Opinion
Docket No. 13434.
1951-05-15
NATIONAL BRASS WORKS, INCORPORATED, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Donald C. McGovern, Esq., for the petitioner. H. Arlo Melville, Esq., for the respondent.
Donald C. McGovern, Esq., for the petitioner. H. Arlo Melville, Esq., for the respondent.
Where petitioner, in violation of O.P.A. regulations, knowingly, and not innocently and unintentionally, overcharged its customers, held, respondent did not err in disallowing as a business expense petitioner's payment to O.P.A. of the amounts overcharged.
The respondent determined a deficiency of $2,911.85 in petitioner's income tax liability for the year 1944. On March 24, 1949, a Memorandum Opinion was entered which sustained the respondent's disallowance as a business expense, of petitioner's payment of $13,071.08 in settlement of an alleged violation of the Maximum Price Regulations of the Office of Price Administration. On March 25, 1949, our decision was entered that there was a deficiency in petitioner's income tax for the taxable year of $2,911.85. The petitioner appealed from that decision to the Court of Appeals for the Ninth Circuit which remanded the cause for further proceedings in conformity with its opinion filed May 23, 1950, (182 F.2d 526).
The record before us in the prior hearing has been amplified by the adduction of oral testimony. The issue is unchanged, viz.: Whether the payment by petitioner in settlement of a claim for violation of regulations of the Office of Price Administration is deductible as an ordinary and necessary business expense.
FINDINGS OF FACT.
The stipulated facts are so found and incorporated herein by this reference. Additional facts are found from the oral evidence.
The petitioner is a corporation and keeps its books and files its returns on an accrual basis of accounting. Its return for the taxable year 1944 was filed with the collector of internal revenue for the sixth district of California, at Los Angeles, California.
During the period here involved petitioner was engaged in the business of making and selling nonferrous castings of brass and bronze alloy. Petitioner, at all times material hereto, purchased its requirements of brass and bronze alloy ingots from H. Kramer & Co., Chicago, Illinois.
Under the Emergency Price Control Act of 1942 (Public Law 421, 77th Cong.,2d Sess.) approved January 30, 1942, the Office of Price Administration was empowered to regulate the selling prices of certain products, including nonferrous castings and the brass and bronze alloy ingots from which such castings are made.
The Office of Price Administration promulgated Price Regulation 202, dated August 13, 1942, effective August 19, 1942, which regulated the selling prices of brass and bronze alloy ingots and provided, in part, as follows:
Sec. 1309.151. On and after August 10, 1942, regardless of any contract * * * no person shall sell * * * at a price higher than the maximum price established * * * .
Said Regulation 202 further provided:
Sec. 1309.165— Appendix A. Maximum prices for brass and bronze alloy ingot. (a) Delivery charges. The maximum prices herein established for brass and bronze alloy ingot include transportation costs to any destination within the continental United States, not exceeding 25 cents per hundred weight. Actual transportation costs in excess of those included may be charged to, and paid by, the buyer.
The Office of Price Administration promulgated Revised Maximum Price Regulation 125 (hereinafter referred to as ‘rmpr 125‘), dated January 27, 1943, effective February 1, 1943, which established maximum ceiling prices of nonferrous foundry products. RMPR 125 was amended from time to time. Amendment No. 3 was dated January 13, 1944, and became effective February 1, 1944. The terms of the original regulation reduced the petitioner's maximum ceiling prices by 1 1/2 cents per pound for the castings involved herein, effective February 1, 1943. Petitioner was furnished a copy of RMPR 125 and was aware of its provisions.
Petitioner's supplier of raw material had been required to reduce its prices by 1 1/2 cents per pound but the supplier also received an increase of three-quarters of a cent per pound in its freight charges. The petitioner took the position that it should be permitted to offset the reduction in its prices by the amount of the freight charge which the supplier had been permitted to pass on to the petitioner effective August 19, 1942.
Petitioner's president, who was also its general manager, consulted an attorney and explained that he felt that O. P. A. would not have done so if the circumstances were understood by the latter. The attorney advised petitioner to take the matter up with the O. P. A. and to see if they could not modify the 1 1/2 cents price reduction to three-quarters of a cent per pound. The petitioner was further advised to make no change in the prices for orders already received, pending the disposition of such an appeal to O. P. A., but on new orders to reduce the price by 1 1/2 cents per pound in accordance with RMPR 125.
