Circuit courts split on home-distilling ban

While the Sixth Circuit held that the ban on distilling spirits in a home was a necessary and proper means of collecting the federal excise tax on distilled spirits and thus was constitutional, the Fifth Circuit held under the same criterion that the ban was unconstitutional.

Distilled-spirits tax and home-distilling ban

In 1791, Congress created an excise tax on distilled spirts. In its current form, in Sec. 5001, the excise tax attaches the moment a distilled spirit comes into “existence as such,” generally “at the rate of $13.50 on each proof gallon” (100 proof, or 50% alcohol by volume).

In 1868, having found that there had been and continued to be rampant evasion and fraud with regard to the distilled–spirits excise tax, Congress created a regime to “secure the revenue” from the tax, which remains largely intact today. Sec. 5178(a)(1)(A) authorizes Treasury to “prescribe such regulations relating to the location, construction, arrangement, and protection of distilled spirits plants as [it] deems necessary to facilitate inspection and afford adequate security to the revenue.” Congress also enacted statutory rules of its own to secure the revenue. Sec. 5178(a)(1)(B) provides, “No distilled spirits plant for the production of distilled spirits shall be located in any dwelling house, in any shed, yard, or inclosure connected with any dwelling house, or on board any vessel or boat, or on premises where beer or wine is made or produced, or liquors of any description are retailed” (emphasis added).

Moreover, under Sec. 5179(a), “Every person having in his possession or custody, or under his control, any still or distilling apparatus set up, shall register such still or apparatus with [Treasury] immediately on its being set up.” Also, under Sec. 5180(a), “Every person engaged in distilled spirits operations shall place and keep conspicuously on the outside of his place of business a sign showing the name of such person and denoting the business, or businesses, in which engaged.” 

Further, Sec. 5203(a) provides, “Every proprietor of a distilled spirits plant shall furnish [Treasury] such keys as may be required for internal revenue officers to gain access to the premises and any structures thereon,” and Sec. 5203(b) allows those officers to “enter any distilled spirits plant, or any other premises where distilled spirits operations are carried on, … at all times, as well by night as by day.”

To encourage compliance with these laws, Congress included harsh penalties for violations. Sec. 5601(a) subjects anyone who possesses an unregistered still, fails to furnish the required bond, or distills in a proscribed place to a fine of “not more than $10,000, or imprisoned not more than 5 years, or both, for each such offense.” Sec. 5602 imposes the same penalty on any person who tries otherwise to defraud the government of taxes owed on distilled spirits.

Ream

John Ream is a former aerospace engineer who opened his own brewery and taproom. Ream wished to distill whiskey at home but was prevented from doing so by the prohibition on home distilling. Ream claimed that but for that prohibition, he would distill whiskey at home.

Ream eventually brought suit in district court, asserting that the home–distilling ban was unconstitutional and thus beyond Congress’s power to enact. The government moved to dismiss, arguing both that Ream lacked standing and that the ban is constitutional; Ream moved for summary judgment. The district court granted the government’s motion, holding that Ream lacked standing because he had not yet bought a still or been specifically threatened with prosecution for violating the ban. Ream appealed the district court’s decision to the Sixth Circuit.

The Sixth Circuit’s holding: The Sixth Circuit reversed the district court and held that Ream had standing to bring his suit challenging the home–distilling ban. The court also held that the ban was constitutional and remanded the case to the district court to enter judgment in favor of the government.

In its opinion, the Sixth Circuit first addressed the Taxing Clause of the Constitution (U.S. Const. art. I, §8, cl. 1), which vests Congress with the “Power to lay and collect Taxes, Duties, Imposts and Excises.” Citing NFIB v. Sebelius, 567 U.S. 519, 574 (2012), the Sixth Circuit found that Congress’s authority under the Taxing Clause is limited to requiring an individual to pay taxes and nothing else. Because the home–distilling ban prohibits certain conduct rather than requiring the payment of tax, the court concluded that the Taxing Clause could not support the ban.

The Sixth Circuit then considered whether the Necessary and Proper Clause of the Constitution (U.S. Const. art. I, §8, cl. 18) supported the ban. This clause vests Congress with power “[t]o make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.” As to the clause’s scope, the Supreme Court’s formulation in McCulloch v. Maryland, 17 U.S. 316, 421 (1819), has long been the standard: “Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional.” The Sixth Circuit explained that whether a law is necessary and whether it is proper are separate questions, but both are covered by the formulation fromMcCulloch.

