"(ii) ROUTINE PURCHASE ORDER EXCEPTION. A routine purchase order

 

for fungible property is not treated as a contract for purposes

 

of this section. An agreement will not be treated as a routine

 

purchase order for fungible property however, if the contractor

 

is required to make more than de minimis modifications to the

 

property to tailor it to the customer's specific needs . . . ."

 

 

[28] In the instance of Suzy's Zoo, where the design is simply printed on a third party manufacturer's mug, coffee cup, tote bag, mylar balloon, greeting card, note card or other product, no more than a de minimis modification to that fungible product is being made. No change in the underlying product is made other than the imprinting of the Suzy's Zoo image on the surface of the product. Suzy's Zoo is entitled to rely on Treasury Regulation section 1.263A- 2(a)(1)(ii)(B)(2)(ii). There is nothing in the Regulation which suggests that the fact that Suzy's Zoo inspects its product or a university inspects the sweatshirts to determine whether they are the color, quality or size ordered, constitutes a material modification to the product, and thereby become a producer under contract. Suzy's Zoo is entitled to rely on this Regulation since its purchases are based on purchase orders of fungible property and there is not a material modification to the properties being purchased.

F. COMMISSIONER WRONGFULLY ASSERTS THAT THE TAXPAYER CANNOT SIMULTANEOUSLY BE A PRODUCER AND A RESELLER.

[29] For the first time, Commissioner now argues on appeal that the taxpayer cannot be both a producer and a reseller. (CB 24.) This is not correct. The Commissioner seems to take the position that because property may be deemed as produced by the taxpayer under section 263A(b)(1), that it cannot also be property acquired for resale.

[30] Section 263A(b)(1) includes property that is actually produced by the taxpayer, as well as property purchased under a production contract. Such property purchased under a production contract may be acquired for consumption, or it may be acquired for resale under section 263A(b)(2).

[31] Section 263A(b)(2)(A) adds any property which is acquired for resale. This may include goods which are purchased in an unmodified fungible form or goods which are produced under contract for resale. There is nothing in the statute that even suggests that the two sections are mutually exclusive. Section 263A(b) indicates only that a very broad range of personal and real properties are subjected to the Uniform Capitalization Rules. It resolves any ambiguities in the old manufacturers excise tax cases.

[32] Most important, the Treasury Regulations clearly show that the two sections are MUTUALLY INCLUSIVE. Regulation section 1.263A-3 established detailed guidelines for handling reseller activities and their own production contracts.

[33] First, subsection (a) of section 1.263A-3 includes as a "reseller" any retailer, wholesaler, or any other taxpayer who acquires property for resale. The only conditions are that the personal property acquired be includable in inventory if held at the end of the taxpayer's year, and that such properties be held for sale in the ordinary course of Suzy's Zoo's business. In the case of Suzy's Zoo, all of the properties produced under contract would be includable in inventory if held at the end of the year and are held for sale.

[34] More importantly, the Regulation explains in detail how to treat goods actually produced, or treated as produced, by the reseller.

[35] Section 1.263A-3(a)(2)(i) explains that any reseller, including a small reseller, that produces property must capitalize into inventory the costs associated with any property that it DIRECTLY PRODUCES. Subsection 1.263A-3(a)(2)(ii) then creates an explicit exception for a small reseller that engages in its own actual production activities. If the small reseller actually manufacturers it own goods, it is subject to a rule that permits only a de minimis amount of personal production.

[36] A separate provision, section 1.263A-3(a)(3), then deals with "RESELLERS WITH PROPERTY PRODUCED UNDER CONTRACT." This section explains that a reseller within the $10 Million exception is not required to capitalize into inventory the cost of any personal property produced for it under a contract with an unrelated person, if the property is entered into incident to the resale activities of the reseller, and the property is held for sale. This is the primary section of the Regulations that the taxpayer believes is applicable to it. Suzy's Zoo purchases merchandise from unrelated third parties. It requires that they affix its design to the surface of the product. It acquires the property for the purpose of reselling it. This Regulation does not create a de minimis rule (as would apply to a reseller with actual production).

[37] It is incomprehensible under these guidelines established by the Treasury Department that the Commissioner now asserts that a reseller cannot also be a producer. Its own Regulations expressly tell us that a taxpayer can be both.

