Bernheim Distilling Co. v. Mayes

• Decision Date: 11 October 1920
• Docket Number: 559.
• Citation: 268 F. 629
• Parties: BERNHEIM DISTILLING CO. v. MAYES, Internal Revenue Collector, et al.
• Court: U.S. District Court — Western District of Kentucky

268 F. 629

BERNHEIM DISTILLING CO. v. MAYES, Internal Revenue Collector, et al.

No. 559.

United States District Court, W.D. Kentucky.

October 11, 1920

George Du Relle and Strother & Hamilton, all of Louisville, Ky., for plaintiff.

W. V Gregory, U.S. Dist. Atty., of Louisville, Ky., for defendants.

WALTER EVANS, District Judge.

This is an action at law to recover from the defendants $5,333.68 the amount of certain taxes assessed by the Commissioner of Internal Revenue against the plaintiff on certain spirits it had rectified, and which taxes the plaintiff paid under protest to J. Rogers Gore, deputy and acting collector, after Mr. Mayes had resigned. A jury was waived by the parties, and by their agreement the case was tried by the court. All testimony offered by the parties was heard and very carefully analyzed and considered by the court, with the result that the facts were found to be as follows:

(1) From July 1, 1917, to the 17th day of February, 1918, both dates inclusive, and for at least 14 years previously, the plaintiff was a wholesale dealer and a rectifier of distilled spirits in the city of Louisville, Ky.

(2) The process of rectifying distilled spirits at plaintiff's establishment was as follows: The taxes due the United States on the spirits to be rectified by plaintiff were always paid upon their withdrawal from the bonded warehouse, where, under the law of the United States, they had been deposited after distillation was completed, to remain until all taxes due thereon to the United States had been fully paid. After such full payment of all taxes due the plaintiff, as it was free to do, removed the distilled spirits to its rectifying establishment in said city. The process of rectification began on an upper floor of their establishment adapted to that purpose, when what was called a 'dump,' usually made up of five barrels, was assembled near a trough. The bungs were removed from these barrels, and the contents of each barrel was, in succession, poured into the trough, from which the spirits ran through pipes to and into a large dumping tank on a lower floor. Two men were usually assigned to this work, one of whom usually removed the government stamps from the barrels after they were emptied, and after he had done this another of the men poured into each empty barrel about five gallons of distilled water, obtained from a nearby tank containing 150 or more gallons thereof, and having done this, this man replaced the bung, shook each barrel in succession, and rolled it over to the dumping trough, where it was again dumped. The entire contents of the barrels thus treated, involving the water in the barrels went into the dumping tank below, with the spirits previously there, and one of the objects of this was to lower the proof of the spirits in the tank, which was entirely lawful. This handling of five barrels took altogether 25 minutes, including the time taken for the spirits to run out of the barrels. The plaintiff, after this latter dumping, was free to treat the tax-paid contents of the dumping tank as it pleased, either by putting in more water, other tax-paid spirits, chemicals, and other ingredients, with the one exception of any untax-paid spirits; the use of the latter being altogether forbidden.

One object of this treatment was to rinse the inside of the barrels, where some parts of the spirits outside of the staves would remain, so as to save those remnants of tax-paid spirits by taking them up in the water and carrying them into the dumping tank, together with any particles of charcoal which might have been separated from the inner surface of the charred staves where such were used. This rinsing was entirely permissible under the law and practice at that time. Furthermore, all of this was preparatory to the re-use or sale of the barrels. The rectifying premises were always open to the visits of the internal revenue officers, and they in fact very frequently visited them.

(3) When distilled spirits, after years of storage in distillery warehouses, are finally gauged for tax payment on withdrawal from the warehouse, the law and the regulations require a certain allowance to be made for what is called 'soakage,' viz. spirits which, in course of time in the warehouse, had been absorbed by the staves of the barrel containing it. This 'soakage' cannot be obtained or extracted from those staves by the use of water, unless that water is of very high temperature and kept in the barrel for a considerable length of time. Water, when used by the plaintiff to rinse its barrels in the way described, while sometimes hot when drawn from the tank soon after the latter had been refilled from the water-distilling apparatus, was usually cool, or only warm, and none of what was used to rinse any of the barrels involved in this case remained in the barrels for rinsing purposes long enough to extract any material part of the 'soakage.'

(4) A special gauger, early in 1918, in examining into the question of the quantity of spirits rectified by the plaintiff, with a view to the taxation of 15 cents per gallon thereon imposed by section 304 of the act approved October 3, 1917 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, Sec. 5986c), had found that there was an excess of such spirits on hand as against a usual deficit in such cases. While that fact is not important in the case before us, it led to an examination by a revenue agent and the special gauger into the manner of plaintiff's treatment of the barrels it had emptied for rectification.

On the 15th, 16th, and 17th days of February, 1918, these revenue officers visited the plaintiff's rectifying establishment and there took possession of certain of the barrels which the plaintiff had emptied into the trough and dumping tank. Thirty of such barrels were thus taken after they had been thus emptied by plaintiff of the spirits they had contained. These revenue officers then poured hot water from the distilled water tank into these barrels and shook them about as long as plaintiff did in rinsing them. The barrels were then emptied by those officers, and thereafter the contents were subjected by them to such tests as they desired to make, and they reached the conclusion that the spirits contained in the water they had thus used was about one-third of a gallon per barrel, which would make 10 gallons recovered from the 30 barrels. The spirits thus recovered were not shown by the testimony of those officers nor claimed by them to be 'soakage,' and the court therefore finds that it was not 'soakage,' but remnants of tax-paid spirits left in the barrels, after those barrels had been rinsed by the revenue officers.

Nevertheless upon the conclusion reached by the two revenue officers as to recoveries from the barrels they tested in February, 1918, they examined the official records to ascertain the number of barrels the plaintiff had rectified since July 1, 1919, and without in any way disclosing to the court in their testimony the number of such barrels, or whether the spirits they had recovered in rinsing exceeded in quantity what plaintiff, when it rinsed the barrels, had obtained, the testimony did show, and the court finds that they reported the results of their tests and investigations to the Commissioner of Internal Revenue, and that that officer acted upon that undivulged report in making...