
    GENERAL MOTORS CORPORATION, FRIGIDAIRE DIVISION v. THE UNITED STATES
    [No. 236-56.
    Decided May 4, 1960.
    Defendant’s motion for rehearing overruled July 15, 1960]
    
      
      Mr. Newell W. Ellison for plaintiff. Messrs. Henry M. Hogan, Calvert Thomas, J. C. Siegesmund, Jr., Daniel M. Gribbon, and John B. Jones, Jr., were on the briefs.
    
      Mr. Harold S. Larsen, with whom was Mr. Assistant Attorney General Charles K. Bice, for the defendant. Messrs. James P. Garland and Philip B. Miller were on the brief.
   Madden, Judge,

delivered the opinion of the court:

Plaintiff sues for refund of excise taxes exacted on the price for which it sold refrigerators to its distributors. It says it is entitled to deduct, as an allowance, the amount it refunded to the distributors, for transmittal to the retailers, on account of the cost of advertising the product in the localities of the various retailers. It relies on the provisions of section 3MB of the Internal Revenue Code of 1939, which reads:

Sec. 3M3. Credits and Befunds.
(a) A credit against tax under this chapter, or a refund, may be allowed or made—
* # # >!•'
(2) to any person who has paid tax under this chapter with respect to an article, when the price on which the tax was based is readjusted by reason of return or repossession of the article or a covering or container, or by a bona fide discount, rebate, or allowance; in the amount of that part of the tax proportionate to the part of the price which is refunded or credited.
[26 U.S.C. § 3M3, 53 Stat. 417 (1939) ]

Under this statute, if a manufacturer sells an item at a stated price, but allows the purchaser a discount, before payment, or a refund or credit of a part of the price, after payment, the amount of the discount or refund or credit is deducted from the originally stated price, and a proportionate refund of the tax is given to the manufacturer. The plaintiff’s situation seems to fit the text of the statute. The Government, nevertheless, urges that for many reasons the statute does not apply.

The plaintiff collected from its vendees a stated price for its refrigerators and other products subject to the manufacturer’s excise tax, as well as for its products not subject to the tax. It had a “cooperative advertising plan” under which most but not all of its products, including all of its products which were subject to the excise tax, were covered. The plan was that the plaintiff agreed, if a retailer of its products would spend money in advertising locally the plaintiff’s products and their availability at the retailer’s store, and if his advertising complied with certain standards set by the plaintiff, the plaintiff would pay to the dealer one-half of the cost of the advertising, but not to exceed 114 percent of the plaintiff’s “suggested cash installed price.” During the period covered by the instant suit, advertisements using the following media were permissible under the plan: newspapers, radio, television, movie trailers, telephone directories, display materials, exhibits and shows, car cards, tabloids, advertising novelties, circulars, direct mail, and signs.

The plan does not obligate a dealer to do any advertising, nor, if he does advertise, to comply with the standards set by the plan. If he does not advertise, or if his advertisements do not comply with the standards, he does not get any payment from the plaintiff. If he is entitled to a payment, he is obliged to submit proof of his claim within the current calendar year or within five months after the end of the year.

The effect of the plan was that if a dealer had, for example, bought refrigerators from the plaintiff, or one of its distributors, and paid $5,000 for them and had spent money in local advertising of the refrigerators, the plaintiff would pay him 1% percent of the suggested installed price of the refrigerators, which we will assume to have been $7,500, if he had spent twice or more the amount of the 1% percent. In the example just given the retailer would get back $93.75. The net payment of the dealer to the plaintiff would be, then, not $5,000, but $93.75 less than $5,000. The plaintiff says that, under section 3443, it should get back the excise tax which it paid on the $93.75.

We think the plaintiff is right. Its sale of the refrigerators was for $5,000 and it paid the sales tax on that sum, but the price was later “readjusted” by way of a rebate to the purchaser. Section 3443 does not say that it is applicable only to some kinds of rebates, or only to rebates given for some kinds of reasons or purposes. It is, of course, conceivable that there might be situations in which a repayment or credit is given by the manufacturer to the purchaser, but to which section 3443 should not apply because its application would violate the statutory purpose, or would create such difficulties in the administration of the tax laws as to compel a departure from the letter of the statute.

Discounts and rebates are given for various reasons but always, we suppose, because the giving of them will be of benefit to the giver. They are, we suppose, always welcomed by the receiver. A discount for prompt payment benefits the giver because it assures him against the loss of the debt, and gives him available working capital. A discount, or a rebate at the end of the year, because of the quantity purchased by the vendee, is good for the seller because it induces the vendee to purchase and dispose of more of the seller’s goods. A promised discount on floor stocks in the hands of the vendee at the time of a model change is good for the seller because it reassures the vendee and causes him to maintain adequate stocks even though a model change is anticipated.

The Government urges that the plaintiff is buying advertising for its goods when it induces and partly pays for the retailer’s advertising. This is, of course, true, but we think it does not distinguish the instant case from other discount and rebate situations which are admittedly covered by section 3443. In the situations referred to above, the vendor is buying the early use of money and insurance against defaults in payment, or is buying additional effort and expense on the part of the retailer to dispose of a large quantity of goods, or is buying assurance that the retailer will maintain an adequate stock of goods so that opportunities for sales will not be missed.

