Estate of Rockefeller v. C.I.R.

• Decision Date: 24 May 1985
• Docket Number: No. 1041,D,1041
• Citation: 762 F.2d 264
• Parties: -5094, 53 USLW 2620, 85-1 USTC P 9429 ESTATE OF Nelson A. ROCKEFELLER, Deceased, Laurance S. Rockefeller, J. Richardson Dilworth and Donal C. O'Brien, Jr., Executors and Margaretta F. Rockefeller, Appellants. v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ocket 84-4182.
• Court: U.S. Court of Appeals — Second Circuit

Page 264

762 F.2d 264

56 A.F.T.R.2d 85-5094, 53 USLW 2620, 85-1

USTC P 9429

ESTATE OF Nelson A. ROCKEFELLER, Deceased, Laurance S.

Rockefeller, J. Richardson Dilworth and Donal C.

O'Brien, Jr., Executors and Margaretta

F. Rockefeller, Appellants. v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 1041, Docket 84-4182.

United States Court of Appeals, Second Circuit.

Argued April 22, 1985.

Decided May 24, 1985.

William E. Jackson, New York City (Stuart E. Keebler, Joseph M. Persinger, Milbank, Tweed, Hadley & McCloy, New York City), for appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Washington, D.C. (Michael L. Paup, Richard Farber, Bruce R. Ellisen, Attys., Tax Div., Dept. of Justice, Washington, D.C.), for appellee.

Before FEINBERG, Chief Judge, and FRIENDLY and NEWMAN, Circuit Judges.

FRIENDLY, Circuit Judge:

This appeal by the Estate of Nelson A. Rockefeller and his widow ¹ from a decision of the Tax Court, 83 T.C. 368 (1984), Featherston, J., presents a new variation on the old theme of what constitutes "ordinary and necessary expenses paid or incurred ... in carrying on any trade or business," I.R.C. Sec. 162(a), which are deductible in determining net income. Appellants contended that expenses incurred by Mr. Rockefeller in connection with the confirmation by the Senate and the House of Representatives, pursuant to the Twenty-Fifth Amendment, of his nomination to be Vice President of the United States were such expenses. The Commissioner of Internal Revenue denied this, the Tax Court agreed, and this appeal followed. We affirm.

The case arises as follows: Mr. Rockefeller incurred expenses of $550,159.78 in connection with the confirmation hearings in 1974, primarily for legal and other professional services. The Commissioner does not contend that the expenses were excessive or unreasonable in relation to the services rendered. In their joint income tax The case was submitted on a rather meagre stipulation of facts which cited only Mr. Rockefeller's tenure as Governor of New York State between January 1959 and December 1973, when he resigned to devote his full time to the Commission on Critical Choices for Americans (1973-74) and the National Commission on Water Quality (1973-74), as showing the trade or business in which Mr. Rockefeller had engaged. However, copies of the hearings before and the reports of the Senate and House Committees on his nomination as Vice President were attached to the stipulation, and the Tax Court's opinion lists other positions held by Mr. Rockefeller referred to in these hearings, as follows: Coordinator of Inter-American Affairs (1940-44), Assistant Secretary of State for American Republic Affairs (1944-45), Chairman of the Presidential Advisory Board on International Development (1950-51), Undersecretary of Health, Education and Welfare (1953-54), and Special Assistant to the President for International Affairs (1954-55). 83 T.C. at 374-75.

return for 1974, which showed a gross income of $4,479,437, Mr. and Mrs. Rockefeller claimed a deduction of $63,275--an amount of these expenses equal to his salary as Vice President during the year. When the Commissioner of Internal Revenue disallowed this deduction, Mr. Rockefeller's estate and Mrs. Rockefeller petitioned for review by the Tax Court and asserted that the entire amount of $550,159.78 was deductible as expenses of the trade or business of "performing the functions of public office."

DISCUSSION

Decision turns on the interpretation of the familiar provision of I.R.C. Sec. 162(a), going back to the Revenue Act of 1918, which allows as a deduction

all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Also relevant is I.R.C. Sec. 7701(a)(26), adopted as Sec. 48(d) of the Revenue Act of 1934, 48 Stat. 680, 696, ch. 277, which says:

The term 'trade or business' includes the performance of the functions of a public office. ²

