Huston v. Iowa Soap Co.

• Decision Date: 08 September 1936
• Docket Number: No. 10606.,10606.
• Citation: 85 F.2d 649,108 ALR 173
• Parties: HUSTON v. IOWA SOAP CO.
• Court: U.S. Court of Appeals — Eighth Circuit

108 ALR 173, 85 F.2d 649 (1936)

HUSTON v. IOWA SOAP CO.^*

No. 10606.

Circuit Court of Appeals, Eighth Circuit.

September 8, 1936.

J. P. Jackson, Sp. Asst. to the Atty. Gen., and Robert H. Jackson, Asst. Atty. Gen. (Stanley Reed, Sol. Gen., of Washington, D.C., Sewall Key and F. A. LeSourd, Sp. Assts. to the Atty. Gen., and Charles A. Horsky, of Washington, D. C., on the brief), for appellant.

J. G. Gamble, of Des Moines, Iowa (R. L. Read and J. F. Rosenfield, both of Des Moines, Iowa, Carl C. Riepe and Milton O. Riepe, both of Burlington, Iowa, Gamble, Read & Howland, of Des Moines, Iowa, and Hirsch, Riepe & Wright, of Burlington, Iowa, on the brief), for appellee.

Before WOODROUGH and THOMAS, Circuit Judges, and DEWEY, District Judge.

THOMAS, Circuit Judge.

The appellee, Iowa Soap Company, an Iowa corporation, brought this suit in the District Court against the appellant, Huston, as collector of internal revenue for the district of Iowa, for an injunction to restrain the collection of processing taxes under section 602½(a) of the Revenue Act of 1934, 26 U.S.C.A. § 999(a). A preliminary injunction was requested. The defendant moved to dismiss the bill of complaint on the grounds (1) that the court is without jurisdiction to restrain or enjoin the collection of the taxes or to hear and determine the issues because:

"1. Section 3224 of the Revised Statutes of the United States 26 U.S.C.A. § 1543 prohibits the maintaining in any court of a suit for the purpose of restraining the assessment and/or collection of a federal tax.

"2. The bill of complaint sets forth no facts, which, if true, would entitle complainant to the relief prayed for in a court of equity, or to any injunctive relief pendente lite in this cause.

"3. Complainant has a plain adequate and complete remedy at law."

And (2) that upon the whole record the plaintiff is not entitled to injunctive relief pendente lite.

After hearing upon plaintiff's application for a preliminary injunction and defendant's motion to dismiss the bill, an order was entered denying the motion to dismiss and granting a preliminary injunction. The appeal is from that order.

The plaintiff is engaged in the manufacture of soaps and allied products, with plants at Burlington, Iowa, and at Camden, N. J. Its products are sold in intrastate, interstate, and foreign commerce. Among the ingredients used in the making of its products are coconut oil and palm oil. Coconut oil has been obtained for the most part from the Philippine Islands and palm oil from Africa.

Section 602½(a) of the Revenue Act of 1934 (c. 277, 48 Stat. 680, 763, 26 U.S.C.A. § 999(a) imposed a processing tax upon these and other oils, and this is the reason for the complaint. Said section provides:

"(a) There is imposed upon the first domestic processing of coconut oil, sesame oil, palm oil, palm kernal (sic) oil, or sunflower oil, or of any combination or mixture containing a substantial quantity of any one or more of such oils with respect to any of which oils there has been no previous first domestic processing, a tax of 3 cents per pound, to be paid by the processor. There is hereby imposed (in addition to the tax imposed by the preceding sentence) a tax of 2 cents per pound, to be paid by the processor, upon the first domestic processing of coconut oil or of any combination or mixture containing a substantial quantity of coconut oil with respect to which oil there has been no previous first domestic processing, except that the tax imposed by this sentence shall not apply when it is established * * * that such coconut oil * * * is wholly the production of the Philippine Islands or any other possession of the United States. * * * All taxes collected under this section with respect to coconut oil wholly of Philippine production or produced from materials wholly of Philippine growth or production, shall be held as a separate fund and paid to the Treasury of the Philippine Islands, but if at any time the Philippine Government provides by any law for any subsidy to be paid to the producers of copra, coconut oil, or allied products, no further payments to the Philippine Treasury shall be made under this subsection. For the purposes of this section the term `first domestic processing' means the first use in the United States, in the manufacture or production of an article intended for sale, of the article with respect to which the tax is imposed, but does not include the use of palm oil in the manufacture of tin plate. * * *

"(f) All provisions of law (including penalties) applicable in respect of taxes imposed by section 600 of the Revenue Act of 1926 sections 1120(a) (b) and 1124(a) shall, insofar as applicable and not inconsistent with this section, be applicable in respect of the taxes imposed by this section." 26 U.S.C.A. § 999(a, f).

