Section 602% of the Revenue Act of 1934 (26 U.S.C.A. § 999) levies a processing tax of 3 cents per pound on certain oils, including coconut oil, sesame oil, palm oil, palm kernel oil, and sunflower oil. It also levies an additional tax of 2 cents per pound on coconut oil. This tax, however, does not apply to coconut oil produced in the Philippine Islands.
The plaintiff by its bill of complaint attacks the processing tax of 3 cents and seeks a determination both under the equity powers of the court and under the declaratory judgment statute (28 U.S.C.A. § 400) that it is an unconstitutional exaction and penalty and not a tax. Injunctive relief is sought against its collection.
The complaint discloses the following facts: The plaintiff is a manufacturer of soaps, operating a manufacturing plant in the city of Los Angeles, where the process of manufacturing is carried on wholly in intrastate commerce. It has a large establishment representing a large investment, and for thirty-seven years prior to the year 1935, its business was conducted at a substantial profit. In 1934, the bill states, it was able to make a profit merely because it had on hand large quantities of vegetable oil which had been purchased before the enactment of section 602% of the Revenue Act of 1934. In the conduct of its business, which is exclusively that of the manufacture of soaps and allied products, plaintiff must use large quantities of coconut oil, which is the only important commercial source of lauric acid. It uses a
Plaintiff’s attack upon the constitutionality of the statute is grounded upon the contention that it is not a tax under article 1, § 8, cl. 1, of the Constitution of the United States, but a penalty, the effect of which is to penalize the plaintiff for the benefit of certain producers of domestic oils and of the Philippine Islands.
The plaintiff, by paraphrasing certain general language of the Supreme Court in United States v. Butler (1936) 56 S.Ct. 312, 80 L.Ed. -, insists that this tax is subject to the same constitutional frailty as the Agricultural Adjustment Act (see 7 U.S.C.A. § 601 et seq.).
It is well to bear in mind that the real basis for the decision in that case is the fact that the Congress had attempted to regulate agriculture and to achieve that result by means of moneys obtained through a tax. Whatever language of general character may have been used in the majority opinion must be read in the light of this main principle which lay at the foundation of the decision. The decision establishes the principle that, irrespective of any question of interstate commerce, the Congress of the United States has the power to levy a processing tax. The minority opinion, written by Mr. Justice Stone, emphasizes this fact by stating: “The constitutional power of Congress to levy an excise tax upon the processing of agricultural products is not questioned.” See United States v. Butler (1936) 56 S.Ct. 312, 325, 80 L.Ed. —.
Another significant matter to be borne in mind is the fact that the court adopted the Hamiltonian view on the meaning of the phrase “general welfare” contained in the taxing clause of the Constitution. Hamilton’s view was contained in his Report on Manufactures, made by him in 1791, while he was Secretary of the Treasury. He there wrote: “The phrase is as comprehensive as any that could have been used, because it was not fit that the constitutional authority of the Union to appropriate its revenues should have been restricted within narrower limits than the ‘general welfare,’ and because this necessarily embraces a vast variety of particulars which are susceptible neither of specification nor of definition. It is, therefore, of necessity left to the discretion of the National Legislature to pronounce upon the objects which concern the general welfare and for which, under that description, an appropriation of money is requisite and proper. And there seems to be no room for doubt that whatever concerns the general interests of learning, of agriculture, of manufacture, and of commerce, are within the sphere of the national councils, as far as regards application of money.(Italics added.)
The processing tax on coconut oil appears to be a revenue measure. It is not tied, as was the processing tax under the Agricultural Adjustment Act (see 7 U.S. C.A. § 601 et seq.), to any scheme, voluntary or coercive, to control intrastate activities which are beyond the power of the Congress. A reading of the measure and a comparison with other provisions would indicate that the object of the Congress may have been to make the tax replace the custom duty which applies to coconut oil originating elsewhere than in the' Philippines. 19 U.S.C.A. § 1001, par. 54; 19 U.S.C.A. § 1301. Coconut oil so originating must pay in addition to this duty the processing tax of 3 cents per pound. The net result is that the processor who uses coconut oil not originating in the Philippine Islands is subject to a tax of 7 cents per pound, while those who, like the plaintiff, use oil originating in the Philippine Islands, pay only the 3 cents per pound processing tax. In effect, a protective tariff is thus given to this Philippine product. There is no direct discrimination between persons using one product instead of another. But, even if there were, that in itself would riot render the tax invalid.
