On July 13, 2009, the United States Court of Appeals for the Fourth Circuit issued an order amending its previous opinion from July 9, 2009, to correct the designation of the presiding judge from "William L. Osteen, Jr. District Judge" to "William L. Osteen, Sr. Senior District Judge." The case involved Volvo Cars of North America, LLC, and its subsidiaries against the United States regarding a federal income tax refund claim. Volvo wrote off excess and slow-moving inventory under a contract with a warehouser dated April 6, 1983, which it claimed reduced its taxable income for the 1983 tax year. The IRS disputed the legitimacy of the sales, asserting that Volvo retained control over the inventory post-transfer. Subsequently, Volvo paid the disputed taxes and sought a refund. A jury ruled in favor of Volvo, determining that the transfers constituted bona fide sales, entitling Volvo to a $2.8 million refund plus interest. However, the district court issued a judgment notwithstanding the verdict, favoring the government on inventory transfers before the contract's execution, stating those transfers were not covered by the contract. The appellate court found sufficient evidence supporting the jury's conclusion that the contract did apply to prior inventory transfers, thus vacating the district court's judgment and remanding for a ruling consistent with the jury's verdict.
Volvo entered into an April 18, 1980 contract (the '1980 Contract') with Sajac Company, Inc., which specialized in inventory management by purchasing and storing excess parts from manufacturers for resale. Manufacturers, including Volvo, could repurchase these parts at prices higher than scrap but lower than manufacturing costs. The contract allowed Sajac to hold the inventory long-term and required it to notify Volvo before selling parts to third parties, while also granting Volvo the right to repurchase inventory at 90% of standard cost. However, the IRS challenged the legitimacy of these transactions, asserting they were not bona fide sales for tax purposes, a position upheld by the Tax Court in Paccar, Inc. v. Commissioner. In response, Volvo and Sajac created a new contract on April 6, 1983 (the '1983 Contract'), which removed problematic provisions and stated that Sajac would purchase certain inventory from Volvo, but did not offer the same control rights to Volvo. The IRS contested all inventory transfers from 1981 to 1990, asserting they were not bona fide sales. Volvo conceded that the 1980 Contract transfers were not bona fide but argued that transfers under the 1983 Contract were valid, claiming it constituted a bona fide sale and replaced the earlier contract. After the IRS disallowed write-offs related to these transfers, Volvo paid the disputed taxes and sought a refund for tax years 1983, 1985, 1986, 1987, and 1989, specifically requesting a refund of $2,807,902 for 1983 due to an alleged improper income increase of $6,101,960 by the IRS.
The jury trial involved testimony from Volvo and former Sajac employees regarding their business relationship and the nature of inventory transfers. Evidence indicated that after Volvo transferred parts to Sajac, both companies acted as if these were bona fide sales, as outlined by the Paccar factors. Testimony revealed that Sajac sold its inventory to Lippert Enterprises without notifying Volvo post-sale and regularly sold Volvo inventory to third parties without prior approval. The district court posed two key questions to the jury: whether inventory transferred before the 1983 Contract was a bona fide sale and whether post-contract transfers were bona fide sales. The jury ruled in favor of Volvo, determining that both sets of transfers constituted bona fide sales for tax purposes.
Following the verdict, the government filed a motion for judgment as a matter of law, arguing insufficient evidence supported the jury's finding of bona fide sales. The district court denied this motion for inventory transferred post-April 6, 1983, stating there was adequate evidence for a reasonable jury to conclude Sajac had control over its inventory. However, for inventory transferred before that date, the court granted the government's motion, ruling it fell under the 1980 Contract, which Volvo acknowledged did not constitute bona fide sales. Volvo appealed this judgment, emphasizing that the 1980 Contract was initially intended for tax write-offs for slow-moving inventory, but both parties recognized it did not meet the bona fide sale criteria due to Volvo's retained control. The 1983 Contract aimed to rectify these issues, and while the jury found it satisfied Paccar standards, the appeal focuses on whether it covered inventory previously transferred under the 1980 Contract.
