Syllabus 145 C. Cls. MCCORMICK & COMPANY, INCORPORATED v. THE UNITED STATES [No. 396-55. Decided February 11, 1959]* ON THE PROOFS Taxes, liquor; drawback.-In an action to recover a drawback of tax previously paid on ethyl alcohol used by plaintiff in the manufacture of nonbeverage flavoring extracts, where the alcohol was fully tax-paid and had been imported from France in such an impure state as to require extensive distilling and purification in a domestic plant, it is held that because the drawback provisions (section 3250 (1) of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.) § 3250(1)), amounts to a privilege or grant rather than a refund provision of tax erroneously assessed and collected, it must be strictly construed in favor of the Government, and under the Code definitions of alcohol, the alcohol used by plaintiff was "produced” in a foreign plant and its use by plaintiff did not give rise to a right to drawback of tax. Internal Revenue 1967 Taxes, liquor; drawback; real party in interest.-Plaintiff's claim for a drawback under section 3250(1) of the Internal Revenue Code of 1939 (26 U.S.C. (1952 ed.) § 3250 (1)), arises when it uses distilled spirits in the manufacture of nonbeverage products and the plaintiff is the "real party in interest" for purposes of prosecuting the action in this court within the meaning of the court's Rule 20 (a), despite the fact that the industrial alcohol plant which sold the alcohol to plaintiff bore the expense of plaintiff's lawsuit and secured the ultimate payment of the plaintiff's claim against defendant. Internal Revenue 2091 Taxes, liquor; drawback; production-what constitutes.-Distilled spirits imported from abroad and taxed as "alcohol" but arriving in this country in such an impure state as to require much additional distillation and purification in a domestic plant, are not, for the purposes of the drawback provision of the Internal Revenue Code of 1939, "produced" in a domestic plant within the meaning of sections 2809 (b)(1) and 3124 (a)(1) of the Code. Internal Revenue 1967 *Plaintiff's petition for writ of certiorari denied by the Supreme Court June 22, 1959, 360 U.S. 916. 160 Opinion of the Court Taxes, liquor; drawback; privilege-not refund.-The provision in the Internal Revenue Code relating to the right to a drawback is the grant of a privilege rather than a refund of taxes assessed and collected and as such must be construed in favor of the Government and against the party claiming the privilege. United States v. Walker-Hill Co., 79 F. Supp. 482. Internal Revenue 1962 Taxes, liquor; drawback; statutes-construction and operation.Since section 3250 (1) of chapter 27 of the Internal Revenue Code of 1939 provides for a drawback on nonbeverage distilled spirits subject to the taxing provisions of chapter 26 of the Code, chapter 26 is a proper place to look for definitions to determine the meaning of the term "produced" used in chapter 27, section 3250 (1). Aetna Insurance Co. v. United States, 142 C. Cls. 771, distinguished. Internal Revenue 1962 Mr. Thornton C. Land for the plaintiff. Mr. Paul L. Peyton and Mr. J. Christopher Meyer, Jr. were on the brief. Mr. Benjamin H. Pester, with whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Mr. David A. Wilson and Mr. Lyle M. Turner were on the briefs. LARAMORE, Judge, delivered the opinion of the court: The question involved in this case is whether the plaintiff was entitled under section 3250 (7) of the Internal Revenue Code of 1939, as amended (26 U. S. C., 1952 ed., 3250 (7)), to a drawback of the tax previously paid on a certain batch of ethyl alcohol, comprising 6,073.20 proof gallons, which the plaintiff used during August and September of 1953 in the manufacture of flavoring extracts. During the period here involved, section 3250 (7) of the Internal Revenue Code of 1939, as amended, provided in part as follows: Any person using distilled spirits produced in a domestic registered distillery or industrial alcohol plant and fully tax-paid in the manufacture or production of medicines, medicinal preparations, food products, flavors, or flavoring extracts which are unfit for beverage purposes, upon payment of a special tax per annum, shall be eligible for drawback at the time when such distilled spirits are used in the manufacture of such products [Emphasis supplied.] 1 1 A similar provision is found in Sec. 5131 (a) of the Internal Revenue Code of 1954. (26 U. S. C., 1952 ed., Supp. V, 5131 (a).) Opinion of the Court 145 C. Cls. It is common knowledge that ethyl alcohol (i. e., ordinary alcohol) comes within the category of distilled spirits. Moreover, it is clear from the evidence in this case that the particular batch of ethyl alcohol involved in the litigation was fully tax-paid at the time when it was used by the plaintiff, that the plaintiff used it in the manufacture of flavoring extracts, that such flavoring extracts were unfit for beverage purposes, and that the plaintiff had paid the special annual tax mentioned in section 3250 (7) of the Internal Revenue Code of 1939, as amended. Therefore, the principal issue in the case is whether the ethyl alcohol was "produced in a domestic registered distillery or industrial alcohol plant." The particular batch of ethyl alcohol with which we are concerned was purchased by the plaintiff on August 7, 1953 from the U. S. Industrial Chemicals Company (which will usually be referred to in this opinion as "USI"). USI was then, and is now, the operator under 26 CFR, Part 182, of a domestic registered industrial alcohol plant at