"* * * appellant is here insisting that the case the facts make is one for the application, not of the principle of imputed knowledge, but of the exception to it, in that here, the agent was acting not in the interest of his principal, but adversely to, and in fraud, of him.
"This will not do. Though improperly, and as it turned out, mistakenly, Yeager was acting in the interest of and not adversely to, his principal. The sale he made was intended by him to be, and if his scheme had worked out it would have been to his principal's benefit. The fact that the desire to get a commission may have induced him to take a chance, which but for it he would not have taken, in no manner characterizes his action as against, rather than in, his principal's interest, within the rule appellant invokes. Here, his every action, misguided and mistaken though it was, was intended for his principal's benefit. The rule to be applied here, where appellant has delivered the car and has taken the benefit of his agent's acts in making the sale, by taking its proceeds, is, that he cannot take the benefits of the act, without also taking the burdens resulting from the agent's knowledge and intentions. Curtis Collins & Holbrook Co. v. United States, 262 U.S. 215, 43 S. Ct. 570, 67 L. Ed. 956; Morris v. Georgia Loan Co., 109 Ga. 12, 34 S.E. 378, 46 L.R.A. 506; Connecticut Fire Insurance Co. v. Commercial National Bank of San Antonio, 5 Cir., 87 F.2d 968."
In Bowen v. Mount Vernon Sav. Bank et al., 70 App.D.C. 273, 105 F.2d 796, 799, the Court said: "The real reason for the rule which charges a principal with his agent's knowledge is simply the injustice of allowing the principal to avoid, by acting vicariously, burdens to which he would become subject if he were acting for himself. The so-called presumption that the principal knows what the agent knows is irrebuttable; it cannot be avoided by showing that the agent did not in fact communicate his knowledge. It should follow that it cannot be avoided by showing that the agent had such an adverse interest that he would not be likely to communicate his knowledge. In general, 'Notice should be imputed wherever there is agency or ratification.' Certainly where, as in this case, it does not appear that the agent acted unfairly toward his principal, or even that he would have derived any advantage from doing so, the principal should be charged with the agent's knowledge."
See also Neal v. Pender-Heyman Hardware Co. 122 N.C. 104, 29 S.E. 96-97, 65 Am.St.Rep. 697; Hughes v. National Equipment Corporation, 216 Iowa 1000, 250 N.W. 154, 157; Independent Shope Brick Co. v. Dugger, Tex.Civ.App., 281 S.W. 602.
In Distilled Spirits, 11 Wall. 356, 78 U.S. 356, 366, 20 L. Ed. 167, the principal authorized his agent to purchase distilled spirits. The agent, without knowledge of the principal, purchased distilled spirits upon which the tax had not been paid. The United States filed a libel against the distilled spirits and the principal, Harrington, claimed them alleging that he was without knowledge of the fraud perpetrated by his agent Boyden. The District Court Judge charged the jury that if Boyden bought the spirits as agent for Harrington and was cognizant of the fraud, Harrington would be bound by his agent's knowledge. The Supreme Court said, page 367 of 11 Wall., 20 L. Ed. 167: "The general rule that a principal is bound by the knowledge of his agent is based on the principle of law, that it is the agent's duty to communicate to his principal the knowledge which he has respecting the subject-matter of negotiation, and the presumption that he will perform that duty." The Supreme Court further said on page 368 of 11 Wall., 20 L. Ed. 167: "The fair construction of the charge is, that if the jury believed that Boyden, the agent, was cognizant of the fraud at the time of the purchase, Harrington, the principal, was bound by this knowledge."
In the above case the agent purchased liquor in fraud of the tax. The principal denied knowledge of the fraud but such knowledge was imputed to him. In the instant case the agents, acting within their authority, sold rubbing alcohol for a taxable purpose in fraud of the tax. The facts are identical except in the one case the agents are purchasing and in the other selling. In the instant case the Government's contentions appear to have a firmer basis because Mifflin has not denied, as did Harrington in the other case, receiving the knowledge the agents are presumed to have transmitted to it. See also Suit v. Woodhall, 113 Mass. 391, 395.
In the instant case there is no proof that the agents Taback and Muchnick did not inform Mifflin as to their knowledge of the intended use of the product they sold on behalf of Mifflin. Therefore, the legal presumption that Mifflin was actually informed must stand because there is no evidence in the record to rebut it. Not a word of denial came from Mifflin or its agents or any one else. Under the above theory, it would not be necessary to invoke the other proposition of law, clearly applicable here, that even though the principal was not actually informed, the knowledge of the agents would be imputed to the principal. Under either theory Mifflin is charged with the knowledge of its agents and its liability for the taxes in question is established.
Counsel for Mifflin contends, however, that under Article 146 of Regulations 3, as amended by Treasury Decision 5541, relative to industrial alcohol, cited in the margin under Note 4, sales in excess of reasonable requirements are not taxable. He argues that Article 146 does not forbid sales in excess of reasonable requirements but merely states that such sales would constitute bad faith on the part of the vendor and cause for the revocation of his permit, but that no tax would be imposed on such sales. It is true no tax could be imposed by a Treasury regulation and could not be imposed in the absence of a specific Act of Congress. The argument advanced on behalf of Mifflin, however, overlooks the provisions of the Liquor Law Repeal and Enforcement Act, c. 740, Sec. 4, 49 Stat. 873, 27 U.S.C.A. § 153, which provides that a person who sells denatured alcohol in violation of regulations now or hereafter in force shall be required to pay tax thereon. I have found as a fact that Mifflin made sales of rubbing alcohol to "persons in quantities in excess of their reasonable requirements" in violation of the regulations then in force.Such violation brings these sales within the taxing provisions of the Act cited above.
Counsel for the Collector of Internal Revenue have filed 38 exceptions to the report of the Special Master. Three of these exceptions are as follows:
"15. The learned Master erred in failing to find that all rubbing alcohol sold by the debtor to its customers, which the debtor knew, through its sales agents, was being purchased on behalf of bootleggers, or would be resold to bootleggers, were sales in excess of the reasonable requirements of the said customers.
"21. The learned Master erred in finding (Report, page 34) that the debtor corporation acquired no knowledge of the illegitimate sales of rubbing alcohol effected on behalf of the debtor by its agents, Muchnick and Taback, when there is entirely no evidence from which this finding could be made.
"24. The learned Master erred in finding (Report, page 33-4-5 and supplemental findings 4 and 11) that the debtor corporation did not know and did not acquire from either of its agents, Muchnick or Taback, or from any of the customers, the knowledge that the rubbing alcohol sold by the debtor to its customers was being diverted to an illegal use, when there is entirely no evidence from which this finding could be made, and further, that there is no evidence to rebut the presumption of law that the agents' knowledge was transmitted to the principal."
These three exceptions to the Master's Report are sustained. This ruling and the views I have expressed in my opinion obviate the necessity of making separate rulings on the other thirty-five exceptions.
I have found that Mifflin through its sales agents sold at least 3720 gross pint bottles of rubbing alcohol in excess of the reasonable requirements of its customers. Each gross contains eighteen wine gallons of rubbing alcohol, which amounts to 66,960 wine gallons. Each wine gallon contains 1.4 proof gallons, or a total of 93,744 proof gallons. Multiplying this figure by the legal tax of $2 per proof gallon produces a result of $187,488 as the amount of tax due on this alcohol.
It is ordered that the Report of the Master be set aside, and the tax claim made by the Collector of Internal Revenue for the First Collection District of Pennsylvania against the Mifflin Chemical Corporation be allowed to the amount of $187,488, together with interest at one-half per centum per month from January 15, 1938.