One type of excise tax case involving advertising expense has been litigated. In F. W. Fitch Co. v. United States, 323 U.S. 582, the question was whether, under the then-applicable version of section 3441 of the Internal Revenue Code of 1939, the manufacturer’s cost of national advertising should be dissected out of and excluded from the sale price on which the excise tax was computed. The statute provided for the exclusion of “A transportation, delivery, insurance, installation or other charge * * Fitch claimed that its expenditures for national advertising were “other charges”, and hence excluded by section 3441. The Supreme Court rej ected the argument. This court, in Ayer Co. v. United, States, 93 Ct. Cl. 386, had previously reached the same conclusion.

The Fitch case is not in point in the instant litigation. Transportation, delivery, insurance and installation charges are expenses incurred after the manufacture of the goods. They are readily susceptible of separate billing. The words “other charge” in section 3441 meant, the Supreme Court held, other charges of a similar nature, considered in the context of the statute.

In the instant case, the taxpayer’s reliance is on section 3443, and the only requirement of the statute is that some of the money which the purchaser had paid for the property should be later refunded to the purchaser. The fact that the occasion for the refund had to do with advertising does not relate the instant problem to the one decided in Fitch, and Ayer.

In the 1956 Report prepared by the staffs of the Joint Committee on Internal Revenue Taxation, and the Department of the Treasury, and submitted to a subcommittee of the Ways and Means Committee of the House of Representatives, the representatives of the Treasury Department joined in the following statement:

Based on the foregoing, the present position of the Service with respect to cooperative advertising substantially is as follows:
(1) The distinction between national and local advertising is abolished.
(2) Where a manufacturer’s selling price to his customer contains an unsegregated advertising charge, it is a part of his tax base.
(3) In the case where a manufacturer makes a separate charge to his distributor for advertising and the proceeds are kept in a separate account earmarked for advertising, the separate advertising charge is not a part of the tax base. This exclusion of the advertising charge from the tax base can be supported by establishing that the charge is either listed separately on the sales invoice or billed separately; the contributions from distributors are set aside as a fund to be used for advertising for the benefit of these contributors; and the funds are so used or the unexpended portion is held in trust or refunded to the contributor upon his withdrawal from the program.
(4) Even in the case of a separate fund (as outlined in (3) above), where the manufacturer makes a contribution to the advertising account, then in accord with Fitch v. U.S., supra, the amount of the manufacturer’s contribution may not be deducted in computing the taxable sale price. However, subsequent allowances from such contributions to distributors for expenditures by them or their dealers in advertising are to be treated as readjustments of sale price under Section 64.16(b) (1) of the Oode. [Italics added.]
The recognition of the allowances in the situation last described as readjustments of sale price is distinguishable from the issue involving the treatment of expenses incurred in fulfilling warranties on the ground that they constitute direct allowances by the manufacturer to his customer as a part of the sales program in which the manufacturer is involved. These adjustments are, as indicated before, made to the manufacturer’s vendee and are not dependent upon conditions which may subsequently occur with respect to the article in the hands of the ultimate consumer many steps removed from the transaction upon which the imposition of tax occurred.

The Treasury’s authorized spokesman read to the subcommittee a prepared statement which contained the following paragraph:

(3) Where the manufacturer makes a contribution to the advertising account in the case of a separate fund, the amount of the manufacturer’s contribution may not be deducted in computing the taxable sale price. Subsequent allowances from such contributions to distributors for expenditures by them or their dealers in advertising should be treated as readjustments of sale price under section 6416(b) (1) of the Code.

The spokesman interrupted his reading to advise the subcommittee that “The Internal Revenue Service will rule in the manner indicated” and that “the problem can best be handled by ruling and does not require legislation.”

The foregoing quoted statements represented the interpretation which the Internal Revenue Service placed upon the statute in January 1956. On December 19, 1956, the Commissioner of Internal Revenue wrote to the chairman of the subcommittee explaining why the Revenue ruling promised in January had not been issued. He said that because of intervening events, principally the filing by taxpayers of several suits involving large sums,

* * * We do not feel that we are in a position to go forward with the publication of the ruling we previously discussed nor, until further facts are developed, to suggest a satisfactory solution to the problem at this time.

On December 16, 1958, T.D. 6340, 23 Fed. Reg. 9692-3, promulgated Treasury Regulations sections 330.1-1 to 330.1-3 bearing on the question of advertising expenses and rebates and allowances. Section 330.1-3 expressly provides that these regulations are not retroactive, hence we do not consider or discuss them.

We think that the interpretation which the Treasury Department gave to section 3443 in January 1956, was right. We find no justification for departing from the language of the statute.

The plaintiff is entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c) .

It is so ordered. '

Littleton, Judge {Bet.), and Laramore, Judge, concur.

Whitaker, Judge,

dissenting:

I am unable to agree with the majority. The retailer paid the purchase price not for a refrigerator alone, but for one that bad already been advertised nationally and which the seller agreed to assist in advertising locally. Hence, when the seller remitted to the advertising medium or to the retailer his agreed contribution to the cost of local advertising, he was doing nothing more than fulfilling the obligation for which the purchase price was paid. He was paying for something he had agreed to deliver as part consideration for the purchase price.