G. INTERNAL REVENUE SERVICE NOTICE 88-86 IS PARTICULARLY RELEVANT.

[38] Suzy's Zoo discussed the Commissioner's administrative pronouncement, Notice 88-86, 1988-2 C.B. 401, in its Brief at pages 43 and 44. The Notice deals directly with the issue at hand. It states in pertinent part:

"The Internal Revenue Service has received comments noting that

 

any taxpayer THAT ACQUIRES PROPERTY FOR RESALE WHICH IS PRODUCED

 

FOR THE TAXPAYER UNDER CONTRACT . . . will be viewed as

 

producing the property. . . . In addition, treating such

 

property as produced by the taxpayer could effect the

 

determination of whether the taxpayer is eligible for the $10

 

Million gross receipts exception of section 263A(b)(2)(B) of the

 

Code." (Emphasis added.)

 

 

"Forthcoming Regulations will clarify that . . a taxpayer will

 

not be viewed, for purposes of the $10 Million gross receipts

 

exception of section 263A(b)(2)(B) of the Code, AS PRODUCING

 

PROPERTY SOLELY BY REASON OF THE FACT THAT THE PROPERTY ACQUIRED

 

FOR RESALE IS BEING PRODUCED UNDER CONTRACT FOR THE TAXPAYER."

 

(Emphasis added.)

 

 

[39] The above language which is marked in bold makes it clear that the traditional view of the Service has been that the TAXPAYER THAT PRODUCES PROPERTY UNDER CONTRACT is a "TAXPAYER THAT ACQUIRES PROPERTY FOR RESALE" within the definition of section 263A(b)(2). In fact, the Commissioner has used the same language as section 263A(b)(2) that says that reseller property is any property "which is acquired by the taxpayer for resale." Accordingly, the Commissioner has clearly taken the position in its own pronouncements that when property is purchased under production contract, the taxpayer may treat the property as property which is "acquired for resale" and is entitled to the benefit of the small reseller exception under Treasury Regulation section 1.263A-3(a)(3). Therefore, production under contract EQUALS acquired for resale in the published view of the Commissioner in Notice 88-86. There is nothing in the Regulation that is inconsistent with the pronouncement of the intent expressed by the Commissioner in Notice 88-86.

H. SUZY'S ZOO NEED NOT BE ENGAGED PRIMARILY IN THE BUSINESS OF PURCHASING GENERIC GOODS FOR RESALE IN ORDER TO QUALIFY AS A RESELLER AND BE ELIGIBLE FOR THE SMALL RESELLER EXEMPTION.

[40] On appeal, the Commissioner raises a novel argument not ruled on by the lower court. It asserts at pages 35 and 36, that the reseller exemption is available only for companies engaged primarily in the business of buying generic fungible goods that can be sold on the shelf without identification with the taxpayer. The Commissioner then asserts that only de minimis or incidental production under contract by such a taxpayer is permitted. Both of these conditions for the small reseller exception are contrary to the plain language of the Treasury Regulations. (AB 41-43; Treas. Reg. section 1.263A- 3(a)(3).) Nothing in the Regulations define a reseller as a person whose primary or sole business is the purchase of goods other than property purchased under production contracts for resale. The Regulations merely define a reseller as any retailer, wholesaler or other taxpayer that acquires property that would be included in inventory at the end of the year. Treas. Reg. section 1.263A-3(a)(1). This definition makes it crystal clear that the term "reseller" is merely a reference to any person who acquires property that would be inventory for resale. Suzy's Zoo acquires its inventory for resale by purchasing it from independent third-party manufacturers, which it then sells on site through its retail store as well as on a wholesale basis through its independent sales representatives. Suzy's Zoo is a "reseller" within any practical definition and clearly within the definition in the Regulations.

I. THE COMMISSIONER ALSO MISINTERPRETS TREASURY REGULATION SECTION 1.263A-3(a)(3) IN ITS ATTEMPT TO MISREAD THE WORD "INCIDENT" TO MEAN "INCIDENTAL" OR DE MINIMIS.

[41] The Regulation provides that a small reseller is not required to capitalize costs for personal property "produced for it under contract . . . if the contract is entered into INCIDENT to the resale activities of the small reseller and the property is sold to its customer." (Emphasis added.) The Commissioner misinterprets this Regulation to apply only in a situation where the small reseller "incidentally" enters into contracts to have property produced for it. The Commissioner fails to recognize the significant difference in the meaning of the word "incident" used in the Regulation and the word "incidental" or "de minimis" as interpreted by the Commissioner.

