A. Giurlani & Bro. v. Com'r of Int. Rev.

• Decision Date: 15 May 1941
• Docket Number: No. 9621.,9621.
• Citation: 119 F.2d 852
• Parties: A. GIURLANI & BRO., Inc. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

119 F.2d 852 (1941)

A. GIURLANI & BRO., Inc. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9621.

Circuit Court of Appeals, Ninth Circuit.

May 15, 1941.

Dinkelspiel & Dinkelspiel, Martin J. Dinkelspiel, and John Walton Dinkelspiel, all of San Francisco, Cal. (Fred S. Herrington, of San Franciso, Cal., of counsel), for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Harry Marselli, and M. S. Price, Sp. Assts. to the Atty. Gen., for respondent.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

GARRECHT, Circuit Judge.

The fundamental question presented is whether $32,962.50 paid in 1935 by petitioner to creditors of an Italian corporation, which controlled the source of supply of petitioner's most profitable merchandise, to save the Italian corporation from bankruptcy, was deductible as an ordinary and necessary business expense or as a loss sustained in trade or business. The Board of Tax Appeals held it was neither and sustained the Commissioner, who had refused to allow the deduction and had assessed a deficiency against the petitioner for the year 1935.

The Board found:

The petitioner is a California corporation, engaged in the wholesale grocery business since 1911. The most profitable part of its business is the importation and sale of olive oil, of which it is the largest importer on the Pacific Coast. The principal stockholders of petitioner are two brothers of Italian birth, A. Giurlani and Giuseppe Giurlani. For the past fifteen years "Star Brand" olive oil, purchased from Gaetano Giurlani, S.A., an Italian corporation of Lucca, Italy, has comprised the greater part of petitioner's olive oil importations. The principal stockholders of the Italian corporation are two brothers of the two principal stockholders of petitioner. The brothers in Italy had no stock in the California corporation, neither had the two brothers in California any stock in the Italian corporation. The trade-mark "Star Brand," which identifies the product of Gaetano Giurlani, S.A., was never registered in the United States, and petitioner never had any right to, or ownership in, the said trade-mark. The total gross profit on all merchandise sales made by petitioner in the calendar year 1935 was $142,323.61, of which $103,280.26 was from the sale of "Star Brand" olive oil. Petitioner distributed about 78,000 gallons of "Star Brand" olive oil in 1935.

In 1935 Gaetano Giurlani, S.A., became financially involved, was placed in bankruptcy, and petitioner received notice that its assets were to be auctioned off in bankruptcy sale. The president, vice-president, and secretary of petitioner conferred, agreed that the closing of the source of supply and inability to serve "Star Brand" olive oil would be detrimental to the business. The secretary was sent to Italy with full power to "do everything to save the Company." He negotiated, compromised, and settled with the creditors of Gaetano Giurlani, S.A., for the sum of $32,962.50, receiving therefor no consideration, tangible or intangible.

"Star Brand," a blend of olive oils, has a distinctive aroma, flavor, body, and color recognizable by merchants, cooks, and other users thereof; we are told there is no other olive oil exactly the same, although it is not urged that "Star Brand" is best.

The "Star Brand" had been inherited in Italy by five brothers from their father, who died in 1916; the fifth brother died in 1934, leaving his interest to the brothers resident in Italy. For more than ten years the brothers resident in California had used the trade-mark exclusively in North America, and the brothers resident in Italy had used the trade-mark elsewhere, except North America. An instrument recitative of these latter facts was registered in Rome, Italy, by the secretary of the California corporation, in 1935.

Petitioner offered no testimony in explanation of why it was not subrogated to the rights of the creditors to whom it made payment in behalf of the Italian corporation; or why it did not receive an interest or share in the Italian corporation upon paying this extraordinarily large sum of money to its creditors; or that it would be impossible to do business with the successor of the Italian corporation had the latter's creditors forced its stockholders out of control; or that it would have been impossible for it to specify to other producers of olive oil in the Lucca district of Italy, a blend which would approximate that which is known as "Star Brand."

