Brown-Forman Distillers Corporation v. United States

• Decision Date: 19 July 1974
• Docket Number: No. 332-70.,332-70.
• Citation: 499 F.2d 1263
• Parties: BROWN-FORMAN DISTILLERS CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

499 F.2d 1263 (1974)

BROWN-FORMAN DISTILLERS CORPORATION v. The UNITED STATES.

No. 332-70.

United States Court of Claims.

July 19, 1974.

N. Barr Miller, Washington, D. C., attorney of record, for plaintiff; J. Marvin Haynes, Walter D. Haynes and David L. Miller, Washington, D. C., of counsel.

Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Joseph Kovner and Gilbert E. Andrews, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, and NICHOLS and KASHIWA, Judges.

OPINION

PER CURIAM:

This case comes before the court on plaintiff's motion, filed May 10, 1974, moving that the court adopt the recommended decision, filed April 5, 1974, by Trial Judge Lloyd Fletcher, pursuant to Rule 134(h), as the basis for its judgment in this case, defendant having filed no notice of intention to except thereto and the time for so filing pursuant to the Rules of the court having expired. Upon consideration thereof, without oral argument, since the court agrees with the said recommended decision, as hereinafter set forth,^* it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 131(c).

OPINION OF TRIAL JUDGE

FLETCHER, Trial Judge:

In this case plaintiff seeks a refund of income taxes for the fiscal year ended April 30, 1963. The plaintiff's claim arises out of the disallowance by the Commissioner of Internal Revenue of amounts which plaintiff claimed as investment credit on the cost of six whiskey maturation (or aging) facilities placed in service by the plaintiff during the fiscal year involved.

The sole question involved is whether plaintiff's facilities for the maturation and storage of its bourbon whiskey qualify for the investment credit in their entirety, as plaintiff contends, or whether certain components of those facilities (walls, roof, and floors) should be excluded from qualification for the investment credit because such components are "buildings" or "structural components" of "buildings", as defendant contends. It is plaintiff's position that its facilities are not "buildings" for investment credit purposes because they are specially designed to function as mild ovens for maturing the whiskey stored therein by cycling the temperature of the whiskey and controlling the humidity, they contain no work space, and the enclosure must be retired contemporaneously with the other principal equipment with which they are integrated. In my opinion, plaintiff's position is well-taken and, accordingly, plaintiff is entitled to recover.

The facts of this case are set forth at length in the findings of fact. Here they will be summarized only as necessary to explain the basis for the conclusion reached in this opinion.

Plaintiff is engaged in the alcoholic beverage business. During the period in question, it engaged in two principal types of activities. One was the business of distilling, aging (or maturing), bottling, and marketing of bottled bourbon whiskey. Its principal premium brands of bourbon whiskey are "Old Forester" and "Early Times" which are distilled, aged, bottled, and marketed exclusively by plaintiff. It also engaged in the purchase of a variety of distilled spirits (other than bourbon), wines, and cordials, all of which it bottled and distributed for sale. The controversy herein involves only the production of the plaintiff's premium brands of bourbon.

During its 1963 fiscal year, plaintiff placed in service six maturation facilities. There facilities were used for maturation of bourbon whiskey prior to the bottling, labeling, and marketing thereof as 4-year-old bourbon whiskey.¹ Plaintiff has previously been allowed the investment credit on part of the cost of these facilities but claims entitlement to the credit on the entire cost thereof as tangible depreciable property with a useful life of more than eight years.

Prior to marketing its whiskey, plaintiff carries out five processes: (1) mashing, (2) fermentation, (3) distillation, (4) maturation (commonly called "aging"), and (5) bottling and labeling of the mature whiskey product for distribution. A number of variables determine the quality and character of such whiskey. Of importance among the several variables are the conditions under which the distillate is aged in the maturation facilities.

