Spreckels v. Commissioner of Internal Revenue

• Decision Date: 28 July 1941
• Docket Number: 9687.,No. 9682,9682
• Citation: 119 F.2d 667
• Parties: SPRECKELS v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. SPRECKELS.
• Court: U.S. Court of Appeals — Ninth Circuit

119 F.2d 667 (1941)

SPRECKELS v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. SPRECKELS.

Nos. 9682, 9687.

Circuit Court of Appeals, Ninth Circuit.

May 15, 1941.

Rehearing Denied July 28, 1941.

Walter Slack, of San Francisco, Cal., for taxpayer.

Samuel O. Clark, Jr., Asst. U. S. Atty. Gen., and Sewall Key, Joseph M. Jones, Lee A. Jackson, and Arthur L. Jacobs, Sp. Assts. to the Atty. Gen., for Commissioner of Internal Revenue.

Before WILBUR, GARRECHT, and STEPHENS, Circuit Judges.

GARRECHT, Circuit Judge.

The taxpayer, a resident of San Francisco, was engaged in the business of purchasing and selling stocks, bonds, and commodities for profit. He maintained an office with employees, and kept a complete set of books on the cash receipts and disbursements basis.

Adolph B. Spreckels' income tax return for 1934, which was filed with the collector for the first district of California on May 9, 1935, disclosed a net taxable income of $121,593.86 and a tax of $37,897.60; the tax was paid in installments, the last of which, in the sum of $9,474.40, was made December 16, 1935. December 23, 1937, the taxpayer filed a claim for refund of income tax in the amount of $4,087.61, upon the ground that certain stamp taxes were paid which had not been claimed as deductions in the return. The Commissioner, in the deficiency letter, dated July 20, 1938, allowed this claim, with the exception of $80. This letter from the Commissioner to the taxpayer relative to tax liability for the year 1934, however, asserted a deficiency in income tax for that year in the sum of $1,254.11, arising out of transactions not important here. Thereafter, on September 26, 1938, the taxpayer filed a petition for redetermination in the Board of Tax Appeals, alleging the deficiency to be based upon matters which are unimportant here, and contending he was entitled to refund of $3,650.36. Later, at the hearing before the Board, on June 8, 1939, the taxpayer filed an amendment to his petition, in which he asserted that during the calendar year 1934 he paid, as selling commissions in connection with sales of stocks, bonds, and commodities in the conduct of his business, the sum of $23,909.29, which he did not take as a deduction in computing his income tax for the year 1934 and contended, by reason thereof, he was entitled to a refund of $4,087.61. All of the errors raised by the original petition were disposed of by stipulation at the trial. There were, therefore, but two questions before the Board: (1) Whether the selling commissions were deductible as ordinary and necessary expenses; and (2) if so, whether claim based upon such payments, filed more than three years after the last payment of tax, is timely. The Board announced an affirmative answer to the first question, but held that the claim for refund was barred by the statute of limitations. Section 322(d) of the Revenue Act of 1934, 48 Stat. 680, 751, 26 U.S. C.A.Int.Rev.Acts, page 756.

The taxpayer's income tax return for 1935, filed April 15, 1936, disclosed a net taxable income of $141,146.57 and a tax of $48.554.03; the tax was paid in installments, the last of which, in the sum of $12,138.50, was made December 11, 1936. A deficiency letter, dated April 7, 1938, addressed to Adolph B. Spreckels by the Commissioner, stated a deficiency of $4,675.17 was disclosed in his income tax liability for 1935. July 6, 1938, the taxpayer filed a petition in the Board of Tax Appeals for redetermination of this deficiency. The errors alleged in this petition are unimportant, for they were also disposed of at the trial by stipulation. An amendment to this petition was also filed at the hearing on June 8, 1939, also raising the question of deductibility of the selling commissions as ordinary and necessary expenses. The Board held in favor of the taxpayer and entered its decision to the effect that there was an overpayment in income tax for the year 1935 in the sum of $1,490.10, which amount was paid within three years before filing of the amended petition.