[42] The term "INCIDENT" is defined as "1. Tending to arise or occur as a result or an accompaniment; 2. Related to or dependent on another thing." The American Heritage Dictionary of the English Language, 3rd Ed, (1992). On the other hand, the term "INCIDENTAL" is defined as "1. Occurring or likely to occur as an unpredictable or minor accompaniment; 2. Of a minor, casual, or subordinate nature." Id.

[43] Regulation section 1.263A-3(a)(3) requires that the contract to produce property be entered into "incident" to the resale activities of the small reseller. In other words, "related to" or "as an accompaniment" of such resale activities. The Regulation does NOT require that the contract be entered into "incidental" (i.e., as a minor accompaniment or of a subordinate nature) to the resale activities.

[44] To the extent that Suzy's Zoo is treated as having property produced for it under contract, such contracts were "incident" or related to Suzy's Zoo's primary business of reselling goods purchased under production contracts.

[45] The purpose of Regulation section 1.263A-3(a)(3) is to clarify that a reseller will not become ineligible for the small reseller exception of section 263A(b)(2)(B), by reason of the fact that the property acquired for resale is being produced under contract for the taxpayer -- without regard to the quantity of property which is purchased under the contract. There is NO de minimis requirement for resellers with property produced under contract. Suzy's Zoo's primary business is reselling goods purchased under production contracts. This Regulation should be contrasted with Regulation section 1.263A-3(a)(2), which applies to resellers with direct production activities. Treas. Reg. section 1.263A-3(a)(2)(ii).

[46] The Treasury Department intentionally considered and implemented a de minimis requirement in the case of resellers with direct production activities, in order to qualify for the small reseller exception. Since no such requirement was included in the Regulation regarding resellers with property produced under contract, the Treasury Department intended that none should exist.

[47] Since taxpayer's average annual gross receipts do not exceed $10 Million, property produced under contract for Suzy's Zoo for resale is excluded from the uniform capitalization rules, even if taxpayer is treated as directly producing such other property for other purposes.

[48] The taxpayer fits this very clear Department of Treasury definition in section 1.263A-3(a)(3), and now the Commissioner wants to deny Suzy's Zoo the benefit of the small reseller exception.

J. THE TAXPAYER WAS ENTITLED TO TREAT PROPERTY AS PROPERTY PRODUCED UNDER A CONTRACT, RATHER THAN DIRECTLY PRODUCED BY THE TAXPAYER, EVEN THOUGH A SPECIAL DESIGN OR SPECIAL APPLICATION WAS REQUIRED IN THE PRODUCTION CONTRACT AND IT WAS NOT INTENDED FOR SELF USE BY THE MANUFACTURER OF THE PRODUCT.

[49] The Commissioner has either neglected, or intentionally failed, to respond to Suzy's Zoo's argument that Treasury Regulation section 1.263A-2(a)(1)(ii)(B)(2)(i) defines a production contract very broadly to include contracts like Suzy's Zoo's where a special design is provided by the taxpayer which the third party manufacturer may not use on its own. It is clear under that Regulation that even though a production contract requires the application of a design such as a cartoon image, logo or trademark, that addition is not intended to preclude the contract from qualifying as a production contract and obtaining the benefit of the $10 Million exclusion. The lower court erred in its failure to apply this broad legal regulatory standard definition of a production contract, and the Commissioner has conveniently failed to deal with it in its Brief.

[50] This failure of the lower court to apply the Regulation to the Suzy's Zoo design and include the existence of a special design application as evidence of a "contract for production" is a material issue for this Court on review. The Tax Court determined that Suzy's Zoo was the "only owner" and "only producer of those products" because it owned the Suzy's Zoo design it had imprinted on the purchased products. (Supp. ER-E, 13.) Its conclusion is the opposite of that required by the Regulation. The Regulation treats the imposition of a specialized design or a specialized application as an inherent part of a production contract, and in fact, treats expenditures for those purposes as evidence supporting the existence of a production contract. This is dramatically inconsistent with the position taken by Judge Laro where he treats the imposition of a specialized design as evidence of the fact that Suzy's Zoo was the owner from the beginning of the product being manufactured and was the actual producer, rather than a producer under contract. His legal determination is exactly opposite to the legal determination required by Regulation section 1.263A-2(a)(1)(ii)(B)(2)(i). For this reason, the lower court erred in treating the taxpayer as the "owner" rather than a "producer under contract."