A refrigerator on his floor was worth but little to the dealer unless his customers knew he had it. What he paid for was the refrigerator itself and the manufacturer’s assistance in letting people know he had it in stock. A refrigerator unadvertised locally, was worth something to the dealer, but advertised locally it was worth considerably more. This added value, gained through local advertising, paid for in part by the manufacturer, was what the dealer purchased. The advertising of the article was an integral part of what the dealer bought, quite as much so the frame, the doors, and the freezing unit. The advertising gave to the article the element of desirability, just as did the paint and the chrome on it. The advertising, both national and local, cooperated with the paint and the chrome to make people want it. Since it was bought for resale, this was its most valuable element to the dealer.

The obligation of the manufacturer to assist in advertising it locally was a part of the consideration for which the sales price was paid and, hence, the discharge of this obligation by payment of the agreed amount could not be an “allowance” to the dealer. An “allowance”, as used in the Act, must work a “readjustment” or reduction in the sales price. There has been no reduction in the sales price. The manufacturer still has the amount paid it when the sale was made and has delivered no more than it agreed to deliver, to wit, a refrigerator and a part of the cost of putting the refrigerator on display locally. A refrigerator on display was what the dealer wanted, not one hidden in its basement. This is what it paid for and this is what the manufacturer gave him.

Section 3441(a) provided that in determining the sales price there should be excluded “a transportation, delivery, insurance, installation or other charge (not required by the foregoing sentence to be included).” Manufacturers insisted that the cost of national advertising was a “charge” to be excluded from the manufacturer’s sales price, but this court held to the contrary in Ayer Co. v. United States, 93 Ct. CL 386. The Court of Appeals of the 8th Circuit was of like opinion, United States v. F. W. Fitch Co., 141 F. 2d 380, but the 7th Circuit had held otherwise in Compana Corp. v. Harrison, 114 F. 2d 400. The Supreme Court settled the controversy in Fitch Co. v. United States, 323 U.S. 582. It held in that case that what the manufacturer sold was a nationally advertised product and that the advertising was an integral part of the product sold and could not be separated from it, whether or not charged for separately, and, hence, that there was no basis for excluding the cost of it from the sales price. I see no distinction between a manufacturer’s national advertising and its advertising done through the instrumentality of its dealers scattered throughout the country from the Atlantic to the Pacific, and from the Great Lakes to the Gulf. When this advertising through dealers is taken as a whole, as it must be, it is indeed national advertising by the manufacturer of its product. The manufacturer knows this local advertising will enhance the value of its product, as well as benefit the dealer and, hence, it is willing to share the cost. Indeed, plaintiff calls it its “cooperative advertising plan.” This is to say that the retailer and the manufacturer “go in together” to do something for their mutual benefit, to advertise that the manufacturer’s product is obtainable at the store of the dealer, and that it is a superior product. This helps the retailer sell the product, and the manufacturer to sell other products.

I reiterate: What the manufacturer sells is not an unknown product, but one nationally advertised and one which he obligates himself to assist in advertising locally up to a stated amount. In each case, the manufacturer incurs an additional cost to enhance the value of the product. In each case, the purchaser must pay this additional cost in order to obtain the product. An advertised product is what is sold, whether advertised nationally or locally. Hence, the cost of neither is to be excluded from the sales price.

Before the manufacturer ever sells the refrigerator it sets up on its books an account to take care of the cost of local advertising. The amount charged to the account is 1% percent of the “suggested cash installed price.” This, of course, is taken into account by the manufacturer in fixing his sales price. When it pays this cost, it is discharging an obligation it assumed when it demanded the sales price. The sales price is no more to be readjusted on that account than for the cost of advertising in a national magazine or the cost of the frame, or the doors, or the freezing unit. They are all an integral part of the thing sold.

This is contrary to the view of the District Court for the Southern District of Indiana in Servel v. Smith, 54 F., Supp. 436. Local advertising was involved in this case, but the opinion did not distinguish between local and national advertising. Judge Evans, acting as District Judge, expressly refused to follow our decision in Ayer Co. v. United States, supra, where national advertising was involved, but did follow Compana Corp. v. Harrison, 114 F. 2d 400, and the District Court’s opinion in Fitch Co. v. United States, supra, which also involved national advertising. However, the Court of Appeals reversed the District Court in Fitch Co. v. United States, and the Supreme Court affirmed the Court of Appeals. Servel v. Smith and Compana Corp. v. Harrison have, therefore, been overruled.

What I have said is in harmony with the principle underlying the decision in Ford Motor Co. v. United States, 140 Ct. Cl. 487. In that case the manufacturer sold its product with an expressed 90-day warranty. No one could purchase the product without this warranty. The manufacturer attempted to claim a tax refund by reason of its reimbursement of its dealers for the expense they incurred in fulfilling the manufacturer’s warranty agreement. This court held that these payments were not a reduction in the sales price, but rather were the fulfillment of the manufacturer’s part of the bargain, to wit, a machine in which no defects would appear in 90 days. When this promise was fulfilled, the purchaser merely received what it had paid for in the first instance. When a manufacturer pays an expense which it has promised to pay at the time of the original sale, it can never be a reduction in the sales price. Its payment is, in fact, a part of the consideration for the sales price. Cf. General Motors Corp. v. United States, 142 Ct. Cl. 842.

