Opinion
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. National Foods, Inc., plaintiff, is a corporation organized and existing under the laws of the state of Louisiana, having its principal office and place of business at New Orleans.
Plaintiff was engaged in the manufacture and sale of food products known as "oleomargarine," which were sold under the trade-names of "Marvel," "Junior," and "Sonny Boy." It also manufactured and sold cooking compounds or shortenings known by the trade names of "Sonny Boy" and "Sunny South."
2. Plaintiff, in the manufacture of its oleomargarine products, used skimmed milk or milk powder in connection with vegetable oils, such as peanut oil, cocoanut oil, cottonseed oil, palm oil, and soybean oil.
The manufacturing process employed by plaintiff consisted in taking the various oils, according to a predetermined formula; the oil was melted, then lowered into an emulsifying machine, where, at a temperature of 150 to 175 degrees, it was churned with skimmed milk; after the oils and skimmed milk were emulsified it was sprayed into very cold water, thus changing it into the form of crystals; it was then kneaded to the proper consistency and salt was added.
Milk is a natural emulsifier. The churning of the compound with skimmed milk gave to the finished product a lactic acid or butter flavor. The use of milk carrier a casein or curd into the product, which improved both its texture and flavor and gave it a semblance of butter. The finished product contained some butter fat, which is an animal fat.
When the finished product was packed in boxes, plaintiff offered it to the trade, and advertised it as a substitute for butter. Plaintiff intended it to be so used, when so manufactured and sold. During the months of September, October, November, and December, 1929, and during January, February, and March, 1930, plaintiff used naturally colored butter in the manufacture of some of its oleomargarine products and paid tax thereon at the rate of 1/4 cent a pound.
3. The Commissioner of Internal Revenue, prior to August 1929, assessed no excise tax against plaintiff in the manufacture and sale of the cooking compounds, known to the trade by the names of "Sonny Boy" and "Sunny South."
On May 28, 1930, the United States Circuit Court of Appeals for the Eighth Circuit (Harrow-Taylor Butter Co. v. Crooks, 41 F. (2d) 627) affirmed a decision of the United States District Court, Kansas City, Mo., holding that products similar to plaintiff's herein were taxable as artificially colored oleomargarine.
Thereafter, the Commissioner of Internal Revenue assessed an excise tax of $5,000 against plaintiff, covering the manufacture and sale, during January, 1929, of "Sonny Boy" and "Sunny South."
4. On September 24, 1929, plaintiff submitted its offer in compromise in the sum of $10 to cover all liabilities for taxes, penalties, and interest due or claimed to be due as manufacturers' excise tax as a result of the manufacture and sale of "Sonny Boy" and "Sunny South." Plaintiff altered the language appearing in the printed form of compromise. The following, quoted from said offer in compromise, shows the two alterations so made by plaintiff, which alterations appear in italics:
"In making this offer, and as a part of the consideration thereof, the taxpayer hereby expressly agrees that all payments and other credits heretofore made to the account(s) for the year(s) under consideration, for which an unpaid liability exists, shall be retained by the United States, and, in addition, the taxpayer hereby expressly waives: "1. Any and all claims to refunds or overpayments to which it may be entitled with respect to the above-named products, under the internal-revenue laws for any years, calendar or fiscal, or any period fixed by law, expiring prior to the date of acceptance of the offer, due through overpayment of any tax, interest, or penalty, or interest on overpayments or otherwise, as is not in excess of the difference between the tax liability sought to be compromised herewith and the amount herein offered, and agrees that the United States may retain such refunds or overpayments, if any, insofar only as they relate to the above-named products. "2. The benefit of any statute of limitations affecting the collection of the liability sought to be compromised, and in the event of the rejection of the offer, expressly consents to the extension of any statute of limitations affecting the collection of the liability sought to be compromised by the period of time (not to exceed two years) elapsed between the date of the filing of this offer and the date on which final action thereon is taken."
The last paragraph of this offer reads as follows: "It is also understood that the waiver to refunds as set out in printed paragraph No. 1 on the first page hereof shall not apply to any claims which this company may have with respect to any sums other than those growing out of the manufacture and sale of the above-named products, which are the only products involved herein."
