F. STRAUSS & SON, INC., OF ARK v. Commissioner of Int. Rev.

• Decision Date: 03 March 1958
• Docket Number: No. 15864.,15864.
• Citation: 251 F.2d 724
• Parties: F. STRAUSS & SON, Inc., OF ARKAN SAS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

251 F.2d 724 (1958)

F. STRAUSS & SON, Inc., OF ARKAN SAS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15864.

United States Court of Appeals Eighth Circuit.

January 24, 1958.

Rehearing Denied March 3, 1958.

Leonard L. Scott and E. Charles Eichenbaum, Little Rock, Ark. (W. S. Miller, Jr., Little Rock, Ark., was with them on the brief), for petitioner.

David O. Walter, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Grant W. Wiprud, Attys., Department of Justice, Washington, D. C., were with him on the brief), for respondent.

Before GARDNER, Chief Judge, and WOODROUGH and VOGEL, Circuit Judges.

GARDNER, Chief Judge.

This matter is before us on petition to review a decision of the Tax Court which determined a deficiency in petitioner's income tax for the year 1950 in the amount of $10,386.12.

Taxpayer is a corporation which at all times here pertinent was engaged in the wholesale liquor business in Little Rock, Arkansas. The sale of liquor in Arkansas has been legal since 1935, subject to state laws providing for county-wide option. At a general election held in November, 1950, there was submitted to vote, pursuant to the Arkansas law, an initiated measure in the nature of a state-wide prohibition act which by its terms would have made it unlawful to manufacture, sell, barter, loan or give away intoxicating liquors within the State of Arkansas, or to export from, import to or transport the same within the state.

In this situation taxpayer and eight other wholesale liquor dealers organized a corporation known in the record as the Arkansas Legal Control Associates, Inc., which we shall hereinafter refer to as the corporation. The purpose of the wholesalers in forming the corporation was to persuade the electorate to vote against the proposed prohibition act, and for the period from May 30 to November 30, 1950, the corporation received contributions totaling $126,265.84 and disbursed over $100,000 for direct advertising through newspapers, radio, billboards, book matches, bar banners, special folders and press releases. Such advertising contained arguments designed to convince the voters that it was in the public interest to defeat the proposed prohibition act. Taxpayer's contribution to the corporation amounted to $9,252.67. On its income tax return for 1950 taxpayer deducted this amount from gross income as an ordinary and necessary business expense but the Commissioner disallowed this deduction.

In the Tax Court taxpayer contended that its payment to the corporation was deductible as a business expense, or alternatively, as a contribution. The Tax Court determined that the payment made by taxpayer to the corporation was neither deductible as a contribution under Section 23(q) of the Internal Revenue Code of 1939 nor as a business expense under Section 23(a) (1) (A) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(a) (1) (A) (q). Taxpayer has now abandoned its contention that this payment to the corporation was a contribution deductible under Section 23(q) of the Internal Revenue Code of 1939, but adheres to its contention that its payment to the corporation was an ordinary and necessary business expense under Section 23(a) (1) (A) of the Internal Revenue Code of 1939, and that is the sole question presented for our determination.

Section 23(a) (1) (A) reads in part as follows:

"In computing net income there shall be allowed as deductions: * * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *."

The statute does not define nor determine what is or is not an "ordinary and necessary" business expense. Deductions are a matter of legislative grace and do not turn on general equitable considerations and the burden of clearly showing the right to the claimed deduction is on the taxpayer. Deputy v. DuPont, 308 U.S. 488, 60 S.Ct. 363, 84 L. Ed. 416; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348; Omaha Nat. Bank v. Commissioner of Internal Rev., 8 Cir., 183 F.2d 899, 25 A.L.R.2d 628; O'Malley v. Yost, 8 Cir., 186 F.2d 603; Wetterau Grocer Co. v. Commissioner of Internal Rev., 8 Cir., 179 F.2d 158; Montana Power Company v. United States, 3 Cir., 232 F. 2d 541. In New Colonial Ice Co. v. Helvering, supra, the rule is stated as follows 292 U.S. 435, 54 S.Ct. 790:

"Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed."

In Omaha Nat. Bank v. Commissioner of Internal Rev., supra, in referring to the rule to be followed in determining income tax deductions we said 183 F.2d 902:

"In examining the taxpayer\'s argument we are required to be mindful of the rule that an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer."

The statute allowing deductions for ordinary and necessary business expenses, as has been observed, does not define nor determine what is or is not an ordinary and necessary business expense. In this situation Section 29.23(q)-1, Treasury Regulation 111, was adopted definitely describing certain classes of expenditures as not allowable deductions under this statute. The regulation reads as follows:

"* * * Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses are not deductible from gross income."

This regulation has been in effect for nearly forty years and is in the nature of a proclaimed policy. It was considered and sustained by the Supreme Court in Textile Mills Securities Corp. v. Com'r, 314 U.S. 326, 62 S.Ct. 272, 279, 86 L.Ed. 249. In that case the court disallowed as deductions expenditures for services rendered in an attempt to procure legislation authorizing payment of claims submitted by former enemy aliens. In the course of the opinion the court among other things said:

"The words `ordinary and necessary\' are not so clear and unambiguous in their meaning and application as to leave no room for an interpretative regulation. The numerous cases which have come to this Court on that issue bear witness to that. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Deputy v. duPont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416, and cases cited. Nor has the administrative agency usurped the legislative function by carving out this special group of expenses and making them non-deductible. We fail to find any indication that such a course contravened any Congressional policy. Contracts to spread such insidious influences through legislative halls have long been condemned. Trist v. Child, 21 Wall. 441, 22 L.Ed. 623; Hazelton v. Sheckels, 202 U.S. 71, 26 S.Ct. 567, 50 L.Ed. 939. Whether the precise arrangement here in question would violate the rule of those cases is not material. The point is that the general policy indicated by those cases need not be disregarded by the rule-making authority in its segregation of nondeductible expenses. There is no reason why, in absence of clear Congressional action to the contrary, the rule-making authority cannot employ that general policy in drawing a line between legitimate business expenses and those arising

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