J. & A. Freiberg Co. v. Dawson

• Decision Date: 31 May 1920
• Citation: 274 F. 420
• Court: U.S. District Court — Western District of Kentucky
• Parties: J. & A. FREIBERG CO. v. DAWSON et al. [*]

274 F. 420

J. & A. FREIBERG CO. v. DAWSON et al. ^[*]

United States District Court, W.D. Kentucky.

May 31, 1920

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

Levi Cooke, of Washington, D.C., and Trabue, Doolan, Helm & Helm of Louisville, Ky., for plaintiffs.

Charles I. Dawson, Atty. Gen., for defendants.

Before DENISON, Circuit Judge, and WALTER EVANS and SATER, District judges.

PER CURIAM.

Section 171 of the Kentucky Constitution provides that taxes 'shall be uniform upon all property of the same class subject to taxation. ' Section 172 says that all property shall be assessed for taxation at its fair cash value. Section 174 directs that all property shall be taxed in proportion to its value, without prejudice to the right to provide for taxation based on income, licenses, or franchises. Section 181a says:

'The General Assembly may, by general laws only, provide for the payment of license fees on franchises, * * * the various trades, occupations and professions, or a special or excise tax.'

Prior to 1917 such license taxes as there were on manufacturing or wholesale dealing in distilled spirits had been by way of an annual tax of a fixed sum. In 1917, in the course of a general revision of the revenue laws of the state, it was provided by chapter 5 of the Acts of 1917 that every corporation or person engaged in the business or occupation of manufacturing distilled spirits, and every owner or proprietor of a bonded warehouse in the state in which such spirits are stored, should, in addition to other taxes, pay a license tax of two cents on every proof gallon liable to federal tax; that every distiller and every bonded warehouseman should make quarterly reports showing the amount of distilled spirits removed from the warehouse by payment of the federal tax or transferred under bond during the quarter, and at the time of making the report pay the tax of two cents per gallon.

The proceeds of the tax were distributed, 20 per cent. to the road fund, 30 per cent. to the school fund, and 50 per cent. to the general fund.

In January, 1920, when the Eighteenth Amendment to the federal Constitution was declared to take effect, there remained in storage in bonded warehouses in Kentucky approximately 50,000,000 gallons of distilled spirits, and there was approximately the same amount (probably somewhat more) in storage in bond in the remainder of the United States. On March 12, 1920, the Governor approved an act of the General Assembly repealing chapter 5 of 1917, and substituting a revision of generally similar purport. The first section thereof, as so revised, is as follows:

'Every corporation, association, partnership and individual engaged in the business of manufacturing distilled spirits, known as whisky or brandy or other species of double stamp spirits, in this state; and every corporation, association, partnership and individual engaged in the business of owning and storing such spirits in bonded warehouses in this state, and in removing same therefrom for the purpose of sale, or for any other purpose, shall pay an annual license tax to the commonwealth of Kentucky of fifty cents on every proof gallon of said distilled spirits so manufactured or stored in a bonded warehouse, or withdrawn from a bonded warehouse, or transferred therefrom under bond out of the commonwealth of Kentucky. ' Laws 1920, c. 13.

Section 2 directed that every owner of a bonded warehouse should make to the State Auditor a monthly report, on the 1st of each month, showing the number of proof gallons withdrawn or transferred since the last report. Section 3 directed the warehouseman, at the time of making each monthly report, to pay to the Auditor 50 cents upon each proof gallon which had been removed from the bonded warehouse or transferred under bond out of the state, and further provides:

'And for the purpose of securing the payment of the license taxes herein provided for, the commonwealth shall have a lien on all such spirits stored in such bonded warehouses, together with the other property of the bonded warehouseman used in connection therewith; and in all cases where the spirits so removed or transferred were owned or controlled by another than the bonded warehouseman, then the bonded warehouseman shall collect and pay the tax due on such spirits so removed or transferred under bond, and shall be subrogated to the lien of the commonwealth.'

