Bercut-Vandervoort & Co. v. United States

151 F. Supp. 942, 38 Cust. Ct. 285, 1957 Cust. Ct. LEXIS 21

Opinions

JOHNSON, Judge.

The merchandise involved in this case consists of 90-proof London dry gin, exported from Holland on July 25, 1951, placed in Foreign Trade Zone No. 3 at San Francisco, and entered for consumption at the port of San Francisco on August 19, 1952. It was assessed with duty at the rate of $1.25 per proof gallon under paragraph 802 of the Tariff Act of 1930, 19 U.S.C.A. § 1001, par. 802, as modified by the General Agreement on Tariffs and Trade, T.D. 51802, and with internal revenue tax at the rate of $10.50 per wine gallon under section 2800 (a) (1) of the Internal Revenue Code of 1939, as amended by 65 Stat. 524, 26 U.S.C. § 2800(a) (1).

No question has been raised as to the rate or amount of duty or as to the rate uof internal revenue tax, but it is claimed that, in view of Articles II and III of the General Agreement of Tariffs and Trade, T.D. 51802, 61 Stat. A14, A18, the tax imposed should not exceed that imposed in respect of the like domestic product and that it should have been assessed on the basis of the proof gallon and not the wine gallon.

Section 2800(a) (1) of the Internal Revenue Code of 1939, as amended, provided, at the time of importation:

“There shall be levied and collected on all distilled spirits in bond or produced in or imported into the United States an internal revenue tax at the rate of $10.50 on each proof gallon or wine gallon when below proof and a proportionate tax at a like rate on all fractional parts of such proof or wine gallon, to be paid by the distiller or importer when withdrawn from bond. On and after April 1, 1954, the rate of tax imposed by this paragraph shall be $9 in lieu of $10.50.”

Article II, section 2 of the General Agreement on Tariffs and Trade, T.D. 51802, 61 Stat. A15, provides:

“2. Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product

“(a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 1 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part; * * *”

[The reference to “paragraph 1 of Article III” in the above provision was amended to read “paragraph 2 of Article III” by the Protocol Modifying Part I and Article XXIX of the General Agreement on Tariffs and Trade, signed September 14, 1948, and entering into force for the United States, September 24, 1952, T.D. 52167; 3 United States Treaties and Other International Agreements 5355. The effective date for the United States was subsequent to the date of entry herein but prior to the date of liquidation. This change was necessitated by the prior modification of Article III, infra.]

Article III, section 2 of the General Agreement on Tariffs and Trade, as modified by the Protocol Modifying Part II and Article XXVI of the General Agreement on Tariffs and Trade, signed September 14, 1948, and entering into force for the United States, December 14, 1948, T.D. 52167; 62 Stat. pt. 3 p. 3679, provides:

“2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. * * *”

Seven witnesses were called at the trial, and the depositions of three persons, taken in Holland, were received in evidence.

According to the depositions, the merchandise involved herein was produced by Wynand Fockink, Amsterdam, Holland, from grain neutral spirits, having a proof of 190-193, purchased from Spiritus Verkoopkantoor of Delft, sales agent of the Royal Netherlands Distilleries. The neutral spirits were redis-tilled, water, herbs, and berries added, and a London dry gin of 178 proof was created. Said gin was later reduced in alcoholic content to 90 proof, solely by the addition of water.

Several of the witnesses who were familiar with the imported merchandise and other dry gins of 90 or 94.4 proof, both domestic and imported, testified that such gins are similar in taste, color, and odor, and are used for the same purposes, chiefly in mixed drinks. It was pointed out that they all possess the taste and odor of juniper berries.

Frank L. Neisler, superintendent, American Distilling Co. of Sausalito, Cal., and Pekin, 111., described the method of production of his company’s gin (Burton’s 94.4 proof) as follows: Neutral spirits of 190 proof are distilled from grain. After testing for purity, the proof is reduced to 120 by the addition of water, and the botanicals, principally juniper berries and coriander seed, are added. The mixture is then redistilled into gin of 158 proof. That product goes into packages or storage tanks in a bonded warehouse in Sausalito. When it is withdrawn from bond, internal revenue tax is paid. It is then dumped in a bottling plant, where it is reduced in proof to 94.4 by the addition of water.

The witness testified that all gin produced at the Sausalito plant is withdrawn at 100 proof or more, and tax is paid on the proof-gallon basis. If it were under 100 proof, tax would be paid on the wine gallon. In the witness’ experience, the tax was charged against gin produced at the Sausalito distillery on the wine-gallon basis only once, when a mistake was made by the technician in lowering the proof below 100.

