Cammarano v. United States Strauss Son, Inc v. Commissioner of Internal Revenue

• Decision Date: 24 February 1959
• Docket Number: Nos. 29 and 50,s. 29 and 50
• Citation: 358 U.S. 498,79 S.Ct. 524,3 L.Ed.2d 462
• Parties: William B. CAMMARANO and Louise Cammarano, his wife, Petitioners, v. UNITED STATES of America. F. STRAUSS & SON, INC., of Arkansas, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

358 U.S. 498

79 S.Ct. 524

3 L.Ed.2d 462

William B. CAMMARANO and Louise Cammarano, his wife, Petitioners,

v UNITED STATES of America.

F. STRAUSS & SON, INC., of Arkansas, Petitioner,

v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 29 and 50.

Argued Nov. 19, 1958.

Decided Feb. 24, 1959.

Frederick Bernays Wiener, Washington, D.C., for petitioners, William B. Cammarano and Louise Cammarano.

Oscar H. Davis, Washington, D.C., for the United States.

E. Chas. Eichenbaum, Little Rock, Ark., for petitioner, F. Strauss & son, inc.

Mr. Justice HARLAN delivered the opinion of the Court.

These cases, coming to us from two different Circuits, present identical issues, and may appropriately be dealt with together in one opinion. The issues involve the interpretation and validity of Treas. Reg. 111, § 29.23(o)—1 and § 29.23(q)—1 as applied by the courts below to deny deduction as 'ordinary and necessary' business expenses under § 23(a)(1)(A) of the Internal Revenue Code of 1939¹ to sums expended by the respective taxpayer petitioners in furtherance of publicity programs designed to help secure the defeat of initiative measures then pending before the voters of the States of Washington and Arkansas.

The Treasury Regulations in question each provides in pertinent part that no deduction shall be allowed to 'sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising * * *.'² Both Courts of Appeals held that these provisions render nondeductible sums paid by petitioners to organizations which expended them in extensive publicity programs designed to persuade the voters to cast their ballots against state initiative measures, even though the passage of those measures would have seriously affected, or indeed wholly destroyed, the taxpayers' businesses—and that so interpreted the Regulations are a valid exercise of the Commissioner's rule-making power. We granted certiorari because of the recurring nature of the question, and because of its importance to the proper administration of the Internal Revenue laws. 355 U.S. 952, 78 S.Ct. 541, 2 L.Ed.2d 529; 356 U.S. 966, 78 S.Ct. 1007, 2 L.Ed.2d 1073.

A brief review of the facts in the two cases is necessary to an understanding of the issues.

No. 29: In 1948 petitioners William and Louise Cammarano, husband and wife, jointly owned a one-fourth interest in a partnership engaged in the distribution of beer at wholesale in the State of Washington. The partnership was a member of the Washington Beer Wholesalers Association. In December 1947 the Association had established a trust fund as a repository for assessments collected from its members to help finance a statewide publicity program urging the defeat of 'Initiative to the Legislature No. 13,' a measure to be submitted to the electorate at the general election of November 2, 1948, which would have placed the retail sale of wine and beer in Washington exclusively in the hands of the State. During 1948 petitioners' partnership paid to the trust fund $3,545.15, of which petitioners' pro rata share was $886.29. The trust fund collected a total of $53,500, which was turned over to an Industry Advisory Committee organized by wholesale and retail wine and beer dealers, which in turn expended it as part of contributions totaling $231,257.10 for various kinds of advertising directed to the public, none of which referred to petitioners' wares as such and all of which urged defeat of Initiative No. 13. ³ The initiative was defeated.

In preparing their joint income tax return for 1948, petitioners deducted as a business expense the $886.29 paid to the Association's trust fund as their share of the partnership assessment. The deduction was disallowed by the Commissioner, and petitioners paid under protest the additional sum thus due and sued in the District Court for refund. That court ruled that the payments made to the trust fund were 'expended for * * * the * * * defeat of legislation' within the meaning of Treas. Reg. 111, § 29.23(o)—1 and were therefore not deductible as ordinary and necessary business expenses under § 23(a)(1)(A) of the Internal Revenue Code of 1939. The Court of Appeals affirmed, holding the Regulation applicable and valid as applied. 9 Cir., 246 F.2d 751.⁴ No. 50: Petitioner F. Strauss & Son, Inc., is a corporation engaged in the wholesale liquor business in Arkansas. In 1950 an initiative calling for an election on statewide prohibition was placed on the ballot to be voted on in the state general election on November 7, 1950. In May of that year Strauss, together with eight other Arkansas liquor wholesalers, organized Arkansas Legal Control Associates, Inc., as a means of coordinating their efforts to persuade the voters of Arkansas to vote against the proposed prohibition measure. Between May 30 and November 30, 1950, Arkansas Legal Control Associates collected a total of $126,265.84, which was disbursed for various forms of publicity concerning the proposed Act.⁵ Strauss' contribution amounted to $9,252.67.