The Sixth Circuit found that to be necessary, under McCulloch, a means must be “plainly adapted” to a legitimate constitutional end. The court stated that in Felsenheld, 186 U.S. 126, 132 (1902), the Supreme Court “glossed that formulation in a case concerning ‘securing the payment of’ taxes specifically — holding that, ‘in the rules and regulations for the manufacture and handling of goods which are subjected to an internal revenue tax, Congress may prescribe any rule or regulation which is not in itself unreasonable.'”

The Sixth Circuit concluded that the prohibition of home stills, at the time it was enacted, made it more difficult for people to conceal the production of distilled spirits and thus evade the excise tax on distilled spirits. “Thus — in the sense of both ‘plainly adapted’ and ‘reasonable’ — the home–distilling ban was ‘necessary’ to the collection of taxes on revenue at the time it was enacted; and we have no reason to conclude otherwise now,” the court stated.

Ream argued that the ban reduces revenue rather than raises it because he would pay tax on any home–distilled whiskey he produced, but the ban prohibits him from producing any home–distilled whiskey. However, the Sixth Circuit found that Congress had ample reason to conclude that, for every at–home distiller who pays the tax, many others would not and that the ban increases revenue rather than reduces it.

The Sixth Circuit also concluded that the home–distilling ban was proper. It noted that not long after the 1868 Act that included the ban was enacted, the Supreme Court said in Ulrici, 111 U.S. 38, 40 (1884), that its “well–considered and minute provisions” were “adopted with one purpose only, namely, to secure the payment of the tax imposed by law upon distilled spirits.” Moreover, the Sixth Circuit found that the home–distilling ban is not expressly prohibited by the Constitution, and it does not seek to regulate conduct indirectly or to circumvent some other limit on Congress’s power (citing McCulloch, 17 U.S. at 423).

Ream further argued that the Taxing Clause and the Necessary and Proper Clause, taken together, could expand Congress’s power beyond its proper limits. The Sixth Circuit stated, “We take that concern seriously; but the concern is misplaced here.” The court explained that whether a law is constitutional depends on a fact–based, empirical judgment. The required judgment regarding the constitutionality of the home–distilling ban was based on facts that “were peculiar to distilling spirits.” Therefore, the court determined that its decision in the case did not expand Congress’s power in other cases involving different facts.

The Sixth Circuit also observed that its power, like Congress’s, is subject to constitutional limits. The court stated (again citing McCulloch, 17 U.S. at 423) that where, as with the home–distilling ban, the law “is really calculated to effect any of the objects intrusted to government,” to inquire further than the court had into the necessity of the law “would be to pass the line which circumscribes the judicial department, and to tread on legislative ground.” Further, the court found that “[o]ne can think that Congress’s power has expanded beyond its constitutional limits as originally understood, … and yet conclude that not every novel exercise of Congressional power is unlawful. And here the novelty lies with the challenge to the law, not the law itself.”

McNutt

Under facts similar to those in Ream’s case, Scott McNutt also challenged the home–distilling ban in a district court in the Fifth Circuit. The district court found McNutt had standing to bring the case and granted him relief because Secs. 5178(a)(1)(B) and 5601(a)(6) (collectively, the home–distilling ban) violated the Constitution’s Commerce, Taxing, and Necessary and Proper clauses. The government appealed the case to the Fifth Circuit, challenging the district court’s decisions with regard to the Taxing and Necessary and Proper clauses but not the district court’s Commerce Clause analysis.

The Fifth Circuit’s holding: The Fifth Circuit affirmed the district court and held that the home–distilling ban was unconstitutional. Like the Sixth Circuit in Ream’s case, the Fifth Circuit held that the ban was outside the scope of Congress’s power under the Taxing Clause. It held so because the ban did not raise revenue but rather operated to reduce it and thus did not represent an exercise of the taxing power of Congress.

However, unlike the Sixth Circuit, the Fifth Circuit held that the ban violated the Necessary and Proper Clause. As the Sixth Circuit did, the Fifth Circuit analyzed separately whether the home–distilling ban was necessary and whether it was proper.