Hugh Mair, plant manager of the Distillers Co., Ltd., of Linden, N. J., testified that his plant produces London dry distilled gins, including Gordon’s, Booth’s, Boord’s, and others. Such gins are produced from 190-proof grain neutral spirits, purchased from Commercial Solvents of Terre Haute, Ind., and Midwest Solvents of Hutchinson, Kans. The spirits are stored until needed in the production of gin, at which time they are pumped into a scale tank, weighed, gauged, and the tax computed and paid. The strength of the gin is then reduced by the addition of water; juniper berries, coriander seeds, and other ingredients are added, and the whole redistilled. The several gins his company makes are sold at 85, 90, and 94.4 proof.

Every time his firm withdraws neutral spirits from bonded warehouse, they are over 100 proof, and tax is paid on the proof-gallon basis.

Lester R. Rodenburg, employed by National Distillers as regional production manager for an area covering Cincinnati, Peoria, Louisville, and Frankfort, testified that his firm manufactures gin, known as Gilbey’s, in the Gilbey Distillery in the Cincinnati division. Grain neutral spirits are produced at the registered distillery of National Distillers at Carthage and are transferred by pipeline in bond to the registered distillery of Gilbey. The neutral spirits are created at 190 proof plus. When needed for the production of gin, they are placed in the gin still with water, juniper berries, and other ingredients, and distilled. The gin produced is over 100 proof and under 160 proof. After it enters the receiving tank, where it is stored, it is reduced to about 101 proof. It is withdrawn from the distillery at that proof, and the tax is paid on the proof-gallon basis. If it were less than 100 proof, tax would! be paid on the wine-gallon basis. In the bottling plant, after the tax has been paid, it is reduced to 90 proof by-adding distilled water.

The issue in the instant case is whether the internal revenue tax should have been imposed on the imported under-proof gin on the proof-gallon basis, instead of the wine-gallon basis, as assessed by the collector.

Under section 2800(a) (1) of the Internal Revenue Code, supra, an internal revenue tax is imposed on all distilled spirits in bond or produced in or imported into the United States at the rate of $10.50 on each proof gallon or wine gallon when below proof. Such tax attaches to distilled spirits domestically produced as soon as they come into existence, but, where such merchandise is placed in bonded warehouse, the tax is not required to be paid until withdrawal from bond and is based upon the proof at that time. 26 U.S.C. § 2800' (a) (1), and (c). If the merchandise is removed from the place where distilled, and not deposited in bonded warehouse, the tax is immediately due and payable. 26 U.S.C. § 2800(b) (2). The tax on imported distilled spirits attaches at the-time of importation. United States v. Westco Liquor Products Co., 38 C.C.P.A., Customs, 101 C.A.D. 446.

A wine gallon is defined as a standard United States gallon, containing 231 cubic inches, and a proof gallon is a wine gallon, containing 50 per centum of alcohol by volume and 50 per centum of water by volume. 26 C.F.R. (1949 edition) sections 186.148 and 186.149. Thus, where distilled spirits are taxable at proof, the tax is $10.50 per standard, United States gallon. However, if sufficient water is added to reduce the proof to 90 (45 per centum of alcohol), the total volume is increased, and the tax is assessed on the wine-gallon basis, that is, $10.50 on the total number of standard gallons of merchandise. Plaintiff claims, however, that the merchandise involved herein (which is under proof) should be taxed on the basis, not of its total volume, as imported, but as if it had been at proof when imported, that is, on a less volume. In other words, the tax on 90-proof gin should have been levied on the proof-gallon basis. The tax would then have been 90 per centum of $10.50 on each standard gallon, instead of $10.50, as assessed by the collector.

It is evident that plaintiff’s claim cannot be sustained under the statute itself. It. is contended, however, that the language of the General Agreement on Tariffs and Trade, supra, has modified the statutory scheme.

Similar contentions have been before the courts on prior occasions in cases involving other trade agreements. Bohemian Distributing Co. et al. v. United States, 15 Cust.Ct. 121, C.D. 957, appeal dismissed May 29, 1946; Vernon Distributing Co. v. United States, 39 C.C. P.A., Customs, 205, C.A.D. 463.