The initiative measure was defeated in the November election. On its 1950 income tax return Strauss deducted the $9,252.67 as a business expense. The Commissioner disallowed the deduction and Strauss filed a timely petition in the Tax Court seeking a redetermination of the deficiency asserted. That court upheld the action of the Commissioner in disallowing the claimed deduction, and the Court of Appeals unanimously affirmed. 8 Cir., 251 F.2d 724.

Since 1918 regulations promulgated by the Commissioner under the Internal Revenue Code have continuously provided that expenditures for the 'promotion or defeat of legislation * * *,' or for any of the other purposes specified in the 'corporate' Regulation now before us, are not deductible from gross corporate income; and since 1938 regulations containing identical language have forbidden such deductions from individual income.⁶ During this period of more than 40 years these regulatory provisions have been before this Court on only one occasion. In Textile Mills Security Corporation v. Commissioner of Internal Revenue, 314 U.S. 326, 62 S.Ct. 272, 86 L.Ed. 249, it was held that the Commissioner properly disallowed the deduction of sums paid by a corporation to a publicist and two legal experts employed to help secure the passage of legislation designed to secure the return of certain properties in this country seized during World War I under the provisions of the Trading With the Enemy Act, 50 U.S.C.A. Appendix, § 1 et seq. This holding was squarely based on the regulatory provisions now embodied in Treas.Reg. 111, § 29.23(q) 1, which were found valid and applicable to the facts involved in that case, although the very busi- ness of the taxpayer seeking the deduction was the direction of the publicity program in the course of which the expenditures were made.

Petitioners suggest that Textile Mills is not dispositive of the present cases, either as to the applicability of the Regulations upon the facts disclosed by these records or as to the validity of those Regulations under the statute if they are found to be applicable. Essentially, petitioners' contentions are (1) that the Regulations cannot properly be construed as applicable to expenditures made in connection with efforts to promote or defeat the passage of legislation by persuasion of the general public as opposed to direct influence on legislative bodies, that is 'lobbying'; (2) that in any case the Regulations are inapplicable to expenditures made in connection with initiative measures; and (3) that if construed as applicable to the facts here presented the Regulations are invalid as contrary to the plain terms of § 23(a) (1)(A) of the 1939 Code and possibly as unconstitutional under the First Amendment.

We need not be long detained by the question of the applicability of the Regulations to petitioners' expenditures. First, we see no justification for reading into these regulatory provisions the implied exceptions which petitioners would have us there find. We cannot accept petitioners' argument that Textile Mills should be read as limiting such provisions to direct dealings with legislators, insidious or otherwise. The deductions whose propriety was before the Court in that case were for expenditures, characterized by the Court of Appeals as being for 'matters of publicity, 'including the making of arrangements for speeches, contacting the press, in respect of editorial comments, and news items," and for the preparation of 'brochures' involving 'a comprehensive study of the history of the treatment of persons and property in war,' 3 Cir., 117 F.2d 62, 65, 63, all designed to influence the opinions of the general public.⁷ Apart from Textile Mills, the Courts of Appeals have uniformly applied these Regulations to expenditures for publicity directed to the general public on legislative matters. See e.g., Revere Racing Ass'n v. Scanlon, 1 Cir., 232 F.2d 816; American Hardware & Equipment Co. v. Commissioner of Internal Revenue, 4 Cir., 202 F.2d 126; Roberts Dairy Co. v. Commissioner of Internal Revenue, 8 Cir., 195 F.2d 948; Sunset Scavenger Co. v. Commissioner of Internal Revenue, 9 Cir., 84 F.2d 453. Petitioners' reading of these Regulations would make all but the reference to 'lobbying' pure surplusage. We think that the Regulations must be construed to mean what they say—that not only lobbying expenses, but also sums spent for 'the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising' are nondeductible.⁸

Likewise unpersuasive is petitioners' suggested distinction between expenses incurred in attempting to promote or defeat legislation pending before legislatures and those incurred in furthering or combatting an initiative measure. We think that initiatives are plainly 'legislation' within the meaning of these Regulations. Had the ...