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July 24, 1940


The opinion of the court was delivered by: BARD

The Commissioner of Internal Revenue made an assessment for taxes against the Mifflin Chemical Corporation of Philadelphia, hereinafter referred to as "Mifflin". Subsequent thereto Mifflin filed a petition for reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207.

 Judge Kirkpatrick approved the petition and referred the matter generally to the late David Werner Amram, Esq., as Special Master.

 Based upon the assessment made by the Commissioner, the Collector of Internal Revenue for the First Collection District of Pennsylvania, filed a claim for taxes against Mifflin in the sum of $254,746.80. Mifflin filed exceptions to the claim.

 Pursuant to the Court's order, Mr. Amram, the Special Master, held a number of hearings. He prepared a draft of his report, signed it, and on April 27, 1939 submitted it to all parties in interest for suggestions, under Rule VIII of the local rules in Bankruptcy. *fn1" Later Mr. Amram prepared a supplemental report. In it he incorporated certain Findings of Fact which were suggested by the Attorney for Mifflin.

 This supplemental report has never been signed. Mr. Amram died June 26, 1939.

 On July 8, 1939 the Court referred the matter to Special Master David Bachman. Mr. Bachman filed his report on July 11, 1939 which report transmits (1) Mr. Amram's draft of his report; (2) the supplemental report which is unsigned; and (3) the suggested Findings of Fact prepared by counsel for Mifflin, which Mr. Amram adopted as part of his supplemental report. All of the hearings on the issues took place before Mr. Amram.

 Mr. Amram in his report recommended that the tax claim of the Collector of Internal Revenue be disallowed. Exceptions were filed to the report by the Collector of Internal Revenue, and these exceptions are now before the Court.

 The Government contends that Mifflin, through its agents, sold rubbing alcohol containing denatured alcohol in violation of laws and regulations pertaining thereto, subjecting this denatured alcohol to the same tax as alcohol that is not denatured.

 A tax in the amount of $254,746.80 plus statutory interest was assessed under Section 2 of the Liquor Taxing Act *fn2" of 1934 and Section 4 of the Liquor Law Repeal and Enforcement Act *fn3" of 1935.

 The one Act levied a tax of $2 a proof gallon on distilled spirits produced, and the other Act makes this tax applicable to denatured alcohol when sold in violation of the laws and regulations *fn4" in effect on August 27, 1935 and thereafter.

 Harry Taback and David Muchnick were employed as salesmen by Mifflin to sell rubbing alcohol compound. Taback made his sales in New York City and Muchnick in Philadelphia. Taback in New York and Muchnick in Philadelphia would confer with alcohol racketeers who were diverting substantial quantities of rubbing alcohol compound. The words of Judge Biggs in his comprehensive opinion in Morgenthau v. Mifflin Chemical Corporation, 3 Cir., 93 F.2d 82, 86, which was a proceeding for the revocation of Mifflin's alcohol permit, very clearly describe the procedure pursued in the instant proceeding: "The procedure employed by these alcohol racketeers was to have the rubbing alcohol compound ordered from Mifflin by a jobbing house or store and then by fictitious sales cause the rubbing alcohol compound to be delivered to themselves or their agents. The rubbing alcohol compound was picked up by trucks operated by these racketeers and delivered to so-called 'drop' houses."

 The testimony of Samuel Waldman revealed the scheme between himself and Taback, Mifflin's New York sales agent, whereby during approximately four months the witness purchased 3000 gross of pint bottles (75,600 proof gallons) of rubbing alcohol from Mifflin through drug concerns. These drug concerns were selected and used by him and Taback for the purpose of deceiving the Government investigators that the product was being sold by Mifflin's sales agents for diversion into illegal channels. Waldman at the time he testified was serving a penitentiary term for conspiracy to violate liquor laws in which an illegal still was involved. The witness began to purchase rubbing alcohol prior to September 13, 1935. He became acquainted with Taback and they discussed arrangements for the purchase by Waldman of large quantities of rubbing alcohol and discussed plans to effect these purchases. They met quite a few times, had telephone conversations quite often, and discussed plans for the acquisition of rubbing alcohol by Waldman in such a manner as to keep the transactions free from suspicion. Taback expressed to Waldman a desire to work with him but was uncertain whether he could work exclusively with Waldman. Waldman testified they had "various discussions about ways and methods of working so that no trouble would come". They were concerned with making shipments indirectly to Waldman through concerns which would be of such character that they would stand an investigation by the alcohol tax unit of the Department of Revenue.

