Los Angeles Soap Co. v. Rogan

• Decision Date: 16 March 1936
• Docket Number: No. 855.,855.
• Citation: 14 F. Supp. 112
• Parties: LOS ANGELES SOAP CO. v. ROGAN.
• Court: U.S. District Court — Southern District of California

14 F. Supp. 112

LOS ANGELES SOAP CO. v. ROGAN.

No. 855.

District Court, S. D. California, Central Division.

March 16, 1936.

Isidore B. Dockweiler, Thomas A. Dockweiler, and Frank Mergenthaler, all of Los Angeles, Cal., for plaintiff.

Peirson M. Hall, U. S. Atty., and Clyde Thomas, Asst. U. S. Atty., both of Los Angeles, Cal., for defendant.

Daniel O'Brien, of Los Angeles, Cal., amicus curiæ.

YANKWICH, District Judge.

Section 602½ of the Revenue Act of 1934 (26 U.S.C.A. § 999) levies a processing tax of 3 cents per pound on certain oils, including coconut oil, sesame oil, palm oil, palm kernel oil, and sunflower oil. It also levies an additional tax of 2 cents per pound on coconut oil. This tax, however, does not apply to coconut oil produced in the Philippine Islands.

The plaintiff by its bill of complaint attacks the processing tax of 3 cents and seeks a determination both under the equity powers of the court and under the declaratory judgment statute (28 U.S.C.A. § 400) that it is an unconstitutional exaction and penalty and not a tax. Injunctive relief is sought against its collection.

The complaint discloses the following facts: The plaintiff is a manufacturer of soaps, operating a manufacturing plant in the city of Los Angeles, where the process of manufacturing is carried on wholly in intrastate commerce. It has a large establishment representing a large investment, and for thirty-seven years prior to the year 1935, its business was conducted at a substantial profit. In 1934, the bill states, it was able to make a profit merely because it had on hand large quantities of vegetable oil which had been purchased before the enactment of section 602½ of the Revenue Act of 1934. In the conduct of its business, which is exclusively that of the manufacture of soaps and allied products, plaintiff must use large quantities of coconut oil, which is the only important commercial source of lauric acid. It uses a large quantity of coconut oil originating in the Philippine Islands. Its business is that of a processor within the meaning of the Revenue Act of 1934. Between May 1, 1934, and December 31, 1935, it paid under the act a total of $485,642.56 as processing tax on the processing of Philippine Islands oil. Processing taxes will continue to be levied by the defendant, who is the collector of internal revenue for the district, unless he is enjoined from collecting the tax. A temporary restraining order was issued. A temporary injunction is now sought. The defendant has filed objections to its issuance. He has also filed a motion to dismiss the bill upon the ground that it does not state facts sufficient to constitute a cause of action, that the court is without jurisdiction to restrain the collection of the tax or to entertain an action in declaratory relief relating to it, and that the plaintiff has a plain, speedy, and adequate remedy at law.

Plaintiff's attack upon the constitutionality of the statute is grounded upon the contention that it is not a tax under article 1, § 8, cl. 1, of the Constitution of the United States, but a penalty, the effect of which is to penalize the plaintiff for the benefit of certain producers of domestic oils and of the Philippine Islands.

The plaintiff, by paraphrasing certain general language of the Supreme Court in United States v. Butler (1936) 56 S.Ct. 312, 80 L.Ed. ___, insists that this tax is subject to the same constitutional frailty as the Agricultural Adjustment Act (see 7 U.S.C.A. § 601 et seq.).

It is well to bear in mind that the real basis for the decision in that case is the fact that the Congress had attempted to regulate agriculture and to achieve that result by means of moneys obtained through a tax. Whatever language of general character may have been used in the majority opinion must be read in the light of this main principle which lay at the foundation of the decision. The decision establishes the principle that, irrespective of any question of interstate commerce, the Congress of the United States has the power to levy a processing tax. The minority opinion, written by Mr. Justice Stone, emphasizes this fact by stating: "The constitutional power of Congress to levy an excise tax upon the processing of agricultural products is not questioned." See United States v. Butler (1936) 56 S. Ct. 312, 325, 80 L.Ed. ___.

