
    THE CALVERT DISTILLING COMPANY AND CARSTAIRS BROS. DISTILLING CO., INC. v. THE UNITED STATES
    [No. 600-52.
    Decided July 12, 1957]
    
      
      Mr. Edgar Barton for the plaintiffs. Messrs. Thomas Kiernan and John Johnston were on the briefs.
    
      Mr. Sheldon J. Gitelman, with whom was Mr. Acting Assistant Attorney General John N. Stull, for the defendant. Mr. James P. Garland was on the brief.
   Maddest, Judge,

delivered the opinion of the court:

The plaintiffs sue for the refund of internal revenue tases on whiskey which taxes were collected from them in circumstances, in which, they claim, the applicable statute relieved them from the taxes.

The plaintiffs are both affiliates of Joseph E. Seagram and Sons, Inc. The plaintiff Carstairs owned and operated a bonded warehouse at Bedford, Ohio. The plaintiff Calvert had such a warehouse at Belay, Maryland. There were in these warehouses in 1946, some 44,000 “packages”, apparently barrels, of whiskey which had been “entered” in bond in the 1940-1942 period. In 1946 it was discovered that for a period of about two years before that time, three employees of Carstairs had been stealing whiskey from the warehouse by a method which left no marks on the barrels.

After the discovery of the theft, the Government authorities conducted a regauge of the barrels of whiskey in the warehouse by the usual method of weighing the barrel with the whiskey in it and subtracting the weight of the barrel. This process disclosed that whiskey had been stolen from 169 barrels which were still in the Bedford warehouse. Before the discovery of the thefts in 1946, a good many barrels of whiskey had been shipped from the Bedford warehouse to the Belay warehouse. These were regauged and it was found that whiskey had been stolen from 311 such barrels. In computing the amounts of the thefts, the officials did not take as the minuend the contents of the barrels upon entry in bond, but that figure less the to-be-expected amount of evaporation and leakage, as shown by other barrels similarly situated, but not stolen from. These computations showed that there had been thefts of 1,760.84 gallons from the barrels still at Bedford, and 2,364.92 from the barrels shipped from Bedford to Belay.

The plaintiffs were obliged to pay the usual taxes on the stolen whiskey, and they do not complain of that. But they were also required to pay the taxes on the whiskey lost by evaporation and leakage from the barrels from which whiskey had been stolen, and it is those taxes which they sue to recover.

Title 26 U. S. C. (1946 ed.) sec. 2901, in its subsection (a) provides that distilled spirits in a bonded warehouse may, at the time they are withdrawn from bond, be regauged, and if it is found that there has been a loss by leakage or evaporation without the fault or negligence of the warehouseman, taxes shall be collected only on the amounts remaining at the time of regauging. The subsection names maximum amounts, based upon the period of time the liquor has been in the warehouse, which may be allowed for evaporation and leakage.

Subsection (b) of section 2901 lists eight other circumstances in which the Commissioner of Internal Bevenue may abate the tax on liquor which has been lost before it is ready for consumption.

The plaintiffs say they should have had the benefit of section 2901 (a); that the quantities of whiskey which were lost by evaporation and leakage were ascertainable by easy calculation and that the fact that whiskey was stolen from the barrels in question is immaterial.

The Government’s agents, in imposing the tax here in question, relied on another section of the statutes, 26 U. S. C. (1952 ed.) 2880 (a), which reads as follows:

Withdrawal from warehouse, and collection of tax on spirits subject to excessive leakage.
(a) Power of the Commissioner. — If it shall appear at any time that there has been a loss of distilled spirits from any cask or other package deposited in an internal revenue bonded warehouse, other than the loss provided for in section 2901 (b), which, in the opinion of the Commissioner, is excessive, he may instruct the District Supervisor of the district in which the loss has occurred to require the withdrawal from warehouse of such distilled spirits, and direct the collector to collect the tax accrued upon the original quantity of distilled spirits entered into the warehouse in such cask or package, notwithstanding that the time specified in any bond given for the withdrawal of the spirits entered into warehouse in such cask or package has not expired. * * *

This provision is, obviously, very drastic, in that where applicable it taxes the entire original quantity of liquor entered in bond, without any allowance for the evaporation and leakage recognized by section 2901 (a) as normal, and which, if the liquor has been in bond for as much as 5% years, as some of the plaintiffs’ liquor had been, may amount to as much as 14% gallons out of a 50 gallon barrel.

