Brief for the Respondents in Opposition — Sheridan v. Rothensies

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INDEX

Page

Opinions below - - 1

Jurisdiction — — - : 1

Questions presented — - 2

Statutes and regulations involved_ - 3

Statement 3

Argument 6

Conclusion _ . . “ 13

Appendix — . - 14

CITATIONS

Cases:

Arthur E. Pratt Co., In re, 252 Fed. 917____ - ; 10

Clements v. Coppin, 72 F. (2d) 796- ; 11

Crandall, In re, 205 Fed. 689. _ ___- ; 7 10

Helvering v. Mitchell, 303 U.S. 391__- ee ne 7

John 1. Livingston Co., In re, 144 Fed. 971 oe 10

Kimberly v. Arms, 129 U.S. 512 : . 11

Morgenthau v. Mifflin Chemical Corp., 93 F. (2a) 82 3, 12

Pullmateh, Inc., In re, 27 ¥. Supp. 884 ae) 11

Rubins, In re, 74 F. (2d) 432, certiorari denied, 295 U.S.

408.055% eres ates paneer A ; 1!

Tenenbaum & Abramowitz, In re, 56 F. (2d) 217. _- se 10

Various Items v. United States, 282 U.S. 577. ____- 7

Wald v. Longacre, 34 F. (2d) 25__- ye See 11

Zito v. United States, 64 F. (2d) 772_____-_- ; ; 12

Statutes:

Liquor Law Repeal and Enforcement Act of 1935, e. 740,

49 Stat. 872, Sec. 4 (U.S. C., Title 26, See. 3111)____- 6, 14

Liquor Taxing Act of 1934, c. 1, 48 Stat. 313, See. 2_____ 7, 8, 14

National Prohibition Act, ¢. 85, 41 Stat. 305, Title IIT:

PRON GB slaw a ian ca ka ke wae aerate 1 er ee 15

So | A ee oe A ee ne eer a A Jota a aaa eae 15

RN EE ete rec eta at att ie biee ae AE Salwar Mine earetaie es 16

Me acy ta ad ote Sade hee chon doe fn 8, 16

Miscellaneous:

Treasury Regulations 3, as amended by T. D. 4541, XIV-1

Cum. Bull. 525, 528 (1935), Art. 146____- aw wn hee er Oe ae

Restatement of Ageney, Sees. 228-231, 282__- - Oeeatae 12

(I)

445421—42—-—1

Geerten Kes YE NONOAL RTS T LEE SIE EE ERENT TOE NO ORG RRS BER

Inthe Supreme Court of the United States

OctToBER TERM, 1941

No. 900

JoHN E. SHERIDAN AND LEo A. CrosseN, TRUSTEES,

MIFFLIN CHEMICAL CORPORATION, DEBTOR IN

BANKRUPTCY REORGANIZATION PROCEEDINGS, SEC-

TION 77B, PETITIONER

Vv.

WaLTerR J. RoTHENsties, CoLLeEcToR of INTERNAL

REVENUE, First CotLeEcTion Disrrict or PENn-

SYLVANIA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE THIRD

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the District Court (R. 380-409)

is reported in 34 F. Supp. 164. Its opinion on

motion for rehearing (R. 421-422) is not reported.

The opinion of the Cireuit Court of Appeals (R.

425-433) is reported in 123 F. (2d) 311.

JURISDICTION

The judgment of the Cireuit Court of Appeals

was entered on October 29, 1941 (R. 433). The

(1)

Ber

2

petition for a writ of certiorari was filed on Jan-

uary 24, 1942. The jurisdiction of this Court is

invoked under Section 240 (a) of the Judicial

Code, as amended by the Act of February 13, 1925.

QUESTIONS PRESENTED

1. Whether sales of rubbing alcohol compound

by a permittee in excess of its customers’ reason-

able requirements are subject to tax under Section

4 of the Liquor Law Repeal and Enforcement Act

of 1935 and Article 146 of Treasury Regulations

3 as amended by Treasury Decision 4541,

2. Whether the Act and the Regulations con-

strued to impose the tax are valid.

