Rev. Rul. 74-427

Advice has been requested whether the product described below is "filled cheese" within the meaning of section 4846(2) of the Internal Revenue Code of 1954.

A company manufactures and sells a product bearing a "mozzarella" cheese flavor and consisting of skim milk and various other ingredients, including vegetable oil. The product is used for such purposes as a topping for the food product known as "pizza," and as an ingredient in the manufacture of veal parmesan patties.

Section 4831(a) of the Code imposes on all filled cheese which shall be manufactured within the United States a tax of 1 cent per pound payable by the manufacturer thereof. A corresponding tax at the rate of 8 cents per pound is imposed by section 4831(b) on filled cheese imported into the United States.

Section 4841(a) of the Code imposes a special tax of $400 a year for each factory, payable by manufacturers of filled cheese.

Section 4846(2) of the Code defines filled cheese as all substances made of milk or skimmed milk, with the admixture of butter, animal oils or fats, vegetable or any other oils, or compounds foreign to such milk, and made in imitation or semblance of cheese. Substances and compounds, consisting principally of cheese with added edible oils, which are not sold as cheese or as substitutes for cheese but are primarily useful for imparting a natural cheese flavor to other foods shall not be considered filled cheese.

Since the product described above is made in imitation of cheese, and contains ingredients, such as skim milk with added vegetable oils, it falls within the statutory definition of filled cheese, provided it does not come within the exception for products that are "not sold as cheese or as substitutes for cheese but are primarily useful for imparting a natural cheese flavor to other foods."

The legislative history of the aforementioned exception indicates a Congressional intention to restrict the exception to a unique type of product. In referring to the exception, the House Report on the 1938 Revenue Act states as follows:

It appears there is now being made from cheese and edible oil a product sold not as cheese, but as cheese flavor, which is used for imparting a natural cheese flavor to various food products. A product of the kind indicated is palpably different from the filled cheese contemplated by the Act of 1896, and should not be classified therewith. (H.R. Report No. 1860, 75th Cong., 3rd Sess. (1938), 1939-1 (Part 2) C.B. 776.)

In explaining the type of product intended to be covered by the exception, the bill's sponsor presented a statement to the Ways and Means Committee which reads, in part, as follows:

The Commissioner of Internal Revenue has recently interpreted the definition of "filled cheese" in the act to cover a product manufactured which is not made of milk or skim milk from which the butterfat has been extracted. It is made of well-aged cheddar cheese from which the moisture has been extracted by a special spray drying process which reduces it to a cheese powder with a moisture content less than 3 percent and generally around 1 percent. This cheese powder is then combined with a combination of vegetable oils normally solid at room temperature in such a way as to cause the cheese particles to be uniformly suspended in the fat globules. * * * Since 1932, however, the above-described method for reducing cheese to a powdered form which is almost moisture free has been developed. Through this medium cheese may be sprayed upon farinaceous food products such as popcorn, and a large business has been developed in the United States in the coating of popcorn which will be wiped out if this product is held to be filled cheese within the meaning of the present act. * * * The product is of such texture that if heated slightly above room temperature it will settle out into cheese and vegetable oils. (Hearings before the Committee on Ways and Means on Revision of Revenue Laws, House of Representatives, 75th Cong. 3rd Sess. pg. 848 et seq.)

Based on the foregoing, it is clear that the words "primarily useful for imparting a natural cheese flavor to other foods" refer only to a special product which is capable, while otherwise meeting the definition of filled cheese, of being applied to such products as popcorn, crackers, or chips, to impart thereto an overall natural cheese flavor. It was not intended to apply to filled cheese products such as the one described in the instant case, which are not applied to other products to impart an overall natural cheese flavor, but which are sold as cheese or as substitutes for cheese, and which became a separate component of the end product.

Accordingly, the above described product is "filled cheese" within the meaning of section 4846(2) of the Code.