 Waldman supplied Taback with the names of drug jobbers and among them were the Bee Drug Company and the Caswell-Massey Company of New York. In their conversations Waldman would tell Taback to ship rubbing alcohol to certain concerns, and Taback would inform him about orders he had. Taback would also inform Waldman when shipments of rubbing alcohol were supposed to be made from Mifflin and when such shipments would arrive, and the concerns receiving them. Waldman testified there were about twenty concerns in New York through whom he purchased rubbing alcohol and he named thirteen of them. These firms and the quantity of rubbing alcohol sold to them according to Mifflin's records are listed in Exhibit No. 1 introduced into evidence.This Exhibit discloses that during the last four months of 1935 Mifflin shipped 2845 gross pint bottles to these concerns that had been selected by Waldman and Taback and through whom were made these fictitious sales of the product that was being diverted into illegal channels.

 The general procedure used by Taback and Waldman in effecting the sales to Waldman through legitimate concerns is described in Waldman's testimony relating to the Bee Drug Company. Waldman contacted Mr. Block of that company, and asked Block "whether he would purchase for me" rubbing alcohol. He and Block discussed the difficulty of getting shipments, and Waldman assured him that if Block placed the order there would be prompt shipment. Waldman would pay the concern cash in advance upon placing the order. A certified check was then sent with the order to Mifflin.

 After placing the orders, Waldman would contact Taback and tell him about the orders being placed and would request him to see that the shipments were made immediately. Taback would assure Waldman that he would see that the shipments were made. After placing orders with the drug concerns and paying the required money Waldman would talk to Taback in order to be assured by Taback that the shipments would be made. Waldman expected Taback's help in getting the shipments and no orders were rejected after Taback said they would be shipped.

 The shipments of rubbing alcohol from Mifflin would be picked up by Waldman at the drug company's place of business. Waldman would also give instructions to either the purchaser or to the Sunset Warehouse or to the Caravan Motor Company as the delivery of the alcohol.

 According to witness Block, of the Bee Drug Company, he purchased for Samuel Waldman 300 gross pint bottles of rubbing alcohol from Mifflin during the period from September 16, 1935 to November 27, 1935. The method used in covering the disposition of the rubbing alcohol by the purchaser is found in the testimony of Block. Block testified that all of the rubbing alcohol was sold to one person whose first name was Sam.However, Sam's name was not placed on the sales record. Instead, the truck driver, upon picking up the shipment, would give Mr. Block a list of various stores where the alcohol was supposed to be taken. Block would then enter upon his sales records the names of the concerns given by the truck driver.

 Taback himself advised another customer to make similar false records. This was testified to by Alexander Mintz of the Ross Products Company, in which he quotes Taback as telling him: "It is not wise to bill it out that way, in such large quantities * * *. If I were you I would split it up into smaller shipments and make more bills out for it in smaller lots."

 Waldman also referred to purchases made through the Caswell Massey Company. Before approaching this concern Waldman contacted Taback for his opinion of the concern and Taback said he thought it was a good concern. Waldman learned that the concern was highly rated financially, and at his instructions the concern sent in an order to Mifflin for 100 gross of rubbing alcohol. The procedure thereafter was much the same as that of the Bee Drug Company. The shipments were picked up by Waldman at the Sunset warehouse, and the alcohol never went to the Caswell Massey Company's place of business. After the first shipment Waldman talked to Taback and was told that he (Taback) had gone to Caswell Massey and learned they were merely a drug store, and he, Taback, thought that they were unable to show proper disposition of such large quantities of rubbing alcohol. Upon this information Taback decided not to ship such large quantities to them in the future, but would send smaller shipments and a few smaller shipments were made.

 This evidence shows Taback was cooperating with Waldman in the placing of orders for the indirect sales of rubbing alcohol to Waldman. The concerns in whose names the orders were actually placed were placing the orders upon the instructions of Waldman, and this procedure was with the full knowledge of Taback. Taback was concerned with regulating the size of the shipments to the purchasers, so that the quantities shipped would not look suspicious to the government investigators. The cutting down of the shipments to Caswell Massey, with knowledge by Taback that even the small shipments were destined to reach Waldman, sustains this conclusion. There was no consideration of the legitimate need of the concern for any quantity of rubbing alcohol, but there was an arrangement between Waldman and Taback that regardless of the size of the order, it was only placed on behalf of Waldman for illegal purposes.

 Evidence of this is found in the testimony of Waldman that Taback was interested in getting new firms, which concerns should be in business, and would be of such character as to stand investigation by the Alcohol Tax Unit, the object being to have a lot of new accounts, so that the orders could be split into smaller groups.

 An explanation of the cutting down in the size of the orders to avoid suspicion is contained in the following statement of Waldman relating to one of the discussions between him and Taback: "A. I think it was in November that the Alcohol Tax Unit started to take a check-up on all these big shipments coming into these various concerns, and we had talked about cutting these 100 gross and 200 ...

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