Almost all discussions of the problem here at issue begin, and many of them end, with McDonald v. C.I.R., 323 U.S. 57, 65 S.Ct. 96, 89 L.Ed.2d 68 (1944), although in fact it sheds a most uncertain light. McDonald had been appointed to serve an unexpired term as judge on a Pennsylvania court, carrying an annual salary of $12,000, with the understanding that he would be a contestant in the ensuing primary and general elections for a full term of ten years. To obtain the support of his party organization, he was forced to pay an "assessment" of $8,000, which was to be used for the support of the entire ticket; he spent an additional $5,017.27 for expenses of his own campaign. The Commissioner disallowed the deduction of both amounts. The Tax Court affirmed, 1 T.C. 738 (1943), as did a sharply divided Supreme Court. ³ The bases for the decision are not altogether clear. At one point Justice Frankfurter emphasized that McDonald's "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. Perhaps fearing that this being-becoming distinction would cut too widely, Justice Frankfurter elaborated other factors. One was that allowance of a deduction for the assessments paid by McDonald would lead to deductions by persons who were not candidates but paid "such 'assessments' out of party allegiance mixed or unmixed by a lively sense of future favors," id., a proposition which would not necessarily follow and which in any event would not explain the disallowance of McDonald's own campaign expenses. This was followed by a sentence, again emphasizing the being-becoming distinction but with a different thought added for good measure, 323 U.S. at 60-61, 65 S.Ct. at 97:

To determine allowable deductions by the different internal party arrangements for bearing the cost of political campaigns in the forty-eight states would disregard the explicit restrictions of Sec. 23 confining deductible expenses solely to outlays in the efforts or services--here the business of judging--from which the income flows. Compare Welch v. Helvering, 290 U.S. 111, 115-116 [54 S.Ct. 8, 9, 78 L.Ed.2d 212 (1933) ].

After disposing of arguments based on what are now I.R.C. Sec. 165 and Sec. 212(1), he continued with some observations concerning the increased public hostility to campaign contributions by "prospective officeholders, especially judges," and then concluded on two notes. One was that, 323 U.S. at 63-64, 65 S.Ct. at 98-99:

To find sanction in existing tax legislation for deduction of petitioner's campaign expenditures would necessarily require allowance of deduction for campaign expenditures by all candidates, whether incumbents seeking reelection or new contenders. To draw a distinction between outlays for reelection and those for election--to allow the former and disallow the latter--is unsupportable in reason. It is even more unsupportable in public policy to derive from what Congress has thus far enacted a handicap against candidates challenging existing office holders. And so we cannot recognize petitioner's claim on the score that he was a candidate for reelection.

(footnote omitted). The other was the desirability of according special deference to the Tax Court's determination on a matter of the sort sub judice, id. at 64-65, 65 S.Ct. at 99. The Supreme Court has not had subsequent occasion to revisit the field plowed in McDonald.

The courts have echoed the various themes sounded in McDonald. Some decisions have stressed the being-becoming distinction; see, e.g., Diggs v. C.I.R., 715 F.2d 245, 250 (6 Cir.1983). Others have emphasized the policy argument against deduction of campaign expenses, namely, that allowing such deductions would involve the whole community in partial subsidization of the electoral expenses of a particular candidate--a subsidy that would pay a larger amount of the campaign expenses of high than of low bracket candidates. See, e.g., James B. Carey, 56 T.C. 477, 479-81 (1971) aff'd per curiam, 460 F.2d 1259 (4 Cir.), cert. denied, 409 U.S. 990, 93 S.Ct. 325, 34 L.Ed.2d 257 (1972). The appellants distinguish the latter cases, stressing that the expenses here at issue were not incurred in an election in which Mr. Rockefeller was pitted against another citizen but in a confirmation in which he was the only candidate. ⁴ However, the policy argument in McDonald is only dubiously applicable to Campbell v. Davenport, 362 F.2d 624, 626 (5 Cir.1966), Nichols v. C.I.R., 511 F.2d 618 (5 Cir.) (en banc), cert. denied, 423 U.S. 912, 96 S.Ct. 215, 46 L.Ed.2d 140 (1975), and Levy v. United States, 535 F.2d 47, 26 Ct.Cl. 97, cert. denied, 429 U.S. 885, 97 S.Ct. 236, 50 L.Ed.2d 166 (1976), disallowing the deduction of small qualification fees payable by any candidate to his party to help to defray the costs of conducting the primary election and of which "[n]o part ... was used to espouse the causes of party candidates in the general election." Nichols, supra, 511 F.2d at 619. Further support for the Commissioner's position can be found in Joseph W. Martino, 62 T.C. 840, 844 (1974), disallowing deduction of legal fees incurred by a successful primary candidate in defending his victory against an election contest suit filed by his opponent; Martino, like Mr. Rockefeller, was not seeking the suffrage of the people as against another candidate.

Appellants' principal argument is that a post-McDonald decision of the Tax Court, in which the Commissioner has acquiesced, David J. Primuth, 54 T.C. 374 (1970), has undermined the being-becoming distinction. Primuth, the secretary-treasurer of a small corporation, Foundry Allied Industries, enlisted the aid of a "head-hunter" organization to find him a better job. This work resulted in his employment as "secretary-controller" of a company with greater geographical scope. The Tax Court held that the fees and expenses paid to the head-hunter organization were deductible under I.R.C. Sec. 162.

Judge...