3. Whether in a reorganization proceeding under

Section 77-B of the Bankruptey Act the District

Court erred in allowing a claim for taxes without

remanding the proceeding to the special master

for the taking of additional evidence, where the

master had disallowed the claim but had afforded

the parties full opportunity to put in their proof.

4. Whether the District Court erred in setting

aside findings of fact made by the master.

5. Whether the knowledge of the debtor’s sales

agents as to the wrongful sales arranged by them

was imputable to the debtor, and if not whether

the debtor was in any event taxable.

6. Whether the finding of the District Court as

to the amount of aleohol wrongfully sold by the

debtor is supported by evidence.

CRE ITER OE CFI as RO ano ake ok acer SE ALR YE he AIBN.

3

STATUTES AND REGULATIONS INVOLVED

The applicable statutes and regulations are set

out in the Appendix, infra, pp. 14-16,

STATEMENT

The Mifflin Chemical Corporation, referred to as

the debtor, was for many years engaged in the busi-

ness of manufacturing a rubbing alcohol compound

under permits to withdraw and use specially de-

natured aleohol (R. 277-288). On the ground,

inter alia, that it had sold quantities of its product

to certain customers in excess of their reasonable

requirements, its permit for 1936 was revoked and

its application for a permit for 1937 was denied.

Morgenthau v. M ifftin Chemical Corp., 93 F. (2d)

82 (C. C. A. 3).

A tax of $254,746.80 was assessed against the

debtor at the rate of $2 per gallon on 127,373.40

gallons of alcohol sold during the period August

27, 1935, to December 30, 1935 (R. 276). There-

after, on J anuary 14, 1938, the debtor filed a

petition for reorganization under Section 77-B

of the Bankruptcy Act (R. 1). The petition was

approved on January 15, 1938, and the matter was

referred generally to a special master to make

findings of fact and conclusions of law and report

thereon to the court (R. 3).

The Collector of Internal Revenue filed proof of

claim for the unpaid tax (R. 4-5). Objections to

the claim were filed by the debtor (R. 0-7, 323-324),

The Collector introduced evidence in support of

LENS ARN Sar BT EARN AT ase Ulta Maar pRHegt ERROR REN

IY SAMS ips PARE Ae 0 SAPS ne OE eet TS ME ARTE RA

4

the claim (R. 7-269). At the conclusion of this evi-

dence, the debtor moved to dismiss the claim and

the Collector moved for the allowance of the claim

(R. 271). The master stated that neither motion

was necessary since counsel for the debtor had said

that he would not offer any testimony and since

the case accordingly was to be decided on the evi-

dence then in the record (R. 271). Counsel for

the debtor thereupon stated that he had no inten-

tion for the present of offering any testimony, but

that he would move to strike certain of the testi-

mony introduced to support the claim, and that fol-

lowing the master’s action on that motion would

advise the master whether or not he would offer

any evidence (R. 272). The motion to strike was

filed on September 8, 1938 (R. 274, 317-321) and

denied by the master on March 27, 1939 (R. 274-

275, 321-322). In ruling on the motion the master,

after adverting to counsel’s reservation of the right

to offer testimony, stated that he had concluded

that the claim should be disallowed but that he had

not finished writing his draft report and that if

prior to the filing of his final report counsel should

give notice of a desire to introduce evidence he

would fix a date for hearing (id.). On April 13,

1939, counsel for the debtor notified the master that

‘‘we do not intend to produce any testimony”’

(R. 424).

Thereafter, on April 27, 1939, the master signed

and served upon the parties a draft report recom-

PE SALEEM CRT Ren CR fA RE ge Se Ee a sae

5

mending disallowance of the claim (R. 322-357).

