STEPHANO BROS., ETC. v. United States, 48743.

• Decision Date: 03 April 1950
• Docket Number: No. 48743.,48743.
• Citation: 89 F. Supp. 693,116 Ct. Cl. 503
• Parties: STEPHANO BROS. TO USE OF GREAT AMERICAN INS. CO. et al. v. UNITED STATES.
• Court: U.S. Claims Court

89 F. Supp. 693

116 Ct. Cl. 503

STEPHANO BROS. TO USE OF GREAT AMERICAN INS. CO. et al. v. UNITED STATES.

No. 48743.

United States Court of Claims.

April 3, 1950.

Jaquelin A. Marshall and Hugh H. Obear, Washington, D. C., for plaintiff. Sands, Marks & Sands, Richmond, Va., and Douglas, Obear & Campbell, Washington, D. C., were on the brief.

Joseph H. Sheppard, Washington, D. C., with whom was Assistant Attorney General Theron L. Caudle, for defendant.

Before JONES, Chief Judge, and MADDEN, HOWELL, WHITAKER and LITTLETON, Judges.

MADDEN, Judge.

The plaintiff, a manufacturer of cigarettes, on January 17, 1946, removed from its factory at Philadelphia for consumption or sale 1,060 cases of Marvel brand cigarettes. It had affixed to the packages of cigarettes the appropriate federal internal revenue stamps for which stamps it had paid $37,100. The cigarettes were delivered to the Baltimore and Ohio Railroad Company consigned to the plaintiff at St. Louis. On January 18 the freight car containing the cigarettes was derailed and burned, and all the cigarettes were destroyed except four cases. The stamps affixed to the packages in the four cases not destroyed had cost the plaintiff $140.56. The railroad paid the plaintiff the amount of its loss in cigarettes and stamps, and two insurance companies reimbursed the railroad. This suit is for the use and benefit of the insurance companies. Their status as beneficiaries is not contested by the Government, and is approved by the decision in United States v. American Tobacco Company, 166 U.S. 468, 17 S.Ct. 619, 41 L.Ed. 1081.

The stamps on the packages which were not destroyed were redeemed by the Government and the plaintiff was paid $140.56, which it paid over to the railroad. The plaintiff's further claim for the redemption of the stamps which had been affixed to the burned packages and had, of course, been burned with them, was rejected by the Commissioner of Internal Revenue by a letter which said that neither Section 2198 of the Internal Revenue Code, 26 U.S.C.A. § 2198, nor Article 116 (b) of Treasury Regulations No. 8 authorized the reimbursement sought by the plaintiff.

We shall recount some of the history of the pertinent statutes and regulations.

The Act of May 12, 1900, C. 393, 31 Stat. 177, 26 U.S.C.A. § 3304, which we quote in a footnote,¹ provided that the Commissioner of Internal Revenue might, subject to regulations prescribed by the Secretary of the Treasury, redeem internal revenue stamps which had been "spoiled, destroyed, or rendered useless or unfit for the purpose intended" and under certain other circumstances, but not unless the stamps were returned "or until satisfactory proof has been made showing the reason why the same can not be returned." This statute applied only to stamps which had not been affixed to packages of tobacco, or were affixed to packages which had not been removed from the factory. Contrast United States v. American Tobacco Co., supra, with American West Indies Trading Co. v. United States, 45 Ct.Cl. 488, 492, 493. The tax seems to be a tax upon manufacture, payable upon removal from the factory, or upon sale, with or without removal. Liggett and Myers Tobacco Co. v. United States, 299 U.S. 383, 57 S.Ct. 239, 81 L.Ed. 294; R. J. Reynolds Tobacco Co. v. Robertson, 4 Cir., 94 F.2d 167.

If, then, stamped packages of tobacco had been removed from the factory, though they were still owned by the manufacturer, and they were spoiled in appearance or contaminated in content the manufacturer under the Act of May 12, 1900, lost not only the value of the tobacco but the stamps which, in the case of cigarettes, were worth more than the tobacco. Manufacturers found a way out by exporting the spoiled or contaminated tobacco and thus obtaining a refund of the value of the Internal Revenue stamps under 26 U.S. C.A. § 2136. But the exporting of such tobacco products for that purpose tended to give American tobacco a bad reputation abroad. For that reason legislation was proposed which would permit the American manufacturer to get back his stamp money directly from the Treasury upon withdrawing the tobacco from the market.

The Act of March 3, 1931, c. 441, 46 Stat. 1510, 26 U.S.C.A. § 2198 was enacted. It reads as follows: "Internal-revenue stamps affixed to packages of tobacco, snuff, cigars, or cigarettes which, after removal from factory or customhouse for consumption or sale, the manufacturer or importer withdraws from the market, may, under regulations prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury, be redeemed if issued after December 31, 1931, and if claim for their redemption is presented by the manufacturer or importer within three years after the year of issue as indicated by the number or symbol printed thereon by the Government, irrespective of the date of their purchase. Stamps of any issue shall not be sold until those of the previous year's issue have been disposed of or later than one year after the year of issue."

Our problem is to determine the meaning of the word "withdraws" in the statutory language "which * * * the manufacturer * * * withdraws from the market." The legislative history shows that the withdrawal might be a rather fully voluntary act of the manufacturer, as where his products had become stale, or where he desired to use a more attractive package, or abandon a brand name. See H.Rep.No.1995, 71st Cong., 2nd Sess., pp. 1-2. Or the withdrawal might be one as to which the manufacturer had no real choice. For example, the cigarettes might, in shipment or storage, have become contaminated with a poisonous or inflammable substance which would make their use impossible. Yet they would come within the clear language of the cited committee report, which refers to "damaged, stale or unmerchantable" products, and would be "withdrawn" from the market, within the meaning of the statute, although the manufacturer had no choice whatever as to whether he would or would not market them.

It seems, then, that the withdrawal contemplated by the statute is not necessarily a withdrawal decided upon by a manufacturer who has a choice as to whether he will or will not let the products go into the market. In the instant case...