Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; Philip L. Sullivan, Judge.
Before SPARKS, MAJOR, and KERNER, Circuit Judges.
These are cross appeals by Durkee Famous Foods, Inc. (hereinafter referred to as the plaintiff or taxpayer) and the Collector of Internal Revenue for the First District of Illinois (hereinafter referred to as the defendant or government) from a judgment entered by the District Court on July 13, 1942. Two suits were instituted by plaintiff, one in July 1938 and the other in July 1940, for the recovery of taxes with respect to the processing of various oils during the period from May 1934 to January 1936, inclusive. The first suit sought recovery in the amount of $76,899.09, which was allowed by the District Court, 46 F.Supp. 642.(This suit, originally numbered 47,306, is involved in appeal No. 8171, and will be referred to here by the latter designation.) The second suit was for recovery of taxes in the amount of $90,589.98. (This suit, originally numbered 1,921, is involved in appeal No. 8172, and will be referred to here by the latter designation.)
The complaint in the second suit alleged three grounds of recovery in counts designated 1, 2 and 3. The cases were consolidated and tried by the court. Plaintiff prevailed in appeal No. 8171, and judgment was rendered against the defendant for $76,899.09, with interest, and also prevailed as to count 1 in No. 8172 to the extent that judgment was rendered against the defendant in the amount of $10,721.41, with interest. In this case, counts 2 and 3 were dismissed. Defendant appeals from the judgment in No. 8171, and also from the judgment predicated upon count 1 in No. 8172. Plaintiff appeals from the limitation of recovery under count 1 (contending that it was entitled to recover in a greater amount), and from the dismissal of counts 2 and 3 in No. 8172.
Plaintiff, an Illinois corporation, was engaged during the period relevant to these appeals in extracting coconut oil from copra, which is the dried meat of coconuts, at its plants located in Portland, Oregon and Berkeley, California, and in the processing of coconut oil, palm kernel oil, sesame oil and sunflower oil at its plants located in Berkeley, California, Chicago, Illinois, Norwalk, Ohio, Louisville, Kentucky, and Elmhurst, New York. Plaintiff's grounds for recovery in each of the suits involve a construction of Sec. 602 1/2 of the Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A. Int. Rev. Acts, page 778, upon which the taxes were assessed by and paid to the defendant. In No. 8171, the judgment of $76,899.09 was the total amount of taxes collected by the defendant. In No. 8172, the amount of taxes collected from plaintiff aggregated the sum of $5,374,551.15, the amount of recovery sought was $90,589.98, and judgment rendered for the plaintiff was in the amount of $10,721.41.
The parties have presented briefs and arguments as though there were two separate appeals. We shall accord like treatment, and first consider the question presented in No. 8171. The section of the Revenue Act in controversy, so far as pertinent to this appeal, provides: "There is hereby imposed upon the first domestic processing of coconut oil, sesame oil, palm oil, palm kernel oil, or sun-flower 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. * * * 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 * * * ."
On May 10, 1934, the date on which this section became effective, plaintiff had on hand in the United States 3,563,303 pounds of coconut oil, sunflower seed oil and sesame seed oil. All of such oils had been imported, and prior to said time had been subjected in the United States to one or more of the following processings, viz., neutralizing, washing, bleaching or deodorizing, and some of the oils had been subjected to a fifth processing - hydrogenation. Between the time the Act became effective and December 1, 1935, plaintiff further processed or used said oils in the manufacture or production of an article intended for sale, and paid, under protest, with respect to said further processing or usage, the taxes, recovery for which was sought and allowed in No. 8171.
The question for decision on this appeal is dependent solely upon the construction to be given the language, "there is hereby imposed upon the first domestic processing * * * ." To be more specific, what was meant by the word "first"? It is plaintiff's contention, sustained by the lower court, that a tax could be legally levied only where the "first domestic processing" took place subsequent to the effective date of the Act, and, inasmuch as all the oils here involved had been subjected to at least one processing before the date of the Act, that a subsequent processing is not within the meaning of the Act, and, therefore, not subject to the tax. On the other hand, it is the contention of the defendant that the "first domestic processing" means the first processing subsequent to the effective date of the Act, and this irrespective of the fact that one or more processings had occurred prior thereto.