The Bohemian Distributing Co. case, supra, involved trade agreements with Canada (T.D. 48033; T.D. 49752) and with the United Kingdom (T.D. 49753). The court quoted from the latter, as follows:

“Articles the growth, produce or manufacture of the territories of either High Contracting Party shall, after importation into the territories of the other, be exempt from all internal taxes, fees, charges or exac-tions other or higher than those payable on or in connection with like articles of domestic or any other origin, * *

The imported merchandise was under-proof whisky, which had been taxed on the wine-gallon basis. Evidence was presented showing that domestic whisky is withdrawn from warehouse above proof; that tax is paid on the basis of the proof gallon; and that the whisky is thereafter diluted with water and bottled. A witness testified that it was advantageous to withdraw domestic whisky from bond over proof, for the reason that, if under proof, it would be taxed on the wine-gallon basis. Counsel agreed that Scotch, whisky is produced over proof and thereafter rectified and reduced below proof,, in which condition it is bottled and imported. The court found that imported whisky below proof was not similar to domestic whisky above proof and held, that taxation of the imported whisky under section 2800 of the Internal Revenue Code on the wine-gallon basis was not. in contravention of the trade agreements with Canada and with the United Kingdom.

The Vernon Distributing Co. case, supra, involved rum, imported from Cuba, below proof. The supplemental trade agreement with Cuba, T.D. 50050, provided :

“The provisions of Article I and. Article III of this Agreement and of the third paragraph of this Article shall not prevent the Government of the United States of America, from imposing at any time on the importation of any article a charge equivalent to an internal tax imposed in respect of a like domestic article or in respect of a commodity from which the imported article has been manufactured or produced in whole or in part.”

In its opinion, the court pointed out, that section 2800 of the Internal Revenue Code imposed a tax on two distinct products: (1) Distilled spirits over proof and (2) distilled spirits under proof, and that, under the trade agreement, the tax on imported merchandise was to be the. equivalent of that assessed on the like domestic article. The court said (39 C. C.P.A. at page 219):

“Coneededly, the rum which appellant imported was below proof— that is, it contained less than 50 per cent alcohol. As distilled from the black strap molasses in Cuba it was 160 degree rum. Had it been imported in that condition, the tax upon it would have been based upon' the proof gallon just as the tax upon 160 degree rum produced in the United States, if any such, would have been. It was not so imported. By the addition of water before importation (whether rectified or not) it was reduced to 89 degree rum. The amount of water exceeded the amount of alcohol; hence it was below proof and by the express terms of the statute, supra, it was required that the tax be assessed upon the wine gallon basis which is defined in the regulations as a standard United States gallon containing 231 cubic inches. This, of course, would be true of domestically produced rum in which the amount of water exceeded the amount of alcohol. So there is no discrimination. To hold with appellant here would have the effect of nullifying an express statutory provision.” [Italics supplied.]

From the statute and the cases cited, the following conclusions are drawn. The statute levies a tax on two distinct commodities: (1) Distilled spirits above proof and (2) distilled spirits below proof. The tax attaches to domestic merchandise when it comes into existence and is payable when the same is withdrawn from bond in its condition at that time. The tax attaches to foreign merchandise when it is imported and is payable when the merchandise is entered or withdrawn for consumption in its condition at that time. If the merchandise, domestic or foreign, is above proof when the tax is payable, it is assessed at $10.50 per proof gallon. If the merchandise, • domestic or foreign, is below proof when the tax is payable, it is assessed at $10.50 per wine gallon. Where a trade agreement provides that imported articles shall not be subject to internal taxes higher than those payable on like domestic articles, the like domestic articles, where distilled spirits under proof are imported, are domestic distilled spirits under proof at the time the tax was payable. Since both such articles are taxable at the same rate, that is, on the wine-gallon basis, there is no discrimination against the foreign product, and the statute is not in contravention of the trade agreements.

The only different factor in the instant case is the language of the General Agreement on Tariffs and Trade, supra, which plaintiff claims constrains another result.

Article II, section 2 of the general agreement, supra, provides that a contracting party may impose a charge on imported merchandise equivalent to an internal tax imposed in respect of the like domestic article. Article III, section 2, supra, provides, further, that imported products “shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.”

It is evident that the purpose of this language is to prevent discrimination against imported merchandise by way of internal taxes. That was also the purpose of the provisions in the trade agreements involved in the cited cases. Those cases held that the present statute was not discriminatory and was not in contravention of the tr-ade agreements.

Plaintiff’s claim is based primarily on the use of the word “indirectly” in Article III, section 2 of the general agreement, supra. Plaintiff argues that, since the domestic producer of distilled spirits may withdraw them from bond above proof, paying tax on the proof gallon, and thereafter reduce them in proof, the underproof gin that goes into commerce is taxed “indirectly” on the basis of the proof gallon. Therefore, it is claimed that imported underproof gin, taxed on the wine-gallon basis, is paying an internal tax in excess of that applied indirectly to domestic underproof gin. In other words, foreign underproof gin should be subject to tax as if it were over proof at the time of importation.