I am authorized to say that Jones, Chief Judge, joins in this dissenting opinion.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

The Plaintiff

1. At all times material to this case, the General Motors Corporation has been a domestic corporation organized and existing by virtue of the laws of the State of Delaware, with its principal place of business in the city of Detroit, Michigan.

2. The Frigidaire Division has, at all relevant times, been a division or branch of the General Motors Corporation, with its principal office at Dayton, Ohio.

3. The principal business of the Frigidaire Division is the manufacture and sale of electrical appliances.

4. During the period that is involved in this action, i.e., August 1, 1948-December 31, 1950, certain of the articles manufactured and sold by the Frigidaire Division of the General Motors Corporation (hereinafter called “the plaintiff”) were subject to the manufacturer’s excise taxes imposed by Sections 3405 and 3406 of the Internal Revenue Code of 1939. The plaintiff filed timely returns and paid the manufacturer’s excise taxes upon its sales prices of such articles.

The Plaintiff's Distribution System,

5. The plaintiff sells substantially all of its products to the Frigidaire Sales Corporation, a wholly owned subsidiary corporation, and to independent distributors. During the period involved in this litigation, there were 23 branches of the Frigidaire Sales Corporation and 21 independent distributors. (Each branch of the Frigidaire Sales Corporation and each independent distributor will usually be referred to hereinafter as a “district”.)

6. (a) Each district purchases products from the plaintiff and then distributes them in a defined and exclusive geographical area. This distribution is generally accomplished by selling such products to independent retail dealers, who, in turn, sell them to consumers.

(b) Within its area, a district has full authority to select dealers, and it acts as a supervisor of such retailers. With some assistance of personnel from the plaintiff’s zone, regional, and headquarters sales staffs, the district selects dealers and tries to develop them into good retailers by making suggestions with respect to effective selling techniques and by assisting them in training their retail salesmen, in using advertising and display materials provided by the plaintiff, in conducting special campaigns and promotions, and in other ways.

(c) The district’s function in the marketing system is very similar to that of the dealers under it, and the district’s interests are closely allied with its dealers.

7. (a) Each separate retail store or outlet is independently franchised by its district. A franchised store or outlet is one that is authorized to sell Frigidaire products at retail. No such stores or outlets are owned or operated by the plaintiff, or by its wholly owned subsidiary, the Frigidaire Sales Corporation, or by any of the latter’s branches.

(b) During the period involved in this litigation, there were approximately 8,500 dealers and approximately 10,000 separate outlets that were authorized to sell Frigidaire products at retail.

(c) In some instances, sales may be made by districts to retail outlets that are not franchised.

8. The general types of business firms that function as Frigidaire dealers are appliance stores (accounting for about 83 percent of the total number of dealer outlets), furniture stores (about 18 percent), department stores (about 10 percent), and miscellaneous types, such as hardware stores, public utilities, and jewelry stores.

9. (a) A dealer is not assigned an exclusive territory in which to sell Frigidaire products; and substantially all dealers are in competition with other Frigidaire dealers, as well as with retailers that sell competing appliances. For example, in the District of Columbia there are 33 Frigidaire dealers, with a total of 52 outlets. Even in a very small community, where there is only one Frigidaire dealer, he will normally have competition from Frigidaire dealers in nearby communities.

(b) Nearly all Frigidaire dealers sell, in addition to a complete line of Frigidaire products, competing products of other manufacturers.

National and, Retail Advertising

10. Advertising is commonly classified in terms of its objective as (a) general or national advertising, or (b) retail or local advertising.

11. (a) General or national advertising is done principally by manufacturers. The objectives of such advertising are to build a reputation for the brand name of the product, to emphasize the characteristics of the product, and to create a desire in the public for the brand and product advertised. No immediate or direct response is expected or obtained from such advertising, its purpose being to leave an impression or mental association with respect to the brand and product advertised. In order to achieve this purpose, the content of national advertising is devoted to illustrating the product and extolling its features and the reputation of the manufacturer and the brand.

(b) The media that are used for national advertising provide blanket coverage. Among such media are nationally distributed magazines and network radio and television shows. Newspapers are also used as media for national advertising ; and when so used, a manufacturer inserts a general ad simultaneously in a large number of newspapers in urban trade areas throughout the country in order to obtain blanket coverage.

12. (a) Eetail or local advertising is done by retailers and has as its principal objective the stimulation of immediate sales for the retailer. This type of advertising informs consumers where nationally advertised products can be purchased. Such advertising, however, is designed not only to sell the products advertised, but to create store traffic by bringing customers into the store, and also to build up cumulatively a personality and a reputation for the store. Thus, this advertising personalizes the particular store by including the name and location of the retailer and covering such items as prices, credit terms, parking facilities, services, and other distinct features of the particular retail outlet.