Following the advice received from the attorney, petitioner sought to obtain permission from O. P. A. to offset the reduction in price by the amount of the additional freight charge.
Petitioner did not reduce its prices to customers as required by RMPR 125. Petitioner made no reduction whatever in its ceiling prices until about one month after RMPR 125 became effective. On about March 1, 1943, petitioner reduced its ceiling prices on new orders received from its largest customer, Security Engineering Company. This adjustment affected approximately one-third of petitioner's business. With respect to orders which had already been received from this customer, and with respect to all other orders, both old and new, from petitioner's other customers, there was no reduction in price.
That practice continued pending the disposition of the freight adjustment question by O. P. A. In the spring of 1944, while such practice was still in effect, two investigators from the Office of Price Administration appeared in petitioner's office and examined its books. As a result of this examination the Office of Price Administration alleged that petitioner had violated RMPR 125. Subsequently, petitioner was advised by its attorney to refund the overcharges to its customers. O. P. A. refused to permit petitioner to make such refunds. In order to settle the claim of the Office of Price Administration, petitioner issued its check, dated July 14, 1944, made payable to the order of the Treasurer of the United States, in the amount of $13,071.08, and was given a receipt therefor which stated, in part, that the check was received ‘* * * in settlement of the Administrator's Claim for treble damages on account of violations of ceiling prices for non-ferrous castings under RMPR 125.‘
The amount of $13,071.08 was based upon the sales made by petitioner in excess of the maximum prices established under RMPR 125, which sales were made during the period February 1, 1943 to January 31, 1944, to customers who bought the castings for use or consumption in the course of their trade or business within the meaning of section 105(e) of the Emergency Price Control Act of 1942. Of the total of 1,296,851 pounds of castings sold during the above period, 871,406 pounds were sold at no reduction in price as required by O. P. A.; 425,445 pounds were sold during this period to Security Engineering Company at the reduced price.
In 1944 petitioner accrued the sum of $13,071.08 as a business expense and deducted this amount in computing its income for Federal income tax purposes. Respondent, in his notice of deficiency, determined that the amount in question was not deductible from gross income within the meaning of section 23(a) or (f) of the Internal Revenue Code.
OPINION.
VAN FOSSAN, Judge:
As presented at the original hearing, this case was submitted entirely on a stipulation of facts. The stipulation did not adequately disclose either the corporate intent or the circumstances surrounding the making of the overcharges out of which arose the payment to O. P. A. of the amount in controversy, nor did it show the relation of the amount of the overcharges to the amount of the payment. The Court of Appeals commented to those aspects of the case, and at the hearing pursuant to mandate, testimony relative thereto was presented. The opinion of the Court of Appeals for the Ninth Circuit, states, in part:
It seems to us that allowance of the sum paid to the government may be allowed as a business deduction when the overcharge has been innocently and unintentionally made and not made through an unreasonable lack of care. The whole question resolves itself into proof with the burden on the claimant. Under such principle it is clear that a fine levied in a criminal action can never be an ordinary and necessary expense. Where guilt has been established, neither innocence nor good intention abide.
No payment to the Administrator made for overcharges in circumstances incompatible with innocence or with reasonable care can be a necessary and ordinary expense. Allowance of the deduction in either of these situations would definitely tend to frustrate enforcement of the Price Control Act.
In our opinion, the term ‘unintentionally made‘ is property descriptive of the precise opposite of what the petitioner did in making these overcharges. Nor can petitioner successfully contend it acted innocently. There was no confusion in the ‘daedalian mazes of the regulations‘ referred to by Judge Learned Hand in Jerry Rossman Corporation v. Commissioner, 175 F.2d 711. Petitioner knew and fully understood the regulation. The Court of Appeals in the instant case has stated that:
* * * the law violated was highly complex and difficult to comprehend and, therefore, innocent violations were not uncommon. It was error in our opinion to conclude simply because the Price Control Act was admittedly violated and the expenditure was incurred as a direct consequence thereof that such expenditure was non-deductible for income tax purposes.