Sections 2880 (a) and 2901 (a) are hard to reconcile. The latter section provides for the abatement of the tax, within the maximum amounts fixed in the statute, in the case of loss by evaporation and leakage without the fault or negligence of the owner. But section 2880 authorizes the Commissioner of Internal Eevenue to disregard any loss, if, in his opinion, it is excessive, and tax the entire original amount of the liquor. It will be remembered that section 2901 (a) itself fixes maximum limits on the amounts allowable for evaporation and leakage, while permitting abatement up to those maximum amounts. Thus the mere fact that these losses exceed the statutory máximums does not make them “excessive”, within the meaning of section 2880 (a) and thus permit them to be disregarded entirely.

Although we are in doubt as to the proper application of these apparently contradictory statutory provisions, it seems to ns that section 2880 (a) must be intended to be applied in cases where the taxing authorities are in doubt as to what has caused the losses; as to whether they were caused by evaporation or leakage or undetected theft or, perhaps, some other cause. In such cases it would be proper that the burdensome consequences of the uncertainty should rest upon the possessor of the liquor, and not upon the public treasury.

In the instant case, the taxing authorities determined, by a method which was approximately correct, how much whiskey had been stolen from each barrel. If, by a more refined method of computation, the Commissioner had determined that the losses from theft were, or may have been, somewhat more, and the losses from evaporation and leakage somewhat less, the plaintiffs could not have complained of that, because, as we have said, the uncertainties should be resolved against the possessor of the whiskey, and not against the treasury. But the amount of the thefts having been determined, determination of how much had leaked and evaporated from each barrel was a problem in subtraction. Applying the usual rule that ambiguities in taxing statutes should be resolved in favor of the taxpayer, if such a resolution is reasonable, we conclude that the Commissioner of Internal Revenue should have given the plaintiffs the benefit of section 2901 (a) and that his application to their situation of section 2880 (a) was an error of law.

The plaintiffs are entitled to recover, with interest as provided by law, and a judgment will be entered to that effect. The amount of the judgment will be determined in further proceedings under our Rule 38 (c).

It is so ordered.

Laramore, Judge; Whitaker, Judge; LittletoN, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the facts as stipulated by the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiffs are corporations duly organized and existing under the laws of the State of Maryland with executive offices in the Chrysler Building, New York City and are engaged in the business of manufacturing and selling whiskey. Both are wholly owned affiliates of Joseph E. Seagram & Sons, Inc.

2. Plaintiff Carstairs Bros. Distilling Co., Inc. (hereinafter referred to as “Carstairs”) was at all times material herein the owner and operator of Internal Eevenue Bonded Warehouse No. 3, located at Bedford, Ohio. Plaintiff, The Calvert Distilling Co. (hereinafter referred to as “Calvert”) was at all times material herein the owner and operator of Internal Eevenue Bonded Warehouse No. 3, Eelay, Maryland.

3. In October, 1946, there were some 44,595 packages of whiskey in either Internal Eevenue Bonded Warehouse No. 3, Bedford, Ohio, or in other bonded warehouses including Internal Eevenue Bonded Warehouse No. 3, Eelay, Maryland, located in the United States to which certain of such packages had been transferred from Internal Eevenue Bonded Warehouse No. 3, Bedford, Ohio between 1943 and October, 1946. The dates of the original entry in bond of these 44,595 packages of whiskey were between October, 1940 and March, 1942, with the greater part entered in bond in the early part of said period.

4. On October 3, 1946, the local police of Bedford, Ohio, arrested two persons who were subsequently indicted by the Grand Jury of the United States District Court for the Northern District of Ohio on the charge, among others, that they had on or about October 2, 1946, knowingly, wil-fully, unlawfully and feloniously in a manner other than that provided by law, removed and aided and abetted in the removal of 322.23 gallons, more or less, of distilled spirits on which tax had not been paid, from Internal Eevenue Bonded Warehouse No. 3, Annex B, at Bedford, Ohio. One of those indicted was Charles A. Brightbill, an employee of Carstairs from November, 1942 until’June, 1945. Both persons subsequently pleaded guilty.

5. An investigation by members of the Alcohol Tax Unit, Internal Eevenue Service, revealed that during the period from approximately May 20, 1944 until October 2, 1946, Charles A. Brightbill, and another in collusion with Frank Mikloucich, a supervisory employee of Carstairs, had been stealing whiskey from Internal Revenue Bonded Warehouse No. 3, Annex B, at Bedford, Ohio. Their method of theft left no marks on the packages.