(b) In the appliance industry, effective retail advertising must take into account conditions peculiar to the dealer’s particular locality, such as local shopping practices, available media, weather, and public utility facilities and rates. Thus, ads for washing machines are run on the evening of the traditional wash day, since experience has indicated that a new washing machine is most appealing to a tired housewife at that time. Dryer ads are effective during periods of rainy or snowy weather, while air conditioner ads are most effective in hot, humid periods. Similarly, the most desirable pages in the local newspapers and the days of the week in which an appliance ad is likely to receive the most prominence are factors that are peculiarly within the knowledge of the local dealers.

(c) For retail advertising, the media used are those which will most effectively and economically reach the market area of the retail store doing the advertising. Local newspapers and spot announcements on local radio and television stations are the principal media for retail advertising.

(d) Some manufacturers, including the plaintiff, furnish to retailers, through the manufacturers’ distributors, mats and illustrations of newspaper advertisements, sample radio and television scripts, and other types of assistance in connection with the retailers’ local advertising. In such situations, the retailers have complete discretion to utilize, or to modify, or to ignore the material made available by the manufacturers.

13. (a) In a distribution system of selected dealers, it is well recognized that national advertising is the responsibility and function of the manufacturer, and that local advertising is the responsibility and function of the retailer.

(b) A successful national distribution and marketing program for most branded products requires both national and retail advertising. This is especially true in the appliance industry, because the method of distribution is through selected dealers, each of whom must be identified to the public as a source of the particular brand or brands of appliances which the dealer carries. In such a distribution system, substantial retail advertising by a dealer is necessary, regardless of the amount of national advertising done by the manufacturer or manufacturers of the products sold by the dealer. Conversely, retail advertising of appliances would be ineffective if it were not used as a supplement to national advertising of the same products.

(c) The manufacturer receives the greatest benefit from national advertising, since brand reputation and good will for the manufacturer’s products are the principal objectives of national advertising. The manufacturer also derives some benefit from local or retail advertising that covers the manufacturer’s products, since this advertising informs the public where such products can be purchased.

(d) The retailer receives the greatest benefit from retail advertising, since this advertising brings people into the advertiser’s store rather than into a competitor’s store, results in sales from inventory of the products (both those advertised and others) handled by the advertiser, and builds a reputation for the particular store in the community. The retailer also receives some benefit from national advertising, but it is not a direct benefit because this advertising equally benefits all dealers handling the products advertised and does not bring customers into a particular store.

14. (a) The plaintiff’s national advertising program is planned and carried out by the plaintiff’s advertising department, with the advice and assistance of an independent advertising agency. This advertising is paid for entirely by the plaintiff, without any contribution from the districts or their dealers. It is designed to sell the brand name, to instill confidence regarding Frigidaire products in the public, and to create a demand for Frigidaire products as against other competitive products. To accomplish these ends, it features Frigidaire’s long experience in the appliance business, the fact that it is a division of General Motors, its record for dependability and for building a quality product, and items which establish or promote the particular national advertising theme that will be used throughout the year to sell new styling and other new features.

(b) During the period 1948-1960, the plaintiff expended $10,464,823.33 for its national advertising. The following chart shows a breakdown of this amount according to the media used for such advertising:

(c) No part of the amount expended by the plaintiff for its national advertising has been claimed, or is now being claimed, as an allowance or as a deduction from the sales prices of plaintiff’s taxable products on which the manufacturer’s excise taxes were paid by the plaintiff.

15. The dealers that sell the plaintiff’s products carry on retail advertising in the course of conducting their business operations. Such advertising differs substantially from the plaintiff’s own advertising in objective, content, and media. (See finding 12.)

Cooperative Advertising Plans in General

16. The first cooperative advertising plan of record was begun in 1902 by the Warner Corset Co., but the practice of using such plans did not grow rapidly until the 1920’s, during which time they were used by some manufacturers in the appliance industry. Today, cooperative advertising plans are used by a great many manufacturers in many industries, including the appliance industry.

17. A manufacturer is interested in having the retailers of its products do a good job of advertising, since their advertising is important to the entire distribution system and is a type of advertising which it is not feasible for the manufacturer to do (unless the manufacturer is engaged in retailing its own products). The purpose of a cooperative advertising plan is to induce retailers to carry out, and to assist them in carrying out, their function of doing retail advertising, by providing that the manufacturer will reimburse the retailers for part of their expenses in advertising the manufacturer’s products. The expectation that such reimbursements will be made is taken into account by the manufacturer in fixing the sales prices of its products that are subject to the cooperative advertising plan.

The Plaintiffs Cooperative Advertising Plan

18. In 1929, or perhaps earlier, the plaintiff inaugurated a cooperative advertising plan. The plan has been in effect continuously since its inception, except that it was temporarily discontinued during the period 1942-1947. Although the plaintiff’s plan has covered different products and different media from time to time, and other minor changes have been made, the basic operation of the plan has remained the same throughout its existence.

19. (a) The plaintiff’s cooperative advertising plan provides (among other things) that “Frigidaire Division, General Motors Corporation, will participate in the cost of local advertising with * * * Districts, and/or their duly authorized Frigidaire dealers,” subject to the limitations stated in the plan.