The master found that the debtor through two

of its salesmen made sales for illegal purposes

and that these were not within the reasonable

requirements of the purchasers. He concluded,

however, that the knowledge of the agents as

to the illegal diversion by the customers was not

imputable to the debtor and that this circumstance

Was decisive against the claim for the tax. (R.

352-357.) A supplemental report adopting as final

the draft report, supplemented by certain findings

of fact requested by the debtor, was prepared by

the master (R. 360-363), but he died before signing

it. A substituted special master was appointed by

the District Court, and on July 11, 1939, he filed a

supplemental report approving and incorporating

the reports of his predecessor (R. 364-365).

On July 24, 1940, after hearing upon exceptions

filed on behalf of the Collector, the District Court

rendered its opinion setting aside the report and

directing that the tax claim be allowed in the

amount of $187,488, together with interest at one-

half percent per month from January 15, 1938 (R.

380-409). The debtor filed a motion for rehearing

praying that the District Court either disallow the

claim or remand the proceeding to the master for

the taking of further testimony (R. 409-420). The

motion was denied in an opinion (R. 421-422), and

on February 10, 1941, the District Court entered its

nar . ees a ,

Be ace FO LTT LE ERE OS PEO OMA SUT lial

6

order setting aside the master’s report and allow-

ing the claim in the amount above stated (R. 422).

On April 4, 1941, after the debtor had filed notice

of appeal, the District Court entered a decree ap-

pointing John E. Sheridan and Leo A. Crossen,

petitioners herein, trustees of the debtor corpora-

tion (R. 423). Their appointment was confirmed

(R. 2) and they prosecuted the appeal to the court

below, which affirmed the order of the District

Court (R. 433).

ARGUMENT

The decision of the court below affirming that of

the District Court is correct and no conflict or other

_reason for further review is presented. We will

answer petitioners’ numerous contentions in the

order in which they are made.

1. Petitioners contend (Pet. 14-19) that even if

the debtor sold its product to customers in excess

of their reasonable requirements, as found by the

District Court (R. 395-396), such sales were not

taxable. This contention was overruled by both

lower courts (R. 383, 408, 430). It is based on an

untenable construction of the wording and purpose

of Section 4 of the Liquor Law Repeal and En-

forcement Act of 1935 (49 Stat. 873) and of Article

146 of Treasury Regulations 3, as amended by

Treasury Decision 4541, XTV-1 Cum. Bull. 525,

528 (1935).

Section 4 of the Act provides that any person

selling denatured alcohol “in violation of laws or

regulations now or hereafter in force pertaining

7

thereto”’ should be subject to all provisions of law

applicable to aleohol not denatured ‘including

those requiring the payment of tax thereon’ and

should be required to pay the tax, which in this

case under Section 2 ( 4) of the Liquor Taxing Act

of 1934 (48 Stat. 313) amounted to $2 per proof

gallon (Appendix, infra, p. 14). Article 146 of

the regulations provides that sales must be confined

to certain classes of purchasers and that failure 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 (Appendix, infra, pe 35).”*

Petitioners argue that this provision, although

authorizing revocation of permits on account of

sales in excess of reasonable requirements, does not

prohibit such sales and that therefore petitioners

were guilty of no violation and were not taxable.

However, such sales would hardly have been made

ground for revocation if it had not been intended

to forbid them. The plain purpose of the regula-

tory and statutory provisions is to protect the rey-

enue by insuring that tax-free alcohol is not di-

verted and that, if diverted, it will be taxed. It

Would not effectuate this purpose to read the

provisions in the narrow manner urged by peti-

tioners. The provisions are remedial, not penal.’

' Various Items v. Uuited States, 282 U.S. 577, 579. Cf.

Helvering v. Mitchell, 303 U.S. 391, 399-405,

44542142»

Dive i A PERK Tal 2 ee |

Boo A ae gem ganreermaseriaiss SEN INT EOI IS NAN IR BE pe Re isiienie _

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8

And there is nothing in the history of Article 146

to support the claim that because of the difficulty

of determining what constitutes ‘‘reasonable re-

quirements’’ in a given instance, sales in excess

thereof were not intended to be made taxable. The

same difficulty would exist in a proceeding to

revoke the seller’s permit.