The bill alleges that the Philippine government has not provided by law for any subsidy to be paid to the producers of copra, coconut oil, or allied products; that during the month of October, 1935, plaintiff used 239,284 pounds of Philippine coconut oil on which there is a processing tax liability under said Revenue Act of $7,178.52, which would be due November 30, 1935, and 12,803 pounds of palm oil on which the tax would be $384.09; that from May 10, 1934, when the act went into effect, up to September 30, 1935, it had paid a total processing tax in the sum of $144,520.29 on coconut oil and of $9,654.70 on palm oil; and that, in addition to said sums, plaintiff during the same period paid to refineries in increased prices due to the tax the further sum of $42,375; that these oils are essential ingredients of the products of plaintiff, and that they will be required for use in substantially the same or larger quantities in the future, and that no substitutes for them can be used.

It is further alleged that plaintiff cannot recover any of the taxes by passing them on to its customers because its products are sold in highly competitive markets; that by reason of its inability to pass on the taxes it has sustained substantial operating loss in the conduct of its business during the last six months of the year 1934 and the first ten months of 1935; and that it has had to borrow money to pay such taxes. It is shown by the affidavit of the president of the plaintiff company that it is indebted in the sum of $600,000, $350,000 of which is represented by current bank loans and $250,000 of which is in serial notes maturing in February, 1937, and February, 1938; that it has cash on hand in the sum of $60,553.30 and unencumbered fixed assets in the city of Burlington having a net depreciated value of $426,360.02, and also fixed assets in Camden having a substantial value.

By reason of the situation thus alleged, it is claimed that plaintiff, notwithstanding the prudent, economic, and efficient management of its business, will be compelled to borrow money with which to pay the tax; that it will be compelled to finance such payments in the future with borrowed money, "with the result that the business, properties and good will of the plaintiff will be substantially destroyed."

It is alleged that section 602½(a) of the Revenue Act of 1934 is unconstitutional and void in so far as it authorizes a processing tax of 3 cents per pound upon coconut oil, for the reason that it is repugnant to section 8 of article 1 and clause 7, section 9, of article 1 of the Constitution; and that the tax on palm oil, in addition to its being in violation of section 8, article 1, of the Constitution, is also violative of the Fifth Amendment.

The plaintiff sought administrative relief by filing claims for refunds of taxes paid on both Philippine coconut oil and palm oil, but no refunds have been made. In the absence of an injunction, plaintiff says it cannot incur the risk involved in refusing to pay the tax because of the heavy penalties and interest imposed by the revenue laws. It is averred further that the applicable laws afford no plain, speedy, and adequate remedy.

Plaintiff's application for a temporary injunction and defendant's motion to dismiss present two questions for determination: (1) Whether the plaintiff, under the circumstances disclosed by the bill and supporting affidavits, is entitled to a preliminary injunction against the collection of taxes imposed by section 602½(a) of the Revenue Act of 1934, notwithstanding the provisions of section 3224 of the Revised Statutes; and (2) whether section 602½(a) of said Revenue Act is a valid exercise under the Constitution of the taxing power of Congress.

These questions have been argued with great skill and ability by counsel for both parties, and we have given the case careful consideration. Since the plaintiff is seeking injunctive relief in a court of equity and the issue of jurisdiction is raised, it is apparent that a determination of but one of these questions is required to settle this appeal, unless it appears that plaintiff has no adequate remedy at law. For, if it is found that the plaintiff has an adequate remedy at law, the alleged unconstitutionality of the taxing statute is immaterial. On the other hand, if it is found that the tax is valid and the statute under which it is levied constitutional, plaintiff is entitled to no relief in equity.

When issues of this character are presented, it is appropriate for the inferior federal courts to consider first the question of equitable jurisdiction. Accordingly we shall proceed to consider the question of the adequacy of plaintiff's remedy at law and the effect of section 3224 of the Revised Statutes (26 U.S.C.A. § 1543) upon the jurisdiction of the court. Section 3224 provides that: "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court."

That section 3224 is not as inclusive as it appears, and that it is not an absolute bar in every case to injunctive relief, has been held in Hill v. Wallace, 259 U.S. 44, 62, 42...