5. From August, 1929, to January, 1930, plaintiff paid tax on its products.
On January 23, 1930, Louis M. Pfisterer, president of plaintiff company, and its largest creditor, was appointed receiver for said company. By order of the court, its assets were advertised for sale. In the receivership proceedings plaintiff's assets were described in Schedule A and Schedule B. In May, 1930, all of said assets were purchased by L.G. Ott, the operating manager of the receiver, who also assisted in the preparation of the receivership papers and the appraisal of its assets.
Among the assets set forth in said Schedule A appeared the following:
"Claims Receivable. "Claims against the United States Government for income and revenue taxes illegally collected. "Appraised at nominal value of $1.00. "Considering that these claims against the United States Government are more or less doubtful as to the amounts which may be derived from same from a successful prosecution, and further there is some uncertainty as to whether anything will be realized on said claims, we have therefore appraised these claims against the Government at a nominal sum of $1.00 (one dollar)."
The evidence fails to show that Ott ever made any claim against the government under his purchase.
6. On August 29, 1930, an opposition to the final account of the receiver was filed in behalf of the United States by the United States Attorney. It claimed priority and preference in the payment of the sum of $5,110.50, as excise taxes on the manufacture and sale of said compounds, "Sonny Boy" and "Sunny South," in the amount of $5,000, and a deficiency in income taxes in the sum of $110.50.
7. On February 20, 1931, the court, on the petition of said receiver, authorized him to "compromise the claim of the United States Internal Revenue Department as set forth in the opposition on file herein, for the price and sum of $500, and to this end tender a certified check for this amount as herein prayed for and according to law."
An offer in compromise, bearing date of February 19, 1931, after being examined by the court, was submitted by the receiver to the Commissioner of Internal Revenue. He tendered $500 to compromise the excise taxes assessed on the "manufacture of 1,598,780 pounds of nut cooking compounds known as 'Sonny Boy' and 'Sunny South,' without payment of manufacturers' excise tax as on the manufacture of oleomargarine."
Plaintiff again altered the printed form on which said offer in compromise was entered by inserting language in conformity with the language set forth in italics in finding 4 hereof.
8. On April 1, 1931, the general counsel for the Bureau of Internal Revenue advised the receiver in writing, as follows:
"This office has before it the original offer dated September 24, 1929, in the amount of $10.00, and the additional offer dated February 19, 1931, in the amount of &0.00, in compromise of the manufacturers' stamp tax assessed in the amount of $5,000.00 and $154,878.00 still unassessed. "After a careful study of the said offers, this office thinks it advisable that the enclosed waiver of refunds should be signed by you as receiver and will be in lieu of the limited waiver printed on form 656 heretofore submitted in connection with the above-mentioned offers in compromise, and, upon receipt of the same by this office, the offers in compromise will be given prompt consideration."
9. On April 7, 1931, the receiver, in response to said letter of April 1, 1931, replied: "In compliance with your letter of April 1st, I am inclosing herewith properly signed waiver of refunds in connection with compromised offers of the National Foods, Incorporated."
The receiver did not consult either his attorney or the court in connection with the executing and mailing of said waiver.
The waiver read:
"Waiver of Refunds. "(Date) April 6, 1931. "In consideration of the acceptance of the original and additional offers amounting to $510.00 in compromise of all outstanding manufacturers' stamp tax liability for the period from July 1, 1928, to August 5, 1929, in connection with the manufacture of cooking compounds known as 'Sonny Boy' and 'Sunny South,' submitted by National Foods, Incorporated, through the Collector of Internal Revenue, for the District of Louisiana, the said L.M. Pfisterer, receiver of National Foods, Incorporated, or the receiver of said corporation may be entitled under the Internal Revenue Laws, for any year, calendar or fiscal, or for any period fixed by law, expiring prior to the date of the acceptance of the offer in compromise, due through any overpayment of any tax, penalty or interest on overpayments, or otherwise, to the extent that such overpayments do not exceed the difference between the amount of the offer in compromise and the liability discharged by the compromise, plus interest and penalties to date of acceptance. "This waiver is to be in lieu of the limited waivers printed on form 656 heretofore submitted in connection with the above-mentioned offers in compromise. "National Foods, Inc., "By L.M. Pfisterer, "Receiver of the National Foods, Inc."
