You Be The Tax Judge: Ream v. Treasury, Who Won?

Earlier, I asked you to consider the case of John Ream, who wanted to distill whiskey at home. While federal law allows individuals to make beer and wine at home, it prohibits them from distilling spirits.

The reason? Taxes. The federal government argues that the ban helps Congress collect the excise tax on distilled spirits. So, Ream sued the federal government.

Who Won?

Ream did—and he didn’t.

The Sixth Circuit first handed Ream a victory on a threshold question. The district court ruled that Ream couldn’t challenge the law because he didn’t have standing. He had neither purchased a still nor begun making whiskey. In other words, he hadn’t yet committed the act that could lead to prosecution.

The appeals court disagreed. It found that Ream didn’t need to commit a felony before asking a court whether the law was constitutional.

But on the question that matters for our purposes, Ream lost. The Sixth Circuit held that Congress could prohibit home distilling as a “necessary and proper” means of carrying out its constitutional power to collect the federal excise tax on distilled spirits. The court’s reasoning went back to the practical problem Congress was trying to solve: tax evasion.

A legal distillery operates on registered premises. Federal revenue officers have significant authority to inspect those premises and the records kept there. A still tucked inside someone’s home is another matter. It’s easier to hide, and the government has much less freedom to enter and inspect a private home. The court concluded that the location restriction was “plainly adapted” to collecting the tax.

What about Ream’s argument that he would happily pay the tax? That didn’t change the result. Congress wasn’t required to consider only whether Ream would pay. It could consider the broader problem of home distillers who might not. By requiring spirits to be produced on registered premises, Congress made it more difficult to manufacture untaxed whiskey.

And, preventing Ream from making whiskey at home doesn’t necessarily mean the government loses the tax entirely. If he buys commercially produced whiskey instead, the government still collects an excise tax. The court reasoned that the prohibition therefore shifts consumption from home-distilled spirits that may escape taxation to commercially produced spirits that are easier to tax.

The court also pointed to another practical problem. The current system doesn’t simply require distillers to pay the tax. It also includes requirements that give federal officials access to distilling premises and make those operations identifiable. Applying those rules to a private home, the court reasoned, isn’t as simple as Ream agreeing to write the government a check.

For the Sixth Circuit, that was enough. The home-distilling prohibition was a permissible way to protect federal tax revenue.

(The Sixth Circuit covers federal appeals from district courts in Kentucky, Michigan, Ohio, and Tennessee.)

But if you ruled for Ream, don’t change your answer just yet.

Just 11 days before the Sixth Circuit ruled against Ream, another federal appeals court considered the same federal home-distilling restrictions—and reached the opposite conclusion.

In McNutt v. Department of Justice, the Fifth Circuit held that the home-distilling prohibition exceeded Congress’s constitutional powers. The court focused on what may be the oddest feature of the government’s tax argument: The law doesn’t help the government collect a tax on home-distilled whiskey. It prevents the whiskey—and therefore the tax—from existing in the first place.

In the Fifth Circuit’s view, that’s not exercising the power to tax. It’s prohibiting conduct. And that matters because the federal government lacks a general police power. Congress has only the powers the Constitution grants it.

The Fifth Circuit was also troubled by where the government’s argument might lead. If Congress can prohibit an activity simply because allowing people to do it at home might make tax evasion easier, the court asked, what’s the limiting principle? Could Congress prohibit other kinds of home-based economic activity on the theory that they’re more difficult to monitor and tax? (Ream made these exact same arguments.)

For the Fifth Circuit, the connection between prohibiting home distilling and collecting an excise tax wasn’t enough. It believes the law went too far.

(The Fifth Circuit covers federal appeals from district courts in Texas, Louisiana, and Mississippi.)

So, if you sided with the government, congratulations: The Sixth Circuit agrees with you.

If you sided with Ream, congratulations: The Fifth Circuit agrees with you.

That’s where the Supreme Court comes in.

Ream has asked the justices to review the Sixth Circuit’s ruling. Meanwhile, the federal government has separately asked the Court to review the Fifth Circuit’s ruling in McNutt. In other words, both sides of the circuit split are now asking the Supreme Court to step in.

(For more about Circuit Courts and splits, check out this explainer.)

Ream’s case has also drawn considerable interest. According to The Buckeye Institute, which represents him, 61 organizations, public-interest law firms, states, and individuals have filed amicus briefs supporting his petition.

More than federal taxing power is at stake. Throughout the litigation, the government has argued that the home-distilling prohibition can also be upheld under Congress’s power to regulate interstate commerce. Ream is asking the Supreme Court to consider that argument, too—and potentially to revisit Gonzales v. Raich, the 2005 decision that upheld federal regulation of marijuana grown at home for personal medical use under the Commerce Clause.

The federal government agrees that the Supreme Court should review the home-distilling ban. But Ream argues that his case gives the justices a chance to address all the constitutional arguments the government has used to defend it.

We may know more soon. Ream filed his reply brief on September 1, and the Supreme Court distributed his petition for its September 28 conference. The case was later rescheduled, so we’ll have to wait a bit longer to find out whether the justices grant certiorari (agree to hear the case).

As for its companion case? McNutt is also pending before the Supreme Court, where the federal government is appealing its loss. A response to the government’s petition is due September 17.

The timing may not be a coincidence. With two petitions asking the Court to resolve opposite sides of the same circuit split, the justices could ultimately consider them together. For now, though, we’ll have to wait and see.