Pittway Corporation, and Subsidiaries v. United States

Citations: 102 F.3d 932; 78 A.F.T.R.2d (RIA) 7616; 1996 U.S. App. LEXIS 33098; 1996 WL 725704Docket: 96-1968

Court: Court of Appeals for the Seventh Circuit; December 18, 1996; Federal Appellate Court

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Pittway Corporation, a contract packager, utilized butane as an aerosol propellant in consumer products, resulting in the IRS imposing a tax under Section 4661(a) of the Internal Revenue Code for the manufacture of certain chemicals, including butane. Pittway sought a refund of $236,056, arguing that its customers, the actual manufacturers, should bear the tax liability. The district court ruled in favor of the government, granting summary judgment, and concluded that Pittway's insertion of butane classified it as having 'used' the chemical under Section 4662(b)(1). Although Pittway acknowledged the use of butane, it contested the characterization of its role in the production of the finished aerosol products, asserting it did not 'manufacture' those products as defined by Section 4661(a), thus challenging the tax imposition. The court emphasized that statutory interpretation starts with the language of the law, which must be enforced according to its terms when clear. The case was argued on October 30, 1996, and decided on December 18, 1996, affirming the lower court's decision.

Section 4661(a) imposes a tax on certain chemicals sold by their manufacturers, specifically targeting chemicals like butane. Under Section 4662(b)(1), the entity that "uses" butane is treated as the manufacturer for tax purposes, with the statute aiming to identify those using butane in products other than fuel. Pittway admits it used butane by incorporating it into aerosol cans but argues that its customers, who directed this use, should be considered the users liable for the tax. The district court ruled that Pittway's status as a manufacturer was irrelevant since the tax applies to any entity using butane, but this interpretation is flawed. The definition of "manufacturer" under the statute is applicable, making Pittway's role as a user significant for tax liability.

Pittway presents three arguments against tax liability. First, it claims it is not liable because similar contract manufacturers have been deemed non-manufacturers for excise tax purposes, citing *Charles Peckat Mfg. Co. v. Jarecki*. However, the statute specifically defines "manufacturer," making that precedent less persuasive. Second, Pittway argues it is not liable because it did not manufacture the end product; however, the statute taxes the manufacturer of the chemical, not the final product. Thus, since Pittway acknowledged it "used" butane as defined by the statute, it is liable for the tax under Section 4661(a).

Pittway argues that the tax statute applies only when a chemical is "sold by the manufacturer" and claims it did not make a sale in this instance. However, it is established that Pittway assembles and packages products, including butane, for a price, which constitutes a sale under the law. Pittway also raises a significant point, albeit briefly, regarding the IRS's failure to issue necessary regulations for Section 4662(b)(1), which mandates that butane be treated as a taxable chemical. Despite the statute indicating that regulations were forthcoming over fifteen years ago, none have been issued.

The government has previously attempted to enforce statutes without the required regulations, as noted in the case of First Chicago Corp. v. Commissioner, where the court highlighted the Treasury's failure to implement regulations due to workload issues. In the current situation, however, the government attributes its inaction to the Tax Reform Act of 1986 and unspecified "efficiency and other concerns." The reasons provided remain unclear, raising questions about their legitimacy, but the absence of regulations is acknowledged.

The court emphasizes the principle that the "plain meaning" of legislation is definitive. The language in Section 4662(b)(1) leads to the conclusion that Pittway, as the user of butane, bears responsibility for the excise tax. Even if regulations existed, their validity would be challenged if they contradicted the statute's clear meaning, as established in MCI Telecommunications v. American Tel. Tel.

The plain meaning rule allows for exceptions only in rare cases where a statute's literal application contradicts the drafters' intentions. Pittway claims such a case exists, arguing that Congress intended to tax those responsible for environmental waste from isobutane usage. However, Pittway asserts its customers are responsible without sufficient justification. As Pittway purchases, stores, and uses isobutane as a raw material, it qualifies as the "manufacturer" under the relevant statute and concedes its usage of butane. There is no evidence suggesting Congress intended to tax anyone other than the manufacturer. The tax imposed is a one-time charge, ensuring that the environmental impact is addressed. While Pittway's customers also use butane, Pittway is the first user for non-fuel purposes and thus designated as the manufacturer responsible for the tax. The court suggests that clearer regulations from the government could help prevent confusion about tax liabilities. Ultimately, the statute clearly taxes the manufacturer, designating Pittway as such, and affirming the district court's decision. Context is vital in interpreting legislative language, and previous cases support the notion that the manufacturer is responsible for such tax liabilities.