Aetna Insurance Company v. United States

Decision Date05 March 1958
Docket NumberNo. 281-52.,281-52.
Citation159 F. Supp. 831
PartiesÆTNA INSURANCE COMPANY, Glens Falls Insurance Company, Home Insurance Company, Institute of London Underwriters, Mutual Fire Marine & Inland Insurance Company, Pearl Assurance Company, Limited, Sun Insurance Office, Limited, The Pennsylvania Railroad Company v. UNITED STATES.
CourtU.S. Claims Court

COPYRIGHT MATERIAL OMITTED

Raymond E. Stefferson and Richard T. Graham, New York City, for plaintiffs Aetna Ins. Co. and others. Paul F. McArdle, Washington, D. C., was on the briefs, for plaintiff Pennsylvania Railway Co.

Benjamin H. Pester, Washington, D. C., with whom was Charles K. Rice, Asst. Atty. Gen., for defendant. James P. Garland, Washington, D. C., was on the briefs.

REED, Justice (Retired), sitting by designation.

This is a suit for a refund of tax paid on industrial alcohol lost as a result of a rail accident during shipment from a bonded warehouse. The plaintiffs are the Aetna Insurance Company and associated insurance companies, and The Pennsylvania Railroad Company. The facts upon which the claim for refund is founded are as follows:

On July 21, 1949, Midwest Solvents Company, Inc., hereinafter referred to as Midwest, a manufacturer of alcohol, withdrew from its Industrial Alcohol Bonded Warehouse 15,280.6 proof gallons of grain alcohol for shipment to Joseph E. Seagram & Sons, Inc., pursuant to a purchase agreement. At the time of the withdrawal of the industrial alcohol from the bonded warehouse, Midwest paid the United States excise taxes thereon in the amount of $137,525.40. This tax-paid alcohol was loaded aboard a tank car and consigned to a point in Pennsylvania. On July 25, 1949, while being transported by one of the trains of the Pennsylvania Railroad, and on the lines of that company, the tank car containing the alcohol was derailed and overturned. As a result of this accident 11,549.57 proof gallons of alcohol were lost.

Pursuant to the provisions of the uniform bill of lading, requiring payment for failure to deliver, under which the shipment was made, the carrier, Pennsylvania Railroad paid to the consignee $109,046.73 on account of the alcohol lost during shipment.1 Of this amount $103,954.50 represented excise taxes paid on the lost alcohol. Thereafter, the Pennsylvania Railroad requested Midwest to file a claim for refund with the Commissioner of Internal Revenue seeking a return of taxes paid on the destroyed alcohol. This claim was rejected on August 4, 1950, by the Commissioner on the ground that "there is no provision of law for the refunding of tax where the spirits have been lost by casualty after the tax ascertained to be due has been paid."

On or about May 19, 1953, the Pennsylvania Railroad took an assignment from Midwest and Hunter-Wilson Distilling Company, the consignee of the alcohol shipment, of all their interest in the lost alcohol "including any and all taxes paid thereon, and any claim against the United States Government for a refund thereof." The Pennsylvania Railroad has been partially indemnified by collection from Aetna Insurance Company and others, also parties to this suit, under insurance contracts in the amount of $53,945.50. By the terms of the insurance policies, and by special subrogation receipts, each of the insurance companies was subrogated to the rights of the Pennsylvania Railroad to the extent of the payment which each company made to the railroad.

Suit was brought on June 4, 1952, under section 3113(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 3113(a) in this court by the insurance companies and the Pennsylvania Railroad, for a refund of the tax represented by the loss of the industrial alcohol. This section reads as follows:

"Whenever any alcohol is lost by evaporation or other shrinkage, leakage, casualty, or unavoidable cause during distillation, redistillation, denaturation, withdrawal, piping, shipment, warehousing, storage, packing, transfer, or recovery, of any such alcohol the Commissioner may remit or refund any tax incurred under existing law upon such alcohol, provided he is satisfied that the alcohol had not been diverted to any illegal use: Provided, also, That such allowance shall not be granted if the person claiming same is indemnified against such loss by a valid claim of insurance.2"

The Government bases its defense to this action upon three main contentions, which are: (1) No statute provides a refund of taxes paid on distilled spirits where the loss occurs after tax payment; (2) The plaintiffs not having paid the tax may not maintain an action for its refund; (3) A train wreck is not a casualty within the meaning of section 3113 of the Code.