The fresh distillate from which bourbon whiskey is produced will be clear in color but harsh and unpalatable to the taste. As the result of chemical changes which occur in the whiskey during its maturation, the raw or fresh distillate eventually becomes finished whiskey. In the course of this processing, fresh distillate is barreled in newly charred white oak barrels. Under Federal regulations, the distillate must be aged or matured in such barrels in order to be labeled and marketed as "bourbon whiskey". It must be aged for two or more years to be labeled and marketed as "straight bourbon whiskey". Plaintiff, however, requires that the fresh distillate which it bottles and markets as bourbon whiskey be aged and matured in such barrels for not less than four years.

During the maturation process, the whiskey-distillate acquires its mellow taste, aroma, and color. It undergoes chemical changes as well. Maturing is brought about by cycling, which is the alternate expansion and contraction of the whiskey into and out of the "red layer" formed underneath the char on the oak barrels. A rise in temperature causes the whiskey to expand into the layer and a lowering of the temperature causes a contraction of the whiskey. Alternate expansion and contraction set up a "push-pull" process within each barrel and through contact with the red layer, the raw distillate gradually acquires the characteristics of mature bourbon whiskey. At the same time, air is drawn into the barrels as a result of the partial vacuum created by the whiskey contraction, and the oxygen from this air heightens the changes occurring in the distillate. The chemical processes of maturation that give bourbon whiskey its characteristic color, taste, and aroma consist of (a) oxidation, (b) extraction of wood components from the barrel, and (c) chemical reactions between the liquid components. These chemical processes require heat, and, as a rule of thumb, for each 10-degree increase in temperature, the rate of chemical reactions within the distillate doubles. As the temperature drops, these chemical reactions slow down and if the temperature gets sufficiently cold, both the oxidation process and the other chemical reactions tend to come to a halt so that no maturity results. On the other hand, plaintiff believes (without contradiction on this record) that if the whiskey is overheated (temperature in excess of 90 degrees Fahrenheit), excessive amounts of wood materials are likely to become dissolved in the whiskey with a consequent decrease in quality.

By traditional means of maturation, the barrels of raw distillate are held for aging or maturation in unheated facilities under conditions in which no artificial temperature or air circulation controls are provided. See, for example, the distilling process described in Heaven Hill Distilleries, Inc. v. United States, 476 F.2d 1327, 201 Ct.Cl. 423 (1973), particularly finding 7. The only available changes in temperature for initiating a cycle of expansion and contraction of the distillate within the barrels are those provided by natural climatic conditions such as changes of the season and the velocity and direction of the outside air.² During summer, the whiskey expands into the charred barrel staves and then contracts back into the barrel with the coming of cooler weather, resulting in one cycle. If there is an early hot spell in the spring, followed by cooler weather before the onset of summer, another cycle may be achieved. At best, two cycles per year are all that can be expected by distillers who mature their whiskey under uncontrolled conditions. There is no doubt the maturation process takes place under these uncontrolled conditions; however, the distillate in different areas of such facilities mature at different rates because of the uneven temperature and air flow within the area and around the barrels. The usual means through which uniformity of quality is achieved by producers who use unheated maturation facilities is the rotation of the location of the barrels within the storage area.

Dissatisfied with this uncontrolled method of maturation, the plaintiff, after years of maturation experiments, developed a process for artificial cycling of its barreled distillates. In its opinion this process results in a more uniform, mature whiskey with a greater mellowness and a more pleasing taste. Thus, in 1961, the plaintiff, with the aid of outside architects, developed the design of the facilities in question to carry out its artificial cycling maturation process. These six facilities were designed to achieve an even flow of air around all barrels of distillate and to perform a greater number of controlled cycles of higher and lower temperature of the air circulated in the enclosure in accordance with plaintiff's method of maturation. The new design also provided for a greater number of barrels per cubic foot of space, improved fire protection for the whiskey, elimination of some mechanical equipment for moving the barreled distillate, and greater convenience for the entry and removal of the barreled distillate.

During maturation, approximately 14 percent of the contents of each barrel evaporates into the air surrounding the barrels in each facility. Over the four-year maturation period, this results in evaporation in each facility of approximately 182,000 gallons. As a result of evaporation, the proof³ (or alcohol content) of properly matured whiskey will increase because the white oak used to make the whiskey...