*726 By a computation of average margins as provided by subsection (e)(1) of section 501, Revenue Act of 1936, the Commissioner has determined deficiencies in petitioner's unjust enrichment tax under subsection (a)(3) of section 501. Petitioner contests the correctness of this determination. Held, the prima facie case made out by the Commissioner's computation of margins has been overcome by the evidence and such evidence shows that petitioner did not shift, either directly or indirectly, to its customers the tax which it paid under the Bituminous Coal Conservation Act of 1935, and hence is not liable for any unjust enrichment tax under section 501(a)(3).
*151 The Commissioner determined deficiencies in petitioner's unjust enrichment tax of $12,796.94 for the year 1936 and $160 for the year 1937. In explanation of these deficiencies the Commissioner stated in his deficiency notice as follows:
During the period November 1, 1935 to March 31, 1936, inclusive, your company paid excise taxes amounting to $16,357.22*727 under the provisions of the Bituminous Coal Conservation Act of 1935. This tax was refunded by the Government on June 3, 1936, and is taxable under the provisions of Section 501(a)(3) of the Revenue Act of 1936, to the extent that the refund does not exceed the amount of the burden of such Federal excise taxes shiftedto *152 others. Likewise the reimbursements received in 1936 and 1937 amounting to $421.11 and $200.00, respectively, as reported in Schedule B of your return are taxable under the provisions of Section 501(a)(2) of the Revenue Act of 1936.
Petitioner does not contest the correctness of so much of the deficiencies as the Commissioner determined under section 501(a)(2). That is to say, the petitioner concedes so much of the deficiency for 1936 as is based upon the inclusion of $421.11 in petitioner's income for unjust enrichment tax purposes for that year.
Likewise, petitioner concedes the correctness of all the deficiency for 1937, because it is entirely based on income covered by section 501(a)(2).
Petitioner, by appropriate assignment of error, contests the correctness of all that part of the deficiency which the Commissioner has determined under the*728 provisions of section 501(a)(3).
FINDINGS OF FACT.
Petitioner is a corporation, with its principal place of business at Dante, Virginia. It was incorporated in the year 1906 under the laws of the State of Virginia and since that time has been continuously engaged in the production, preparation, and sale of bituminous coal.
On August 30, 1935, Congress passed the Bituminous Coal Conservation Act, hereinafter sometimes referred to as the Guffey Act. Section 3 of that act levied an excise tax on the sale of bituminous coal of 15 percent of the sale price at the mine, and provided for a credit or drawback of 90 percent of the tax if the coal producer accepted and complied with the code regulating the conduct of its business. The tax was "to be payable monthly for each calendar month, on or before the first business day of the second succeeding month." It took effect on November 1, 1935.
Pursuant to the Guffey Act a coal commission was established, which promulgated rules and regulations to which the coal producers could subscribe and thereby receive the benefit of the 90 percent credit on their coal taxes. Petitioner subscribed to and operated under the rules and regulations*729 of the coal commission. It thereby received the benefit of the 90 percent drawback, so that its Guffey coal tax amounted to 1 1/2 percent of the sale price of its coal at the mine. During the effective period of the Guffey Act petitioner paid taxes under its provisions in the total sum of $16,357.22.
Immediately following the invalidation of the Guffey Act, petitioner applied for and obtained a refund of the entire amount of the tax which had been illegally collected from it, with interest thereon in the sum of $272.06.
*153 Petitioner's comptroller of accounts, shortly after the first of November 1935, called the attention of petitioner's president to the fact that the Fuffey Act was effective, and sought his direction as to whether the tax to be paid by the corporation should be added to the invoices sent to the purchasers of the coal. Petitioner's president replied to the effect that the taxes paid ought to be added to the invoices for coal, but that the conditions of the coal market were so chaotic that it would be inadvisable to add the tax to the invoices.