Shortly after the Act became effective, there was promulgated under the Revenue Act of 1934, Treasury Regulations 48, which amoung other things provided: "First domestic processing means the first use in the United States on or after the effective date of the Act." This Regulation has been in effect at all times pertinent to the instant inquiry. Plaintiff argues that the Regulation does violence to the language of Congress in that it in effect amends the enactment by inserting the phrase "on or after the effective date of the Act," while the defendant insists that the Regulation is a proper interpretation of the statutory language.
That the question for decision is a difficult one is evidenced by the contrariety of views held by numerous courts which have given consideration thereto. It has been decided favorably to the government by two Courts of Appeals, the Second Circuit in Loose-Wiles Biscuit Co. v. Rasquin, 95 F.2d 438, and the Third Circuit in Colgate-Palmolive-Peet Co. v. United States, 130 F.2d 913. The difficulty which the court had in the latter case is disclosed by the fact that a second opinion was filed upon petition for rehearing, to which there was a vigorous dissent. The question has also been decided, favorably to the government but by a divided court, by the Court of Claims in Tasty Baking Co. v. United States, 38 F.Supp. 844, which followed the reasoning of the Loose-Wiles case. In Cincinnati Soap Co. v. United States, 22 F.Supp. 141, and in Armour & Co. of Delaware v. Harrison*fn1 (N.D.Ill.), decided July 14, 1937, decisions were reached favorable to the taxpayer (the latter decision by Judge Barnes). In addition, Judge Sullivan, who tried the instant case below, decided for the taxpayer and rendered a well reasoned opinion which evidences a careful study of the question (46 F.Supp. 642). It is interesting to note that Judge Sullivan refused to follow the reasoning of the Third Circuit in the Colgate case and that Judge Maris, who dissented in the latter case, quoted with approval the opinion of Judge Sullivan in the instant case.
It would unduly prolong this discussion and perhaps serve no useful purpose to undertake to analyze and distinguish the reasoning by which these various courts have arrived at opposite results. It seems pertinent, however, to make a few observations.The court in the Loose-Wiles case apparently gave no consideration to the legislative purpose or history of the Act, and predicated its decision on the reasonableness of the Treasury Regulation which interpreted the Act as the first domestic processing "on or after the effective date of the Act." It concluded that Congress by an amendment by the Revenue Act of 1936, § 702, 26 U.S.C.A. Int. Rev. Acts, page 779, approved this administrative interpretation. On the other hand, the court in the Colgate case denied the contention that Congress by the 1936 amendment had given such approval. The court in the latter case, in reaching a decision favorable to the government, relied upon what it designated as two "sign posts," (1) that the statute is presumed to operate on future Acts unless the contrary intent is declared, citing Hassett v. Welch, 303 U.S. 303, 58 S. Ct. 559, 82 L. Ed. 859, and (2) the Treasury Regulations interpreting the Act. It is pertinent to note that the government in the instant case strongly urges these two so-called "sign posts" as guides to the construction which it seeks.
It seems plain, however, that the rule of "prospective operation" affords no support to the government's contention. In the cases relied upon, as well as others which we have examined, the rule has been invoked in determining whether a statute was to be applied retroactively as distinguished from prospectively. That was true in Hassett v. Welch, supra, where the court construed an amendment to the Revenue Act relative to the estate tax imposed upon trusts. The government contended that the amendment was applicable to such trusts created prior to the enactment thereof. The court on page 307 of 303 U.S., on page 562 of 58 S. Ct., 82 L. Ed. 859, said: "We hold that the statutes are prospective in their operation and do not impose a tax in respect of past irrevocable transfers with reservation of a life interest." In the instant case, there is no question but that the statute is to be prospectively applied. The question is whether a second or third or some subsequent processing can be designated as the "first domestic processing" and therefore the taxble event.
We think there is no room for legitimate argument but that a literal reading of the language employed by Congress supports plaintiff's position. It is difficult to conceive of plainer language than the "first domestic processing." According to the government, however, first means second or third or fourth. If Congress intended first after the effective date of the Act, it could easily have so stated. Not only did it fail to do this, but it later in the same section defined the term "first domestic processing" as meaning "the first use in the United States." ...