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District Court of Appeal, First District, Division 1, California.


Civ. 12066.

Decided: October 17, 1942

Norman A. Eisner, of San Francisco, for appellant. Sherman Anderson, of Los Angeles, for respondent.

Plaintiff brought this action to recover certain sums of money allegedly paid out by plaintiff for the use and benefit of defendant. From a judgment in favor of plaintiff, defendant prosecutes this appeal.

The case was tried on an agreed statement of facts and on evidence introduced by the parties. The essential facts are not in dispute and are as follows:

Plaintiff and defendant are both California corporations. Plaintiff operates an internal revenue bonded warehouse for the storage of distilled spirits in Los Angeles. Defendant is a distiller and operates an internal revenue bonded warehouse at Sausalito, and maintains offices in San Francisco and Los Angeles. Prior to October 11, 1938, the San Angelo Corporation, engaged in Los Angeles in the wholesale liquor business, verbally ordered from defendant twenty–five drums of gin, to be delivered by defendant to plaintiff's warehouse in Los Angeles for storage. Under the law governing the transmission of spirits from one bonded warehouse to another, and as a prerequisite to obtaining permission of the Internal Revenue Department for such transfer, it was necessary for the receiving warehouse (plaintiff) to fill out and file government form No. 236, containing detailed information concerning the shipment and designating the name of the transporting agency. The defendant, the sending warehouse, the distiller–owner of the gin, furnished plaintiff, the receiving warehouse, with the requisite information, and also instructed plaintiff that it should designate the Evans Freight Lines, Inc., a motor carrier, as the transporting agency. The plaintiff filled out and filed the proper form with the Alcohol Tax Unit of the Internal Revenue Department. The law also required warehouses to furnish the government a transportation and warehousing bond to insure payment of all taxes due on the liquor deposited in the warehouse. This bond was also to cover such liability for taxes while the liquor was in transit to the receiving warehouse. Pursuant to this requirement plaintiff was bonded to the United States in the sum of $200,000. That bond provided that it was to cover the obligation of plaintiff to pay the tax imposed by law on all liquor deposited in the warehouse, “and on all distilled spirits now or hereafter in transit thereto from any distillery. * * *”

On October 14, 1938, the Alcohol Tax Unit authorized the transfer of the gin and the Evans Freight Lines, Inc., received the gin from defendant's warehouse in Sausalito consigned to defendant. It is conceded that title to the gin did not pass to San Angelo Corporation but remained in defendant, and that defendant assumed and was liable for all transportation charges. While the gin was in transit and in the physical custody of Evans Freight Lines, Inc., the carrying vehicle collided with another vehicle, and the gin was completely destroyed in the ensuing fire. At the time the gin was destroyed the tax imposed on distilled spirits had not been paid. By the provisions of the Transportation Act of 1920, 41 Stat. 456, and of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 1 et seq., it was provided that there was an abatement of the tax on liquor destroyed in transit when such liquor was being transported by certain designated agencies, but it is admitted that such abatement provisions did not apply to liquor destroyed while being transported by an agency of the type of Evans Freight Lines, Inc. Admittedly, the tax imposed by the United States on such liquor by the provisions of the Internal Revenue Code was due and payable to the United States upon the destruction of the liquor.

After the liquor had been destroyed there was considerable correspondence between defendant and plaintiff as to what should be done. On October 25, 1938, an officer of defendant in San Francisco wrote to the manager of the defendant's Los Angeles office ordering him to “request” plaintiff to file for a remission of the tax. Upon receipt of this “request” plaintiff immediately by letter requested the Alcohol Tax Unit to remit the anticipated tax of $4,708.13. Substantial correspondence was then carried on between plaintiff, defendant, and the Alcohol Tax Unit in an effort to secure a cancellation, abatement or remission of the tax. The Alcohol Tax Unit took the position that the tax was due and must be paid. By letter dated March 30, 1939, plaintiff informed defendant that the collector of internal revenue had denied all requests to abate or remit the tax and had ordered that the tax be paid by plaintiff within ten days of March 29th, and requested defendant to send a check to plaintiff in the required amount. Defendant replied to this letter under date of April 3, 1939, and, among other things, stated: “I suggest you use every means possible to have the Department remit or cancel this charge, and after that is definitely settled and the money is paid then we can go further into the matter.” When this letter was sent, defendant had already received a communication from the office of the district supervisor of the Alcohol Tax Unit informing defendant that “no tax will be assessed against The American Distilling Company in this case.” On April 7, 1939, plaintiff filed a written claim for abatement of the tax, and as part of such claim was required to post a bond, the premium for which was $105.93. In June of 1939 plaintiff filed a supplemental claim. Plaintiff expended $100 for legal advice reasonably required in the preparation and filing of these claims.

