National Brass Works v. Commissioner of Int. Rev.

• Decision Date: 05 June 1953
• Docket Number: No. 13161.,13161.
• Citation: 205 F.2d 104
• Parties: NATIONAL BRASS WORKS, Inc. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

205 F.2d 104 (1953)

NATIONAL BRASS WORKS, Inc. v. COMMISSIONER OF INTERNAL REVENUE.

No. 13161.

United States Court of Appeals Ninth Circuit.

June 5, 1953.

Todd W. Johnson, Donald C. McGovern and Edward D. Robertson, Los Angeles, Cal., for petitioner.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, I. Henry Kutz and Hilbert P. Zarky, Sp. Assts. to the Atty. Gen., for respondent.

Before STEPHENS and POPE, Circuit Judges, and McCORMICK, District Judge.

STEPHENS, Circuit Judge.

In its income tax return for the year 1944, National Brass Works, Incorporated, petitioner herein, claimed and deducted from its gross income as an ordinary and necessary business expense¹ an amount equal to the sum paid the government on July 17, 1944, "in settlement of the Office of Price Administration Administrator's claim for treble damages on account of violations of ceiling prices for non-ferrous castings under Revised Maximum Price Regulations RMPR 125." The Commissioner of Internal Revenue disallowed the claim and determined a deficiency in petitioner's income tax for the year 1944 in the sum of $2,911.85. Petitioner applied for a redetermination of the deficiency and the Tax Court sustained the Commissioner upon the submitted stipulated facts. Petitioner then sought and obtained review in this court.

In the opinion filed by this court remanding the case for further proceedings,² we said that a payment to be held as an ordinary and necessary business expense must "not frustrate the purposes of a statute or violate public policy", must not be a "fine in a criminal case", and must not be a "forfeiture in a case where it has been proven that the forfeited article has been knowingly or carelessly permitted to be used for or toward an illegal purpose". We held that petitioner's payment was not a fine or forfeiture within the above definitions. And, since the law violated was "highly complex and difficult to comprehend", an expenditure incurred because of a proved violation of the Price Control Act, 50 U.S.C.A.Appendix, § 901 et seq., was not automatically precluded as a valid income tax deduction. Accordingly, the Tax Court was directed to allow the claim if, upon taking evidence, it determined that the overcharges had been "innocently and unintentionally made and not made through an unreasonable lack of care". As was indicated, the issue was resolved into a question of proof with the burden on the taxpayer-petitioner.

Upon remand, the Tax Court took evidence and made findings to the following effect: RMPR 125, dated January 27, 1943, reduced petitioner's maximum ceiling prices by one and one-half cents per pound for the castings involved herein, effective February 1, 1943. Petitioner's supplier was also required by the price directive to reduce its prices by one and one-half cents per pound. However, freight rates were simultaneously increased three quarters of a cent per pound, thus netting petitioner only a three-quarter cent reduction in the cost of its supplies. Petitioner took the position that it should be permitted to off-set the ordered price reduction by the increased cost. Upon seeking the advice of its attorney, petitioner-taxpayer was advised to take up the matter with the O.P. A., and, pending the O.P.A.'s decision, to lower its prices one and one-half cents per pound for new orders while leaving unchanged the prices for orders already received. Petitioner reduced its prices by the full amount only on orders received from its single largest customer after March 1, 1943. The adjustment affected approximately one-third of petitioner's business. As a result of an investigation in the spring of 1944, the O.P.A. alleged that petitioner had violated RMPR 125 and threatened to sue for treble damages. Only then did petitioner reduce its prices as to all customers in conformity with the regulations. The claim of the O.P.A. was settled for $13,071.08, the exact amount of the overcharges.

The Tax Court concluded that petitioner had not acted "unintentionally" or "innocently", that, in fact, the overcharges had been thoroughly considered and acted upon with advice of counsel which was not entirely followed; that petitioner "purposely, deliberately and knowingly failed to comply with the price regulation". Accordingly, it held that the payment to the O.P.A. was not a necessary business expense. Petitioner now brings his cause once more before this court for review.

Petitioner raises as its first specification of error the failure of the Tax Court "to find specifically whether there was or was not `an intention to violate the Act' on petitioner's part, as required by the mandate of this Court." We hold that when the Tax Court found that petitioner had not acted unintentionally, and that it had acted "purposely, deliberately and knowingly", it had conformed to the rule laid down by this Court.

The petitioner contends that the Tax Court failed "to find specifically as to whether there was or was not a `lack of due care to conform to the law' on petitioner's part, as required by the mandate." In our former opinion we held that "where the payment has been made in circumstances which are inconsistent with intention to violate the Act and inconsistent with a lack of due care to conform to the law it would be an ordinary and necessary expense. Allowance of the deduction in these circumstances could not frustrate the enforcement of the Act." National Brass Works, Inc., v. C.I.R., 9 Cir., 1950, 182 F.2d 526, 531. Since the Tax Court, as we have already pointed out, found that petitioner had intended to violate the Act, it follows that petitioner could not have exercised "due care to conform to the law".

Petitioner says there is no evidence supporting the finding that petitioner intended to violate the Act. To begin with, petitioner did violate the Act in that it did not reduce its prices as directed by the Office of Price Administration. And we must keep in mind that it was petitioner's burden to show that the violation was unintentional. Petitioner argues that simply because it charged one and one-half cents more than the ceiling price it does not necessarily follow that there was an intention to violate the Act. We agree; we remanded the case for the Tax Court to consider the possibility that the overcharges had been made unintentionally, through misunderstanding...