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March 13, 1933


The opinion of the court was delivered by: ADLER

ADLER, District Judge.

Both of the above-entitled suits involve identical issues, and the facts in each are substantially the same.

The complainants are domestic corporations, one doing business in the city of Buffalo, N.Y., and the other in the city of Rochester, N.Y. The defendant is the collector of internal revenue for the Twenty-Eighth district of New York, which includes the cities of Buffalo and Rochester.

 These actions are brought in equity. Upon the filing of the bills of complaint, applications were made in each suit, upon verified affidavits of officers of the complainant corporations, for temporary injunctions restraining the defendant from proceeding to collect or assess any and all taxes against the complainant corporations upon the manufacture and sale of "brewer's wort." Temporary injunctions were issued. Motions by the complainant corporations to make these injunctions permanent pending the determination of the suits were denied upon the failure of the complainant corporations to furnish security.

 Decision on motions to dismiss the bill of complaint in each suit was reserved until the end of the trial. The grounds of the motions which were set up in the amended answers as separate and distinct defenses were: (a) That the complainant corporations had a complete and adequate remedy at law, of which they had not availed themselves; (b) the alleged causes of action were barred under the provisions of section 3224 of the Revised Statutes (26 USCA § 154), prohibiting the maintenance of any suit for the purpose of obtaining injunctive relief to restrain the collection of any tax; (e) failure of the bills of complaint to allege facts sufficient to constitute a valid cause of action in equity; (d) lack of jurisdiction.

 The complainant corporations rest their prayer for equitable relief upon the grounds: (a) That the so-called "blend" manufactured and sold by them is not in fact "brewer's wort," and therefore cannot be taxable as such; (b) that the tax in question is, in fact, a penalty; (c) that the tax is confiscatory; (d) that the method of assessment and collection pursued by the defendant was illegal.

 It seems necessary to quote the applicable provisions of the Revenue Act of 1932, with brief comment on the act and the regulations. Section 601, subd. (c) (2) of title 4 (26 USCA §§ 3601-3629 note), reads as follows: "Brewer's wort, 15 cents a gallon. Liquid malt, malt syrup, and malt extract, fluid, solid, or condensed, made from malted cereal grains in whole or in part, unless sold to a baker for use in baking or to a manufacturer or producer of malted milk, medicinal products, foods, cereal beverages, or textiles, for use in the manufacture or production of such products, 3 cents a pound. For the purposes of this paragraph liquid malt containing less than 15 per centum of solids by weight shall be taxable as brewer's wort."

 The tax imposed under title 4, § 601, subd. (c) (2), became effective June 21, 1932. (See article 2 of Regulations 44.) It attaches when title to the article sold passes from the manufacturer (article 5 of Regulations 44), and shall be paid by the manufacturer on all sales made directly or through an agent (article 4 of Regulations 44). Returns must be filed with the tax on or before the last day of the month following that for which it is made, except when otherwise prescribed under article 31, covering jeopardy assessments (article 48 of Regulations 44). All taxes are due and payable to the collector without assessment by the Commissioner or notice from the collector at the time fixed for filing the returns (article 49 of Regulations 44).

 Another provision of the Revenue Act of 1932 which has application to these cases is section 1105 (26 USCA § 4105), which reads as follows:

 "(a) If the Commissioner finds that a person liable for tax (other than income tax) under any provision of the internal-revenue laws designs quickly to depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect such tax unless such proceedings be brought without delay, the Commissioner shall cause notice of such finding to be given such person, together with a demand for an immediate return and immediate payment of such tax, and such tax shall thereupon become immediately due and payable.

 "(b) If such person (1) is not in default in making any return or paying any tax under the internal-revenue laws, and (2) furnishes to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly return and pay the tax to which the Commissioner's finding relates, then such tax shall not be payable prior to the time otherwise fixed for payment."

 Something of the business, history, the organization, and the financial set-up and status of the complainant corporations, as developed by the testimony on the trial, must be stated. The Broadway Blending Corporation was incorporated and commenced business on August 5, 1932, by borrowing the sum of $5,500. It apparently acquired no other assets. On December 1, 1932, its bank book shows a balance on hand of $18.81. However, the entries in the bank book disclose that from August 10, 1932, to October 12, 1932, inclusive, this corporation deposited approximately $100,000. The Cataract Blending Corporation was incorporated and began business on July 8, 1932, with an authorized capital stock of $25,000, $1,500 of which was cash, and $23,500 of stock was issued for a quantity of machinery and tin cans.

 1. On the question whether the product taxed was not "brewer's wort," the testimony offered by the complainants was not convincing. In the Broadway case complainant's witness who was its expert gave practically no testimony on that point. In the Cataract case, after testifying at length as to the analysis of a sample, which testimony was admitted over objection on the ground of the uncertain identification of the sample, the same witness who was in the employ of both complainants stated that the product is a diluted malt syrup solution and not liquid malt or wort. He called it a blend. The defendant offered the testimony of two government chemists. They testified that they made analyses of the product of complainants, and testified positively that they found it to be "brewer's wort." Further, that in their opinion it was made wholly or in part from malted cereal grains. This was the entire testimony in these cases on the nature of complainants' product. I shall not comment further on this question at this time, in view of my conclusions shortly to be stated on the other questions involved.

 2. Complainants contend that the tax in question is in fact a penalty, and that therefore section 3224 of the Revised Statutes (26 USCA § 154), which will hereafter be discussed, is without application. The complainants offered in evidence the Revenue Act of 1932 imposing the tax and the committee hearings in Congress held prior to its passage. I must find that the entire act was designed and passed for the purpose of raising revenue for the support of government. As stated by the Supreme Court in Lipke v. Lederer, 259 U.S. 557, 42 S. Ct. 549, 66 L. Ed. 1061, the distinction between a tax and a penalty is that the one has for its purpose the raising of revenue and the other is punishment for an infraction of the law. Lipke v. Lederer, supra, had under consideration a penalty, so termed, in the National Prohibition Act (27 USCA), a penal statute. It does not apply, because there is nothing here to indicate that the tax in question was included in the Revenue Act of 1932 for any other purpose than to raise revenue. Even assuming that "brewer's wort" cannot be used except in the manufacture of beer in violation of the National Prohibition Act, the Congress may tax ...

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