K. THE TAX COURT AND COMMISSIONER FAILED TO APPLY THEIR OWN PRIOR DETERMINATION THAT GOLDEN GATE LITHO WAS ALREADY THE OWNER OF INVENTORY PROPERTY SOLD TO SUZY'S ZOO AND THEREFORE, IT IS INCONSISTENT TO TREAT SUZY'S ZOO AS ALSO THE OWNER OF THE SAME INVENTORY PRIOR TO THE SALE FROM GOLDEN GATE LITHO TO SUZY'S ZOO.

[51] In this case, the lower court concluded that Suzy's Zoo is and has been the only "owner" of its products, from the creation of the artwork up until the time the products are sold to its customers, and thus, that taxpayer is the only producer of those products for purposes of section 263A. (Supp. ER-E, 14.) Section 263A(a)(1) of UNICAP requires taxpayers to capitalize into inventory all costs described in the Uniform Capitalization Rules. The lower court has therefore treated the products purchased by Suzy's Zoo from Golden Gate Litho under production contracts as inventory under UNICAP. Earlier, when testing Golden Gate Litho's ownership of the same products, both the Tax Court and the Commissioner took the position that Golden Gate Litho had title to the paper products and such indicia of ownership that it was required to include the merchandise in its own inventory, within the meaning of Regulation section 1.471- 1. The 1998 Golden Gate Litho case involved sales of inventory from Golden Gate Litho to Suzy's Zoo. It is incomprehensible that the Tax Court now treats Suzy's Zoo as the owner of the same property it treated Golden Gate Litho as owning in the Golden Gate Litho Tax Court case decided one year earlier. Golden Gate Litho, 75 T.C.M. 2312 (1998).

[52] The Commissioner's attempt to distinguish the Golden Gate Litho case in its Brief is nonresponsive and misleading. It states that Golden Gate Litho is not relevant because the question now is whether the taxpayer is a producer, not whether the product is merchandise. However, the underlying issues are the same. The particularly relevant issue raised by the lower court in this case was whether Suzy's Zoo was the "owner" of the merchandize so as to include it in INVENTORY under UNICAP. The issue in the Golden Gate Litho case was whether the taxpayer had such indicia of ownership and title as to be treated as the owner of the property and to be required to include it in its INVENTORY. This issue was the same in both cases, with different results by the same court.

[53] The Commissioner asserts that under section 263A the taxpayer may be considered as the owner of property produced, even though it does not have legal title. That may be true; however, in Golden Gate Litho, the Tax Court determined that even though Golden Gate Litho held title, it was also the person (the owner) required to include the property in inventory. The Commissioner is requiring the same property to be included in the inventory of Golden Gate Litho and Suzy's Zoo at the same time. This is a pure case of trying to light the candle at both ends to collect revenue by the Commissioner. Therefore, the Commissioner should be collaterally estopped from asserting a different position in this case.

[54] The Tax Court decision in Golden Gate Litho is controlling on the issue of ownership. Golden Gate Litho, not Suzy's Zoo, is the owner required to include the paper products in its inventory. Suzy's Zoo is a small reseller under a production contract not required to use UNICAP. 10

L. THE COMMISSIONER ERRS IN ARGUING THAT THE YEAR OF CHANGE FOR MAKING AN ADMINISTRATIVE ADJUSTMENT UNDER SECTION 481 WAS 1994, INSTEAD OF 1988, WHEN UNICAP WAS REQUIRED TO BE APPLIED TO SUZY'S ZOO, IF APPLICABLE.

[55] Suzy's Zoo has succinctly explained that section 803(d) of the Tax Reform Act of 1986, which established the Uniform Capitalization Rules, REQUIRED that the year of change for making any section 481 adjustment must be the first taxable year beginning after December 31, 1986. (AB 47-55.) This was an affirmative act of Congress that had the effect of directly changing the method of accounting of taxpayers. Thereafter, as a matter of law, section 6501 of the Code gave the Commissioner a three-year period during which to audit the taxpayer and impose a deficiency. It did not do so.