Plaintiff quotes from certain of the debates which occurred during the discussion of the adoption of the coconut oil processing tax from which it may be inferred that the object of the Congress was to discourage the use of coconut oil and to force the use of domestic oil substitutes. Assuming this to have been the object, the answer is in the decisions just cited, which state clearly that, where the power to tax is not limited, the mere fact that the legislative body in exercising it may have sought to repress the use of one product or to foster the use of another does not make the exercise of the taxing power constitutionally vulnerable. See Fox v. Standard Oil Co., supra. Few tax measures could stand the test if the courts, disregarding the presumption of constitutionality, were to scrutinize apparently proper exercises of power with the view of discovering a hidden purpose to achieve an unlawful end. The instances in which courts have done so, such as Hill v. Wallace (1922) 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822; Bailey v. Drexel Furniture Co. (1922) 259 U.S. 20, 42 S.Ct. 449, 66 L.Ed. 817, 21 A.L.R. 1432; United States v. Constantine (1935) 296 U.S. 287, 56 S.Ct. 223, 80 L.Ed.-; United States v. Butler, supra, were those in which the unlawful regulation sought to be attained, under the guise of taxation, was apparent to the court. They were instances in which the taxing power was used merely as a cloak to achieve an unauthorized end.
The contention here that the real aim was to aid indirectly domestic products and that for that reason the tax is, in reality, a penalty, is of the same character as that made in Miller v. Standard Nut Margarine Co., supra. There it was argued that the tax on oleomargarine was in reality a penalty imposed for the purpose of eliminating competition with butter. The Supreme Court declined to invalidate the tax upon that ground.
But it is insisted that, in view of the requirement of clause (A) of section 999 (a), title 26, that the taxes collected with respect to coconut oil wholly of Philippine product or produced from materials wholly of Philippine growth be held as a separate fund and be paid to the treasurer of the Philippine Islands, the object of the tax has failed with the establishment of the Philippine commonwealth. The date of the establishment of the Philippine commonwealth was subsequent to the enactment of the act. By the treaty concluded with Spain on November 7, 1900 (31 Stat. 1942), the Philippines “came under the complete and absolute sovereignty and dominion of the United States and so became territory of the United States over which civil government could be established.” See Fourteen Diamond Rings v. United States (1901) 183 U.S. 176, 22 S.Ct. 59, 46 L.Ed. 138; Porto Rico Brokerage Co. v. United States (1935 Cust.& Pat. App.) 76 F. (2d) 605, 610.
There is no limitation upon the power of the Congress to appropriate money to use in any portion of its territories, whether the territories are states, possessions, or protectorates. See Balzac v. Porto Rico (1922) 258 U.S. 298, 42 S.Ct. 343, 66 L. Ed. 627. The power to govern possessions implies the power to spend money for their benefit. The power to govern implies the power to tax. And it cannot be contended that a tax from a particular source may not be earmarked for the use of a particular territory of the United States. .The establishment of the Philippine commonwealth in 1935 under the independence statute of 1933, as amended (48 U.S.C.A.- §§ 1231-1256), has not severed completely the ties between the Philippines and the United States. Until the complete withdrawal of the sovereignty of the United States over the Philippines, which will not occur until the expiration of a period of ten years from the date of the inauguration of the
To that extent the United States is still sovereign. For, as stated by Mr. Justice Holmes in American Banana Co. v. United Fruit Co. (1909) 213 U.S. 347, 358, 29 S.Ct. 511, 513, 53 L.Ed. 826, 16 Ann.Cas. 1047: “The very meaning of sovereignty is that the decree of the sovereign makes law.”
Moore says: “A state is sovereign from the point of view of the law of nations, when it is independent of every other state in the exercise of its international rights externally and in the manner in which it lives and governs itself internally.” John Bassett Moore, Digest" of International Law (1906) vol. 1, p. 18. And see Wilson on International Law (2d Ed.1927) p. 16; De Lima v. Bidwell (1901) 182 U.S. 1, 21 S.Ct. 743, 45 L.Ed. 1041; Downes v. Bidwell (1901) 182 U.S. 244, 21 S.Ct. 770, 45 L.Ed. 1088.