It is elementary, of course, that the extent of allowable deductions from gross income for the purpose of income taxation is dependent upon legislative grace; that only as there is clear provision therefor can any particular deduction be allowed; and that, therefore, a taxpayer claiming a deduction must be able to point to an applicable statute and show that he comes within its terms. New Colonial Ice Co., Inc. v. Helvering, Commissioner, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348; White v. Commissioner, 9 Cir., 61 F.2d 726, 728. Likewise, "It is well settled that the determination of the Commissioner is prima facie correct, and the burden is upon the taxpayer claiming a deduction disallowed by the Commissioner not only to prove that the Commissioner erred, but also to establish his right to the deduction and the amount thereof. Cases cited." Langford Inv. Co. v. Commissioner, 5 Cir., 77 F.2d 468, 472. Moreover, on petition for review in the Circuit Court of Appeals, "The function of the court is to decide whether the correct rule of law was applied to the facts found; and whether there was substantial evidence before the Board to support the findings made. * * *" Helvering v. Rankin, 295 U.S. 123, 131, 55 S. Ct. 732, 736, 79 L.Ed. 1343. See also Parkersburg Iron & Steel Co. v. Burnet, Commissioner, 4 Cir., 48 F.2d 163, 164.

The Revenue Act of 1934, 48 Stat. 680, allowed as deductions for the purpose of computing net income, "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *." Sec. 23(a), 26 U.S.C.A. Int.Rev.Code, § 23(a). It is not a sufficient compliance with the statute that the expense sought to be deducted is an ordinary expense or a necessary expense. "In order that such payments may meet the requirements of the statute, they must be both an ordinary expense and a necessary expense." Lloyd v. Commissioner, 7 Cir., 55 F.2d 842, 844. See, also, Commissioner v. The Hub, Inc., 4 Cir., 68 F.2d 349, 350. This rule is stated by the Supreme Court in Deputy v. DuPont, 308 U.S. 488, 497, 60 S.Ct. 363, 368, 84 L.Ed. 416, as follows: "* * * Congress has not decreed that all necessary expenses may be deducted. Though plainly necessary they cannot be allowed unless they are also ordinary."

The petitioner contends that the expenditure of $32,962.50, made by it in 1935, was an ordinary and necessary expense of the business and deductible as such and that the Commissioner erred in disallowing the claimed deduction. It argues "that whenever a taxpayer, individual or corporate, expends money for the purpose and with the motive of protecting an existing business, such expenditure constitutes an `ordinary and necessary expense' which is deductible."

Petitioner marshals a formidable array of authorities as advancing its cause; respondent counters with an equally impressive display of decisions in support of the Commissioner and the Board's ruling. But these cases, and the many others discovered by us in independent research, fail to provide "any verbal formula that will supply a ready touchstone." Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212. This frustration caused the Supreme Court to say, in the case just cited: "Many cases in the federal courts deal with phases of the problem presented in the case at bar. To attempt to harmonize them would be a futile task. They involve the appreciation of particular situations, at times with border-line conclusions." Quite recently the same court gave utterance to a kindred thought in Deputy v. DuPont, 308 U.S. 488, 496, 60 S.Ct. 363, 367, 84 L.Ed. 416: "Review of the many decided cases is of little aid since each turns on its special facts." Thus, unfettered, we proceed to determine the question in this case on its own special facts, taking advantage of whatever help we may find in the decided cases. We are bound to give to the words "ordinary and necessary" their usual, ordinary, and everyday connotation, without reference to "some esoteric concept derived from subtle and theoretic analysis,"¹ and keep in mind the admonition that "when it comes to construction of the statutory provision under which the deduction is sought, the general rule that `popular or received import of words furnishes the general rule for the interpretation of public laws' case cited is applicable."²

Was the payment necessary? Unquestionably, some action was required on the part of the taxpayer or of the Italian corporation if the former desired to save to itself the large profit which came to it as a result of its dealings in "Star Brand" olive oil. Perhaps, in the exercise of the judgment of petitioner's officers, it was thought "necessary" to make the payment. This would almost seem to follow from the stating of the fact, but here other considerations present themselves. We are not informed, by the record presented by the petitioner, of the effect of the payment and are left to assume that it had the desired effect — that of assuring the source of supply, of guaranteeing the flavor, odor, color, and body of the olive oil to be purchased by the petitioner. Nor are we enlightened as to precisely why it was necessary to make the payment without receiving any consideration therefor, tangible or intangible. Moreover, without stopping to labor the point, we are impelled to observe that while the payment appears expedient and wise from a business standpoint, its necessity has not been shown clearly, and not...