[56] The Commissioner in its Brief relies on Regulation section 1.481-1(a)(1) as providing that the year of change does not take place until the taxpayer's income is "computed" under a method different from their preceding year. It states that this is necessary in order to carry out the purpose of section 481. However, the issue before the Court is the mandate of a law of Congress, not the interpretation in the Regulation or whether the purpose of Congress might have been better fulfilled by deferring the year of change until a computation is remade by the Service. The Commissioner also relies on Internal Revenue Service Notice 88-78, 1988-2 C.B. 394, 396 (CB 43). Again the notice is a matter of Commissioner interpretation and not the application of the law as required by section 803(d) of the Tax Reform Act of 1986. As taxpayer has explained, the issue before the Court is not how the law might have been made better, but rather how Congress chose to apply immediately the law when it enacted the Uniform Capitalization Rules.

[57] If the Uniform Capitalization Rules are applicable, the section 481 adjustment was required to be made for the first taxable year beginning after December 31, 1986, as mandated by section 803(d)(2)(B) of the Tax Reform Act of 1986.

III.

CONCLUSION

[58] Suzy's Zoo has no production facilities and engages in no actual manufacturing of any product. Its goods are purchased from unrelated third parties under contracts to produce fungible goods for resale bearing Suzy's Zoos's cartoon designs. Suzy's Zoo only issues purchase orders to manufacturers, requesting the production of products that are acquired by Suzy's Zoo for resale; this product is to bear a design designated by Suzy's Zoo. Suzy's Zoo makes no modifications to the generic goods themselves. The goods may come in different sizes and shapes in the same manner as shirts purchased for resale by Lands' End. As with any purchaser, Suzy's Zoo examines the goods to assure that the purchased goods are what the purchaser agreed to buy. This is consistent either with the taxpayer being a mere purchaser of fungible goods with immaterial modifications, not subject to UNICAP; or with taxpayer being a mere purchaser under production contracts in which the actual producer applies specialized designs and applications (the Suzy's Zoo design) to the product, as described in the Regulations. In reality, Suzy's Zoo does nothing more than to put its private design label on the product purchased for resale.

[59] Appellant Suzy's Zoo respectfully requests that this Court determine that the decision of the lower court should be reversed and that there is no deficiency owed by taxpayer-Appellant. Suzy's Zoo was a small reseller, as defined in Regulation section 1.263A- 3(a)(1), and was not subject to the Uniform Capitalization requirements of section 263A(a) pursuant to section 263A(b)(2)(B), as it had no more than $10 Million in gross receipts. In the alternative, Suzy's Zoo was not subject to UNICAP since it was not a producer, but was the mere non-owner of merchandise purchased by it from others pursuant to routine purchase orders under which only de minimis modifications have been made. There are thousands of small businesses just like Suzy's Zoo, waiting for this Court to give them the protection intended by Congress and the Treasury Regulations.

[60] Should the Appellate Court determine that the taxpayer is subject to UNICAP, then it respectfully requests that section 481 be applied in the manner required by Congress as described in Appellant's Opening Brief.

[61] Appellant requests a determination that Appellant's costs of goods sold for 1994 should not be reduced by the sum of $737,277, as improperly adjusted under section 481, and that the only proper adjustment for 1994 is to increase the cost of goods sold by $70,010 under section 263A, should the Uniform Capitalization Rules be applicable.

Dated: October 2, 2000

 

Respectfully submitted,

 

 

HIGGS, FLETCHER & MACK, LLP

 

 

By: Richard A. Shaw

 

 

By: Bruce M. O'Brien

 

 

Attorneys for Petitioner-Appellant,

 

SUZY'S ZOO

 

 

* * * * *

 

 

CERTIFICATE OF COMPLIANCE

[62] This is to certify that the foregoing APPELLANT'S REPLY BRIEF, complies with the type-volume limitation of less than 7,000 words, pursuant to Rule 32(a)(7)(B) and (C) of the Federal Rules of Appellate Procedure for the United States Court of Appeals for the Ninth Circuit. According to the word processing system used to prepare the text of the aforementioned brief, MicroSoft Word, the document contains 6,987 words, including footnotes, and excluding the Table of Contents, Table of Authorities, or certificates of counsel attached thereto.