6. Any loss of whiskey which resulted from theft was not a loss provided for in Section 2901 (b), 26 U. S. C. Section 2901 (b). ,

7. Immediately after the apprehension of the persons accused of theft of whiskey from Internal Revenue Bonded Warehouse No. 3, Annex B, Bedford, Ohio, as aforesaid the District Supervisor, Alcohol Tax Unit, Internal Revenue Service, at the direction of the Commissioner of Internal Revenue conducted a regauge of the packages of whiskey in Bonded Warehouse No. 3, Bedford, Ohio between October, 1946 and January 17, 1947. The method of regauging was that customarily employed in government bonded warehouses to determine the amount of spirits on hand at the time of tax payment; that is, by weighing the contents of each package separately from the package (barrel).

8. As a result of that regauge, plaintiff Carstairs was directed by the Commissioner of Internal Revenue to detain in Internal Revenue Bonded Warehouse No. 3, Annex B, Bed-ford, Ohio, 169 packages of whiskey.

9. All packages shipped from Internal Revenue Bonded Warehouse No. 3, Bedford, Ohio, prior to October 2, 1946, had been gauged on the date of entry into bond and regauged on the date of shipment. The method of regauging was that customarily employed by government bonded warehouses to determine the amount of spirits on hand at the time of transferring packages from one warehouse to another, that is, by weighing each package, together with its contents and subtracting therefrom the weight of the package (barrel) itself as determined upon entry into bond. A record of the weight of each package on the date of shipment, its building and rack location prior to shipment, and its destination upon shipment was maintained in Internal Revenue Bonded Warehouse No. 3, Bedford, Ohio. The records referred to heretofore were examined by inspectors of the Alcohol Tax Unit, Internal Revenue Service between October, 1946 and January 17,1947.

10. As a result of tlie regauging of the weights plaintiff Calvert was directed by the Commissioner of Internal Revenue to detain in Internal Revenue Bonded Warehouse No. 3, Relay, Maryland, 311 packages of whiskey.

• 11. As a result of the regauge, as described in finding 7, plaintiff Carstairs, on October 23, 1947, was directed by the Commissioner of Internal Revenue, who determined the losses through theft to be excessive, to withdraw from bond 166 packages of the 169 packages of whiskey detained at Internal Revenue Bonded Warehouse No. 3, Annex B, Bed-ford, Ohio, and taxpay on the original entry gauge of said 166 packages.

12. As a result of the regauging of packages sent from Internal Revenue Bonded Warehouse No. 3, Annex B, Bed-ford, Ohio, as described in finding 9, the plaintiff Calvert, on October 28, 1947, was directed by the Commissioner of Internal Revenue, who determined the losses through theft to be excessive, to withdraw from bond 310 packages of the 311 packages of whiskey detained at Internal Revenue Bonded Warehouse No. 3, Relay, Maryland, and to taxpay on the original entry gauge of said 310 packages.

13. Of the 310 packages detained at Internal Revenue Bonded Warehouse No. 3, Relay, Maryland, as aforesaid, 199 were owned by plaintiff Carstairs and the tax payment on the original entry gauge on these packages was made by plaintiff Carstairs. .

14. By .virtue of the regauging of the 166 packages detained at Internal Revenue Bonded Warehouse No. 3, Bedford, Ohio, as aforesaid, the Commissioner of Internal Revenue computed that there was a theft of 1,760.84 proof gallons from such 166 packages, and at the request of an agent of plaintiff Carstairs, so notified plaintiff Carstairs by letter dated October 31,1947.

• 15. By virtue of the regauging of the 3Í0 packages detained in Internal Revenue Bonded Warehouse No. 3, Relay, Maryland, as aforesaid, the Commissioner of Internal Revenue -computed that there was a theft of 2,364.92 proof gallons from such 310 packages and, at the request of an agent of plaintiff Carstairs, so notified plaintiff Carstairs by letter dated October 31, 1947.