In pursuance of these directions the tax was not added to any of petitioner's invoices to its customers*730 during the period of the enforcement of the Guffey Act, except as follows: On several shipments of coal in 1936 made by petitioner to the Cherokee Indian School at Whittier, North Carolina, and on several shipments of coal made in the same year to the Veterans Administration at Johnson City, Tennessee, petitioner added the amount of the taxes to the invoices. These were agencies of the Federal Government and they declined to pay the tax and it was never collected from them.
In practically all contracts for the sale of coal entered into by the petitioner covering the period here in controversy there was a clause to this effect:
The price named in this contract is based upon the existing cost of production. Therefore any increase or decrease in the wage costs by increase or decrease of wage rate or the limitation of hours or any regulation or restriction imposed by a State or Federal Government shall correspondingly increase or decrease such price.
Likewise any change in the present rate of any State, Federal, or foreign tax on the production or sale of coal or any such new tax shall increase or decrease such price on all coal thereafter shipped hereunder.
In October 1935, *731 preceding the effective dates of the Guffey tax, petitioner increased by 16 cents per ton the price of its coal. This increase was made to cover a wage increase which became effective at that time. This wage increase was brought about by a general mine strike in September 1935 for wage increases. The increase in selling price, for the first month, was set at 16 sents per ton; but it was then found that the actual increase in labor costs was slightly in excess of 15 cents per ton. The purchasers of coal who had been charged 16 cents per ton were subsequently refunded the excess labor charge of 1 cent per ton previously charged to them.
When petitioner put into effect this increase in the price of its coal the Clinchfield Fuel Co., which was the sole selling agent of petitioner, sent to each contract customer of petitioner a circular letter reading as follows:
As you have read in the newspapers, the recent strike on the part of the union mine workers has resulted in a contract for increased pay for union mine labor. It became necessary, therefore, on October 1st, for the Clinchfield Coal Corporation to put into effect this same wage scale.
*154 Our first estimate*732 of this increased mining labor cost is approximately 16?? per ton. We are therefore adding this amount per ton to invoices for shipments beginning October 1st, 1935, but when payroll figures are completed any difference between the above estimate and the actual amount per ton will be adjusted between us.
This increase represents solely the increased cost of production due to wage increases to mine labor. It does not include any charges for tax or administration expenses incident to the Bituminous Coal Conservation Act of 1935 (Guffey Bill) and has no connection whatever with that legislation.
During the period the Guffey Act was in effect, namely, from November 1, 1935, to May 18, 1936, petitioner did not increase the selling price of its contract coal. On the contrary, petitioner on November 25, 1935, decreased the selling price of its coal twenty cents per ton, or approximately 10 or 12 percent of the selling price.
At the time this price reduction was put into effect the Clinchfield Fuel Co., selling agent of petitioner, sent to all petitioner's customers a circular letter reading in part as follows:
This reduced price basis will apply until further notice.
The*733 condition of the coal industry remains unsettled. Recent wage agreements made between operators and union miners in some districts which have been on strike may result in upsetting agreements previously reached in other producing districts, thereby precipating further controversy.
We are doing the best we can in a very trying situation to meet market conditions, at the same time maintaining dependable service on high quality coal, and we appreciate your continued confidence.
This reduction in price remained in effect throughout the period of the enforcement of the Guffey Act and for a considerable period thereafter. The only exception to this was as to some domestic sizes of coal which were influenced by seasonal demand. There were some fluctuations up and down in prices for these sizes, but these fluctuations were in no way related to the payment of the 1 1/2 percent Guffey coal tax.
At least 80 percent of petitioner's coal business was done by contract and the reduction of 20 cents per ton applied to all this contract business throughout the period of the Guffey coal tax. Petitioner's domestic sizes of coal were not sold under contract, but were sold by what were known*734 in the trade as "spot sales."