(b) It is further provided in the plan that the plaintiff’s participation “will be on the basis of 50% of the actual net cost to the District or dealer” of the local advertising of Frigidaire products that are subject to the plan; but this is subject to the limitation that “The total amount of such participation with each District and/or its dealers shall not exceed 1%% of the * * * ‘Suggested Cash Installed Price’ of new and current models of Frigidaire products” which are subject to the plan, and that “The total amount of such participation with, any one dealer shall not exceed 1%% of such billings to him.”

(c) It is further provided in the plan as follows:
The District has the legal obligation to extend the provisions of the plan on a like basis to all dealers authorized to- sell the eligible products. Districts will advise all such dealers in writing of the provisions of the plan and will keep records on each dealer showing the amount of participation allowable and the amount used. Kecord forms and procedures are provided for this purpose.
(d) The plan also provides that:
Districts and dealers will pay for the advertising placed by them and will be reimbursed by the Frigidaire Division to the extent of the applicable participation, when claims are submitted in the manner and in the time limits outlined.
(e) Advertising under the plan must be in accordance with instructions issued by the plaintiff with respect to copy, space, policy, and other requirements. However, the plaintiff’s instructions concerning these matters leave to the local advertisers broad leeway with respect to the manner in which such advertising shall be conducted. The policy limitations imposed by the plaintiff under the plan are very broad, such as: (a) that retail advertising, in order to qualify under the plan, must not contain derogatory statements about other manufacturers; and (b) that the plaintiff will not participate in any increased cost for “special position” advertising. There is also a policy requirement under the plan which states that the theme and general characteristics of retail advertising should follow the precedent established by current national advertising, but this is liberally applied. It is based on the plaintiff’s belief that it is good business management for the national advertising theme to be used in retail advertising, and that, when this is done, the retail advertising will be more effective than it would otherwise be.
(f) The plan covers only certain products manufactured by the plaintiff, and these products are changed from time to time. Household refrigerators, ranges, automatic washers, ironers, dryers, dehumidifiers, and home freezers were subject to the plan throughout the period of time involved in this litigation. Window air conditioners were made subject to the plan on January 1, 1949, store-type air conditioners on April 11, 1949, reach-in refrigerators on May 26, 1949, and cases and fixtures on June 21, 1949; and each of these products thereafter continued to be subject to the plan throughout the remainder of the period involved in the present case.
(g) The media that may be used for local advertising under the plan are prescribed in the plan. During the period involved in this action, the use of the following media was permissible: newspapers, radio, television, movie trailers, telephone directories, billboards, display materials, exhibits and shows, car cards, tabloids, advertising novelties, circulars, direct mail, and signs.
(h) The provisions of the plan are set out in a cooperative advertising manual prepared by the plaintiff, and copies of this manual are available to interested persons.
20. Frigidaire dealers have complete discretion to determine when they will advertise locally the products that are subject to the plaintiff’s cooperative advertising plan, which of the approved media will be used for such advertising, how much money they will spend on such advertising, and how their expenditures on retail advertising will be allocated among the various products.
21. (a) When the plaintiff sells to a district products which are subject to the cooperative advertising plan, an “accrual” amounting to 1% percent of the suggested retail prices of such products is made to a cooperative advertising fund account that is maintained on the plaintiff’s books in the name of the particular district.
(b) During the years involved in the present case, the total accruals made by the plaintiff in accordance with the procedure mentioned in paragraph (a) of this finding were as follows:
1948_$2,071,359.03
1949_ 4, 093,212.61
1950_ 6,089,469.37
12,254, 041.01
(c) The portions of the total accruals referred to in paragraph (b) of this finding which related to sales of products on which the plaintiff paid the manufacturer’s excise taxes imposed by Sections 3405 and 3406 of the Internal Revenue Code of 1939 were as follows:
1948_$1,838,223.49
1949_ 3,600,331.19
1950_ 5,206, 070.63
10,644,625.31

22. (a) When local advertising of Frigidaire products is done by a dealer, the dealer submits a claim, with supporting vouchers, to the appropriate district for one-half of the cost of such advertising, if reimbursement under the plaintiff’s cooperative advertising plan is desired. The district examines the claim for errors and to determine whether there has been compliance with the provisions of the plaintiff’s cooperative advertising plan in connection with the advertising on which the claim is based. If the district approves the claim, the district then forwards it to the plaintiff.

(b) Upon receiving a claim for reimbursement that has been approved by the appropriate district under the cooperative advertising plan, personnel of the plaintiff examines the claim for errors and to determine whether there has been compliance with the provisions of the cooperative advertising plan. If the claim is allowed by the plaintiff in whole or in part, reimbursement of the claimant in the proper amount is made by the plaintiff. Such amount is charged on the plaintiff’s books against the cooperative advertising fund account that is maintained in the name of the appropriate district (see finding 21).

