United States v. United States Industrial Alcohol Co.

• Decision Date: 29 March 1939
• Docket Number: No. 4361.,4361.
• Citation: 103 F.2d 97
• Parties: UNITED STATES v. UNITED STATES INDUSTRIAL ALCOHOL CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

103 F.2d 97 (1939)

UNITED STATES v. UNITED STATES INDUSTRIAL ALCOHOL CO. et al.

No. 4361.

Circuit Court of Appeals, Fourth Circuit.

March 29, 1939.

Frank J. Ready and J. Louis Monarch, Sp. Assts. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, James M. Hoffa, of Baltimore, Md., and Larkin H. Jennings, Sp. Assts. to Atty. Gen., on the brief), for the United States.

Thomas D. Thacher, of New York City (Venable, Baetjer & Howard and Edwin G. Baetjer, all of Baltimore, Md., and Sanford H. E. Freund, of New York City, on the brief), for appellees.

Before NORTHCOTT and SOPER, Circuit Judges, and WYCHE, District Judge.

WYCHE, District Judge.

In this action the United States Government seeks to recover from the defendants taxes in the sum of $8,140,514.88, alleged to be due under the Revenue Act of 1926.¹

The declaration alleges substantially that during 1929 and 1930, the defendants, United States Industrial Alcohol Company, and its wholly owned subsidiary, United States Industrial Chemical Co., Inc., had industrial alcohol plants and bonded warehouses at Baltimore, Maryland, and were engaged in the business of manufacturing and selling industrial alcohol, and in the course thereof withdrew from bond large amounts of distilled spirits from their bonded warehouses under the false and fraudulent representations that they were to be used for industrial purposes only, but really with the design and intent that after said distilled spirits had been denatured and manufactured by them into a product called "lacquer thinner" the latter was to be chemically treated and the alcohol was to be recovered and used for beverage purposes; and that the latter purpose was carried out under circumstances which, it is alleged, made the defendants responsible for the diversion of the distilled spirits, so withdrawn from bond, to beverage purposes.

The defendants demurred to the declaration on the ground that the alleged taxes, for the recovery of which the suit was brought, are in reality penalties to enforce the 18th Amendment to the Constitution of the United States, U.S.C.A., and laws enacted pursuant thereto, and that by ratification of the 21st Amendment of the Constitution of the United States the 18th Amendment and all laws passed pursuant thereto became inoperative and no recovery can be had thereunder. The learned District Judge overruled this demurrer and concluded that the power of Congress to enact the revenue statute referred to did not depend upon the constitutional authority conferred by the 18th Amendment, and therefore the statute did not fall with the adoption of the 21st Amendment repealing the 18th Amendment, 8 F.Supp. 179. The District Court, however, thereafter overruled demurrers to pleas interposing the statute of limitations and a prior conviction in bar of the action and sustained demurrers to replications to these pleas, and finally concluded that the suit was for penalties and not for taxes, 15 F.Supp. 784. The appeal is taken by the United States from final judgment dismissing the actions as to both defendants, and the question presented here is whether the claim of the United States, or any part thereof, is a civil claim at law for unpaid excise taxes or for criminal penalties.

The $6.40 levied by the Revenue Act of 1926 involved in this appeal had its origin in the War Revenue Act of 1917, and was there entitled "War Tax on Beverages".² This act provided for a tax of $1.10 per proof gallon on all distilled spirits in bond when withdrawn for non-beverage use and $2.10 per proof gallon when withdrawn for beverage purposes. These taxes were to be in addition to the tax of $1.10 per proof gallon levied under the Revenue Act of 1894³ without distinction as to use, thereby making the total tax $2.20 per proof gallon if withdrawn for non-beverage use and $3.20 if withdrawn for beverage purposes.

The Revenue Act of 1918⁴ combined in one act the taxes provided by the Revenue Act of 1894, and the War Revenue Act of 1917, thereby making the non-beverage rate $2.20 per proof gallon, and by doubling the combined exaction on the beverage rate, made it $6.40 per proof gallon. On July 1, 1919, the War Prohibition Act⁵ became effective, making it, for the duration of the war and until the termination of demobilization, unlawful to sell distilled spirits for beverage purposes, and disallowing the withdrawal from bond for beverage purposes except for export. The National Prohibition Act was passed October 28, 1919, and became effective January 16, 1920, on which date the 18th Amendment became effective both of which prohibited the use of intoxicating liquor for beverage purposes.