Curtis Bay, Baltimore, Maryland. Acting in accordance with the authorization contained in section 3125 (a) of the Internal Revenue Code of 1939, as amended (26 U. S. C., 1952 ed., 3125 (a)), for the importation into the United States of "alcohol of 160 proof, or greater," for industrial purposes, USI on June 2, 1953 entered into a contract with the Justfrank Company for the purchase by the former from the latter of: ** approximately 5,675,000 U. S. wine gallons of ethyl alcohol, at 190 U. S. proof, *** stored in * * France. It was provided in the contract that the ethyl alcohol should be delivered to USI at its Curtis Bay plant. The contract prescribed various specifications, in addition to the matter of proof, which the ethyl alcohol should meet. During June and July of 1953, the Justfrank Company shipped or caused to be shipped to USI from France a total of 5,583,529 U. S. wine gallons of impure ethyl alcohol. This ethyl alcohol failed to meet a number of the specifications prescribed in the contract. It did, however, meet the requirement of the contract as to proof. 160 Opinion of the Court Although the impure ethyl alcohol that was furnished to USI under the contract of June 2, 1953 failed to meet a number of the specifications prescribed in the contract, the ethyl alcohol was accepted by USI when it was tendered for delivery at USI's Curtis Bay plant. Because of the presence in this ethyl alcohol of impurities, particularly excessive amounts of methyl alcohol (methanol), amyl alcohol, and nonvolatile residue, the ethyl alcohol, at the time when it was delivered to and received by USI, was not suitable for human consumption and was not usable in the manufacture or production of medicines, medicinal preparations, food products, flavors, or flavoring extracts (i. e., the purposes mentioned in section 3250 (7) of the Internal Revenue Code of 1939, as amended). Shortly after the importation by USI of the impure ethyl alcohol from France, the alcohol was processed by USI in its plant at Curtis Bay. The processing consisted, first, of a chemical treatment in order to make the excessive impurities in the alcohol susceptible of removal through further distillation, and, second, of an additional distillation procedure, unusually complicated in nature, for the removal of the excessive impurities. There resulted from this chemical treatment and additional distillation a supply of more than 5,000,000 U. S. wine gallons of ethyl alcohol that was suitable for human consumption and usable in the manufacture or production of medicines, medicinal preparations, food products, flavors, or flavoring extracts. On August 7, 1953, USI sold to the plaintiff 7,620.20 proof gallons of the ethyl alcohol that resulted from the chemical treatment and additional distillation mentioned in the preceding paragraph. In making this sale, USI impliedly warranted (among other things) that the ethyl alcohol sold to the plaintiff constituted nonbeverage drawback spirits. A tax was paid by USI to the Internal Revenue Service at the rate of $10.50 per proof gallon, or in the total amount of $80,012.10, in connection with the delivery of the 7,620.20 proof gallons of ethyl alcohol to the plaintiff. The purchase price which the plaintiff paid to USI for this ethyl alcohol included the amount of the tax. Opinion of the Court 145 C. Cls. Thereafter, during August and September of 1953, the plaintiff used 6,073.20 proof gallons of this tax-paid ethyl alcohol in the manufacture and production of flavoring extracts. Such flavoring extracts were unfit for beverage purposes. The plaintiff later filed with the Internal Revenue Service in October 1953 a claim under section 3250 (7) of the Internal Revenue Code of 1939, as amended, for a drawback of the tax previously paid on the 6,073.20 proof gallons of ethyl alcohol referred to in the preceding paragraph. The claim was rejected by the administrative agency on the ground that the ethyl alcohol in question was imported and not "produced in a domestic registered distillery or industrial alcohol plant," as required by section 3250 (7). The amount of the drawback claimed on this ethyl alcohol was $57,695.40. The administrative rejection of the plaintiff's claim was followed by the institution of the present suit alleging plaintiff's entitlement to a drawback under section 3250 (7)2. Defendant generally denied its liability to plaintiff for a drawback and affirmatively defended on the ground that plaintiff has no interest in this action and that the real party in interest is USI. Because defendant's affirmative defense, if proven, would bar plaintiff's recovery without going into the merits of the claim, we think it advisable to discuss this question first. The defendant's contention concerning the plaintiff's alleged ineligibility to maintain this suit is apparently based upon the provision in rule 20 (a) of the Rules of this court to the effect that: Every action shall be prosecuted in the name of the real party in interest * *** It appears that the present suit is being prosecuted for the plaintiff by and at the expense of USI; that in November 1953 USI paid to the plaintiff $57,695.40 in order to "secure" the ultimate payment of the plaintiff's claim against the A second cause of action in plaintiff's petition alleging liability on the ground that defendant misled plaintiff into believing it was purchasing distilled spirits which were eligible for drawback has apparently been abandoned since no evidence on this point was presented at the trial and it has not been briefed to the court. |