A Compounder Cannot Under the Law Engage as Denaturer of Alcohol

December 8, 1959 BIR RULING NO. 647-59 MEMORANDUM FOR: The Chief, Alcohol Division (Thru the Revenue Operations Executive) (Assessment) B.I.R., Manila This has reference to your memorandum dated November 4, 1959, and, in answer to the queries posed therein, you are informed as follows: cdi 1. The term "rectifier" comprises every person who rectifies, purifies, or refines distilled spirits or wines by any process other than by original and continuous distillation from mash, wort, wash sap or syrup through continuous closed vessels and pipes until the manufacture thereof is complete. (Sec. 194(c) Tax Code; emphasis supplied). Under this definition, rectification is clearly not limited to the use of a rectifying column or apparatus. The phrase "by any process" certainly includes rectification by chemical process. Your query is, therefore, answered in the negative. 2. Under section 38 of Regulations No. 3, now Circular No. 16, no person shall engage in the manufacture or production of denatured alcohol unless he is a duly licensed and registered distiller or rectifier of distilled spirits. This provision which is now embodied in Circular No. 16 remain in full force and effect, and no attempt had been made to modify or amend the same even after the enactment of the National Internal Revenue Code in 1939. This is a clear indication of the fact that those charged with the enforcement of the internal revenue law did not recognize any change in the substance of the provisions of the old law as effected by the new law. For purposes of comparison, there is quoted below the pertinent provisions of the old and new laws: "SEC. 74(b). Domestic alcohol of not less than one hundred and eighty degrees proof (ninety per centum absolute alcohol) may be withdrawn from a registered distillery or bonded warehouse without the payment of the internal-revenue tax provided in this section for use in the arts and industries and for fuel, light, and power, provided said alcohol shall have been mixed in the presence and under the direction of an authorized Government officer, with methyl alcohol or other denaturing material or materials, or admixture of the same, suitable for the use for which the alcohol is withdrawn, but which destroys its character as a beverage and renders it unfit for liquid medicinal purposes; such denaturing to be done upon the application of any registered distiller on the distillery premises or elsewhere in denatured alcohol bonded warehouses specially designated by the Collector of Internal Revenue for denaturing purposes only, and to which alcohol for industrial purposes may be transferred from the distillery premises under bond and under conditions prescribed by the Collector of Internal Revenue with the approval of the Secretary of Finance and Justice, PROVIDED, HOWEVER, That notwithstanding anything in this section contained, domestic alcohol, when suitably denatured, may be withdrawn from bond without the payment of internal-revenue tax under the conditions herein prescribed for use in the manufacture of either and chloroform and other definite chemical substances and provided it does not appear in the finished product as alcohol: AND PROVIDED, FURTHER, That the license taxes imposed by section sixty-eight of this Act upon dealers in distilled spirits shall not apply to dealers in industrial alcohol manufactured and sold in accordance with the provisions of this section, and that the taxes imposed by section one hundred and thirty-nine of this Act shall apply to all dealers in industrial alcohol so manufactured and sold." (Act No. 1189, The Internal Revenue Law of 1904, as amended by Act No. 1940, May 20, 1909). "SEC. 164. Requirements incident to process of denaturing alcohol . Where alcohol is withdrawn for denaturing for purposes enumerated in section one hundred twenty-eight of this Code, or as motor fuel, the process of denaturing shall be effected either on the distiller premises or in a bonded warehouse designated by the Collector of Internal Revenue for denaturing purposes only. To such warehouses alcohol may be transferred under bond under conditions prescribed in the regulations of the Department of Finance." (Sec. 164, National Internal Revenue Code). It is to be observed that section 164 of the Tax Code constitute only a part of section 74(b) of the old law. Another part now constitute section 128 of the Tax Code and others were discarded. However, it will also be observed that the counterpart provisions of section 164 of the Tax Code in section 74(b) of the old law are very similar with the only exception that the provisions of section 164 are a little bit more condensed. After a careful comparison of both laws, we cannot see any difference in substance. Accordingly, the provisions of the regulations must be applied. Therefore, the bonded warehouse mentioned in section 164 of the Tax Code must be understood to refer to the distiller's or rectifier's bonded warehouse. Hence, it was error to have given permits to persons other than registered distillers and rectifiers to establish bonded warehouses for denaturing purposes. As regards the question of whether or not we may legally cancel the permits granted to denaturers of alcohol who are not registered distillers or rectifiers, certainly we can. It is now a well settled rule that the Government is not estopped by the mistakes or errors of its officers. However, in BIR Ruling No. 572, series of 1958, we held in a similar question posed by you that, considering the manifestation to the effect that, such permittees have invested considerable amount of capital in the construction and equipping of the denaturing warehouses, it will be oppressive if we are to do so now. On second thought, we find that this statement in BIR Ruling No. 572 may not actually be true after all. This is for the reason that the permittees concerned must have been in operation for many years already. If they did, they must have already secured the return of their capital. 3. A rectifier may compound only tax-paid spirits and the compounding must be done in a separate establishment. This compounding establishment may be in the same building as the rectifying establishment, but it must be conducted in a room separated from the rest of the premises, having only one door or other opening connecting it therewith and capable of being securely locked with double locks. (Sec. 166, Tax Code; Sec. 33, Regulations No. 3). A rectifier may also denature alcohol in an establishment located in the same building as the rectifying establishment in accordance with the provisions of Chapter V of Regulations No. 3, now Circular No. 16, but subject to the terms and conditions therein prescribed. Accordingly, a registered rectifier may rectify, compound, and denature alcohol in separate establishments in the same building, subject to the provisions of the regulations. cdtech A compounder cannot under the law engage as denaturer of alcohol. (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue