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Helvering v. Druggists' Specialties Co.

March 25, 1935

HELVERING, COM'R OF INTERNAL REVENUE, ET AL.
v.
DRUGGISTS' SPECIALTIES CO., INC.



Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.

Author: Woolley

Before BUFFINGTON, WOOLLEY, and THOMPSON, Circuit Judges.

WOOLLEY, Circuit Judge.

Druggists Specialties Company, Inc., hereinafter called the complainant, held a permit "Issued under Title III of the National Prohibition Act" (section 1 et seq. [27 USCA §§ 63, 71 et seq.]), and extended from year to year, authorizing the monthly withdrawal -- tax-free -- of 4400 wine gallons of specially denatured alcohol, Formula No. 39-B, to be used in the manufacture of certain approved toilet preparations. On March 31, 1933, the Supervisor of Permits issued a citation under section 9 of title 2 of the act (27 USCA § 21), charging that the complainant had in bad faith violated the terms and conditions of its permit and certain provisions of the National Prohibition Act and Regulations promulgated thereunder, particularly section 4 of title 2 (27 USCA § 13), in that (1) during one month it manufactured 4532.7 gallons of hair tonic not in accordance with the formula and sample approved for this preparation; (2) that upon simple distillation the product was fit for beverage purposes; (3) that complainant disposed of the same under circumstances which indicated it was to be used for beverage purposes without payment of tax.

On April 5, 1934, the Hearer, on reconsideration, found that the evidence sustained the charges in the citation and on his recommendation the Supervisor, under authority of section 9 of title 2, revoked the permit.

On April 21, 1934, the complainant, though asserting that sections 4 and 9 of title 2 of the National Prohibition Act are no longer in force, filed a bill in the District Court under authority of section 9 averring compliance with section 4 and seeking reversal of the Supervisor's action. The learned court, without considering the question whether the facts supported the order, held that since the repeal of the Eighteenth Amendment to the Constitution the Supervisor had no authority to exercise discretion in revoking or refusing permits for use of specially denatured alcohol tax-free. Accordingly it reversed the Supervisor's order and directed that the permit be reinstated. The Commissioner of Internal Revenue and other defendants in the bill appealed, raising the questions which were argued and decided below:

1. Did repeal of the Eighteenth Amendment render inoperative title 3 and sections 4 and 9 of title 2 of the National Prohibition Act in so far as they relate to permits for specially denatured alcohol for use in the arts tax-free?

The answer to this question is also the answer to the second question:

2. Since repeal of the Eighteenth Amendment has the Supervisor authority to revoke permits for the use of specially denatured alcohol?

A reading of the National Prohibition Act discloses that the major portion of title 2 is directed to carrying out the inhibitions of the Eighteenth Amendment in respect to the manufacture, sale and transportation of alcohol for beverage purposes; that title 3 is directed to permitting and promoting the use of non-beverage alcohol for industrial purposes, the issuance of permits therefor and the promulgation of regulations affecting the same; and that sections 4 and 9 of title 2 relate in part to the objects of title 3.

Whether title 3 and sections 4 and 9 of title 2 are still in force depends, under the ruling in United States v. Chambers, 291 U.S. 217, 54 S. Ct. 434, 78 L. Ed. 763, 89 A.L.R. 1510, on whether their enactment in the National Prohibition Act rested on the power which the Eighteenth Amendment gave the Congress and whether, accordingly, the provisions fell with its repeal. Admittedly, title 3 and some of the sections of title 2 were not enacted under authority of the Eighteenth Amendment, for they were enacted before its adoption, were addressed to different though related matters, expressly to take effect at once after the passage and upon approval of the act. If these provisions of the National Prohibition Act did not require the sanction of the Eighteenth Amendment for their enactment it follows that when the Eighteenth Amendment was repealed no constitutional sanction was drawn from under them. Thus, not being devitalized by the Twenty-First Amendment, they remain as before, as if no Eighteenth Amendment had been adopted and repealed. Therefore these provisions of several parts of the National Prohibition Act rest necessarily on the general powers of the Congress exclusive of power conferred by the Eighteenth Amendment.

