Reporter's Statement of the Case 102 C. Cls. gaging in the production of adulterated butter as a business within the meaning of Section 4 of the taxing act of May 9, 1902 (32 Stat. 194, 196; U. S. Code, 1940 ed., Tit. 26, Sec. 2321; Internal Revenue Code Sections 2320 (b) and 2322); (2) whether plaintiff manufactured any adulterated butter; (3) whether the number of pounds of butter held by the Commissioner of Internal Revenue to have been adulterated, and upon which plaintiff was assessed, was excessive or erroneous; and (4) whether the amount of the tax which can legally be exacted of plaintiff should be limited to the number of pounds contained in the specific boxes or containers from which samples were taken and found to be adulterated. The court, having made the foregoing introductory statement, entered special findings of fact as follows: 1. The plaintiff is a corporation organized and existing under the laws of the State of Illinois, and has been engaged in the manufacture and sale of butter in Chicago, Illinois, since 1932. 2. In case No. 44008 the petition was filed July 7, 1938, to recover $450 paid up to that time on tax assessments made against plaintiff in 1936 and 1937, aggregating $9,476.70. The testimony was heard during 1940 and 1941. Proof for both sides was closed December 26, 1941. March 11, 1942, the court allowed defendant's motion to reopen the case and to file a counterclaim which asks for judgment against plaintiff for the balance of the aforesaid tax assessments and interest unpaid. Plaintiff's answer to defendant's counterclaim was filed April 21, 1942, alleging all of the 1937 tax assessment and most of the 1936 tax assessment had been paid since plaintiff's petition was filed. A stipulation of facts was filed by the parties on October 14, 1942, which, among the facts stipulated, sets forth the amount of taxes paid on the 1936 and 1937 assessments, as hereinafter shown. In case No. 45764 the petition was filed October 10, 1942, to recover $6,938.49 paid on the aforesaid tax assessments of 1936 and 1937. Case No. 44008 and case No. 45764 relate to the same subject matter. The petition in case No. 4 Reporter's Statement of the Case 45764 is in substance an amended petition to the petition in case No. 44008 because of additional payments and the filing of additional refund claims, and, also, for the purpose of making the pleadings conform to the proof. 3. May 25, 1936, and again on January 26, 1937, M. G. Krueger, an Internal Revenue Agent, accompanied by Inspector John T. Sullivan of the Pure Food and Drug Administration, visited plaintiff's place of business in Chicago and made an investigation and examination of plaintiff's method of manufacturing butter. During each of these investigations and examinations samples of butter were taken and, following analyses of such samples taken, Krueger recommended to the Commissioner of Internal Revenue that plaintiff be considered a manufacturer of adulterated butter and that appropriate taxes be assessed. Taxes were accordingly assessed against plaintiff as hereinafter shown. 4. 21 U. S. C., Sec. 321 (a), defines butter, and on the fat content states: and containing not less than 80 per centum by weight of milk fat, all tolerances having been allowed for. 26 U. S. C., Sec. 2320 (b), defines adulterated butter. 26 U. S. C., Sec. 3206 (a) (2), imposes on manufacturers of adulterated butter a special tax of $600 a year. 26 U. S. C., Sec. 2321 (a) (1) and (b), provides for the assessment and collection of a tax of 10 cents per pound upon adulterated butter to be paid by the manufacturer. 5. Plaintiff was engaged in the manufacture of butter from cream and also in the rechurning or reworking of butter purchased in tubs containing about 63 pounds each from H. C. Christians Company and Peter Fox & Sons, both of which companies were large wholesale dealers in Chicago. 6. At the beginning of the hearing in this case the parties entered into a stipulation as follows: None of the butter which plaintiff manufactured from cream is in controversy here. The controversy revolves around the butter which was bought by the plaintiff from others and was reworked in plaintiff's plant. Reporter's Statement of the Case 102 C. Cls. May 25, 1936, and again on January 26, 1937, a sample of butter from a tub, purchased by plaintiff in tubs from the wholesale dealers aforesaid, was taken and analyzed and found to contain not less than 80 percent fat. During the hearing both parties appear to have proceeded on the assumption that the butter purchased in tubs from the wholesale dealers contained not less than 80 percent fat; that is, was legal butter. No contention or proof to the contrary was submitted. 