2. Petitioners contend (Pet. 20) that Section 4

of the Liquor Law Repeal and Enforcement Act

as applied by the courts below constitutes an un-

constitutional delegation of legislative power to

the Commissioner, and that Article 146 of the reg-

ulations, as applied, is unauthorized. These prop-

ositions are unsupported by any authority and are

without merit. Section 4 of the Act does not pur-

port to authorize the Commissioner to prescribe a

tax. On the contrary the tax was fixed by Con-

gress in Section 2 (4) of the Liquor Taxing Act

of 1934 (Appendix, infra, p. 14). And Article 146

is clearly valid under the provisions of Section 13

of Title III of the National Prohibition Act (Ap-

pendix, ‘nfra, p. 16) authorizing the Commissioner

to issue such regulations governing the distribution,

sale, and use of alcohol as may be necessary or

proper to secure the revenue and to prevent diver-

sion of alcohol to illegal uses.

3. It is contended (Pet. 21-25) that the District

Court erred in allowing the claim without remand-

ing the proceeding to the master in order to afford

mn i RRL Sate ete 1 ERASER ,

EOWA TR ere TES Sg Re eee IE ere ERIE EAT INN SET CE —

9

petitioners an opportunity to introduce any evi-

dence which they might have to defeat the claim.

But, as appears from the statement of facts

(supra, p. 4), the debtor had ample opportunity

to offer evidence in the proceedings before the spe-

cial master. It simply chose not to do so. The mas-

ter made it clear that his action disallowing the

claim would not be taken upon the debtor’s motion

for disallowance, but would be a final disposition

upon all the evidence which the parties desired to

introduce (R. 271, 274-275). Hence the case may

not be likened to one in which a dismissal of the

suit at the close of the plaintiff’s evidence makes it

unnecessary for the defendant to put in its testi-

mony. ‘The debtor here could not assume that the

disallowance would be sustained and then, after the

claim was allowed, delay the proceedings by secur-

ing a remand for the purpose of adducing evidence

which the master clearly indicated should have

been offered, if at all, prior to his report. It may

be noted, moreover, that in its motion for rehearing

the debtor did not allege what evidence it desired

to adduce (R. 419-420), and that in denying the

motion the judge was satisfied that no purpose

would be served and no pertinent facts would be

established by a remand (R. 422).

The decisions relied on by petitioners (Pet. 10,

22-23) were based upon circumstances dissimilar

10

to those herein and they do not conflict with the

decision of the court below.’

4. Petitioners contend (Pet. 25-27) that the Dis-

trict Court erred in setting aside the findings of

fact made by the master. No particular findings

are specified, nor is the sufficiency of the evidence

discussed. Moreover, as was pointed out by the

District Court (R. 396), the findings of fact made

by it were not at variance with those of the master,

except in the case of several which dealt with the

debtor’s knowledge of the diversions of its product

and which, insofar as not based on erroneous prin-

ciples of law, were found to have been unsupported

by any evidence (R. 397-407, 408-409). The Dis-

trict Court explicitly stated (R. 397) that the

master’s findings should be sustained if supported

by substantial evidence, and, contrary to petition-

? The referee’s disallowance of the claim in /n re John H.

Livingston Co., 144 Fed. 971 (C. C. A. 2d), was taken upon

a motion for disallowance, and, so far as appears from the

per curiam opinion, there was no occasion for the trustee to

introduce any evidence if he desired to do so. The pro-

ceeding in Jn re Crandall, 205 Fed. 689 (C. C. A. 9th), was

remanded for the reason that the district court erred in treat-

ing as conclusive evidence which was not conclusive and

which the referee had ignored. The referee in /n re Arthur

E. Pratt Co., 252 Fed. 917 (N. D. N. Y.), had erred in

restricting the introduction of evidence, and in /n re Tenen-

baum & Abramowitz, 56 F. (2d) 217 (S. D. N. Y.), the pro-

ceeding was remanded because the referee had failed to con-

sider a presumption in favor of the claimant and the

district court had no way of knowing what his findings

would have been if the presumption had been taken into

account.