In due course the claim was denied, and on August 3, 1939, plaintiff paid to the collector of internal revenue the sum of $4,809.21––the amount of the tax, plus due interest. Plaintiff immediately demanded that it be reimbursed for these various sums by defendant, and, upon defendant's refusal to pay, instituted this action.

The trial court found that the money so paid out by plaintiff was paid in pursuance to authority given plaintiff by defendant, was paid at defendant's direction, and was paid out in defendant's behalf and for defendant's benefit, and rendered its judgment in favor of plaintiff. On this appeal defendant urges that under the provisions of the law, and the regulations made thereunder, when bonded liquor is damaged or destroyed in transit the primary obligation is upon the receiving warehouse, and that the owner or distiller is not liable, except secondarily, for such tax.

The Internal Revenue Code, and the regulations made thereunder, provide a complete system for the imposition and collection of taxes on distilled spirits. Under the provisions of section 2800(a)(1) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 2800(a) (1), it is provided that: “There shall be levied and collected on all distilled spirits (except brandy) in bond or produced in or imported into the United States an internal revenue tax at the rate of $2.25 (and on brandy at the rate of $2.00) on each proof gallon or wine gallon when below proof and a proportionate tax at a like rate on all fractional parts of such proof or wine gallon, to be paid by the distiller or importer when withdrawn from bond.” Section 2800(c) provides as follows: “The tax shall attach to distilled spirits * * * as soon as this substance is in existence as such * * *.” Section 2800(d) provides as follows: “Every proprietor or possessor of, and every person in any manner interested in the use of, any still, distillery, or distilling apparatus, shall be jointly and severally liable for the taxes imposed by law on the distilled spirits produced therefrom.”

It is to be noted that under these sections, as soon as the distilled spirits come into existence, the law imposes a tax upon the distiller of such liquor. That liability continues until the tax is paid. However, the government recognized that such spirits are frequently kept in bond for several years before sale or resale. It was therefore provided by section 2879(b) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 2879(b), that: “The tax on all distilled spirits hereafter entered for deposit in internal revenue bonded warehouses shall be due and payable before and at the time the same are withdrawn therefrom and within eight years from the date of the original entry for deposit therein; and warehousing bonds hereafter taken under the provisions of the internal revenue laws shall be conditioned for the payment of the tax on the spirits as specified in the entry before withdrawal from the internal revenue bonded warehouse, and within eight years from the date of said entry.” Subdivision (c) provides that: “The Commissioner shall prescribe the form and penal sums of bonds covering distilled spirits in internal revenue bonded warehouses and in transit to and between such warehouses: Provided, That the penal sums of such bonds covering distilled spirits shall not exceed in the aggregate $200,000 for each such warehouse.”

It will be noted that under this section the distiller may keep the spirits in bond for eight years before the tax is payable. If it is withdrawn within eight years of original entry the tax is payable on withdrawal. Thus, in the present case, had the gin reached plaintiff's warehouse, plaintiff would have stored the gin until it was withdrawn from bond by San Angelo Corporation. At the time of withdrawal plaintiff would have collected the tax from San Angelo Corporation and paid the same to the government.

Section 2879 above quoted also recognized that liquor might be transferred from one bonded warehouse to another before it was withdrawn from bond, and that the spirits might be injured or destroyed in transit or while so stored. The section therefore authorized the commissioner to prescribe the form of bonds to cover the bonded liquor while in transit to, or in possession of, receiving warehouses. It was pursuant to this provision that the commissioner required as a condition to authorizing bonded liquor to be transferred from one bonded warehouse to another, that all receiving warehouses post a bond to protect the government's right to the tax while the spirits were in transit to, or in possession of, the receiving warehouse. The bond posted by plaintiff expressly guaranteed the payment of the tax to the government by plaintiff in the event the liquor was withdrawn from bond from plaintiff's possession, or was destroyed while in transit to plaintiff. For this reason there can be no doubt, and it is a conceded fact, that under the bond plaintiff was liable to the government for the tax. It is equally apparent that under the provisions of the Internal Revenue Code first above quoted, the distiller has a continuous liability for the payment of the tax from the moment the spirits come into existence until the tax is paid. The fact that as between the government and the taxpayer, the government proceeded against plaintiff on its bond, or the fact that it is the rule of the department that all remedies should be exhausted against the bond of the receiving warehouse before proceeding against the distiller and owner, does not determine the rights between the distiller–owner and the receiving warehouse. The real question presented in this case is not who is liable to the government in the first instance for the tax, but as between persons who are both liable, upon whom, as between themselves, does the ultimate liability rest?