7. The issues in this case revolve around (a) whether plaintiff was a manufacturer of adulterated butter, and (b) whether the taxes imposed against plaintiff, in whole or in part, were properly assessed. Some of the butter tested from plaintiff's plant had less than 80 percent of fat and an excess of moisture (water), which led to the assessment of taxes involved in this suit. 8. On the matter as to how the butter purchased in tubs from wholesale dealers was rechurned, the testimony is in irreconcilable conflict. Plaintiff's officers and employees who testified insist the butter from the tubs was rechurned without the addition of water, and that the only purpose of rechurning the butter was to get the proper pliability to repack in Friday boxes. Rechurning in this manner would not increase the moisture content of the butter. Based on admissions of officers of plaintiff to defendant's aforenamed officers at the time of their investigations, the observation of said defendant's officers of one rechurning operation with warm water added to the butter, and the assumption that the butter purchased in tubs from the wholesale dealers was legal, the conclusion is inescapable that the excess moisture found in the rechurned butter was absorbed in the operation of rechurning the butter with water and that after the rechurning the butter was not sufficiently worked or reworked, if at all, to eliminate excess moisture. Plaintiff submitted no evidence to show that any of the butter purchased by it from wholesalers and rechurned contained less butter fat or more moisture than permitted by law when received by it and before it was rechurned. Such samples of this butter before it was rechurned as were taken by defendant's offi Reporter's Statement of the Case cers showed that such butter met all the requirements of the statute as to fat and moisture before it was rechurned. The evidence shows that it was not necessary to rechurn the butter purchased in tubs, with or without water, in order to obtain the proper pliability to repack in Friday boxes, as that pliability could have been obtained by letting the butter in tubs stand in ordinary room temperature for 24 hours without any deterioration of the butter. 9. In the manufacture of butter from cream there are two well-known operations: (1) the churning which results in butter and buttermilk, and (2), after the separation of the buttermilk from the butter, the butter is worked in order to bring about the proper cohesion and to eliminate excess moisture. In the rechurning of the butter taken from the tubs purchased from the wholesale dealers the record does not show whether the butter so rechurned was afterwards worked or reworked for any purpose. The record discloses that the rechurned butter was packed in Friday boxes, placed in the refrigerator to cool, and then removed in order to be cut with a hand-operated Friday cutter into prints to be sold to plaintiff's customers. Whether the butter manufactured from cream was packed in Friday boxes is not disclosed by the record. 10. Inspector Sullivan had been engaged for over 20 years in making factory inspections and checking on creameries, butter factories, cheese factories, and other food establishments, taking samples. The purpose of Sullivan's inspections was to ascertain if the products manufactured complied with the requirements of the Food and Drug Act. 11. Inspector Sullivan visited plaintiff's plant a number of times other than the two times he accompanied Krueger, referred to in finding 3. He visited the plant February 17, 1932, and took a sample of butter, which when analyzed showed a fat content of 71.68 percent. On April 12, 1932, Sullivan took three samples of butter which had fat contents of 81.90, 80.95, and 81.08 percent, respectively. A sample taken April 27, 1937, had a fat content of 79.85 percent. A sample taken on May 28, 1937, had a butter fat content of 81.28 percent. Reporter's Statement of the Case 102 C. Cls. The inspector did not know whether these samples of butter were reworked butter or creamery butter. 12. March 23, 1936, Inspector Goodman called at plaintiff's plant to inspect the quality of cream. While there he observed tubs of butter dumped into a churn. He observed nothing further of this operation but reported what he had seen to Inspector Sullivan. JUNE 1936 ASSESSMENT 13. Inspector Sullivan received instructions to accompany Internal Revenue Agent Krueger on a visit to plaintiff's plant. The two called there in the afternoon of May 25, 1936. They first saw J. C. Hanzlik, vice president of plaintiff. Hanzlik called Novak, secretary and treasurer of plaintiff, and told him that Krueger was a Government officer and wanted to go through the plant with Sullivan. Novak followed them through the plant. He told them the firm was churning from cream about 30,000 pounds of butter monthly, and was in addition manufacturing about 40,000 pounds of reworked butter. He told them that the butter which was reworked was purchased from Peter Fox & Sons and H. C. Christians Company; that the butter was received in tubs and was allowed to remain on the churn floor for several hours until it softened sufficiently, after which it was thrown into the churn which had previously been partly filled with warm water and rechurned, and that this method of reworking butter had been employed for a considerable length of time. These statements of Novak are not refuted in the proof offered by plaintiff. Novak also told them that no record of moisture and fat contents was kept but that the butter maker did make tests on each rechurning. While Krueger and Sullivan were in the plant that afternoon no churning operations took place. At the time there were 11 tubs of butter, purchased from H. C. Christians Company, standing along the side of the churn. Krueger and Sullivan went to the cooler and there found rechurned butter in 32 Friday boxes, also several cartons containing one-pound prints, quarter-pound prints, some five-pound and ten-pound rolls, 6 ten-pound tubs, 2 thirty-pound tubs, and 1 sixty |