16. The computed theft referred to in findings 14 and 15 was arrived at as follows:

(a) The losses in packages regauged at Bedford, Ohio were determined by comparing losses in packages which either showed signs of tampering or.which the criminal investigation disclosed were accessible to the thieves, with the losses in packages of comparable, age and location within the warehouse, not showing signs of tampering and not available to the thieves. The loss through theft was computed to be the difference, in gallons between the loss in packages showing signs of tampering or available to the thieves and the ordinary and normal loss by leakage and evaporation in comparable packages not showing signs of tampering or available to the thieves. The theft in pounds was converted to proof gallons.
(b) The loss in packages which had been shipped from Bedford, Ohio prior to October 2, 1946 was determined by ascertaining the gallonage, at the time of shipment, in the manner described in finding 9, of each package which showed signs of tampering or were available to the thieves, and substracting therefrom the average gallonage of packages of comparable age and location within the warehouse at the time of shipment, which had no evidence of tampering and were not available to the thieves. The loss through theft was computed to be the difference in gallons between the loss in packages showing signs of tampering or available to the thieves and the ordinary and normal loss by leakage and evaporation in comparable packages not showing signs of tampering or available to the thieves. The theft in pounds was converted to proof gallons.
(c) The average loss due to evaporation of comparable packages which showed no signs of tampering, and were not available to the thieves, as a rule did not vary from the maximum loss of such comparable packages by more than .8 proof gallons to 1.5 proof gallons. The original entry gallonage per package varied between 48 and 50 gallons.

17. The total amount of computed theft from the 476 packages, ordered to be detained by the Commissioner of Internal Revenue either at Internal Revenue Bonded Warehouse No. 3, Relay, Maryland, or Internal Revenue Bonded Warehouse No. 3, Bedford, Ohio, was 4,125.76 proof gallons.

18. Each of the aforesaid 476 packages was released from bond in December, 1947.

19. Subsequent to the regauging referred to in finding 7, whiskey detained at Internal Revenue Bonded Warehouse No. 3, Bedford, Ohio was regauged in December, 1947. The regauging between October, 1946 and January, 1947, as referred to in finding 7, showed 4,930.68 proof gallons on hand. The regauging in December, 1947 showed 4,490.03 proof gallons on hand.

20. The total proof on the original entry gauge of the 365 packages which plaintiff Carstairs was required to taxpay on the original entry gauge was 17,963.4 proof gallons and on the basis of this figure a tax of $161,670.60 was paid in December, 1947, by the purchase and affixing of the appropriate stamps. The actual proof gallons contained in the 365 packages in question at the time of tax payment was 10,602.54 proof gallons.

21. The total proof on the original entry gauge of the 111 packages on which plaintiff Calvert was required to taxpay was 5,468.7 gallons and on the basis of this figure a tax of $49,218.30 was paid in December, 1947, by the purchase and affixing of the appropriate stamps. The actual proof gallons contained in the 111 packages in question at the time of tax payment were 3,496.03 gallons.

22. With respect to both plaintiffs, the total proof on the original entry gauge of the 476 packages on which tax payment on the original entry gauge was ordered was 23,432.1 proof gallons. The actual proof gallons contained in the 476 packages in question at the time of their tax payment was 14,098.57 proof gallons.

23. Each of the aforesaid 476 packages had a capacity of 40 or more proof gallons and the evaporation of each such barrel was less than 14*4 gallons although no computation of evaporation was made by the Commissioner of Internal Revenue.

24. Any loss from the aforementioned packages caused by leakage or evaporation occurred without the fault or negligence of plaintiffs or their agents or employees.

25. On or about November 20, 1951, plaintiffs pursuant to Sections 2901 (a) and 2901 (b) of the Internal Revenue Code of 1939, filed with the Collectors of Internal Revenue in Baltimore, Maryland, and in Cleveland, Ohio, claims for a partial refund of taxes paid as aforesaid. Plaintiff Car-stairs filed a claim in Cleveland, Ohio for a refund in the amount of $32,995.53. Plaintiffs Carstairs and Calvert filed a claim in Baltimore for a refund amounting to $51,006.44.

26. On or about June 27, 1952, plaintiff Carstairs received a formal notice of disallowance in full of its claim for refund of $32,995.53.

27. On or about June 27,1952, plaintiffs received a formal notice of disallowance in full of their claim for refund of $51,006.44.

28. Plaintiffs make no claim with respect to taxes of $37,131.84 paid on the 4,125.76 proof gallons computed to have been stolen as aforesaid.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered November 6, 1957, that judgment for the plaintiffs be entered for $46,869.93, together with interest thereon as provided by law from January 29, 1948.  