The Fifth Circuit applied the McCulloch standard (discussed above) to determine if the home–distilling ban was necessary. The Fifth Circuit found that under the McCulloch standard, the prohibition of home stills was not necessary because it is not “plainly adapted” to effectuate Congress’s taxation of spirits. In the court’s view, because Secs. 5178 and 5601(a)(6) “tax nothing, and are distinct from the regulation of distilling alcoholic products that is permitted by federal tax law, they do not help Congress raise revenue.” To the contrary, the court found that “the statutes reduce revenue by preventing individuals from making distilled spirits.” The Fifth Circuit, quoting the Supreme Court in James Everard’s Breweries v. Day, 265 U.S. 545, 560 (1924), stated that “Section 5178 has no ‘real or substantial relation to the enforcement of’ the taxing power.”

With regard to whether the home–distilling ban was proper, the Fifth Circuit returned to the McCulloch opinion. In McCulloch, the Fifth Circuit stated, the Supreme Court characterized a law as proper when it is not prohibited by another enumerated power and is “consist[ent] with the letter and the spirit of the constitution” (McCulloch, 17 U.S. at 421). On the other hand, the Supreme Court stated that a law must be declared unconstitutional if Congress “adopt[ed] measures which are prohibited by the constitution” or “pass[ed] laws for the accomplishment of objects not [e]ntrusted to the government” and “under the pretext of executing its powers” (id. at 423). Relatedly, the Fifth Circuit found that a law that exceeded Congress’s powers would expand the federal government and necessarily infringe on state sovereignty, citing Printz, 521 U.S. 898, 923—24 (1997). Thus, the court concluded, “By purporting to ban activity without a plain connection to the exercise of Congress’s taxation power, Congress has essentially — and ‘improperly’ — invaded the reserved police and regulatory power of the states.”

The Fifth Circuit also agreed with McNutt that the banning of home distilling is not a proper means of exercising Congress’s taxing power because it took away his choice to pay the tax on distilled spirits by engaging in otherwise legal activity, although the activity is licensed and regulated. According to the court, under the government’s reasoning, Congress could “criminalize nearly any at–home conduct only because it has the possibility of concealing taxable activity.” “Logically,” the court stated, “the Necessary and Proper Clause cannot expand the reach of the taxing power to criminalize conduct that could produce taxable revenue under the pretext that generating revenue for the federal government will be enhanced.” The Fifth Circuit concluded that, without any limiting principle, endorsing the government’s theory that Congress could ban home distilling to prevent tax avoidance would violate the court’s obligation to read the Constitution “carefully to avoid creating a general federal authority akin to the police power” (citing NFIB, 567 U.S. at 536).

Reflections

In Ream, the majority, and in McNutt, the entire panel, held that the plaintiffs had standing to bring a pre–enforcement challenge to the home–distilling ban. However, in a dissent to Ream, the dissenter argued that Ream did not have standing to challenge the home–distilling ban and would not have reached the merits in the case. In order to have standing to bring a suit challenging a law that has not been enforced against a plaintiff, the plaintiff must prove that the threatened enforcement of the law is sufficiently imminent by showing an intention to engage in the conduct prohibited by the law and that a credible threat of prosecution exists.

In the Sixth Circuit, to show that a credible threat of prosecution exists, a plaintiff is required to show that at least some combination of the four credible–threat factors exists (Davis v. Colerain Township, 51 F.4th 164, 174 (6th Cir. 2022)). The four factors are:

(1) a history of past enforcement against the plaintiffs or others; (2) enforcement warning letters sent to the plaintiffs regarding their specific conduct; (3) an attribute of the challenged statute that makes enforcement easier or more likely, such as a provision allowing any member of the public to initiate an enforcement action; and (4) the defendant’s refusal to disavow enforcement of the challenged statute against a particular plaintiff. [Christian Healthcare Centers v. Nessel, 117 F.4th 826, 848 (6th Cir. 2024) (citation modified)]

Not every factor has to be established (id.).

After applying the four factors with respect to the facts in Ream, the dissent found that only the fourth credible–threat factor had been established. Therefore, the dissent concluded that Ream did not have standing to bring a pre–enforcement challenge to the home–distilling ban.

Ream, No. 25–3259 (6th Cir. 4/21/26); McNutt, No. 24–10760 (5th Cir. 4/10/26)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.