Malley v. Walter Baker & Co.

• Decision Date: 17 May 1922
• Docket Number: 1547.
• Citation: 281 F. 41
• Court: U.S. Court of Appeals — First Circuit
• Parties: MALLEY, Collector, etc., v. WALTER BAKER & CO., Limited.

281 F. 41

MALLEY, Collector, etc., v. WALTER BAKER & CO., Limited.

No. 1547.

United States Court of Appeals, First Circuit.

May 17, 1922

Frederic S. Harvey, Asst. U.S. Atty., of Lowell, Mass., and Charles T Hendler, of Washington, D.C. (Robert O. Harris, U.S. Atty of Boston, Mass., and Carl A. Mapes, Solicitor of Internal Revenue, and Terry A. Lyon, Attorney of Treasury Department both of Washington, D.C., on the brief), for plaintiff in error.

Arthur J. Santry, of Boston, Mass. (Harvey H. Bundy and Putnam Bell, Dutch & Santry, all of Boston, Mass., on the brief), for defendant in error.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON Circuit Judge.

The ultimate question in this case is whether all, or any, of the sweet chocolate manufactured and sold by the defendant in error, herein called the plaintiff, is subject to a 5 per cent. excise tax as candy, under the provisions of title 9, Sec. 900, of the Revenue Act of 1918 (40 Stat. 1122 (Comp. St. Ann. St. Supp. 1919, Sec. 6309 4/5a)), and the regulations made by the Commissioner of Internal Revenue under authority granted by this act.

Between February 24 and August 31, 1919, the plaintiff made sales of such chocolate aggregating $635,137.30, and under protest paid the 5 per cent. tax thereon, amounting, with interest to December 5, 1921, to $35,232.25. Suit to recover this tax came on for trial before the District Court with a jury. After much evidence on both sides had been taken, much of it having little or no bearing on the real issue, the court below found and ruled that the word 'candy' had no special trade significance, different from its meaning in ordinary speech; that the regulations of the Commissioner hereinafter set forth were invalid, as an attempt to extend the natural meaning of the language of the statute; that chocolate is an independent substance, used directly for food, and, though used in the manufacture of candy, is not candy, within the meaning of this tax act; and ordered a verdict for the plaintiff in the full amount claimed. The case comes here on writ of error.

The Revenue Act, supra, provides: 'There shall be levied, assessed, collected, and paid upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages for the prices so sold or leased: * * * (9) * * * Candy, 5 per centum.'

The Commissioner of Internal Revenue, under the usual grant of power found in such statutes, promulgated regulations duly approved on May 1, 1919, by the Secretary of the Treasury. Article 22 of these regulations is as follows:

'Candy.-- Candy, within the meaning of the act, includes chocolate creams, bonbons, gum drops, jelly drops, jelly beans, imperials, caramels, stick candy, lozenges, taffies, candy kisses, wafers, fudges, or Italian creams, nougats, peanut brittle, sugared almonds, chocolate covered fruits, and nuts, glace or candied fruits and nuts, popcorn and other cereals and cereal products mixed with or covered with molasses, sugar or other sweetening agent, hard candies, plain and chocolate covered marshmallows, candy cough drops and sweetened licorice not taxed as cough drops, sweet chocolate and sweet milk chocolate whether plain or mixed with fruit or nuts; and all similar articles however designated. It does not, however, include cereal breakfast foods, cake and pastries, nor bitter chocolate which needs the addition of sugar before it becomes pleasing to the taste. If a manufacturer of glace or candied fruits at the time the goods are shipped or sold (whichever is prior) has in his possession an order or contract of sale with certificate of the purchaser printed thereon or in writing and permanently attached thereto showing that such fruits so purchased are to be used in the manufacture of food products, such as ice cream, cakes, and pastries, the sale thereof shall not be taxable. Where a manufacturer of candy sells in connection with the sale of his own product candy which he has bought from another manufacturer, and on which he has performed no further process of manufacture, the tax attaches only to such portion of the goods sold as have been manufactured by him. ' (Particularly pertinent words we have italicized.)

