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Seagram v. Smith

June 20, 1940


Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.

Author: Evans

Before EVANS and MAJOR, Circuit Judges, and WILKERSON, District Judge.

Plaintiff seeks a reversal of a judgment of the District Court denying it a refund of $6,102 (and $235.94 interest) theretofore paid as a Federal tax on distilled spirits, by it manufactured.

The ground on which recovery is sought is that 3,051 proof gallons on which the tax was imposed ($2 per proof gallon) were lost through spillage ooccasioned solely through plaintiff's negligence in transferring the spirits from tanks in its "still house" to tanks in the cistern room. The spirits were erroneously run into an already partially filled tank, instead of into the appropriate empty tanks, and overflowed, causing the loss of the spirits upon which the tax is challenged.

The District Court found taht despite orders of plaintiff to its employees that the spirits were to be transferred to tanks No. 2 and No. 3, plaintiff's employees neglected to so notify the Government employee - the storekeeper-gauger - who always had custody of the keys to the cistern room, pursuant to statutory and regulatory provisions, and that when the Government agent opened the valves the spirits ran into tank No. 6 which was already nearly full.

This loss occurred after distillation process was completed. Plaintiff had, regardless of this loss, complied with the Federal regulation requiring it to manufacture, at least 80% of its capacity.

After the loss occurred on September 1, 1934, plaintiff applied for a remission of the tax, which claim was rejected, and thereafter (November, 1935) a $6,102 tax was assessed and the collector made demand (December 3, 1935) for the payment of the tax. Plaintiff, on December 13, 1935, filed a claim for abatement of the assessed tax, which claim was rejected August 1, 1936, and plaintiff, on August 10, 1936, paid the tax under protest and filed the claim for refund (October 2, 1936), which was rejected November 6, 1936. Plaintiff thereupon instituted this suit for refund.

EVANS, Circuit Judge.

Plaintiff makes the following contentions: The tax on its distilled spirits does not attach until they are withdrawn.The loss of the spirits in question did not constitute such a withdrawal or removal as to warrant the assessment of a tax. In other words, losses occurring during operation and production in the distillery are to be distinguished from losses in warehouse after the spirits have been withdrawn from the cisterns, and entered the storage rooms or warehouse. A loss of spirits occurring during production in a distillery due to negligence does not justify or warrant the collection of the taxes provided it is shown, as here, that 80% of the productive capacity of the distillery has been otherwise produced and accounted for.

Defendant, on the other hand, contends that the loss of the spirits constituted such a withdrawal or removal as to require assessment and collection of the tax. The loss occurred after the spirits had been produced and though distinguishable from a loss in a warehouse, the distiller is nevertheless liable for a tax thereon. Such a tax, having been lawfully assessed, could only be abated upon plaintiff's showing facts bringing itself within the express authorization of remedial statutes.

On the sharply controverted issue, the court's sixth finding becomes all important. "6. That said loss or destruction of said 3,051 proof gallons of spirits occurred in Plaintiff's distillery cistern room after the production or distillation of said spirits had been completed,a nd after the same had entered said cistern room but before the time when same should have been drawn off by the storekeeper-gauger and placed in the internal revenue bonded warehouse provided by law."

This finding, if sustained by the evidence, is determinative.

The evidence, we think, supports the finding that the production and distillation of the spirits had been completed before they were lost.

While there may be some question as to just when production or distillation of spirits is completed, the decisions in the cases of United States v. Witten, 143 U.S. 76, 79, 12 S. Ct. 372, 36 L. Ed. 81; United States F. & G. Co. v. United States, 2 Cir., 201 F. 91; United States v. Guest, 4 Cir., 143 F. 456, convince us ...

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