(c) Disallowances by the plaintiff represent only a small percentage of the amounts claimed under tlie cooperative advertising plan. For example, only 1,604 claims were rejected wholly or partially out of 34,548 claims that were submitted to the plaintiff for the year 1950. Of the 1,604 claims involved in rejections, 553 (or about one-third) were disapproved solely because they contained mathematical errors. The dollar amount of the plaintiff’s disallowances (referred to by the plaintiff as deductions) for 1950 was only $29,381.75, whereas claims aggregating $4,372,422.89 were allowed by the plaintiff for the same year. An analysis of the plaintiff’s disallowances for 1950 is set out below:

23. (a) Local advertising is sometimes placed by a dealer or dealers through the plaintiff’s advertising agency. When this is done, the agency renders its usual advertising services, including the placing of the advertising, at the discretion of the advertiser or advertisers. If the agency pays for the advertising, which is done in some cases, it bills the plaintiff; and the plaintiff, upon paying the amount of the bill, in turn bills one-half to the appropriate district and charges the remaining one-half against the cooperative advertising fund account maintained on the plaintiff’s books in the name of the particular district (see finding 21). In other cases, one-half of the advertising cost is billed directly to the appropriate district by the publisher and the other one-half to the advertising agency, which, in turn, bills the plaintiff; and the one-half thus billed to the plaintiff is charged against the cooperative advertising fund account maintained in the name of the appropriate district.

(b) The inference is warranted that any amount billed to and paid by a district under the alternative procedures outlined in paragraph (a) of this finding is rebilled by the district to the dealer or dealers for whom the advertising was done.

24. Under the cooperative advertising plan, the plaintiff obligates itself to provide, upon request, certain advertising and display material (such as circulars, tabloids, novelties, and showroom display items) for use in retail advertising. When such material is ordered from the plaintiff, the plaintiff charges one-half of the actual cost of the material against the cooperative advertising fund account that is maintained on the plaintiff’s books in the name of the appropriate district (see finding 21), and the plaintiff bills the other one-half to the person ordering the material. During the period involved in this litigation, the aggregate amount of $346,322 for advertising and display material was charged against the cooperative advertising fund accounts maintained in the names of the several districts, out of a total of $10,011,963.04 charged against such accounts as representing the plaintiff’s total participation in the cost of retail advertising under the cooperative advertising plan (see finding 25).

25. (a) For the period involved in this action, the plaintiff’s participation in the cost of local advertising under the cooperative advertising plan, and the charges made against the cooperative advertising fund accounts maintained in the names of the several districts, aggregated $10,011,963.04. This total amount was distributed among the several years as follows:

1948_ $1,350,080.13
1949_ 4,289,460.02
1950 _ 4,372,422. 89
_ 10, Oil, 963.04

(b) The evidence does not show precisely to what extent the figures set out in paragraph (a) of this finding related to the local advertising of Frigidaire products on which the plaintiff had paid the manufacturer’s excise taxes imposed by Sections 3405 and 3406 of the Internal Revenue Code of 1939. However, the accruals for the same period under the cooperative advertising plan were based largely upon taxable products (see finding 21); and spot checks made by the plaintiff from time to time have indicated that the local advertising of taxable products under the cooperative advertising plan has about the same relationship to the advertising of all Frigidaire products under the plan that accruals upon taxable products have to all accruals.

(c) The following table shows the extent of the plaintiff’s participation in local advertising during the period involved in the present case, according to the media used in such advertising:

Media 1948 1949 1950 Total
Newspapers. $865,898.80 $2,579,620.19 $2,490,692.13 302.12
Radio__ 158.549.59 818,513.04 867,621.54 1,844, 684.17
Movie Trailers_ 106.201.60 233,697.65 263,623.07 603, 522.32
Telephone Directories.. 87,636.96 199,766.64 221,183.51 608, 587.11
Billboards. 48,546.14 111,355.37 120,724.58 280, 626.09
Display Material. 5,448.00 112,385.00 73,327.50 191, 160.50
Exhibits & Shows_ 19,695.04 77,613.16 84,009.91 181, 318.11
Car Cards_ 72,093.42 75,700.55 147, 793.97
Television_ 414.00 19,627.27 113,070.91 133, 012.18
Tabloids_ 56,183.04 38,790.89 94, 973.93
Advertising Novelties.. 60,187.60 60, 187.60
Circulars.... 1,415.96 2,995.58 12,944.37 17, 355.91
Direct Mail_ 8,-124.37 8, 124.37
1,705.10 2,609.56 4, 314.66
1,350,080.13 t, 289,460.02 4,372,422.89 \ 10,011,963.04 I

26. During the period involved in this litigation, the charges that were made against the cooperative advertising fund accounts maintained on the plaintiff’s books in the names of its several districts represented:

(a) claims for reimbursement that were allowed and paid by the plaintiff pursuant to the procedure outlined in finding 22, representing one-half of the cost of local advertising placed directly by Frigidaire dealers under the cooperative advertising plan;
(b) amounts paid by the plaintiff to its advertising agency pursuant to the procedures outlined in finding 23, representing one-half of the cost of local advertising placed by Frigidaire dealers through the plaintiff’s advertising agency under the cooperative advertising plan; and
(c) one-half of the cost of display and other advertising material furnished by the plaintiff pursuant to the procedure outlined in finding 24.

