Before SWAN, MOORE and SMITH, Circuit Judges.
J. JOSEPH SMITH, Circuit Judge.
The sole issue presented by this appeal is whether amounts credited to a retailer or wholesaler to reimburse expenditures for local advertising pursuant to a cooperative local advertising program constitute price readjustments entitling a manufacturer to an excise tax refund prior to the 1960 amendment of Section 6416(b)(1) of the Internal Revenue Code of 1954, 26 U.S.C. § 6416(b) (1). The United States District Court for the Southern District of New York, Richard H. Levet, D.J., decided the question in the negative, and the taxpayer has appealed. Though the question is close, we think the district court correct and affirm the judgment.
The Waterman-Bic Pen Corporation, a manufacturer of pens and other writing instruments, sued for a refund of $13,827.89 on payments of its manufacturer's excise tax from November 20, 1958 through March 31, 1960. During the tax period in question, Waterman-Bic spent more than $137,000 reimbursing its vendees under its cooperative advertising program. Under this program Waterman-Bic agreed to allow a credit of up to 10% of the price of a vendee's order as reimbursement for the costs of locally advertising Waterman-Bic's products. Participation in the program was optional with the vendee, but in order to be reimbursed, a vendee had to comply with the following conditions:
(1) Only the products of Waterman-Bic were to be advertised, though a proportionate reimbursement would be made if Waterman-Bic's products were advertised with another's products.
(2) Waterman-Bic's products were to be advertised at list price only.
(3) Advertising costs had to be reasonable.
(4) Proof of performance had to be submitted to Waterman-Bic.
Section 4201 of the 1954 Internal Revenue Code imposes an excise tax of 10% on the price for which a manufacturer sells mechanical pencils, fountain pens, and ball point pens. The manufacturer's sales price is defined by § 4216(a) of the 1954 Internal Revenue Code, which provides:
"In determining, for the purposes of this chapter, the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment, but there shall be excluded the amount of tax imposed by this chapter, whether or not stated as a separate charge. A transportation, delivery, insurance, installation, or other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary or his delegate in accordance with the regulations."
In Fitch Co. v. United States, 323 U.S. 582, 584, 65 S. Ct. 409, 411, 89 L. Ed. 472 (1945), the Supreme Court construed this section to equate the manufacturer's sales price with the f. o. b. wholesale price. "In essence, all manufacturing and other charges incurred prior to the actual shipment of an article and reflected separately or otherwise in the f. o. b. wholesale price are to be included in the sale price underlying the tax, while all charges incurred subsequent thereto are to be excluded." The Court rejected the contention that a manufacturer's national advertising costs should be excluded from the sales price as a subsequent "transportation, delivery, insurance, installation, or other charge" within the meaning of § 4216(a).
"Advertising and selling expenses incurred by a manufacturer such as petitioner clearly fall within the class of charges which Congress intended to be included in the tax base. Regardless of whether we consider such expenses technically as manufacturing costs, it is obvious that they are incurred prior to the actual shipment of articles to wholesale purchasers and that they enter into the composition of the wholesale selling price. Even if the purchaser accepts delivery at the factory, he pays for the advertising and selling expenses. Thus they must be included in the taxable sales price." 323 U.S. at 584-585, 65 S. Ct. at 411.
Waterman-Bic seeks to distinguish its position from that of the taxpayer in the Fitch case on two theories. The first is that the sums expended for advertising allowances should be considered price readjustments under § 6416(b)(1) rather than exclusions from the sales price under § 4216(a). The second is that there is such a fundamental difference between local and national advertising that Congress intended to treat them differently for excise tax purposes.
The district court rejected both these theories, holding that an allowance for local advertising does not constitute a price readjustment within the meaning of § 6416(b)(1). Judge Levet reasoned that § 4216(a) and § 6416(b)(1) must be read in pari materia, and that the differences between national and local advertising were insufficient to distinguish the Fitch case. In doing so, Judge Levet declined to follow the three-two decision of the Court of Claims in General Motors Corp., Frigidaire Division v. United States, 277 F.2d 929, 149 Ct. Cl. 749, (1960), which held ...