Dated: October 2, 2000

 

 

RICHARD A. SHAW

 

 

* * * * *

 

 

CERTIFICATE OF SERVICE

[63] This is to certify that two (2) copies of the foregoing APPELLANT'S REPLY BRIEF was served on counsel for Appellee by mailing the same on September 29, 2000, in a postage paid wrapper addressed as follows:

Dated: October 2, 2000

 

A. Wray Muoio, Attorney

 

Appellate Section

 

U.S. Department of Justice

 

PO Box 502

 

Washington, D.C. 20004

 

 

RICHARD A. SHAW

 

FOOTNOTES

 

 

1 26 U.S.C. 263A(b)(2)(B). All section references herein not otherwise designated are to the Internal Revenue Code of 1986, as amended.

2 The final Regulations published August 9, 1993, became applicable for taxable years beginning in 1994. The taxpayer's fiscal year began on July 1, 1993. However, the final regulations were issued during its taxable year and were intended to "clarify what the language of the statute was always intended to state." 1 Merten's, Law of Federal Income Taxation, section 3.101. The Tax Court, the Commissioner, and the taxpayer have all relied upon the Treasury Regulations as an interpretive basis for providing clarity to the statute and rely on those Regulations in this Appeal. (Appellee- Commissioner's Brief, fn.4.)

3 As used herein, Petitioner-Appellant is referred to as the "taxpayer" or "Suzy's Zoo" and Respondent-Appellee is referred to as the "Commissioner."

4 As used in this Brief, "AB" refers to pages of Appellant Suzy's Zoo's Substitute Opening Brief; "CB" refers to pages of Appellee Commissioner's Brief.

5 A de novo review of a mixed question of fact concerning a tax issue is found in Exmoor Country Club v. United States, 119 F.2d 961 (7th Cir. 1941), where the Court reviewed de novo whether children's automobile rides and pony rides were statutory structures constituting "places" within the meaning of section 1700(a) of the Revenue Act of 1926, and whether amounts paid were "admission charges."

6 The Tax Court refers to the "printer's reproduction of taxpayer's characters onto ORDINARY paper" as merely one small step and that the reproduction of images was merely a "MECHANICAL STEP." In fact, the Chinese discovery of paper and Gutenberg's invention of the printing press in 1454 are among the most important discoveries in the annals of history. The printing process, the creation of fonts, the selection of ink, the quality and type of paper, the effective use of printing presses, are all important printer decisions designed to make the paper product more creative, more utilitarian and more salable as a fungible item. (CB 8; Tax Court Discussion, Supp. ER-E 14.)

7 Charles Peckat Mfg. Co. v. Jarecki, 196 F.2d 849, 852 (7th Cir. 1952) citing Carbon Steel at 506.

8 Id. at 851, the Court then cites numerous cases where the manufacturers tax was imposed on taxpayers who merely contracted for others to produce a product for them: Carbon Steel Co. v. Lewellyn, 251 U.S. 501 (1920); Allen v. Smith, 173 U.S. 389; Reichelderfer v. Johnson, 63 App. D.C. 334, 72 F.2d 552; and Chandler Laboratories, Inc. v. Smith, DC 88 F.Supp 583 (E.D. Pa 1950). However, in United States v. Gamble-Skogmo, Inc., 91 F.2d 372 (8th Cir. 1937), the Eighth Circuit found that a third party production contract for refrigerators did not constitute manufacturing by the taxpayer.

9 In fact, the same piece of artwork is frequently used by several different manufacturers on several different types of products.

10 Appellant notes for the Court that at page 56, line 3 of Appellant's Opening Brief, the correct Treasury Regulation citation is section 1.263A(a)(1) and not section 1.263A(a)(2).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    SUZY'S ZOO, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 00-70461
  • Authors
    Shaw, Richard A.
    O'Brien, Bruce M.
  • Institutional Authors
    Higgs, Fletcher & Mack LLP
  • Cross-Reference
    Suzy's Zoo v. Commissioner, 114 T.C. No. 1; No. 9423-98 (January 6,

    2000) (For a summary of this opinion, see Tax Notes, Jan. 17, 2000,

    p. 360; for the full text, see Doc 2000-1101 (24 original pages) or

    2000 TNT 5-9 Database 'Tax Notes Today 2000', View '(Number');

    Suzy's Zoo Appellate Brief see Doc 2000-23086 (67 original pages) or

    2000 TNT 191-58 Database 'Tax Notes Today 2000', View '(Number';

    Department of Justice Appellate Brief, see Doc 2000-25141 (68

    original pages) or 2000 TNT 202-42 Database 'Tax Notes Today 2000', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    capitalization rules, uniform, creative expenses
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-27271 (41 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 221-21
Copy RID