A state may exercise certain limited extraterritorial rights over its citizens or on certain subjects within the domain of another state, as in the case of the extraterritorial courts maintained by the United States in China and the mixed courts of certain European powers in Egypt. The exercise of these rights do not affect sovereignty. But, when one state demands allegiance of the citizens of another state and an oath of allegiance of its officials, retains appellate jurisdiction over its courts, gives its chief executive officer the right to suspend the operation of any law or governmental order by mere executive fiat and the right to veto amendments to the state’s Constitution, retains the right to intervene (by force of arms, we assume) in order to maintain the government or to make it fulfill its obligations or for the purpose of protecting life and liberty, we have a quasi independence only.
We do not have either that internal or external independence of one state towards another which is the essence of sovereignty and which would justify an executive or judicial characterization of the territory of the subject state as foreign territory. De Lima v. Bidwell, supra; Downes v. Bid-well, supra.
But, in the last analysis, it is unimportant what term we apply to the suzerainty which the United States still exercises over the Philippines.
On the whole, it is apparent that, by the establishment of the Philippine commonwealth, the Philippines have not ceased to be a possession of the United States. The government of the United States exercises powers over them which are those of a sovereign. It will not surrender its complete sovereignty until the 4th of July immediately following the expiration of a period of ten years from the inauguration of the new Philippine government. The United States having, therefore, retained certain sovereignty, although limited, over the Philippines, and having assumed certain binding obligations towards them, they may continue to pay to them moneys which have been collected for their benefit during the time when the United States exercised complete sovereignty over them.
But even if we assume that complete independence has already been achieved, and that the moneys which have accumulated from the processing tax on coconut oil originating in the Philippines, can no longer be paid to the Philippine Islands, the only result we can conceive would be that the moneys will go, as do other moneys derived from the processing tax established by the Revenue Act of 1934 (48 Stat. 683), into the Treasury of the United States and become a part of the general funds of the United States.
No authority has been called to our attention which holds that under such circumstances courts can relieve the taxpayer of its payment. We know of no legal doctrine sanctioning such result. Clearly it is for the Congress to say, assuming the original object to have failed, what shall be done with the money collected for the use of the Philippine Islands. It alone can determine that the money accumulated shall now be put to a different use or be returned to the taxpayer or that the taxpayer be, in the'future, relieved of the tax.
We conclude that the processing tax on coconut oil is a proper exercise of the taxing power of the Congress of the United States and that the present status of the Philippines does not render invalid its exercise so as to relieve the processors of its payment. F.or a contrary view, see the findings in Iowa Soap Co. v. Huston (D.C. Iowa 1936) 13 F.Supp. 517.
We are also of the view that the complaint fails to state a cause for the intervention of this court, in view of the provisions of section 3224 of Revised Statutes (26 U.S.C.A. § 154 [now 26 U.S.C.A. § 1543]) and of the Declaratory Judgment Act, as amended (28 U.S.C.A § 400) which prohibit the institution of suits seeking to enjoin the collection of taxes and of actions seeking declaratory judgments in tax matters. In Rieder v. Rogan (D.C.1935) 12 F.Supp. 307, I discussed very fully the validity of these provisions. The decision of the Supreme Court in the Rickert Rice Mills v. Fontenot (1936) 56 S.Ct. 374, 80 L.Ed. 355, does not weaken the authority of the long list of cases cited in my opinion and in which the Supreme Court has sustained consistently the validity of restraints upon the power to sue the government in tax matters. All that the court ruled in Rickert Rice Mills v. Fontenot, supra, was that, the Agricultural Adjustment Act (7 U.S.C.A. § 601 et seq.) having been declared unconstitutional, the uncollected taxes which had been impounded by the District Court pending the determination of the validity of the act were returnable to the taxpayer. This upon the ground that any attempt to collect them now would be an unlawful trespass. So ruling, the court did not either directly or indirectly, question the validity or propriety of congressional limitations upon suits relating to taxation. Two recent cases have so interpreted this decision. See Simonin’s Sons, Inc., v. Rothensies (D.C.Pa.) 13 F.Supp. 807, decided in De-
We conclude that the validity of the enactment under attack and the prohibitions which the Congress has placed upon the right to institute actions relating to taxation stand in the way of granting the relief sought by the bill, and that this court, is without jurisdiction to entertain it. The-temporary restraining order will therefore ■be vacated, a preliminary injunction will be denied, and the bill will be dismissed. Am exception to each of the rulings made is» allowed.