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We sincerely hope that the committee will eliminate the authorization for bulk distribution and will direct that the Treasury Department continue the present regulations.
The CHAIRMAN. Thank you for your appearance and the information you have given the committee.
The next three witnesses are Dr. James M. Doran, supervisor of the Distilled Spirits Institute; Mr. Harry L. Lourie, executive secretary, American Association of Alcoholic Beverage Importers; and Mr. Fred A. Caskey, general counsel, League of Distilled Spirits Rectifiers. These gentlemen have stated that they will file briefs in lieu of testifying orally before the committee.
(The brief of Dr. James M. Doran is as follows:)
BRIEF FILED BY DR. J. M. DORAN, ADMINISTRATOR DISTILLED SPIRITS INSTITUTE
DISTILLED SPIRITS INSTITUTE, INC.,
Washington, D. C., June 20, 1935. Hon. ROBERT L. DOUGHTON, Chairman Ways and Means Committee,
House of Representatives. DEAR MR. DOUGHTON: As administrator of the Distilled Spirits Institute, Inc., an organization representing practically the entire distilling industry of the United States, and pursuant to the permission granted by the committee, I desire to set forth certain suggestions relative to H. R. 8539, with respect to the regulation of the alcoholic beverage industry, now pending before your committee. The distillers desire to have the strictest Federal control possible imposed upon the industry consistent with practical operations and believe with a few amendments the bill should be passed as speedily as possible, as in our judgment it will be not only salutary, but will give substantial additional protection to the revenue.
Section 4 (e) should be amended by adding to the fourth line thereof, after the words “ or association " the words except affiliates."
Section 8, paragraph (a) (5), defines the term “affiliate.” Section 5 prohibits certain acts to be done by any distiller
directly or through an affiliate.” The amendment is necessary for the reason that many of our distilling corporations, large and small, who do business in more than one State, and they are all in interstate business, have found it necessary, in order to meet the requirements of State laws, to organize a separate corporation to do business in the State and are required to maintain a corporate office in the State. These subsidiary corporations, which are defined under the term “affiliate” in the bill, are wholly owned and are brought into being by reason of State laws, and in most instances are merely sales subsidiaries. They are not so-called “interlocking directorates", which the bill, as I read it, is intended to prohibit, and while the same officers may serve in each corporation nevertheless the ownership is one and the same.
Section 4, paragraph (f). This provision constitutes a decided weakening of the Federal control power and would seriously cripple the revenue-collection system as now set up and operating, with a probable large loss of revenue to the Government, increased hazard to the public, and bring about unfair competition to legitimate taxpayers. The conditions obtaining prior to prohibition where there was no organized illicit distilling in the large metropolitan centers cannot be compared with the conditions obtaining today. Prior to prohibition moonshining was sporadic in the northern sections, and where it obtained to any considerable extent it was confined to small units scattered throughout the southern Appalachian country. I know whereof I speak, having been in the Internal Revenue Bureau from 1907 on. Even in the days prior to prohibition a large part of the routine work of the Bureau of Internal Revenue agents and inspectors was concerned with the detection of the refilling and substituting of barrels and bottles on the premises of wholesale liquor dealers and retail liquor dealers. In those days the principal violation consisted of substituting the cheapest kind of whisky for high-priced brands. This substitution was not only a criminal offense, but grossly defrauded the consumer.
During prohibition, as is well known, there were built up large-scale illicit operations producing high-proof spirits in large quantities from grain, molasses,
corn sugar, white sugar, etc. These high-proof spirits were used as a base for making all manner of distilled spirit beverages, such as rye whisky, bourbon whisky, Scotch whisky, etc. Within the last 2 years these large-scale moonshiners have adopted the method of heating high-proof spirits (cut to about 100 proof) with oak chips and producing an article that has the color and taste of whisky. It is this material that is now being used widely by unscrupulous tavern keepers and liquor dealers in the refilling of bottles. These spirits are untaxpaid. The entire Treasury procedure for protecting the revenue consists in having a Government officer guard every point where bulk spirits are being handled and bottled, and only relaxing the personal supervision of the officer when the spirits are placed in the numbered, identified bottles, and sealed with a strip stamp over the opening, which strip stamp carries a serial number and the name or symbol of the taxpayer. A record of the stamps so sold is kept in the office of each collector of internal revenue and affords a means of identification. While it is true that a bottle may be refilled, it is much more easily detected by an examining revenue officer than would be the case of a barrel whose contents were substituted in ,whole or in part with untaxpaid spirits.