On May 10, 1919, the Commissioner ruled as follows:

'Sweet chocolate sold in parcels of such size and shape that it is commonly purchased and consumed as candy by the general public is taxable as candy, but sweet chocolate sold in large packages not as candy, but intended for further manufacturing purposes, is not taxable, provided the manufacturer has in his possession a certificate of the purchaser in writing showing that the chocolate so purchased is to be used for further manufacturing purposes.'

This ruling applies to sweet chocolate the exemption procedure applicable under the regulation, supra, to glace and candied fruits.

Article 22 of the Regulations was revised in December, 1920, so that, while still covering affirmatively 'sweet chocolate and sweet milk chocolate, whether plain or mixed with fruit or nuts,' it by the addition of paragraph (b) excluded--

'sweet chocolate, glace or candied fruits or nuts sold by the manufacturer used under circumstances where it is obvious from the condition of the product, method of packing or from other facts in connection with the sale that it will not be consumed in the form in which it is then sold.'

The Commissioner, on January 25, 1921, in response to inquiry from the plaintiff, applied in detail the regulation to the plaintiff's business, as disclosed, and also ruled that--

'Upon the submission of evidence from the taxpayer, claims already rejected will be reopened and allowed in the amount representing tax paid on products herein held not taxable. Action on pending claims will be held in abeyance for further evidence.' It thus appears that, even after suit brought, the department was ready to entertain claims for taxes paid on sweet chocolate 'sold for use in a form other than that in which it is sold by the manufacturer.'

In the plaintiff's declaration, it admitted in each of the five counts--referring to the certificate called for by the ruling of May 10, 1919, supra--that it had 'no such certificates with respect to the chocolate upon the sale of which the tax was assessed, and says that it was impossible for the purchaser to determine at the time of the sale of such chocolate whether it would be used for further manufacture or not. ' The record does not support this allegation of the impossibility of obtaining such certificates. No reason is apparent why in much, if not all, of the business such certificates could not have been obtained. But this was not made the exclusive method of distinguishing sweet chocolates intended for consumption, as such, from sweet chocolate intended as a food ingredient; any reasonable method of showing the determinative facts was available to this plaintiff.

At the trial it was agreed that:

'An analysis of the various brands of chocolate upon which the tax in suit was paid would show the following percentages of sugar:

'Between 60 and 65 per cent. in Caracas chocolate.

'Between 50 and 55 per cent. in German's chocolate.

'Between 50 and 55 per cent. in Century and Vanilla chocolate.

'Between 30 and 35 per cent. in Dot chocolate.

'Between 50 and 55 per cent. in Eagle chocolate.'

It was also agreed that an annexed schedule showed the sales of the various brands from February 24 to April 30, 1919. Sales for the months of May to August, inclusive, were shown only in the aggregate. Assuming, as we fairly may, that the schedule for February, March, and April is fairly typical of the whole period of about 7 months, it is clear that about half of the sales in question consisted of the Caracas sweet chocolate, which contains from 60 to 65 per cent. of sugar, and that the sales of the Dot chocolate, containing only from 30 to 35 per cent. of sugar, were not more than about 10 per cent. of the aggregate. All the other brands contained from 50 to 55 per cent. of sugar. The necessary inference, therefore, is that the sweet chocolates sold, taken as a mass, were considerably more than half sugar.

It is matter of common knowledge, and the evidence and numerous exhibits also show, that this sweet chocolate is manufactured in cakes and bars, adapted for consumption as candy, packed in convenient cartons for sale as candy, advertised as 'delicious for eating,' or 'excellent as a confection,' and sold in large quantities over the candy counters, and consumed, at least in substantial part, in the form put out by the manufacturer for such consumption. Plainly, it is a mixture, about half and half, of sugar and chocolate, sometimes with flavoring material like vanilla and in the form in which it is put up and marketed intended to cater to the same tastes and to appeal to the same class of consumers as are chocolate bonbons (barely distinguishable in composition) and other well-known forms of candy or confectionery. Sugar, 'the appeal to the sweet tooth,' is, of course, the basic ingredient in all candy. Sweet...