10. Said offers in compromise were accepted by the Commissioner of Internal Revenue, and the receiver received a letter dated June 17, 1931, as follows:
"The Commissioner has considered the propositions submitted by L.G. Ott, treasurer of the above-named company, on September 24, 1929, and by you on February 19, 1931, through the Collector of Internal Revenue, New Orleans, Louisiana, as a compromise of manufacturer's stamp tax assessed in the amount of $5,000.00, with penalties and interest due up to the date of the acceptance of the offer, as manufacturer's stamp tax on oleomargarine as a result of the manufacture and sale of alleged colored cooking compounds known as 'Sonny Boy' and 'Sunny South' and also as a compromise of liability for tax on the manufacture of 1,548,780 pounds of the same cooking compounds with respect to which no tax has been determined or assessed. This unassessed tax would amount to $154,878.00. "You are advised that said offers have been accepted, with the advice and consent of the Secretary of the Treasury and the concurrence of the Attorney General, on the following terms: "$510.00, together with waiver of refunds dated April 6, 1931, attached to the offers in compromise and made a part thereof, in compromise of the aforesaid liabilities. "Respectfully, "C.M. Charest, General Counsel."
11. On June 10, 1931, the Bureau of Internal Revenue instructed the United States Attorney to dismiss the opposition to the receiver's account. On June 16, 1931, the court entered its order dismissing said opposition with prejudice. On September 21, 1931, the receiver was discharged and his bond canceled.
12. Plaintiff, between April, 1929, and May, 1930, purchased stamps for uncolored oleomargarine in the amount of $1,509.50, and stamps for colored oleomargarine during the same period amounting to $23,950. The evidence tends to show that all of these stamps were used by plaintiff.
13. On March 28, 1933, plaintiff filed its claim for refund of the stamp tax in the amount of $36,713.20. Said stamps were purchased during each of the months from April, 1929, to May, 1930, both inclusive. Said claim for refund contained the following: "The claimant purchased these stamps as a manufacturer of oleomargarine believing that its product was subject to such taxes. It manufactured no product which contained any element of an animal nature but its products were solely and entirely composed of vegetable oils. This was not such a product as was, prior to July 10, 1931, subject to taxes under the Act of August 2, 1886 , as amended, as that act was interpreted by the United States Supreme Court in the case of Miller v. Standard Nut Margarine Co., 284 U.S. 498, 52 S.Ct. 260, 76 L.Ed. 422. These taxes so paid having been wrongfully collected, their refund is hereby sought under the provisions of the law relating to such refund."
On March 19, 1934, the Commissioner of Internal Revenue rejected said claim. His letter of rejection was as follows:
"Your claim for the redemption of oleomargarine stamps stated to have been affixed in the amount of $36,713.20 has been examined. "The basis of your claim is that the stamps of which redemption is requested were used in connection with the sale of a product such as was held in the decision of the Supreme Court of the United States in the case of the Standard Nut Margarine Company of Florida to be not subject to tax as oleomargarine prior to July 10, 1931, the effective date of an amendment, to the oleomargarine act (26 U.S.C.A. § 970 and note). "An examination of the records shows that during the period covered by your claim your company used natural colored butter in the manufacture of its products. This rendered the product subject to tax under section 2 of the Act of August 2, 1886, 24 Stat. 209, which provides in part 'That for the purposes of this act certain manufactured substances, certain extracts, and certain mixtures and compounds, including such mixtures and compounds with butter, shall be known and designated as "oleomargarine." ' "Furthermore, under date of April 6, 1931, Mr. J.M. Pfisterer receiver of National Foods, Inc., in consideration of the acceptance of an offer in compromise executed a waiver of 'any and all refunds to which the National Foods, Incorporated, or the receiver of said corporation, may be entitled under the internal revenue laws, for any year, calendar or fiscal, or for any period fixed by law, expiring prior to the date of the acceptance of the offer in compromise, due through any overpayment of any tax, penalty, or interest on overpayments. * * * ' "In view of the above your claim is hereby rejected."