In the light of the present difficulties of the Bureau of Internal Revenue it seems extremely dangerous to provide for larger bulk distribution and unsupervised bottling. If the Department were to attempt to supervise increased bottling the extra personnel cost would be enormous. While the Department records will show that legitimate tax payments are steadily increasing, indicating that steady progress is being made in the war against the large-scale illicit operator, the present seizure records likewise disclose that hundreds of large stills are being captured every month. I do not mean large pot stills, but large continuous stills similar to the stills constructed in registered distilleries. Many of these stills are from 2 to 312 feet in diameter, from 20 to 30 feet in height and contain as many as 35 and 40 so-called " distilling plates." It is well known that substantiial quantities of molasses, corn sugar, and white sugar go into illicit distilling, and the last session of Congress very wisely enacted a law giving the Secretary of the Treasury authority to follow up shipments of potential distilling material.
We are entirely sympathetic with the desire to reduce the price of whisky to the consumer through any practical means, but to adopt section 4 (f) could in no event reduce the price of whiskey more than one-half of 1 cent per drink. This is plain arithmetic and can be verified readily.
As to the legitimate cooperage interests, the distillers and brewers are the largest purchasers of cooperage. It is difficult to see how paragraph (f) of section 4 can possibly operate to help the legitimate cooperage business. If a distiller puts his whisky away in a barrel, as he undoubtedly will, and then instead of bottling it himself or sending it to a rectifier he ships it direct to a wholesale liquor dealer, or a tavern keeper, or a hotel keeper, or a private citizen, it is the same barrel and, therefore, unless there is an increased sale of barrels other than to the legitimate distillers I cannot see how the legitimate cooperage business can be increased. Legal tax payments last year were only about 58,000,000 gallons of spirits, as compared with an average preprohibition year of 140,000,000 gallons. It is not surprising, therefore, that the cooperage business is not as great in volume as it was prior to prohibition. There is only one way in which this will be increased, namely, in the increase of legal tax payments.
Section 4, paragraph (f), lines 17 to 23, makes the provisions of paragraph (f) inapplicable to those States which now prohibit the sale of whisky in bulk, among these States being New York, Ohio, Pennsylvania, Wisconsin, and Arkansas. There are a number of others, but I do not have the definite information before me. While it is true that this section would not be applicable to these States, nevertheless there are many other States that have a well-established procedure in most cases fixed by the legislature of the States whereby they collect the State tax by means of a stamp purchased from the commissioner of revenue and affixed to the bottles. These State laws and procedures have been built up on the basic premise of all spirits being cased and bottled under Federal regulations. The committee should give very serious attention to the disrupting effects on many States in considering this particular section.
I am endeavoring to put an end to the practice followed by two or three distillers of taking back barrels from rectifiers, scraping them, destroying the brands, and then reusing them for storing whisky. This move, which is meet
ing with almost complete success, will aid the legitimate cooperage business, lut it has no connection whatever with revenue.
The main provisions of the bill, which give complete control over labels, advertising and fair trade practices, are wholly in the public interest and we believe they should be adopted without change.
Before the promulgation of the rules and regulations which section 2 (d) authorizes the administrator to prescribe a public hearing should be required as to the fair trade practice provisions of section 5. The unfair competition and unlawful practices which this section condemns are matters on which the industry may be expected to have information not necessarily possessed by the administrator and to provide for a full expression of views a public hearing should be required.
Section 4 (g), page 9: The word “shall ” should be changed to “may in order that the administrator may be in a position to impose upon a permittee the penalties provided for in section 6, and to compromise them by a money payment if he so decides, without having placed on him the mandatory requirement of revoking the permit. Cases will arise where a money penalty will be deemed adequate by the Administrator and not to warrant the closing of the business by revoking the permit, and that discretion should be left to the administrator.
Section 4 (j) should be amended on page 13, lines 2 to 5, to read as follows:
"Upon commencement of proceedings under this subsection, the court may upon application therefor grant a stay of the administrator's order."
This would make clear the authority of the court to allow, if it so desired, the operation of a business pending determination of the appeal.
It is presumed the prohibition against the furnishing of signs, except advertising specialties as carried in section 5 (b), lines 20 and 21, page 14, would not prevent the furnishing of ordinary advertising material such as placards, calendars, etc., though the language used is sufficiently broad to cover such items. It is suggested this language be clarified in order that ordinary advertising items may be used. Respectfully,
J. M. DORAN, Administrator. Brief filed by Harry L. Lourie, representing the Association of Alcoholic Beverage Importers.
