Campbell v. Davenport

• Decision Date: 25 July 1966
• Docket Number: No. 22470.,22470.
• Parties: Ellis CAMPBELL, Jr., District Director of Internal Revenue, Appellant, v. Gussie L. DAVENPORT, Individually and as Independent Executrix of the Estate of F. B. Davenport, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

362 F.2d 624 (1966)

Ellis CAMPBELL, Jr., District Director of Internal Revenue, Appellant, v. Gussie L. DAVENPORT, Individually and as Independent Executrix of the Estate of F. B. Davenport, Appellee.

No. 22470.

United States Court of Appeals Fifth Circuit.

June 9, 1966.

As Corrected on Denial of Rehearing July 25, 1966.

Melvin M. Diggs, U. S. Atty., Dallas, Tex., Louis F. Oberdorfer, Asst. Atty. Gen., Meyer Rothwacks, Melva M. Graney, Robert A. Bernstein, Fred R. Becker, Attys., Dept. of Justice, Washington, D. C., for appellant, Martha Joe Stroud, Asst. U. S. Atty., of counsel.

Larry L. Bean, Sam G. Winstead, Dallas, Tex., for appellee, Jackson, Walker, Winstead, Cantwell & Miller, Dallas, Tex., of counsel.

Before BELL and THORNBERRY, Circuit Judges, and FISHER, District Judge.

THORNBERRY, Circuit Judge:

The facts in this case are undisputed and fully stipulated. During the taxable year 1962, Judge F. B. Davenport was a candidate for re-election to the office of Judge of the 116th Judicial District Court of Texas. He was successful and served until his death on June 18, 1963.

Under the Texas Election Code, V.A. T.S., a candidate in a primary election must pay an assessment levied by the county executive committee before his name may be placed on the ballot.¹ The assessment is basically the candidate's apportioned share of the cost of running the election as computed by the committee from an estimate of election expenses. The assessment may be used only to defray the expenses arising from the primary elections as provided by statute. Funds in excess of election expenses are refunded to the candidates in proportion to the amounts each paid.

Judge Davenport was assessed $2,880.00 and received a refund of $921.60. The net assessment of $1,958.40 was claimed as a deduction by the taxpayer and disallowed by the Commissioner. Payment of $555.19 tax was required. Mrs. Davenport, individually and as executrix of Judge Davenport's estate, filed suit for refund, asserting that the net assessment is deductible as an ordinary and necessary business expense (Int.Rev.Code of 1954, § 162); as an ordinary and necessary expense incurred for the production or collection of income (Int.Rev.Code of 1954, § 212); or as a deductible state tax (Int.Rev.Code of 1954, § 164, 26 U.S. C. § 164 (1958)).² The District Court concluded that the assessment was deductible "since the payment was a necessary and proper expenditure not only for the carrying on of the business but for the production of the business." Davenport v. Campbell, N.D.Tex.1964, 238 F. Supp. 568, 572.

I.

Consideration of whether the assessment is deductible as an ordinary and necessary expense incurred in carrying on a trade or business or in the production of income must begin with an analysis of McDonald v. Commissioner, 1944, 323 U.S. 57, 65 S.Ct. 96, 89 L.Ed. 68. Judge McDonald sought to deduct his campaign expenses and an "assessment" paid to the party organization to obtain its support. The Court found that performance of the judicial office constituted carrying on a trade or business under the terms of the Code and that the judge was entitled to deduct all ordinary and necessary expenses paid in carrying on that trade or business. The Court noted, however, that "his campaign contributions were not expenses incurred in being a judge but in trying to be a judge for the next ten years." 323 U.S. at 60, 65 S.Ct. at 97, 89 L.Ed. at 72. (Emphasis added.) Thus, the Court drew a distinction between expenses incurred in performing the judicial function and those expended in an effort to secure election, and denied a deduction for expenses of the latter type. The Court also refused to allow a deduction of such campaign expenses as expenses incurred in the production of income. Although the assessment in the present case differs in some ways from that in McDonald the rationale of McDonald prevents the reaching of a different result here. Judge Davenport's assessment was incurred as an expense of attaining the office, not in performing the judicial function. For this reason, the deduction of the assessment as an ordinary and necessary expense incurred in carrying on a trade or business or in the production of income was properly denied by the Commissioner.

II.

A more difficult question is presented in determining whether the assessment qualifies as a tax under Section 164 of the Code.³ Prior to the 1964 Amendments and during the taxable year 1962, Section 164 provided that taxes paid or accrued within the taxable year were deductible with certain exceptions not applicable here.⁴ No definition of "taxes" is found in the Code. As is frequently the case, the drafting of an acceptable definition has proven easier than applying the definition to a particular fact situation. Indeed, the Commissioner's attempts to classify assessments are classic examples of this proposition. In Revenue Ruling 57-345, such assessments were found to be taxes deductible under Section 164; while in Revenue Ruling 60-365, the assessment was held to be a fee rather than a tax.

Revenue Ruling 57-345, construing a New Mexico statute, defines "tax" as:

"an enforced contribution, exacted pursuant to legislative authority in the exercise of taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes, and not as a payment for some special privilege granted or service rendered. Taxes are, therefore, distinguishable from various other contributions and charges imposed for particular purposes under particular powers or functions of the Government. In view of such distinctions, the question whether a particular contribution or charge is to be regarded as a tax depends upon its real nature * * *.

"A charge primarily imposed for the purpose of regulation is not a tax, even though it produces revenue. On this basis, fees paid for dog licenses, automobile inspection, and automobile title registration have been held not to be deductible as taxes * * *. Similarly, amounts paid to purchase hunting and fishing licenses have been held not deductible as taxes * * *. On the other hand, the conduct of primary elections constitutes the performance of a proper State or Governmental function in the same manner as the conduct of general elections, and is not merely the regulation of a private function."

Since the purpose of the filing fee required by the New Mexico statute was "to raise revenue which is to be used in defraying the expenses of the primary election," the Revenue Ruling concluded that the assessment was a tax within Section 164.

The Commissioner considered the same question in Revenue Ruling 60-366 which involved the North Carolina primary filing fee. The Ruling notes that:

"an important factor in distinguishing a fee from a tax is the purpose for the imposition of the charge. Clearly, if the only or the primary purpose is the raising of revenue, the charge is a tax, and governmental regulation arising merely as an incident will not alter the character of the exaction * * *. On the other hand, `if the fee is exacted for the primary purposes of regulating and restraining an occupation or privilege deemed dangerous to the public or to be specially in need of public control, and compliance with certain conditions is required in addition to the payment of the prescribed sum, such fee is a license * * *. A charge imposed as a consideration for a privilege granted one by a governmental unit is not a "tax" in the sense in which the word is ordinarily used.\'"

The Ruling then cites a North Carolina case which found the assessment to be "one of the reasonable means adopted by the legislature to regulate primary elections * * *" and concludes that "since the North Carolina Supreme Court has held that this levy was to regulate the primary election and was not a revenue measure, it is a regulatory fee * * *" and not a "tax." Revenue Ruling 57-435 was revoked.

Although in both Rulings the Commissioner relies on basically the same definition and finds that the purpose of the assessment determines whether it is to be classified as a tax or as a fee, he obviously has had some difficulty in applying the definition.

We now try our hand at classifying the assessment. We are not referred to any Texas cases which have attempted to determine the nature of the assessment. It is, however, not difficult to conclude that the assessment in Texas has both a regulatory and a revenue function. Thus, it...