The key issue revolves around whether the 1983 Contract constitutes a sale of inventory that had previously been transferred to Sajac under the 1980 Contract, which the government claims was a warehousing arrangement rather than bona fide sales. The determination hinges on whether the 1983 Contract replaced the 1980 Contract or if both operated concurrently, covering different inventory. If the 1983 Contract replaced the 1980 Contract, Volvo would be eligible for a tax write-off for the inventory previously transferred.
The analysis requires reference to state law to ascertain the legal interest in the property before applying federal tax implications. Both parties agree that the 1983 Contract resulted in a bona fide sale under federal tax law; however, the crux of the matter lies in state law concerning the inventory addressed by the 1983 Contract. Volvo argues that the context and course of performance indicate that the 1983 Contract replaced the earlier agreement, covering inventory still in Sajac’s possession or sold to third parties.
Conversely, the government claims that specific language in the 1983 Contract indicates it was forward-looking and did not pertain to previously transferred inventory. They further argue that since the cancellation clause of the 1980 Contract was not invoked, it remains effective alongside the 1983 Contract.
The 1983 Contract starts with the language stating that Sajac agrees to purchase certain inventory from Volvo; however, it lacks a clear definition of what constitutes "certain inventory." The government asserts that future tense language concerning transportation and payment details implies the contract pertains only to inventory to be transferred subsequently. Nevertheless, these future tense references do not limit the definition of "certain inventory." Wisconsin law, governing the contract, allows for the definition of terms based on the intent of the parties, suggesting that the contract's language can be interpreted to include the previously transferred inventory.
Wis. Stat. 402.202 emphasizes that the interpretation of contractual language should be informed by the commercial context rather than solely by traditional legal construction rules. A court must first determine if the language in question is ambiguous before admitting evidence of "course of performance." This statute allows for the consideration of the parties' intentions and the broader circumstances surrounding the contract. In the case at hand, the 1983 Contract was created to revise the 1980 Contract, specifically to address IRS concerns that prevented tax write-offs for sales to Sajac. Evidence indicated that the 1983 Contract was a direct response to tax court rulings regarding the 1980 Contract, with both agreements focused on the sale of slow-moving and excess inventory for mutual benefit and tax advantages.
Testimony revealed that Volvo and Sajac collaborated to amend the contract following a relevant tax case, but there was no indication that they intended to treat the inventory from the two contracts differently. Sajac continued to manage Volvo's inventory without distinguishing between items transferred under the two agreements, indicating no operational change. The necessity of maintaining separate inventory categories would have created significant legal and logistical challenges, and there was no evidence that Sajac made any efforts to segregate the inventories. Thus, the evidence supports the conclusion that the contracts were treated as a single entity concerning inventory management and tax implications.
Sajac, upon going out of business in 1991, sold all its Volvo inventory to Lippert Enterprises without notifying Volvo, which only learned of the sale well after it occurred. The 1980 Contract required Sajac to notify Volvo of any inventory disposition, while the 1983 Contract did not include such a requirement. The government's position is that the 1980 Contract remained in effect for inventory transferred before the 1983 Contract, suggesting Sajac was obligated to notify Volvo. However, the lack of notice raises an inference that the 1983 Contract governed all Volvo inventory. This evidence could have influenced the jury's interpretation of "certain inventory" in the 1983 Contract, supporting their rejection of the government's view. The government argued that the 1980 Contract continued because neither party canceled it as per its cancellation clause, which allows unilateral cancellation with written notice. However, mutual consent could also terminate the contract, which the evidence suggests occurred. The jury was correctly instructed on the applicable legal standards and had the discretion to determine if the 1983 Contract constituted a bona fide sale of all inventory, including previously transferred items. The evidence did not warrant a conclusion that the jury acted unreasonably in its finding. Consequently, the district court's decision to overturn the jury's verdict was erroneous, leading to the judgment being vacated and remanded for entry consistent with the jury's verdict.