First. The Government says that section 3113(a) does not allow a refund of tax after its payment. It points out that the tax on alcohol is an excise tax on the manufacture of the spirits and attaches at the time of production, although payment is deferred until the time it is removed from a bonded warehouse. Once it has been removed from bond and the tax paid, the Government contends, no refunds may be made due to any loss. In support of this position the Government cites sections of the Internal Revenue Code dealing with refund of taxes paid on distilled spirits.3 Section 2901 of the 1939 Code, 26 U.S. C.A. § 2901 allows refund of tax on distilled spirits, and has generally been interpreted by the courts as not allowing refund after the tax has been paid and the alcohol withdrawn from bond, see Erie Railroad Company v. United States, Ct.Cl., 156 F.Supp. 908. Cf. Stitzel-Weller Distillery, Inc. v. United States, D.C., 82 F.Supp. 50, affirmed, 6 Cir., 180 F.2d 357. Apparently in order to make sure that such an interpretation of that section was followed by the courts and administrative offices, the Congress, after the Stitzel-Weller affirmation, quickly amended section 2901, 64 Stat. 7, in 1950 and provided in its subsection (c) that:

"* * * Nothing in section 2901 as hereby amended, or as heretofore amended, shall be construed to authorize refund of the tax where the loss occurred after the tax was paid."

This amendment restored to the Code a limitation concerning the refund of taxes on distilled spirits which had existed in prior acts. Rev.Stat. § 3221; 1939 Code § 2901(b), 53 Stat. 341. This same congressional limitation on refunds of tax paid on distilled spirits was manifested in section 5011(a) (3) of the 1954 Code.4

We think that the Government's reliance on these sections in its attempt to show the intention of Congress with respect to refunds claimed as here under section 3113(a) is misplaced. Section 2901 of the 1939 Code was contained in Chapter 26, Subchapter A, Part IV, 53 Stat. 340. Subchapter A was headed Distilled Spirits and Part IV thereof Miscellaneous Provisions Relating to Distilled Spirits. On the other hand, section 3113(a) is found in Subchapter C, part II, which came under the general heading Industrial Alcohol Plants. 53 Stat. 360. Thus the two sections relating to refunds of tax on alcohol cannot be said to be so interrelated that they must be read in pari materia. In fact an opposite conclusion seems to be justified.

There was a logical distinction between refunding taxes on distilled spirits and industrial alcohol. The latter was used in industry, commonly rendered nonpotable, and was like any other article of commerce. When not drinkable it did not offer the temptations incident to production, storage, and shipment of the other alcohol. Had Congress intended to provide the same restrictions on refunds of tax paid on industrial alcohol as those applied to distilled spirits, it had ample opportunity to do so.

In enacting section 5011 of the 1954 Code, Congress set forth in that section the requirements for refund of tax on both distilled spirits and industrial alcohol. However, the rule against refund after payment of tax is expressly limited to subsection (a) of section 5011 which deals only with distilled spirits. Subsection (c) of section 5011 sets forth the requirements for refund of tax paid on alcohol produced in an industrial alcohol plant and does not forbid a refund after payment of the tax. Section 5011(c) is substantially the same as section 3113(a) of the 1939 Code.5 The logical conclusion, therefore, would be that Congress did not intend to restrict, either in the 1939 Code or the 1954 Code, refunds of taxes on industrial alcohol to losses occurring prior to the time that the tax is paid.

The legislative history of the provision for refund of industrial alcohol taxes upon loss of the commodity confirms this view. The provision first appeared in the National Prohibition Act of 1919, Title III, Industrial Alcohol, § 14, 41 Stat. 321. It was inserted in the bill in the House, obviously to protect producers of industrial alcohol from losses, and agreed to there and in the Senate without significant discussion. 58 Cong. Rec. 2971; 4893, 4904. At that time, 41 Stat. 317, § 35, all tax provisions on intoxicating liquor were specifically continued in effect. The manufacture of distilled spirits largely for beverage purposes had long been closely supervised and taxed. The provisions for protection of the revenue were detailed and included provisions for recovery or abatement of taxes on distilled spirits only while in bond.6 The omission of the restrictions as to industrial alcohol can only be explained by the less likelihood of tax violations from its handling. As set out above, this difference between distilled spirits and industrial alcohol has continued down to this time. When section 5011(c), supra, footnote 5, the present provision, was before Congress the Committee Reports on the Internal Revenue Code said, as to the subsection:

"Subsection (c), `Loss or destruction of alcohol,' is existing law (see sec. 3113(a)) except that the parenthetical statement `(produced at an industrial alcohol plant or imported under section 5311)' has been inserted following the words
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