The record now shows that the overcharges ‘admittedly‘ made were thoroughly considered. Petitioner acted with the advice of counsel in so doing,
although he did not follow such advice in all respects. The overcharges were made because petitioner felt that the three-quarters cent price increase allowed its supplier should be offset against the reduction of 1 1/2 cents in petitioner's prices by O. P. A. We are not concerned with the intrinsic merits of petitioner's view that it was entitled to some adjustment in the 1 1/2 cents reduction ordered by O. P. A. What does concern us, however, is the fact that petitioner purposely, deliberately, and knowingly failed to comply with the price regulation. This failure gave rise to the Price Administrator's claim for treble damages, which claim petitioner settled by payment of the controverted amount.
Petitioner insists that the following testimony of its counsel is correct ‘* * * It was a carefully considered plan adopted under my advice. He did exactly what I advised him to do in connection with it.‘
Petitioner requested a finding of fact to the effect that the O. P. A. regulations were complicated and difficult to understand. We have no doubt that many of such regulations may properly be so characterized but, as stated above, there is no evidence that petitioner failed to understand the pertinent regulation. The evidence points entirely the other way, i.e., the regulations involved were well understood, but petitioner, holding the view that it was receiving inequitable treatment by compliance therewith, and after careful consideration, deliberately violated the regulations.
Petitioner further comments on the policy of O. P. A. to settle cases involving innocent violations by requiring payment of merely the amount of the overcharge. Since the payment involved here was in the exact amount of the overcharge, petitioner argues that it is an innocent violation and the stigma attached to the words ‘penalty‘ and ‘damages‘ is removed. The record clearly supports petitioner's contention that the payment coincided in amount with the overcharge, i.e., it included no ‘damages.‘ There were 871,406 pounds of castings sold on which the price was not reduced the 1 1/2 cents per pound, as required by O. P. A. This would indicate an overcharge of $13,071.09, an amount within one cent of the payment of O. P. A. Relying on this fact, petitioner invokes the language of Jerry Rossman, supra:
* * * the Administrator's consent to accept the overcharge showed that he thought that the taxpayer used adequate care; and that was enough.
But it appears from the Rossman case that ‘adequate care‘ means care to avoid the making of any overcharges knowingly. That is, if the overcharges were unwittingly and innocently made, as in the Rossman case, allowing a reduction of the overpayment of such overcharge would not ‘frustrate‘ the Price Control Act. As we read the Rossman case and the opinion of the Ninth Circuit in the present case on appeal, the opposite result should follow where the record shows the overcharge was deliberately or ‘intentionally made.‘
Another argument advanced by petitioner here is that by disallowing the deduction we, in effect, add a penalty to what was simply a repayment, when such a penalty was not insisted on by O. P. A. The amount of the repayment is, in effect, increased by the additional tax on net income petitioner must thus pay because of the disallowance of the deduction. In the Rossman case the Court of Appeals discussed at length the question of whether the price regulation acts would be ‘frustrated‘ by allowing such a deduction. It appears to us in this case that if there is any frustration of statutes involved, the greater error would be on the side of allowing as an ‘ordinary and necessary business expense‘ under section 23(a)(1)(A), repayment of overcharges deliberately and intentionally made. Although, possible, we may be aiding the enforcement of the price regulations in disallowing the deduction, yet not to disallow it would fail to distinguish between one who knowingly and deliberately violates such regulations and one who does so unknowingly. We think that such a distinction is proper. In Henry Watterson Hotel Co., 15 T.C. 902, on appeal C.A. 6, we cited the opinion of the Court of Appeals in the instant case, saying: ‘Petitioner failed to carry his burden to prove such an error was innocently made.‘
In our opinion, the petitioner has not shown that the overcharge was ‘innocently and unintentionally made.‘ We hold, therefore, that the Commissioner did not err in disallowing as an ordinary and necessary business expense petitioner's payment to O. P. A. of the amount in settlement of the claim for damages growing out of the overcharge.
Reviewed by the Court.
Decision will be entered under Rule 50.