Section 4 required that every distiller pay this license tax upon the product of his manufacture when removed from his premises, unless then placed in a bonded warehouse; that all distillers shall file a monthly statement with the Auditor showing the amount of spirits so removed and not going into a bonded warehouse, and at the same time pay the specified license tax thereon. Section 5 provides that every person or corporation failing to make reports as directed, and failing to pay the taxes as they become due, shall be guilty of a misdemeanor, and upon conviction be fined not less than $500 nor more than $1,000, and that each day that such taxpayer is in default after the date such report is due 'shall be considered and treated as a separate offense. ' Section 6 gives the proceeds of the tax 65 per cent. to the road fund and 35 per cent. to the general fund. Section 7 declares that the license tax of the statute shall be in lieu of all other license, franchise, or excise taxes now imposed by law on persons or corporations engaged in business covered by this act, and repeals chapter 5 of 1917. Section 8 recites that, whereas the business covered and licensed by the act is not now an adequate license tax, and whereas liquor in bonded storage is being removed from the bonded warehouses and disposed of without the receipt by the state of adequate license tax, 'an emergency is hereby declared to exist, and this act shall take effect from and after the date of its passage and approval by the Governor.'

The plaintiff, which is an Ohio corporation, in October, 1916, purchased from the distiller warehouse receipts covering 9,800 proof gallons of whisky, original gauge, and upon the purchase of these certificates became and remained the owner of this whisky, which continued in the distiller's bonded warehouse until January, 1920, when it was transferred to a bonded warehouse operated by the Louisville Public Warehouse Company. Thereby the plaintiff has had, and it has, such constructive possession of the whisky as the federal laws contemplate before the federal tax is paid. In April, 1920, plaintiff desired to have this liquor transferred, under the existing federal regulations which permit such transfer, to another bonded warehouse in the state of Massachusetts, and directed the Louisville Public Warehouse Company to proceed with such transfer, at the same time tendering payment to the warehouse company of all storage charges, ad valorem taxes, and all other payments attending such transfer and claimed to be proper, excepting the 50-cent license fee under the act of 1920. The warehouse company refused to permit such withdrawal and transfer, for the sole reason that the 50-cent tax had not been paid. and claimed a lien upon the whiskey to secure such payment.

Thereupon plaintiff filed this bill against the Warehouse Company and against the State Auditor and the State Attorney General, alleging that the warehouse company was unlawfully refusing to make the transfer, and that the state officers were threatening to enforce this law and the penalties thereof against plaintiff and the warehouse company, and asking that the warehouse company be enjoined from further refusing to make the transfer or from further asserting any lien for this 50-cent tax, that the state officers be enjoined from any step attempting to enforce the act or the lien thereof, and that the Attorney General be enjoined from instituting any action, civil or criminal, to coerce the payment of this tax, or to collect the penalties or fines prescribed in the act. A motion for preliminary injunction was made, and the District Judge, proceeding under section 266 of the Judicial Code (Comp. St. Sec. 1243), caused the motion to be heard before the court as now constituted.

Several questions are involved, and it is not feasible to discuss all of them exhaustively. As to several of them, we state only our conclusions. As to some, we add the reasons which induce the conclusion.

1. Jurisdiction of This Court as a Federal Court.-- This is clear: First, because the bill shows diverse citizenship with more than $3,000 involved in money values; and, second, because the bill states a case of rights arising under the Fourteenth Amendment to the federal Constitution. It is well settled that in the latter case the federal court has jurisdiction if the claim of federal right is made in good faith and is not frivolous, even though in the end it may turn out to be erroneous.

2. Case Arising under Section 266, Judicial Code.-- Two state officers are made parties defendant, and an injunction is sought to prevent them from enforcing the law of the state which law is said to be unconstitutional. The tax law does not seem to impose upon the Auditor any duty of enforcement, nor is it clear that he can do anything which would be harmful enough to call for an advance prohibition. As to the Attorney General, the case is different. While this statute does not require him to act, it seems to be understood by all parties, including the Attorney General himself, that it is his official duty to enforce the law by bringing, on behalf of the state, all actions and by enforcing all penalties which the law provides for. The bill alleges that he intends to enforce these penalties, and he does not dispute this allegation. The matter has...