ASSOCIATION OF ALCOHOLIC BEVERAGE IMPORTERS,
Washington, D. C., June 20, 1935. Hon. ROBERT DOUGHTON, Chairman Committee on Ways and Means,
Washington, D. C. DEAR MR. DOUGHTON: The Association of Alcoholic Beverage Importers, representing more than 90 percent of the total importations of alcoholic beverages in the United States, respectfully request that the Committee on Ways and Means give consideration to the following matters which the association believes are of sufficient importance to bring to your attention.
The association is in entire accordance with any legislation which would provide for control of the labeling of imported alcoholic beverages, the advertising of such beverages, and would also prevent unfair practices. During the past year and a half all importers have been operating under a code of fair competition administered by the Federal Alcohol Control Administration. Under this code of fair competition there has been material improvement with respect to informative labels on imported distilled spirits and with respect to ethical advertising and fair competitive practices. The association believes that it is highly desirable to have immediate legislation which will preserve the gains made with respect to the foregoing.
You are further advised that during the period from December 1933 until May 27, 1935, all members of the importing industry operated under permits issued by the Federal Alcohol Control Administration, and that this system of control appeared to be an efficient manner of not only recording individuals, firms, and corporations who were engaged in the importing business but also in exercising a system of control with respect to the enforcing of informative labels, ethical advertising, and fair trade practices. The association is in favor of the continuance of the permit system with respect to importers.
I am instructed by the board of governors of the association to respectfully urge the committee to amend section 2 (a), page 3, lines 6 to 8, inclusive, so that an independent commission, responsible to the President only, be created.
I am also instructed by the board of governors of the association to respectfully call to the attention of the committee the advisability of there being incorporated on page 4, line 7, a proviso to the effect that the Administrator shall promulgate rules and regulations with respect to the enforcement of section 5. only after the holding of a public hearing for which due notice had been given. It is the view of the board of governors of the association that a public hearing on matters affecting unfair competition and unlawful practices, including labeling and advertising, will undoubtedly be of real benefit, in that it will enable interested parties to offer evidence with respect to conditions existing in the various branches of the liquor industry. The industry is, after all, in its formative stages, since relatively a short period has elapsed since prohibition. The administrator's powers should be broad enough so that modifications may be made of regulations from time to time to keep pace with changes which may come in the economic conditions of the industry.
The board of governors desires to call to the attention of the committee section 4, subsection (f), page 9, lines 11 to 23, inclusive. This section permits the sale of distilled spirits, wine, or malt beverages in barrels, casks, or kegs made of wood and of a capacity of one or more wine gallons. It also permits the sale from such containers. The importing industry has no objection to the importation of cereal beverages in barrels, but it does object to the importation of spirits in barrels containing more than 1 gallon each, because it fears that such importations may result in the substitution of illicit spirits for the original beverages contained in the barrels and that, furthermore, such permission would definitely result in loss of revenue to the Federal Government. The importing industry is now suffering to some extent from the refilling with illicit spirits of bottles which have contained well-known brands of imported spirits. It fears that the provision now carried in the bill will not only result in the wholesale refilling of bottles bearing well-known brands from such bulk containers, but that taverns, restaurants, saloons, bars, etc., will use initial purchases of genuine tax-paid imported spirits brought into the United States in barrels as a basis for endless tapping of the barrel, with subsequent loss to revenue and the continuance of the illicit industry. It is evident that the cooperage industry of the United States cannot obtain any material benefit from the legislation which would permit the importation of foreign spirits in barrels, since in the majority of such importations the barrels would not be of American origin. Furthermore, if a legitimate trade were developed in such bulk shipments, the empty barrels in themselves might constitute a competitive factor with domestic coopers. It is the opinion of the board of governors of the association that the regulations which have prevailed up to the present time limiting the importation (with some minor exceptions) of alcoholic beverages, excluding cereal beverages, to containers of not more than 1 gallon each have been of decided benefit not only to the consumer in assuring him of the authenticity of the goods he purchases but also in protecting the revenue of the Government.