Petitioner's income statement as per its books from 1929 through 1936, inclusive, was as follows:
| 1929, loss | $333,410.96 |
| 1930, loss | 299,031.56 |
| 1931, loss | 229,380.44 |
| 1932, loss | 363,847.60 |
| 1933, loss | $326,447.43 |
| 1934, gain | 24,461.85 |
| 1935, loss | 82,320.37 |
| 1936, loss | 244,218.83 |
The above figures include deductions for dividends, sinking fund, coal sales tax, refunds, Federal pay roll tax, and coal board expenses. *155 Without those deductions the books of the taxpayer for the periods in question showed the following results:
| 1929, loss | $216,805.86 |
| 1930, loss | 180,655.71 |
| 1931, loss | 126,139.31 |
| 1932, loss | 283,143.48 |
| 1933, loss | $236,238.35 |
| 1934, income | 96,651.20 |
| 1935, loss | 39,667.01 |
| 1936, loss | 185,468.84 |
Petitioner did not shift, either directly or indirectly, any of its Federal excise tax burden under the Guffey Coal Act to its customers to whom it sold coal during the effective period of said act.
OPINION.
BLACK: As has already been stated, part of the deficiencies in petitioner's unjust enrichment tax for the years 1936 and 1937 were determined under the provisions of section 501(a)(2) *735 and part were determined under section 501(a)(3), Revenue Act of 1936.
That part of the deficiencies determined under section 501(a)(2) has been conceded by petitioner and is no longer in issue. All of the deficiency determined by the Commissioner under section 501(a)(3) is in controversy.
Section 501(a)(3) is printed in the margin. 1
The statute in question provides that the Commissioner in his determination of the deficiency may determine to what extent, if any, the vendor shifted the burden of the tax to the vendee, by the*736 use of margin computations. Section 501(e) provides for the use of this method and is printed in the margain. 2
The Commissioner in his determination of the deficiencies in the instant case has used the margin method. His computation of the margins is set out in full detail in the deficiency notice and is a part of the record in this proceeding, and has been carefully examined and studied, but is not incorporated herein on account of its length. The petitioner attacks the correctness of this margin computation on the ground that in its compilation the Commissioner used only *156 two factors, namely, royalties and depletion, as factors of cost of petitioner's product. It is petitioner's contention that these two factors which respondent has used in his compilation are only a small*737 part of petitioner's cost; that there are other factors of cost quite as important, such for example as selling costs, and that the Commissioner has not taken these other factors into consideration in his computation of the margins for the base period and for the tax period. Petitioner contends that if he had done so quite a different result would have been reached.
Petitioner embodies its views as to a correct computation of the margins in its Exhibit 3, which was introduced in evidence. This computation has likewise been carefully examined and studied, but is not incorporated in our findings on account of its length.
Petitioner devotes considerable space in its brief to an argument that the Commissioner has erred in his computation of the margins and, therefore, there is no statutory presumption in his favor. For reasons which we shall presently state, we think it would be unprofitable for us to discuss the computation of the margins which the Commissioner has made or the computation which petitioner has made in its Exhibit 3.
For the purposes of this case we shall assume that respondent's computation of the margins, which are contained in his deficiency notice, were*738 made in accordance with the statute and Treasury regulations and that the presumption provided by section 501(e) exists in his favor. This presumption, however, is a rebuttable one.
Section 501(i) provides:
(i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. Such proof may include, but shallnot be limited to:
[Here the statute sets out in detail certain methods of proof which may be used in rebuttal of the presumption which arises under subsection (e).]
We think the petitioner has succeeded in rebutting the statutory presumption raised in the Commissioner's favor by subsection (e). In the first place, petitioner has proved clearly that it did not add the amount of the tax to its invoices of coal sold. The only exceptions to this were a few invoices for coal sold to agencies of the Federal Government. These agencies refused to pay the tax and it was never collected from them by petitioner.
Petitioner's comptroller testified:
Shortly after the first of November, 1935, I called our president's attention to the*739 fact that this Act was effective and that up to that point we had not added the tax to any invoices and asked him if he had given consideration to the application of the tax. He replied that he had and that it ought to be added but the chaotic condition of the market was such that we would not do it. For *157 that reason it was never added to any other invoices other than the ones I have pointed out.