In 1921 the Revenue Act of 1918 was amended⁶ so as to provide, "* * * on all distilled spirits on which tax is paid at the nonbeverage rate of $2.20 per proof gallon and which are diverted to beverage purposes * * *, there shall be levied and collected an additional tax of $4.20 on each proof gallon, * * *, to be paid by the person responsible for such diversion."

The Willis-Campbell Act⁷ continued in force, or re-enacted by express provisions, all laws relating to the taxation of intoxicating liquor not directly in conflict with the National Prohibition legislation.

In 1926, the Revenue Act of 1918 was still further amended by section 900 of the Revenue Act of 1926, 44 Stat. 104, by providing: "* * * on all distilled spirits which are diverted to beverage purposes * * * there shall be levied and collected a tax of $6.40 on each proof gallon * * to be paid by the person responsible for such diversion. If a tax at the rate of $2.20, $1.65, or $1.10 per proof gallon or wine gallon has been paid upon such distilled spirits, a credit of the tax so paid shall be allowed in computing the tax imposed by this paragraph."

The history of the legislation discloses that the first increase in the rate on distilled spirits withdrawn for beverage purposes was made by the War Revenue measure of 1917, and that it was then clearly a revenue tax to help meet the expense of the war. The Revenue Act of 1918 increased the rate to $6.40 to become effective February 25, 1919. On that date National Prohibition had neither been passed nor become effective. This tax, therefore, was not imposed as a penalty to enforce the policy of National Prohibition. When the Revenue Act of 1918 became effective it was not a violation of the law to withdraw spirits for beverage purposes, therefore, the tax it levied cannot be classified as a punitive penalty. It necessarily follows that the Revenue Act of 1918, was an independent revenue statute and no section of it was, or could have been intended to enforce National Prohibition, or relate to it in any manner whatsoever. Its continuation by re-enactment, or amendment by subsequent revenue laws, did not change its name, its title, its motive, its purpose, its nature, or its character. Congress named it a tax at its birth and called, understood and meant it to be a tax, as a means of raising revenue, throughout its legislative life.

In construing the Revenue Act of 1921, the Supreme Court said: "* * * the Revenue Act of 1921, * * * enacted on the same day as Willis Campbell Act, shows that Congress had no intention then of relieving liquor from taxation merely because illegally dealt with; for it provided specifically that if distilled spirits, tax-paid for nonbeverage purposes, be diverted to beverage purposes, an additional tax of $4.20 per gallon must be paid, although under the law such diversion could not be made legally. * * *"; and that, "a law which imposes a tax on intoxicating liquor, whether legally or illegally made, is not in conflict with another law which prohibits the making of any such liquor. * * * There is no direct conflict between any provision of the prohibitory legislation and the imposition of the tax here in question." United States v. One Ford Coupe Automobile, 272 U.S. 321, 47 S.Ct. 154, 156, 71 L.Ed. 279, 47 A.L.R. 1025.

And in the same case the Supreme Court further declared: "A tax on intoxicating liquor does not cease to be such because the sovereign has declared that none shall be manufactured, and because the main purpose in retaining the tax is to make law breaking less profitable. * * * These additional amounts also are called taxes by Congress, and were understood by it to be such." (Italics supplied)

In a case construing another section of the Revenue Act of 1926, the Supreme Court said: If the tax was levied "to raise revenue its validity is beyond question notwithstanding the fact that the conduct of the business taxed was in violation of law. The United States has the power to levy excises upon occupations, and to classify them for this purpose; and need look only to the fact of the exercise of the occupation or calling taxed, regardless of whether such exercise is permitted or prohibited by the laws of the United States or by those of a state. The burden of the tax may be imposed alike on the just and the unjust. It would be strange if one carrying on a business the subject of an excise should be able to excuse himself from payment by the plea that in carrying on the business he was violating the law. The rule has always been otherwise. The tax imposed by Rev.St. § 3244, as amended, affords an opposite illustration. That act imposes an excise, varying in amount, upon different forms of the liquor traffic." United States v. Constantine, 296 U.S. 287, 56 S.Ct. 223, 226, 80 L.Ed. 233. And in the recent case of Sonzinsky v. United States, 300 U.S. 506, 57 S.Ct. 554, 556, 81 L.Ed. 772, the Supreme Court declared that: "it has long been established that an Act of Congress which on its face purports to be an exercise of the taxing power is not any the less so because the tax is burdensome or tends to restrict or suppress the thing taxed."

Thus, it is well settled that Congress is empowered to tax by one statute, that which it prohibits and makes criminal by another;...