This would be in direct contravention of the statute and would be contrary to the well-known principle of customs law that imported merchandise is subject to duty in its condition as imported. United States v. Citroen, 223 U.S. 407, 32 S.Ct. 259, 56 L.Ed. 486; United States v. Lo Curto & Funk, 17 C.C.P.A. Customs, 342, T.D. 43777; Leonard Levin Co. v. United States, 27 C.C.P.A. Customs, 101, C.A.D. 69.

Furthermore, it would result in imported overproof distilled spirits and imported underproof distilled spirits paying tax at the same rate, thus breaking down the express statutory classification. The record herein shows that overproof distilled spirits is an article of commerce distinct from underproof spirits. Therefore, the statutory distinction is a reasonable one.

Where, as here, the taxing statute distinguishes between a product in one condition and the same product in another and different condition, the imported and the domestic products must be compared in their condition at the time the tax is applied. Both imported and domestic distilled spirits are taxable and both are taxable in either of two conditions: (1) When under proof and (2) when over proof. Therefore, distilled spirits, under proof when imported, must be compared with distilled spirits, under proof when withdrawn from bond, since, in both instances, that is the time when the tax is applicable. It is clear that both are taxed on the wine-gallon basis, and there has been no discrimination against the imported merchandise.

The statutory scheme, in fact, is of long standing and has been reenacted by Congress from time to time, most recently in the Internal Revenue Code of 1954, section 5001(a) (1), 26 U.S.C. § 5001(a) (1). On the other hand, the provisions of the General Agreement on Tariffs and Trade, relied on by plaintiff, are general ones applicable to all internal charges of any kind imposed by any of the contracting parties. They are not directed specifically or solely to the internal revenue tax on distilled spirits produced in or imported into the United States. Since the congressional intent has been clearly expressed both before and after the effective date of the general agreement, it is reasonable and proper to conclude that the provisions of the agreement were intended to be and are in accord with, rather than contrary to, the legislative purpose. As we have shown, the statute does not discriminate between domestic and foreign merchandise, but imposes a different rate on two distinct classes of merchandise. Both classes may be imported, and the tax is imposed in accordance with the condition of the merchandise at the time it is entered or withdrawn for consumption. To paraphrase the language of our court of appeals in Vernon Distributing Co. v. United States, supra, to hold with plaintiff here would have the effect of nullifying an express statutory provision.

Plaintiff contends that the statute contains hidden benefits for the domestic producer, on the ground that it permits him to withdraw his merchandise while it is above proof, pay tax on the proof-gallon basis, and reduce the proof thereafter without further tax.

The foreign producer may, of course, export distilled spirits which are above proof and reduce them in this country after payment of the tax. Plaintiff claims, however, that he is not in the same favorable position since, in order to obtain the tax benefit, he must either establish a plant in this country for processing and packaging his merchandise, with all the risks and expenses attendant upon this method, or sell his goods in bulk and let the purchaser process the merchandise, thus depriving the goods of the prestige of having been packaged and placed on the market by the foreign producer.

On the other hand, where the foreign producer chooses to send in his mer chandise bottled, ready for the market, he pays the tax only upon the quantity which actually is entered or withdrawn from warehouse for consumption. The domestic producer, who withdraws his merchandise above proof, pays on the proof-gallon basis on the total quantity withdrawn and is entitled to no refund of tax for any loss.which, may occur thereafter. 26 U.S.C. § 2901(c). Even in the case of loss or destruction in bonded warehouse, allowances are not made under all circumstances, and, in the case of loss by theft, the burden is on the distiller or warehouseman to establish that the loss did not occur as the result of connivance, collusion, fraud, or negligence on his part or on the part of his employees. 26 U.S.C. § 2901(a) and (b). See St. Paul Mercury-Indemnity Co. of St. Paul v. United States, 9 Cir., 156 F. 2d 425; Rogan v. Conterno, 9 Cir., 132 F. 2d 726; Glenmore Distilleries Co. v. Glenn, D.C., 92 F.Supp. 688; Julius Kessler & Co. v. United States, 61 Ct.Cl. 723, certiorari denied 273 U.S. 700, 47 S.Ct. 95, 71 L.Ed. 847.

If, as plaintiff claims, the statutory scheme harbors hidden benefits for the domestic product, it also contains disadvantages. Under plaintiff’s theory, there would be a discrimination in favor of the foreign product, since it would pay internal revenue tax on the proof-gallon basis on the quantity actually entered nr withdrawn for consumption, whereas domestic merchandise would pay the tax on the quantity withdrawn, whether or not all of that quantity were processed and sold for consumption. It is not reasonable to suppose that Congress or the negotiators of the trade agreement intended to discriminate against the domestic product.

For the reasons stated, the protest is overruled. Judgment will be rendered accordingly.