Hershey Creamery Co. v. United States

• Decision Date: 08 January 1952
• Docket Number: No. 48926.,48926.
• Citation: 122 Ct. Cl. 423,101 F. Supp. 877
• Parties: HERSHEY CREAMERY CO. v. UNITED STATES.
• Court: U.S. Claims Court

101 F. Supp. 877

122 Ct. Cl. 423

HERSHEY CREAMERY CO. v. UNITED STATES.

No. 48926.

United States Court of Claims.

January 8, 1952.

Willis F. Daniels, Harrisburg, Pa., for plaintiff. Edward C. First, Jr., and Daniels, Swope & First, Harrisburg, Pa., were on the briefs.

H. S. Fessenden, Washington, D. C., with whom was Asst. Atty. Gen. Theron Lamar Caudle, for defendant. Andrew D. Sharpe and A. F. Prescott, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

LITTLETON, Judge.

The plaintiff seeks a refund of income tax paid in 1943. It claims that the Bureau of Internal Revenue erroneously refused to permit the deduction, under Section 23(a) (1) (A) of the Internal Revenue Code, 26 U.S.C.A. § 23(a)(1)(A), as an ordinary and necessary expense, of the sum of $81,118.62 paid by plaintiff to the Administrator of the Office of Price Administration in settlement of a civil suit for overceiling price charges. This alleged expense was incurred in the following manner.

Plaintiff was engaged in the manufacture and sale of dairy products, principally ice cream. Due to rising costs during the war year of 1942, plaintiff found it necessary to seek relief from existing price ceilings on its products. Following a conference with officials of the Office of Price Administration in Washington, D. C., plaintiff, on November 30, 1942, filed a petition in the District Office of the Office of Price Administration in Harrisburg, Pa., requesting an increase in its ceiling selling prices. A supplemental application was filed by plaintiff with the Washington office on December 18, 1942.

During the course of conferences held on these applications between representatives of plaintiff and members of the Office of Price Administration on December 29, 1942, and on January 13, 1943, plaintiff was informed that an order granting the desired relief would be issued. On January 30, 1943, in response to a telephone inquiry, plaintiff's vice president was advised that the order had not yet been issued, but that the order would be forthcoming within forty-eight hours. When the order was not issued within forty-eight hours, plaintiff's vice president again called the official in the Office of Price Administration in Washington, D. C., who had assured him that the order would be forthcoming, but was informed that this official was out of town.

Although the order was not forthcoming as promised, plaintiff increased its maximum selling prices sometime during the first two weeks of February 1943. Plaintiff did this in good faith, and without any willful intent to violate existing price ceilings, relying upon the assurances previously given that such an order would be issued. On February 22, 1943, plaintiff voluntarily discontinued the price increase on the advice of its counsel that it was in danger of being cited for a price violation because the formal order for the increase had not been received.

On March 18, 1943, plaintiff was notified by the Office of Price Administration that an amended regulation had been issued granting industry-wide price relief, which it was believed would provide the relief sought by plaintiff. However, because of special requirements of Pennsylvania law, this amended regulation did not afford plaintiff the desired relief, and on March 31, 1943, plaintiff requested the Office of Price Administration to reconsider its case. As a result, further conferences were held between representatives of plaintiff and of the Office of Price Administration, in April and May 1943.

On June 9 or 10, 1943, plaintiff once again discussed the matter with an Office of Price Administration attorney who informed plaintiff that final approval of the requested relief had not been given, but that he did not know what was delaying it inasmuch as plaintiff appeared to have complied with all the necessary regulations. Relying in good faith upon this advice, and without any willful intent to violate existing price ceilings, plaintiff on June 10, 1943, again increased its maximum selling prices.

Plaintiff also filed a formal application for price relief on July 12, 1943, with the New York Regional Office of the Office of Price Administration because a substantial portion of its operations was within that territory. This application was denied on July 28, 1943, and on July 31, 1943, plaintiff's supplemental application of December 18, 1942, filed in the Washington office, was also denied. Plaintiff filed no requests for review of these decisions but, instead, on August 5, 1943, terminated the price increases effected on June 10, 1943.

