Opinion
Docket No. 10235.
1947-09-25
GARIBALDI & CUNEO, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Herman A. Fischer, Esq., for the petitioner. David F. Long, Esq., for the respondent.
INCOME— DEDUCTION— ORDINARY AND NECESSARY EXPENSE— SECTION 23(a)(1)(A).—One and one-half times overcharges paid to the United States in settlement of a suit for violation of a ceiling price regulation on bananas was not deductible as an ordinary and necessary expense where it does not appear that the petitioner could not have avoided the overcharges by the exercise of reasonable intelligence and diligence. Herman A. Fischer, Esq., for the petitioner. David F. Long, Esq., for the respondent.
The Commissioner determined a deficiency of $2,107.74 in income tax and one of $620.94 in declared value excess profits tax for the fiscal year ended January 31, 1945. The only issue for decision presented by the pleadings is whether the Commissioner erred in disallowing a deduction of $7,280.71 claimed as an ordinary and necessary expense under section 23(a)(1)(A) of the Internal Revenue Code, representing an amount paid in settlement of a suit for violation of OPA regulations.
FINDINGS OF FACT.
The petitioner is an Illinois corporation. Its return for the taxable year was filed with the collector of internal revenue for the first district of Illinois.
The petitioner was engaged in the wholesale fruit and vegetable business in Chicago during the taxable year. It was one of the largest wholesale dealers in bananas in the Chicago district.
The Administrator, Office of Price Administration, filed a complaint in the District Court on behalf of the United States against the petitioner on January 15, 1945, charging the petitioner with violations of a regulation under the Emergency Price Control Act fixing the maximum price on bananas. The charge was that since January 15, 1944, the petitioner had demanded and received for bananas $4,853.81 in excess of the maximum lawful price. The action was for treble damages.
The petitioner and the Administrator on that same day, January 15, 1945, settled the suit by a stipulation, subject to the approval of the court, under which the petitioner admitted the violations and agreed to pay $7,280.71 (one and one-half times the overcharges) and costs.
The court, on the same day, entered a judgment against the petitioner for $7,280.71 and costs.
The petitioner paid the judgment prior to February 1, 1945, and claimed a deduction of $7,280.71 on its return for its fiscal year ended January 31, 1945.
The Commissioner, in determining the deficiencies, disallowed the deduction and explained that the amount was not deductible under section 23(a)(1)(A) of the code, or any other provision of section 23.
The petitioner has failed to show that it could not have made correct computations of the maximum price on bananas under the applicable OPA regulation during the taxable year if it had exercised ordinary diligence and reasonable intelligence in attempting to make such computations.
The payment of $7,280.71, described above, was not an ordinary and necessary expense paid or incurred during the taxable year in carrying on the business of the taxpayer within the meaning of section 23(a)(1)(A) of the code.
The stipulation of facts is incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The petitioner would have the Court believe that the OPA regulations and computations thereunder were so complicated and confusing that it was next to impossible to avoid a violation of them; few, if any, banana dealers in Chicago were free from censure by the OPA authorities, the violations by the petitioner were only to be expected; and the payment was deductible under section 23(a)(1)(A). The respondent claims the violations by the petitioner were designed, aggravated, and wholly inexcusable. It is not necessary to decide exactly where the truth lies. The petitioner sold above the lawful ceiling prices and was sued for the violations. It settled the suit by an agreement in which it not only admitted its fault, but paid a substantial penalty. It had no further violations.
The record does not justify a finding that the violations were ordinary and necessary in the petitioner's business. It appears that they could have been avoided by the exercise of reasonable care. There is some evidence that the petitioner did not make a computation each week to determine the maximum price it could charge, as was necessary under the regulation, but made varied excessive charges not based upon any recent computation and made improper charges for drums. There is also evidence tending to show that its cashier, who was looking after the banana sales, knew how to make a proper computation under the applicable regulation. The evidence does not show that he did not know how to determine the ceiling price under that regulation. He was called as a witness, but he did not explain how or why he had failed to follow the regulation. There is testimony by a lawyer that the regulation was confusing and admitted of several different interpretations, but it does not appear that the violations by the petitioner were due to any such causes. The expenditure in settlement of the suit was not an ordinary and necessary expense of carrying on the petitioner's business. That is the only issue raised by the pleadings.
Reviewed by the Court.
Decision will be entered for the respondent.