No other charges were made against these accounts.

27. (a) The cooperative advertising fund accounts maintained on the plaintiff’s books in the names of the several districts are kept on an annual basis. At the end of the calendar year, the plaintiff sends to each district a closing statement showing the year-end balance, if any. If there is a balance, it is held over for a 5-month period to allow any participation claims for the preceding year to be submitted. At the end of the 5-month period, any balance in the account is closed out to profit.

(b) Under the cooperative advertising plan, each district keeps records on each of its dealers, showing the amount of participation that is allowable to the particular dealer under the plaintiff’s cooperative advertising plan, and the amount used by the particular dealer.

28. (a) Under the cooperative advertising plan, accruals on sales by the plaintiff of products covered by the plan are set aside in the cooperative advertising fund accounts that are maintained on the plaintiff’s books in the names of its several districts, irrespective of whether such sales are taxable under Sections 3405 and 3406 of the Internal Eevenue Code of 1939 or not.

(b) The plaintiff’s books are maintained on a product basis, and its records accurately reflect (1) the accruals in the cooperative advertising fund accounts which represent sales of products by the plaintiff on which the manufacturer’s excise taxes imposed by Sections 3405 and 3406 of the Internal Eevenue Code of 1939 are paid by the plaintiff, and (2) the accruals which represent sales on which such taxes are not paid.

(c) The charges made against the cooperative advertising fund accounts pursuant to the procedures outlined in findings 22, 23, and 24 are not segregated in the plaintiff’s records on the basis of individual products; and, hence, the plaintiff’s records do not show the extent to which its participation in the cost of local advertising under the cooperative advertising plan relates to the advertising of products that have been sold by the plaintiff subject to the manufacturer’s excise taxes imposed by Sections 3405 and 3406 of the Internal Revenue Code of 1939. (In this connection, see finding 25(b).)

29. The plaintiff’s districts, on their own accord, purchase very little advertising. If advertising is purchased by a district, it is very much the exception to the rule.

30. On September 26, 1952 and February 24, 1953, the plaintiff didy filed with the Internal Revenue Service, pursuant to the applicable law and regulations, claims for refund in the total amount of $787,631.69. The basis for these claims was the plaintiff’s contention that the “refunds” made by the plaintiff pursuant to its cooperative advertising plan, as set out in findings 22-26, constituted readjustments in the sales prices of its taxable products by way of bona fide discounts, rebates, or allowances to the plaintiff’s vendees, within the meaning of Section 3443(a) (2) of the Internal Revenue Code of 1939. The plaintiff has not been informed of any final action by the Commissioner of Internal Revenue, or any other official, on such claims for refund.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on April 21,1961, that judgment for the plaintiff be entered for $787,631.69, without prejudice to the parties’ positions with respect to interest.

Pursuant to a supplemental report of the commissioner recommending that no interest be allowed on the judgment entered April 21, 1961, to which recommendation plaintiff filed objections, the court rendered an opinion on July 19, 1961, holding that no interest is allowable on the judgment of April 21,1961, and said judgment is deemed to be amended so as to be without interest. 
      
       Tlis section of Internal Revenue Code of 1954 is substantially identical with section 3443 of the 1939 Code.
     
      
       Hearings on Excise Tax Technical and Administrative Problems before a subcommittee of the House Committee on Ways and Means, 84th Cong., 2d Bess., Part 2, pp. 13-15 (January 10, 1956).
     
      
       Id. pp. 57-59.
     
      
       Hearings on Excise Tax Technical and Administrative Problems before a subcommittee of the House Committee on Ways and Means, swpra, Part 3, pp. 922-923.
     
      
      See statement following Conclusion of Law, p. 773.
     
      
       In some instances, districts make retail sales to consumers themselves.
     
      
       The limitation of 1% percent was suspended during the period January 1-June 30, 1949.
     
      
       This is subject to the overall limitation that the plaintiff’s participation with a particular dealer in the cost of the local advertising -will not exceed 1% percent of the total of the suggested retail prices of those Frigidaire products handled by the dealer that are subject to the cooperative advertising plan. (But see footnote 6.)
     
      
       The only part of 1948 Involved in tlie present litigation and included in this figure was from August 1 to the end. of the year.
     
      
       See footnote 8.
     
      
       During the period involved in this action, reimbursement was effected by means of a check drawn by the plaintiff in favor of the claimant dealer, and sent by the plaintiff to the appropriate district for delivery to the dealer. Since the beginning of 1951, reimbursement has been effected by means of a credit memorandum issued by the plaintiff.
     
      
      
         Several Erigidaire dealers in a locality may cooperate in tRe running of a joint ad.
     
      
       Only that portion of 1948 beginning on August 1 and extending through the remainder of the year is involved In the present litigation and included In this figure.
     
      
       The amount of the plaintiff’s participation in 1949 was larger than the total accruals for 1949 (see finding 21(b),)i because there was no limit on the amount of retail advertising that might be done under the cooperative advertising plan during the first half of 1949 (see footnote 2).
     
      
       The only part of 1948 Involved In tlie present litigation and included in these figures was the period from, August 1 to the end of the year.
     