Defendant argues that the primary liability was not upon it to answer for the tax, but upon plaintiff. It points out that the liquor was traveling under plaintiff's bond at the time it was lost, and contends the risk of loss is the normal risk assumed by the receiving warehouse as part of its business. It urges that the receiving warehouse should insure itself against such risk and regulate its charges accordingly.

As already pointed out, there is no escape from the conclusion that, insofar as liability to the government is concerned, plaintiff was directly liable. Under the provisions of its bond plaintiff was clearly liable to the government for the tax on liquor in transit to its warehouse. There also can be no doubt but that the Internal Revenue Department has ruled that, so far as the government is concerned, it will always first proceed against the bond of the receiving warehouse. Defendant treats this as conclusive of the present controversy. We do not think this conclusion follows.

It is apparent from an examination of the entire act that what the act has done is this––it has provided for a tax on the distiller–owner which is imposed upon the distilled spirits the moment they come into existence. That liability continues from that moment until the tax is paid. At no time is the distiller–owner released from that fundamental liability. The act also provides for a pyramiding of the tax liability. As the distilled spirits move from one bonded warehouse to another during the eight–year period, the law requires the receiving warehouse to assume liability to the government for the payment of the tax if the spirits are removed from bond while in its custody. That provision does not relieve the distiller–owner from the ultimate responsibility. The tax is imposed “on all distilled spirits” (§ 2800(a) (1) of the Internal Revenue Code, supra), not on the mere temporary custodian or upon the privilege of acting as custodian. The mere fact that the law requires the tax to be collected from the custodian is a neutral circumstance in determining the ultimate liability between the distiller–owner and the custodian. The provision requiring the custodian to pay the tax to the government was passed to expedite collection of the tax. In the normal transaction the custodian is the logical person to pay the tax because the buyer of the spirits normally removes them from bond from the possession of the custodian, pays the custodian the tax, and the custodian pays the government. When, as in the present case, the liquor is destroyed in transit to the receiving warehouse, the theory is that while in transit such spirits are in the legal custody of the receiving warehouse, and, by their destruction, have been removed from bond from such custody. Under the terms of section 2879 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 2879, the tax is payable when the liquor is removed from bond, or, in any event, within eight years from the date of original entry. If defendant is correct in its contention that as between it and the receiving warehouse the primary and ultimate responsibility is upon the receiving warehouse, and it, as between it and the receiving warehouse, is not liable, it would mean that a distiller–owner could store distilled spirits in the bonded warehouse of another and leave it there so stored for over eight years. The receiving warehouse would have to pay the tax at the end of eight years, and thereafter, if defendant is correct, the distiller–owner could remove the spirits from bond without paying or refunding the tax to the custodian warehouse. If defendant is correct, the distiller would be completely and forever free from liability once the spirits passed into the hands of a bonded warehouse. That is not the law. San Angelo, etc., Corp. v. South End W. Co., 19 Cal.App.2d Supp. 749, 61 P.2d 1235; American D. Co. v. Hollywood S. Co., 28 Cal.App.2d 439, 82 P.2d 711.

From the above analysis it follows that as between the receiving warehouse and the distiller the ultimate and fundamental responsibility rests upon the distiller. The tax is not imposed on custody, but on the spirits themselves, and those spirits were distilled by defendant. When plaintiff paid the tax, as it was required to do, it was not paying its debt, but the debt of defendant. Plaintiff's primary responsibility to the government for the tax was simply the result of Congress' attempt to facilitate the administration of the tax provisions, and the collection of the tax. There was no attempt by Congress to regulate the responsibility as between the distiller–owner and the receiving warehouse for the tax. That liability is ultimately imposed on the distiller–owner, and not on the temporary custodian of the liquor.

Defendant makes a separate attack on the inclusion in the judgment of the $100 legal fee and the $105.93 charge for the bond, both reasonably expended by plaintiff in its attempts to secure a remission and abatement of the tax. The record shows that Buck, president of defendant, by letter dated April 3, 1939, addressed to plaintiff, suggested plaintiff “use every means possible to have the Department remit or cancel this charge” and then stated, “after that is definitely settled and the money is paid then we can go further into the matter.” The legal advice and bond were secured after that letter was received. It is obvious from that letter and the other correspondence that the parties were not sure who was ultimately responsible for the tax, and that defendant authorized plaintiff to try and get an abatement and to that end to use all reasonable means. Since we have held that the ultimate responsibility rested on defendant, it is obvious that the challenged expenditures were made on defendant's behalf, for its use and benefit, and at its request.

For the foregoing reasons the judgment appealed from is affirmed.

PETERS, Presiding Justice.

WARD, J., and WAGLER, Justice pro tem., concurred.

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