Evidently the Congress entertained the same view for, after repeal of the Eighteenth Amendment, it set about to repeal the District of Columbia Alcohol Beverage Control Act, 48 Stat. 391, approved January 24, 1934. It repealed the National Prohibition Act in the District of Columbia "with the exception of title III, and section 4 of title II insofar as it affects denatured alcohol." Section 1. It did not expressly except section 9 of title 2 from repeal. That section, however, we regard to be so closely linked with provisions of title 3 that it is a part of the system established under title 3 which admittedly remains in force. Senate Report No. 15, Sixty-sixth Congress, First Session 1919; House Report, H.R. Vol. 1; Higgins v. Foster (C.C.A.) 12 F.2d 646; Allied Drug and Chemical Corp. v. Commissioner (D.C.) 10 F. Supp. 619; United States v. Philip H. Warshaw, Inc. (D.C.) 8 F. Supp. 95.

We hold that title 3 of the National Prohibition Act is still in force and that sections 4 and 9 of title 2, not resting on constitutional authority for their enactment, are likewise in force if they relate to the regulation and collection of the government's revenue as well as, at one time, to the inhibitions of the Eighteenth Amendment. That is the next question.

The complainant insistently urges that all the provisions here in question were deprived of their statutory vitality and were effectively repealed by the adoption of the Twenty-First Amendment because they all relate to the "dominant purpose" of the National Prohibition Act, namely; to prevent the manufacture, sale and transportation of intoxicating liquor as a beverage. Ma-King Products Co. v. Blair, 271 U.S. 479, 46 S. Ct. 544, 70 L. Ed. 1046. If this were true it would be an end to the case. But it is certainly true, under decisions by the Supreme Court, that liquor sold in violation of the National Prohibition Act, when in full force, was taxable and proceedings for taxes and penalties could, under appropriate revenue statutes, be had against such liquor and against those possessing it. Thus the act had a revenue aspect as well as the purpose to abolish the use of liquor as a beverage. Indeed, section 13 of title 3 of the National Prohibition Act (27 USCA § 83) itself says that the Commissioner shall from time to time issue regulations in respect to the manufacture, use and sale of alcohol "to secure the revenue * * *. But regulations promulgated by the Commissioner in respect to the use of denatured alcohol and permits issued in compliance with them were not first made under title 3 of the National Prohibition Act but were made in pursuance of statutes in earlier periods having to do exclusively with the protection and collection of federal revenues. Manifestly, such regulations were necessary, and still are necessary, because of the fact that denatured alcohol when used in the arts was, and still is, tax-free. In order that the thing regulated, namely alcohol, should not be converted from its tax-free condition for industrial purposes into a tax-imposed condition for drinking purposes and be sold without payment of the tax, regulation is imperative. Specifically to prevent the withdrawal of tax-free alcohol, its conversion into taxable alcohol and its sale without payment of the tax, the Act of June 7, 1906, c. 3047, 34 Stat. 217, amended and extended by the Act of March 2, 1907, 34 Stat. 1250, and the Act of October 3, 1913, c. 16, § 4, par. N. subsec. 2, 38 Stat. 114, 199, (26 USCA §§ 487, 488), Selzman v. United States, 268 U.S. 466, 45 S. Ct. 574, 69 L. Ed. 1054, conferred regulatory powers on the Commissioner of Internal Revenue to prescribe "the conditions upon which said alcohol may be withdrawn free of tax." The statutes however said nothing about permits. They apparently left that to the Commissioner under authority which it conferred upon him to "make all necessary regulations for carrying into effect the provisions of this Act." The Commissioner made such regulations and by Regulations No. 30, revised August 22, 1911 and further revised October 12, 1917, provided, among other things, for a permit system to control the withdrawal, sale and use of specially denatured alcohol free of tax. Article 52 of Regulations 30 provided: "That permits when issued will ...


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