14. No claim for the refund of said stamp tax was ever made or filed by the receiver. George N. Murdock, of Chicago, Ill., for plaintiff.
J.H. Sheppard, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
GREEN, Judge.
The plaintiff is a corporation which was, during the period under consideration, engaged in the manufacture and sale of oleomargarine under various tradenames. On March 28, 1933, the plaintiff filed a claim for refund of taxes in the sum of $36,713.20, being the amount of stamps purchased from April, 1929, to May, 1930, both inclusive, and alleged to have been used in paying tax on its products. The basis of this claim was that its products were not subject to tax, and that the tax had been wrongfully collected. This claim was rejected by the Commissioner, and the plaintiff now seeks to recover $25,459.50 thereon by this suit.
The defendant sets up the following defenses:
(1) That the plaintiff is not the proper party to maintain the suit as it is not the owner of the claim upon which the action is brought. (2) That the claim has been waived through the acceptance of an offer of compromise negotiated between the defendant and the receiver of plaintiff. In connection with this second claim it appears that, subsequent to the time when the taxes in question were paid, a receiver was appointed for plaintiff company who entered into a compromise agreement for the settlement of the tax account of plaintiff. Plaintiff, however, claims that the receiver had no authority to make such an agreement. (3) That there is no foundation for a refund claim on the part of anyone for the reason that plaintiff's products were properly taxed and the government collected no more than was due. (4) That the court has no jurisdiction to review the findings of the Commissioner.
As the third of the above-named defenses, if sustained, will make it unnecessary to consider the other three, this defense will be first taken up.
The evidence shows that the plaintiff in the manufacture of the products taxed used skimmed milk or milk powder in connection with certain vegetable oils. In the process employed, the oil was melted, put in an emulsifying machine, and at a certain temperature was churned with skimmed milk. When the oils and skimmed milk were emulsified the mixture was sprayed into very cold water, thus changing it into the form of crystals. Afterwards it was kneaded to the proper consistency, and salt was added. Milk is a natural emulsifier, and the churning of the compound with skimmed milk gave to the finished product a lactic acid or butter flavor. The use of skimmed milk carried a casein or curd into the product which improved both its texture and flavor. The finished product contained some butter fat, which is an animal fat.
The plaintiff claims that in making its products it used vegetable oils and no animal fat, and that for this reason it was not taxable under the statute.
We think this contention cannot be sustained for two reasons; First, because plaintiff used skimmed milk in manufacturing its product and skimmed milk, as we have found, contains an animal fat. True the quantity of fat is small, but this does not exempt the mixture from the statute. Second, because the plaintiff's product was made in imitation or semblance of butter and when so made is taxable under the provisions of section 2 of the Act of August 2, 1886.
This case is quite similar to the case of John F. Jelke Co. v. United States, 63 Ct.Cl. 370, 378, except that if anything the case of the government as now presented is somewhat stronger. In the Jelke Case, supra, the same process was used as is shown in the case before us. Skimmed milk was churned with vegetable oils in the same manner, producing a flavor and aroma of butter. The court said with reference to the Jelke Case: 'Water may be used instead of skim milk, and the product would, for all practical purposes, be identical with that produced by the use of skim milk. What, then, could be the purpose of using the more expensive mixing medium, except to obtain the slight butter semblance resulting from the use of skim milk?"
--and held the product taxable.
In Miller v. Nut Margarine Co., 284 U.S. 498, 508, 52 S.Ct. 260, 263, 76 L.Ed. 422, it was said (referring to the act as it then stood): "The language used in the original act was not sufficiently clear and definite to include products containing no animal fat." In the instant case, the evidence shows that the product contained animal fat. It is true the quantity was small, but the final result of the mixture of skimmed milk which contained the fat was to give the product the texture, flavor, and semblance of butter, and we think it was taxable.
We also think that the facts set forth in finding 5 show that the plaintiff is not in any event the owner of the claim upon which suit is brought, and is therefore not entitled to maintain the suit.
In view of what we have stated above, it is not necessary to consider the other defenses set up by defendant. Plaintiff's petition must be dismissed, and it is so ordered.