The attention of the committee is called to section 5 (e), Labeling, on pages 16, 17, 18, and 19 of the bill. On page 17, lines 8 to 13, inclusive, a provision is made that in the case of distilled spirits produced by blending or rectification with neutral spirits the label must bear a statement giving the percentage of neutral spirits used and the name of the commodity from which neutral spirits have been distilled. Many distilled spirits of both domestic and foreign origin are always made from neutral spirits derived from various sources, such as grain, molasses, or wine. It is generally recognized that gin and many cordials are produced from neutral spirits with the addition by distillation or compounding of various flavors. In the opinion of the board of governors the declaration of the percentage of neutral spirits where employed in the blending or rectification of distilled spirits should be limited to the percent of neutral spirits employed in the blending or rectification of whiskies, rums, and similar spirits, and the bill should bear a direct exemption from such declaration in the case of distilled spirits which are commonly recognized as always being made from neutral spirits, plus additional flavors, such as gin, cordials, and liqueurs. If the committee agrees with the foregoing recommendation, a similar change should be made in section 5 (g), Advertising, page 20, lines 16 to 21, inclusive.
On page 17, line 3, the proposed legislation provides for an exception to the declaration of alcoholic content in the case of wines. It is suggested that this exception be modified to permit the omission of the statement of alcoholic content on wines containing not more than 14 percent of alcohol, commonly known as "light wines ", and there should be a statement of the alcoholic content re.
quired on the label in the case of wines containing more than 14 percent. This appears necessary to the association, because an important class of wines known as “fortified wines ", commonly represented by ports, sherries, etc., usually contain 18 to 21 percent of alcohol. These wines having a much higher alcoholic content than the so-called “natural wines ", it appears desirable that the consumer should have definitely before him on the label the alcoholic content of these heavier wines so that he can readily differentiate between them and what are commonly known in the trade and by the consuming public as “light wines.”
The board of governors urges the committee to substitute on page 17, beginning with line 19, a provision forbidding the sale by the Government of any -distilled spirits, wine, or malt beverages which have been seized for being in violation of the laws of the United States. The United States Government has in the past held public sales of domestic and foreign merchandise seized for being in violation of various laws and the prices paid at such sales have been far below the prices normally paid by importers or domestic wholesalers for similar goods. At a great many of the sales the price realized by the Government has been in the case of imported goods considerably below the amounts normally collected by the Government for the tariff and internal revenue. Obviously it is an unfortunate situation and difficult to understand if the importing industry is forced to comply with various conditions of fair practices and then must meet the competition of illegal goods which have been sold by the United States Government at prices far below the duty-paid costs to the legal members of the industry. Obviously, if the Government retires from the sales, there may actually be an added profit to the Government, because if there is a demand for the volume of distilled spirits sold at these sales, then an equivalent amount of legal spirits will be withdrawn from customs custody and the Government will obtain the full revenue imposed by the Tariff Act and the internal revenue laws. Respectfully submitted.
HARRY L. LOURIE, Executive Secretary.
BRIEF FILED BY FRED A. CASKEY, GENERAL COUNSEL, LEAGUE OF DISTILLED
SPIRITS RECTIFIERS, INC.
LEAGUE OF DISTILLED SPIRITS RECTIFIERS, INC.,
Washington, D. C., June 21, 1935. Hon. ROBERT DOUGHTON, Chairman Committee on Ways and Means,
United States House of Representatives, Washington, D. C. DEAR MR. DOUGHTON: The League of Distilled Spirits Rectifiers, Inc., representing approximately 75 percent of the total gallonage output of the manufacturing rectifiers of the United States, 'respectfully requests that your committee give careful consideration to the following matters pertaining to the bill, H. R. 8539.
The League of Distilled Spirits Rectifiers, Inc., is a voluntary trade association, whose members, together with all other concerns engaged in the rectify. ing business, have been for the past year and a half operating under a code of fair competition administered by the Federal Alcohol Control Administration. The league is in hearty accord with legislation having for its purpose the control of the industry not only from the revenue viewpoint but from the social, economic, and moral aspects as well. The league is, of course, vitally interested in maintaining the industry on a high plane of competitive business activity, and to that end it is interested in the abolishment of unfair trade practices and protecting the interests of the consumer. Just what body, agency, or bureau administers to and regulates this industry we leave to the wisdom of the committee.
At this point we pause to pay tribute to the very efficient administration which has just been concluded by the Federal Alcohol Control Ar!ministration and also the efficient manner in which the Alcohol Tax Unit has operated in the interests of both the Government and the industry. Although rules and regulations, which were frequently changed by the Federal Alcohol Control Administration, at times appeared to impose an onerous burden upon the industry, real progress was made with respect to the enforcement of ethical and proper advertising, labeling, and fair-trade practices.
The league is unalterably opposed to the provisions of section 4 (f) of the bill. It is believed that hulk sales of whisky should be limited to distillers and rectifiers, as provided by present regulations of the Alcohol Tax Unit.