PERRIN S TDI IE ZN eT INET NEN RMON tT eS ISSIR NSD MeSH

PERI IM

ll

ers’ assertion (Pet. 26), the same view appears to

have been held by the court below (see R. 426, note

4). Thus there is no conflict with the decisions

cited by petitioner (Pet. 11, 25) for the same rule.’

5. It is contended next (Pet. 27-30) that the

courts below erred in overruling the master’s con-

clusion that the debtor was not chargeable with its

agents’ knowledge of the sales for illegal purposes,

which concededly were sales in excess of its cus-

tomer’s reasonable requirements within the mean-

ing of Article 146. The master and perhaps also

the District Court considered that scienter was a

necessary element of the debtor’s taxability (R.

354-357, 396-409). The court below did not de-

cide this question but stated that for purposes of

argument it would assume that the debtor was

liable for the tax only if knowledge of the diver-

sions was attributable to it (R. 430).

Neither Article 146 nor the pertinent statutes

contain any provision that a taxpayer must have

knowledge that its sales are wrongful. Certainly

it would not be unreasonable to place upon him as

a condition of tax exemption the duty of seeing

that his sales are proper. Such a duty would

seem especially appropriate in circumstances like

* Kimberly v. Arms, 129 U. 8. 512: In re Pullmatch, Ine..,

27 F. Supp. 884 (S. D. Ohio) ; Wald v. Longacre, 34 F. (2d)

25 (C. C. A. 3d); Clements v. Coppin, 72 F. (2d) 796

(C. C. A. 9th): Zn ve Rubins, 74 F. (2d) 432 (C. C. A. 7th),

certiorari denied, 295 U. S. 758.

RE Ee FAAS EY Ee Be AEE a =a . . OES:

12

those here, where the debtor’s sales sharply in-

creased during the period in question (R. 388-389,

398). See Morgenthau v. Mifflin Chemical Corp.,

93 F. (2d) 82, 86, 88 (C. C. A. 3). In any event,

the imputation of knowledge here was correct.’

The two salesmen involved admittedly knew of the

illegal diversions and, while in arranging the sales

they may have been acting primarily in their own

interest, they were not acting beyond the scope of

their authority or adversely to their principal.

6. Finally, petitioners contend (Pet. 30-34) that

the evidence did not warrant the District Court in

making any finding as to the specific amount of

aleohol wrongfully sold by the debtor. The Dis-

trict Court found (R. 395) that the debtor’s wrong-

ful sales amounted to at least 3,720 gross pint

bottles. The evidence supporting this finding is

carefully detailed in the court’s opinion and the

record references are given (R. 384-396). Where

the judge found that the proof was not clear, he did

not credit it; the original assessment was reduced

from $254,746.80 to $187,488. The court below held

+ See Zito v. United States, 64 F. (2d) 772 (C.C. A. 7), and

other cases cited in the opinion of the District Court (R. 400—

406). See also Restatement of Agency, Secs. 228-231, 282.

The decisions invoked by petitioners (Pet. 11, 27-28) as

presenting conflicts with the holding herein were correctly

distinguished by the court below (R. 432) on the ground

that the agents there involved acted adversely to their prin-

cipals in the sense either of defrauding them or of acting

for the other parties to the transactions.

13

that there was a substantial basis for the finding as

to the amount of the sales, and there is no occasion

for further review.

CONCLUSION

The petition for writ of certiorari should be

denied for the reasons stated.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SAMUEL O. Ciark, J %

Assistant Attorney General.

J. Louis Monarcn,

Newton K, Fox,

Special Assistants to the Attorney General.

H. G. Incrawam,

Attorney.

Frpruary 1942.