Another significant matter to be borne in mind is the fact that the court adopted the Hamiltonian view on the meaning of the phrase "general welfare" contained in the taxing clause of the Constitution. Hamilton's view was contained in his Report on Manufactures, made by him in 1791, while he was Secretary of the Treasury. He there wrote: "The phrase is as comprehensive as any that could have been used, because it was not fit that the constitutional authority of the Union to appropriate its revenues should have been restricted within narrower limits than the `general welfare,' and because this necessarily embraces a vast variety of particulars which are susceptible neither of specification nor of definition. It is, therefore, of necessity left to the discretion of the National Legislature to pronounce upon the objects which concern the general welfare and for which, under that description, an appropriation of money is requisite and proper. And there seems to be no room for doubt that whatever concerns the general interests of learning, of agriculture, of manufacture, and of commerce, are within the sphere of the national councils, as far as regards application of money." (Italics added.)

The processing tax on coconut oil appears to be a revenue measure. It is not tied, as was the processing tax under the Agricultural Adjustment Act (see 7 U.S. C.A. § 601 et seq.), to any scheme, voluntary or coercive, to control intrastate activities which are beyond the power of the Congress. A reading of the measure and a comparison with other provisions would indicate that the object of the Congress may have been to make the tax replace the custom duty which applies to coconut oil originating elsewhere than in the Philippines. 19 U.S.C.A. § 1001, par. 54; 19 U.S.C.A. § 1301. Coconut oil so originating, must pay in addition to this duty the processing tax of 3 cents per pound. The net result is that the processor who uses coconut oil not originating in the Philippine Islands is subject to a tax of 7 cents per pound, while those who, like the plaintiff, use oil originating in the Philippine Islands, pay only the 3 cents per pound processing tax. In effect, a protective tariff is thus given to this Philippine product. There is no direct discrimination between persons using one product instead of another. But, even if there were, that in itself would not render the tax invalid. Courts have held repeatedly that a tax cannot be invalidated merely because its effect might be to discourage the use of a product, such as oleomargarine, or even the destruction of a business. See Veazie Bank v. Fenno (1869) 8 Wall. 533, 19 L. Ed. 482; McCray v. United States (1904) 195 U.S. 27, 56, 24 S.Ct. 769, 49 L.Ed. 78, 1 Ann.Cas. 561; Alaska Fish Co. v. Smith (1921) 255 U.S. 44, 41 S.Ct. 219, 220, 65 L.Ed. 489; Miller v. Standard Nut Margarine Co. (1932) 284 U.S. 498, 52 S. Ct. 260, 76 L.Ed. 422; Magnano Co. v. Hamilton (1934) 292 U.S. 40, 54 S.Ct. 599, 78 L.Ed. 1109; Fox v. Standard Oil Co. (1935) 294 U.S. 87, 100, 55 S.Ct. 333, 79 L.Ed. 780. In Alaska Fish Co. v. Smith, supra, Mr. Justice Holmes, said: "Even if the tax should destroy a business, it would not be made invalid or require compensation upon that ground alone. Those who enter upon a business take that risk."

Plaintiff quotes from certain of the debates which occurred during the discussion of the adoption of the coconut oil processing tax from which it may be inferred that the object of the Congress was to discourage the use of coconut oil and to force the use of domestic oil substitutes. Assuming this to have been the object, the answer is in the decisions just cited, which state clearly that, where the power to tax is not limited, the mere fact that the legislative body in exercising it may have sought to repress the use of one product or to foster the use of another does not make the exercise of the taxing power constitutionally vulnerable. See Fox v. Standard Oil Co., supra. Few tax measures could stand the test if the courts, disregarding the presumption of constitutionality, were to scrutinize apparently proper exercises of power with the view of discovering a hidden purpose to achieve an unlawful end. The instances in which courts have done so, such as Hill v. Wallace (1922) 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822; Bailey v. Drexel Furniture Co. (1922) 259 U.S. 20, 42 S.Ct. 449, 66 L.Ed. 817, 21 A.L.R. 1432; United States v. Constantine (1935) 296 U.S. 287, 56 S.Ct. 223, 80 L.Ed. ___; United States v. Butler, supra, were those in which the unlawful regulation sought to be attained, under the guise of taxation, was apparent to the court. They were instances in which the taxing power was used merely as a cloak to achieve an unauthorized end.

The contention here that the real aim was to aid indirectly domestic products and that for that reason the tax is, in reality, a penalty, is of the same character as that made in Miller v. Standard Nut Margarine Co., supra. There it was argued that the tax on oleomargarine was in reality a penalty imposed for the purpose of eliminating competition with butter. The Supreme Court declined to invalidate the tax upon that ground.

But it is insisted that, in view of the requirement of clause (A) of section 999 (a), title 26, that the taxes collected with respect to coconut oil wholly of Philippine product or produced from materials wholly of Philippine growth be held as a separate fund and be paid to the treasurer of the Philippine Islands, the object of the tax has failed with the establishment of the Philippine commonwealth. The date of the establishment of the ...