Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Guy K. Bard, Judge.
Before CLARK, JONES, and GOODRICH, Circuit Judges.
This case presents an appeal from an order of the District Court allowing against the Mifflin Chemical Corporation, a debtor corporation under § 77B, 11 U.S.C.A. § 207, a tax claim in the principal amount of $187,488 on denatured alcohol diverted to beverage purposes. The claim is for unpaid taxes on such alcohol sold between August 27 and December 30, 1935. The District Court had referred the matter to a special master who, after a series of meetings, filed a report in which a disallowance of the claim was recommended. The District Judge did not accept this recommendation. The principal arguments of the appellant and the facts relating to them will be dealt with individually.
I. Appellant complains that the lower court erred in allowing the claim for taxes without remanding the case to the master and without giving the trustees for the debtor corporation an opportunity to offer testimony in opposition to said claim. Cases involving disallowances of claims by referees are cited in support of this argument.*fn1
There are two answers to the point. The first is that the function of the referee is not the same as that of the special master. The ordinary reference of a case to a referee makes him a court for that purpose.*fn2 The master functions in an advisory capacity only. The reference in this case is under § 77B of the Bankruptcy Act, prior to the Chandler Act.*fn3 The order of reference authorized the special master "to make * * * findings of fact and conclusions of law on the issues of insolvency, creditors' claims, * * * and to report thereon to the Court." The special master thus did not sit as a court; it was his function to hear and report his findings of fact and conclusions of law.*fn4 Nor were his powers increased by the fact that apart from this reference he was a referee.*fn5
The argument is likewise inapplicable as a matter of fact, because the trustees were given an opportunity to be heard. But they did not choose to offer testimony. At the conclusion of the hearings the special master stated, and no objection was made, that it was not necessary to act on various motions by both counsel because no further testimony was to be offered by either side and therefore, the case was to be decided on the record already before him. Counsel for the trustees did say that he might want to offer evidence after action of the master on his motion to strike out certain testimony. But this too was never done despite the fact that in his ruling on that motion, the master again offered an opportunity to the debtor corporation to bring forth witnesses. Further, in response to an order obtained by the government, counsel for the trustees informed the special master that they would not offer any testimony. Nor was any request to do so made until after the case was decided by the District Court adversely to the debtor corporation. We think this mere statement of facts is sufficient to show that there was no denial of the right of the debtor corporation to offer testimony. It chose to refrain from doing so and therefore does not have a right now to obtain another opportunity because of an adverse decision.*fn6
II. Appellant makes the point that the imposition of the tax lacked basis in fact because of the absence of foundations and certainty with regard to the amount of alcohol which the government claimed was so diverted as to become subject to taxation. This subject, however, was considered at length and with care by the learned judge who had the testimony before him and who reviewed it in his opinion. Where he felt that the proof was not clear he reduced the amount which was claimed against the debtor and that reduction was considerable. The original assessment was for $254,746.80 which the trial judge reduced to $187,488. We cannot say that there was no substantial basis for his finding and the point is governed by the ordinary rule with regard to the findings of fact in the court below.*fn7
III. The remaining arguments of the appellant are directed to the application of the taxing statutes and the regulations thereunder to the facts of this case. To their answer a brief resume of the history of the present legislation is indicated. Originally, denatured alcohol was subject to the same tax as alcohol intended for beverage purposes. In 1873 for the first time Congress provided for an exemption from the tax where alcohol was used for specified scientific purposes.*fn8 Then in 1894 a rebate of the tax on alcohol to be used for non-beverage purposes was ordered.*fn9 In 1906 the Denatured Alcohol Act*fn10 was passed. This authorized alcohol for industrial purposes to be withdrawn from bonded warehouses without payment of the usual tax. The same plan was incorporated in Title III of the National Prohibition Act,*fn11 which also empowered the Commissioner of Internal Revenue to issue regulations concerning alcohol "to secure the revenue, to prevent diversion of the alcohol to illegal uses * * * ." Pursuant to this authorization a regulation was promulgated to the effect that
"The sales of this product must be confined to persons legitimately engaged in a bona fide drug trade, * * * . Failure to comply with these requirements and to confine sales to such persons, or the making of sales to such persons in quantities in excess of their reasonable requirements will constitute bad faith on the part of the permittee and grounds for the revocation of his permit."*fn12
The taxing act in effect at the time in question was Section 2 of the Liquor Taxing Act of 1934*fn13 which provided for a unit tax of $2. Coupled with this act, however, and also applicable, is the Act of August 27, 1935.*fn14
It is to be noted that the liability which is the basis of the claim in this case does not arise from any regulation, but from the statute itself. The Act of 1934 sets the unit tax. The 1935 statute provides for payment of the tax if denatured alcohol is withdrawn and distributed in violation of the statute or regulations. The regulations do not impose the tax; they simply provide for the manner in which the taxfree alcohol is to be distributed. Mifflin's contention that alcohol improperly withdrawn is not subject to tax but only subjects a producer or seller to revocation of permit is without foundation.
We think that there is no force in the argument either that the amount of alcohol in excess of reasonable requirements cannot be ascertained at all or was not ascertained in this case. The tax sought to be imposed here is for alcohol which found its way into the channels of illicit trade.Illicit distribution is not within the reasonable requirements of anybody's legitimate business.
The final question, however, is whether Mifflin is to be charged with responsibility of knowledge of facts concerning such distribution.It is assumed for the purpose of argument, though not decided, that it becomes liable for the tax only if responsibility for knowing of improper diversion may be attributed to it. The District Court pointed out and properly emphasized the very considerable growth in the company's sales of this product during the period in question.*fn15 This fact alone may not be conclusive but it certainly is one which should suggest an inquiry to the company's management.*fn16 And of ...