In answer to the foregoing testimony, respondent contends that the fact that petitioner did not add the amount of the tax paid directly to each invoice of coal shipped would by no means be conclusive that petitioner did not shift the burden of the tax to its vendees. That, of course, is true.
The tax could be passed on to petitioner's vendees by an increase in the price of coal which would equal or exceed the tax, just as effectively as by adding the tax to the invoice. The evidence in the instant case shows that in October 1935, after the Guffey Act had been enacted by congress but prior to November 1, 1935, when the tax became effective, petitioner increased the price of its coal 16 cents per ton, later adjusted to 15 cents per ton. The evidence conclusively shows that*740 this increase in price was made by petitioner because of increased labor costs which were occasioned by wage increases that were put into effect a short time prior thereto. This increase in price of 15 cents per ton did not stay in effect very long.
On November 25, 1935, petitioner reduced its prices on all contract coal 20 cents per ton. Also, shortly after that it made similar reductions in price on its spot sales of domestic sizes of coal. This decrease in price of 20 cents a ton for coal remained in effect until June 1, 1936, which was after the Guffey Act had been declared unconstitutional. The only exceptions to this were some fluctuations upward of spot sales of domestic sizes of coal which were influenced by seasonal demand. Therefore, it seems clear that petitioner did not shift the burden of the tax to its customers by increasing the price of its coal to them. Aside from adding the tax directly to the invoice or collecting it by an increase in the price of coal, there would doubtless be still another method by which petitioner could have passed on the tax to its customers, assuming that certain factors were in existence. For example, if after November 25, 1935, when*741 petitioner put into effect a general decrease of 20 cents per ton in the price of its coal, there had been a substantial decline in petitioner's operating expenses and selling expenses which was not passed on to its customers, that would doubtless be a factor which would tend to sustain the presumptive correctness of the margin computation which the Commissioner has made.
The evidence shows that no such lowering of operating expenses and selling expenses took place, but that on the contrary during the remainder of the period when the tax was in effect petitioner's operating deficit per ton of coal was greater than it was prior to November 25, 1935. Therefore, we think that, taking the evidence as a whole, it *158 shows that petitioner did not shift, either directly or indirectly, any part of the Guffey coal tax to its customers.
We think that the facts of the instant case bring it within the ambit of our decision in . See also (Fourth Circuit), in which the court reversed a decision of the Processing Tax Board of Review and in its opinion, among other things, *742 said:
We do not think that this decision should be sustained in view of the Board's findings. It gave too great weight to the marginal method required by section 907(a), (b) and (c), and too little weight to proof of the actual facts permitted by section 907(e) of the Act. Having found that the comparison of margins resulted unfavorably to the taxpayer, the Board accepted the statutory prima facie presumption, and held that the greater part of the burden of the tax was shifted, notwithstanding the express finding that no part of the tax was added to the sales price of the goods or collected from the customers. Moreover, this weight was given to the marginal method in the face of the further finding that during the post-tax period, a substantial change prevailed in the taxpayer's business in that the selling price of the cigars was reduced while the grade of tobacco used was maintained at the previous level, so that the margin between the cost of the raw material and the selling price of the manufactured goods was necessarily diminished.
On the strength of the foregoing authorities we sustain the petitioner on the only issue involved in this proceeding.
Decision will be*743 entered under Rule 50.
Footnotes
1. SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.
(a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
* * *
(3) A tax equal to 80 percentum of the net income from refunds or credits to such person from the United States of Federal excise taxes erroneously or illegally collected with respect to any articles, to the extent that such net income does not exceed the amount of the burden of such Federal excise taxes with respect to such articles which such person shifted to others. ↩
2. (e) For the purposes of subsection (a)(1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows:
(1) From the selling price of the articles there shall be deducted the sum of (A) the cost of such articles plus (B) the average margin with respect to the quantity involved; or
* * * ↩