The opinion of the court was delivered by: STALEY
This suit in equity was commenced by Schenley Distillers, Inc., a Delaware corporation, and Joseph S. Finch and Company, a Pennsylvania corporation, against John H. Bingler,
the United States District Director of Internal Revenue for the Pittsburgh Internal Revenue District. The plaintiffs, who are distillers, owners, or warehousemen of whiskey and other distilled spirits stored in bond in Internal Revenue Bonded Warehouses, and both wholly-owned subsidiaries of Schenley Industries, Inc., requested that the defendant be permanently enjoined from determining or collecting the federal tax on any distilled spirits presently or hereafter in bond, in which they have an interest, unless and until the said distilled spirits shall be voluntarily withdrawn from bond. Because the requested injunctive relief is grounded upon allegations that the threatened collection of federal taxes as provided by an Act of Congress would be repugnant to certain provisions of the Constitution of the United States, the application for relief has been considered, pursuant to statutory requirement, 28 U.S.C. 2282, 2284 (1952) by a three-judge court.
We are presently concerned with the defendant's motion, upon which argument has been heard, that the complaint be dismissed for various reasons. These are that the tax laws attacked are constitutional; that the plaintiffs have an adequate remedy at law; that this court does not have jurisdiction to issue an injunction restraining the collection of the taxes; that the plaintiffs should not be heard to attack the conditions of a statute under which they have obtained and are enjoying privileges; and that the complaint fails to state sufficient facts upon which relief can be granted.
which govern the taxation of distilled spirits and which are relevant in this case provide that there is 'imposed on all distilled spirits * * * produced in * * * the United States an internal revenue tax at the rate of $ 10.50 on each proof gallon'. 'The tax shall attach to distilled spirits * * * as soon as this substance is in existence as such * * *.' § 5001(a, b). A distiller, however, is not required to pay the tax at the time of the production of distilled spirits. After distillation, the spirits are deposited in locked tanks known as receiving cisterns. Under certain circumstances, however, the spirits are deposited in bonded warehouses for aging and in such circumstances the tax must be paid before the spirits are withdrawn from the warehouses. In any event, however, the tax must be paid within eight years from the date of the original entry into the warehouse. The tax, when paid, is paid upon the actual number of gallons in existence, which amount is lower than the amount originally deposited in the warehouse. This is because losses during storage will occur from various causes, such as soakage, leakage, evaporation, casualty, or theft. Under certain specified circumstances, the tax on the spirits is never collectible: if the spirits are voluntarily destroyed, or redistilled, or withdrawn for export.
The plaintiffs, in asking that this court enjoin the collection of the tax on their distilled spirits unless and until they are voluntarily withdrawn from bond, have in effect requested that we enjoin the enforcement of that provision of the law which requires that, regardless of voluntary withdrawal from bond, the tax must be paid within eight years of the deposit in bond.
In considering such interference with the collection of taxes as provided by Congress, we are faced immediately with Section 7421 of the Internal Revenue Code of 1954. That section provides, with certain exceptions that do not concern us, that '* * * no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.' To grant plaintiffs' request would clearly restrain the collection of a tax, and thus, if Section 7421 is applicable to this case, we must deny the requested relief.
This provision, which has been in the law for over eighty-five years, reads as though an injunction restraining the collection of taxes is not permitted under any circumstances. There have been situations, however, in which the Supreme Court of the United States has held that provision was not applicable and an injunction was permissible. So far as we have been able to discover, with just one exception, those cases in which the injunctions restraining government officials have been permitted were all cases in which the court held that the purported tax sought to be restrained was in reality not a tax but a penalty, and the Court said that the statutory prohibition did not apply to the collection of penalties. Lipke v. Lederer, 1922, 259 U.S. 557, 42 S. Ct. 549, 66 L. Ed. 1061; Hill v. Wallace, 1922, 259 U.S. 44, 42 S. Ct. 453, 66 L. Ed. 822; Regal Drug Corp. v. Wardell, 1922, 260 U.S. 386, 93 S. Ct. 152, 67 L. Ed. 318; Mulford v. Smith, 1939, 307 U.S. 38, 59 S. Ct. 648, 83 L. Ed. 1092; see also Allen v. Regents of University System of Georgia, 1938, 304 U.S. 439, 58 S. Ct. 980, 82 L. Ed. 1448.