No further steps were taken until January 29, 1944, when the Administrator of the Office of Price Administration instituted a civil action for treble damages against plaintiff in the United States District Court for the Middle District of Pennsylvania. This action was brought under Sections 205(a) and (e) of the Emergency Price Control Act of 1942, 56 Stat. 23, 33, 50 U.S.C.A.Appendix, § 925 (a, e), for plaintiff's overceiling sales of ice cream in violation of the general maximum price regulation. No answer to this action was filed by plaintiff. In the meantime, the Administrator of the Office of Price Administration issued a formal order and opinion on April 27, 1944, denying plaintiff's original application of November 30, 1942, for a price increase.

On May 15, 1944, plaintiff filed its corporate income and declared value excess profits tax returns for 1943. These returns were prepared to reflect the accrual basis of accounting regularly employed by plaintiff in keeping its books. Plaintiff reported therein an income tax liability of $141,312.25, subsequently reduced by the Bureau of Internal Revenue to $139,221.29, and an excess profits tax liability of $545,964.48, subsequently adjusted to $488,790.54.

Later, on May 31, 1944, pursuant to a stipulation between plaintiff and the Office of Price Administration, the United States District Court entered a consent decree against plaintiff for $81,118.62 representing the exact amount of the overcharges exacted in February 1943, and the amount exacted for the period from June to August 1943. This amount of $81,118.62 represented only single damages, and the stipulation provided that it was accepted by the Government in full settlement of the Administrator's claim for treble damages under the Emergency Price Control Act of 1942.

Following this consent decree, on September 15, 1944, plaintiff filed an amended corporate income and excess profits tax return for the year 1943. In this amended return plaintiff sought only to reduce the amount of its gross sales for 1943 by the amount of $81,118.62, which amount was designated a "refund of sales per Office of Price Administration agreement."¹ Plaintiff's attempted reduction in gross sales was rejected by the Bureau of Internal Revenue. As a result, on May 14, 1948, plaintiff filed a claim for a refund in the amount of $65.509.97 for the calendar year 1943, which amount represented the tax on the $81,118.62 paid in settlement of the Office of Price Administration suit. The Commissioner did not act upon this claim within six months; hence, plaintiff instituted the present action.

Plaintiff argues that the payment of the amount of overcharges to the Office of Price Administration pursuant to the consent decree constituted the payment of damages for violation of the Emergency Price Control Act, and did not constitute the payment of a penalty. By treating the payment as one for damages, plaintiff urges that it is deductible as an ordinary and necessary business expense under Section 23(a) (1) (A) of the Internal Revenue Code. In the alternative, plaintiff insists that even if the payment to the United States be regarded as a penalty, its deduction for tax purposes as an ordinary and necessary business expense would not frustrate the policies of the Emergency Price Control Act of 1942, because of the fact that plaintiff made the overcharges without intent to violate the Act. Plaintiff also contends that the payment may be properly deducted as an accrued expense in 1943 because, while the payment was not made until 1944, all of the events which fixed the existence of the liability and the amount thereof occurred in 1943. The Government insists that because the plaintiff kept its books on the accrual basis, it cannot deduct as an expense in 1943 amounts which were neither paid nor accrued during that taxable year. The Government also argues that the payment of the amount of overcharges to the Office of Price Administration constituted a penalty for violation of the ceiling prices; and, that under existing decisions, penalties are not deductible as ordinary and necessary business expenses, because, to allow their deduction would destroy the purposes of the penalty as a deterrent to further violations. Furthermore, the Government contends that plaintiff was not an innocent violator of ceiling price regulations, having raised its prices knowing that no price increase had been granted.

As a statutory authorization for the deduction of the amount paid to the Office of Price Administration, plaintiff relies on Section 23(a) (1) (A) of the Internal Revenue Code, as amended by 56 Stat. 798, 817; 26 U.S.C.A. 23(a) (1) (A), which provides for the deduction of "All the ordinary and necessary expenses paid or incurred during the taxable year".² The term "ordinary" has been construed not to require that the payments be habitual or normal in the sense that the same taxpayer has to make them frequently, but rather the payment may be unique or non-recurring to the particular taxpayer affected. Commissioner v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171. The type of transaction out of which the obligation arose, and its normalcy in the business world may be taken as guides to the allowance of the deduction. Mertens, Law of Federal Income Taxation (1942), Section...