The two petitions were consolidated for hearing and were disposed of by the Board in a single opinion, although separate decisions were entered.

In 1934 the taxpayer paid brokers selling commissions of $23,692 in connection with sales of stocks, bonds, and commodities, and in 1935, $2,246.25, in like transactions. He did not deduct the selling commissions in computing income in making his income tax returns for the taxable years. Upon taxpayer's books the selling commissions were deducted from the selling price before the net profit or loss was determined. In his income tax return for 1934 the taxpayer reported losses of $114,249.38 arising out of sales of stocks and commodities, and took a deduction of $2,000; in 1935 he reported losses of $8,009.69 arising out of like transactions and took a deduction of $2,000 thereon.

Separate petitions for review of the Board's decisions were taken with respect to the tax liability for the year 1934 and for the year 1935; the taxpayer is the moving party so far as 1934 is concerned, while the Commissioner brings the 1935 tax liability problem before us. Both petitions will be considered together because the basic question before this court in each case is identical; only in the event that our conclusion on deductibility is in the taxpayer's favor will it be necessary to consider whether the claim for refund for 1934 was timely filed.

It is provided by Section 23(a) of the Revenue Act of 1934, 48 Stat. 680, 688, 26 U.S.C.A.Int.Rev.Acts, page 671, that, "In computing net income there shall be allowed as deductions: * * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *." This is the provision of the taxing act which has direct application to the present situation.

Our principal concern here is whether purchasing and selling commissions paid by the taxpayer, engaged in the business of buying and selling securities, are deductible as ordinary and necessary expenses, or must be figured, respectively, as additions to cost or offsets against selling price.

Incidental to the Commissioner's authority to administer the income tax law is the power to make regulations for the information of the taxpayers, the guidance of the collectors, and the realization of purposes of the taxing acts. Section 62 of certain of the later Revenue Acts (notably, 1934, 48 Stat. 680, 700, 26 U.S. C.A.Int.Rev.Code, § 62) furnishes specific authority for the publication of such regulations and under that section was published Regulations 86, relating to the income tax under the Revenue Act of 1934. Regulations 86, referring to Section 23(a) of the 1934 Act, quoted above, says, "Among the items included in business expenses are * * * commissions, * * * ." This simple, general statement, is not decisive, for this article concludes with the sentence, "As to items not deductible under any provision of section 23, see section 24," and Article 24-2 of the same Regulations provides, in part, that: "* * * Commissions paid in purchasing securities are part of the cost price of such securities. Commissions paid in selling securities, when such commissions are not an ordinary and necessary business expense, are an offset against the selling price."

The qualifying clause, which we have emphasized, first appeared in Regulations 77, article 282, covering the Revenue Act of 1932. For several years prior to the publication of Regulations 77, the statement referring to purchasing and selling commissions appeared in the Regulations substantially as written above, without the qualifying clause. As early as Regulations 33, par. 108 (respecting the Revenue Acts of 1913 and 1916), the following definition was in effect: "Commissions paid in purchasing and selling securities are a part of the cost or selling price of the securities and not otherwise deductible. They do not constitute expense deductions in a return of income."

Hutton v. Commissioner, 5 Cir., 39 F.2d 459, treated, and denied, the deductibility of purchase commissions as ordinary and necessary business expenses under the Revenue Act of 1921, under which Regulations 62, art. 293, provided as in the 1934 Act, with the exception, of course, of the qualifying clause, not included in those Regulations. The court concluded purchasing commissions were part of the cost of the securities and not deductible as ordinary and necessary expenses.

The provision of Article 23(a)-1 must be read in conjunction with the provisions of Article 24-2 of Regulations 86, applicable here, in order to give recognition to both and do violence to neither. Undoubtedly, the clause, "when such commissions are not an ordinary and necessary business expense," refers to that part of Article 23(a)-1 of Regulations 86, quoted above. It will be noted, however, and it is to be stressed, that the part of Article 24-2 to which we have reference is specific, as opposed to the general nature of the reference to "commissions" in Article 23(a)-1, and therefore should control....