In Hill v. Wallace, 1922, 259 U.S. 44, 42 S. Ct. 453, 66 L. Ed. 822, the Court granted an injunction against the collection of taxes and said that an injunction could be granted in a case apparently within the terms of the statutory prohibition if there were present 'extraordinary and entirely exceptional circumstances.' 259 U.S. at page 62, 42 S. Ct. at page 456. The Court, however, in a later case denying an injunction, in an opinion written by Chief Justice Taft who also wrote the Hill opinion, interpreted the Hill case as one which should in fact be classed as a case involving a penalty in the form of a tax. Graham v. DuPont, 1923, 262 U.S. 234, 257-258, 43 S. Ct. 567, 67 L. Ed. 965. Thus, up to the time of the Graham decision, the cases in which injunctions were permitted involved penalties rather than taxes, although the Supreme Court had said several times that even the collection of a tax could be enjoined under extraordinary and exceptional circumstances.
Eventually, in Miller v. Standard Nut Margarine Co., 1932, 284 U.S. 498, 52 S. Ct. 260, 76 L. Ed. 422, a factual situation was presented which warranted an injunction against the collection of taxes even though the tax was not considered a penalty as in prior decisions. In that case, an injunction restraining the imposition and collection of oleomargarine taxes on a product known as 'Southern Nut Product' was permitted. The Court stated, 284 U.S. at page 509, 52 S. Ct. at page 263, 'in cases where complainant shows that in addition to the illegality of an exaction in the guise of a tax there exist special and extraordinary circumstances sufficient to bring the case within some acknowledged head of equity jurisprudence, a suit may be maintained to enjoin the collector.' The special and extraordinary circumstances were discussed by the Court, which said:
'* * * A valid oleomargarine tax could by no legal possibility have been assessed against (complainant), and therefore the reasons underlying (7421) apply, if at all, with little force. LeRoy v. East Saginaw Ry. Co., 18 Mich. 233, 238-239; Kissinger v. Bean, Fed.Cas.No. 7,853. (Complainant) commenced business after the product it proposed to make had repeatedly been determined by the Commissioner and adjudged in courts not to be oleomargarine or taxable under the act, and upon the assurance from the Bureau that its product would not be taxed. For more than a year and a half (complainant) sold its product relying upon the aforesaid rulings that it was not subject to tax. If required to pay the tax its loss would be seven cents per pound. Before the Commissioner's latest ruling, (complainant) had made and sold so much that the tax would have amounted to more than it could pay. (The Commissioner) acquiesced in the injunctions granted (in other cases) and did not assess any tax upon identical products contemporaneously being made by complainants in such suits, and directed enforcement against (this complainant's) entire product. Such discrimination conflicts with the principle underlying the constitutional provision directing that excises laid by Congress shall be uniform throughout the United States. It requires no elaboration of the facts found to show that the enforcement of the act against (complainant) would be arbitrary and oppressive, would destroy its business, ruin it financially and inflict loss for which it would have no remedy at law. It is clear that, by reason of the special and extraordinary facts and circumstances, (7421) does not apply. The lower courts rightly held (complainant) entitled to the injunction.' 284 U.S. at pages 510-511, 52 S. Ct. at page 263.
To our knowledge, the Standard Nut Margarine case is the only case, and no other has been cited by counsel,
in which the Supreme Court clearly held that although no penalty was involved, the circumstances were so special and extraordinary as to render inapplicable the statute prohibiting the maintenance of a suit to restrain the collection of taxes.
In the light of the Supreme Court decisions, Section 7421 prohibits the issuance of an injunction in this case, unless either the tax sought to be enjoined is in reality a penalty or the necessary special and extraordinary circumstances are present. Certainly, the tax on distilled spirits is not a penalty. United States v. Rizzo, 1936, 297 U.S. 530, 533, 56 S. Ct. 580, 80 L. Ed. 844. Thus, this court has jurisdiction to issue the requested injunction only if the requisite special and extraordinary circumstances are presented, in addition, of course, to the illegality of the exaction, with which we need not now concern ourselves.
The complaint in this suit is very lengthy, covering thirty-nine printed pages, most of which are devoted to facts concerning the entire distilled-spirits industry and the internal revenue laws applicable to the industry presently and historically. The factual allegations which specifically concern the plaintiffs are not many. The facts which follow are taken from the complaint and the submitted affidavits.
Because of the necessity for aging, distilled spirits are not marketed at the time of distillation but in later years. The industry, therefore, must estimate its needs in relation to the expected demands in the future. The requirement of the law that the tax on distilled spirits be paid within a certain time after deposit in warehouses has been in effect for many years although the time limits on payment have varied. Except for recent years, this time limitation was not of significant practical concern to the industry because it was always able to market its aged spirits before the deadline for payment of the taxes arrived.
In recent years, however, the industry has not been able to market its aged spirits before the eight-year tax payment deadline. It has had on hand millions of gallons of spirits upon which the tax became due but for which there was no market. The result has been an economic squeeze, resulting in financial losses. In some cases where the tax was paid, the industry, because of acute financial reasons, had to dump the spirits on the market and attempt to recoup what it had ...