Mazzei v. Commissioner

Sterrett, /., I respectfully dissent from the majority opinion for the following reasons:

In Tank Truck Rentals v. Commissioner, 356 U.S. 30, 33, 35 (1958), the Supreme Court laid down the test for denying a deduction on the grounds of public policy. An otherwise allowable deduction may be denied if allowance would “severely and immediately” frustrate “sharply defined national or State policies proscribing particular types of conduct, evidenced by some governmental declaration thereof.” Frustration of a particular State policy “is most complete and direct when the expenditure for which deduction is sought is itself prohibited by statute.” Tank Truck Rentals v. Commissioner, supra at 35 . If the expenditure is payment of a penalty imposed by the State because of an illegal act, allowance of a deduction would clearly frustrate State policy by reducing the “sting” of the penalty imposed. Accordingly, the Supreme Court disallowed the deduction of fines the taxpayer had paid during the course of its trucking operations. The Court said, “To allow the deduction sought here would but encourage continued violations of State law by increasing the odds in favor of noncompliance.” Tank Truck Rentals v. Commissioner, supra at 35 .

In Commissioner v. Sullivan, 356 U.S. 27 (1958), decided the same day as Tank Truck Rentals, the Court refused to disallow the deduction of rent and wage expenses in operating an illegal bookmaking establishment. The Court stated, “The fact that an expenditure bears a remote relation to an illegal act does not make it nondeductible.” Commissioner v. Sullivan, supra at 29 . See also Commissioner v. Heininger, 320 U.S. 467 (1943); Lilly v. Commissioner, 343 U.S. 90 (1952). Once again in Commissioner v. Tellier, 383 U.S. 687, 694 (1966), the Supreme Court reiterated and emphasized its position that an otherwise allowable deduction should only be disallowed when in violation of a public policy that is sharply limited and carefully defined.

Against this background, Congress as part of the Tax Reform Acts of 1969 and 1971 attempted to set forth categories of expenditures within the purview of section 162 which were to be denied on the grounds of public policy. The Senate Finance Committee report for the 1969 Tax Reform Act states “The provision for the denial of the deduction for payments in these situations 1 which are deemed to violate public policy is intended to be all inclusive. Public policy, in other circumstances, generally is not sufficiently clearly defined to justify the dis-allowance of deductions.” (Emphasis added.) S. Rept. No. 91-552, 91st Cong., 1st Sess. (1969), 1969- 3 C.B. 597 . In expanding the category of nondeductible expenditures, the legislative history of the 1971 Tax Reform Act states, “The committee continues to believe that the determination of when a deduction should be denied should remain under the control of Congress.” (Emphasis added.) S. Rept. No. 92-437, 92d Cong., 1st Sess. (1971), 1972- 1 C.B. 599 .

While the above statements have direct effect under section 162, where most of the public policy decisions have arisen, it does seem to call for judicial restraint in other areas where Congress has not specifically limited deductions. Moreover, such statements may have been a reaction to widely varied decisions such as those in Edwards v. Bromberg, 232 F. 2d 107 (C.A. 5, 1956), and Luther M. Richey, Jr., 33 T.C. 272 (1959), which we think are not fairly distinguishable, and have led to the disparate results so inimical to the uniform administration of the tax laws. 2

Despite the above, the majority seeks to invoke public policy as the tool to deny the petitioner an otherwise allowable theft loss. While congressional intent could logically be read to remove public policy considerations from the Internal Revenue Code where not specifically included, 3 at a minimum the strict test, laid down by the Supreme Court must be met.

In the majority opinion, as in Richey, we apparently pay lip service to the Supreme Court by stating “that to allow the loss deduction would constitute an immediate and severe frustration of the clearly defined policy against counterfeiting obligations of the United States.” Unfortunately in both cases we fail to discuss precisely how that frustration will occur. In the case of illegal payments such as bribes and kickbacks and the payment of fines, we are able to see a direct relationship between the allowance of the deduction and encouragement of continued violations of the law. In essence, the Government underwrites a portion of the expenses. However in the instant case we cannot see how counterfeiting will be encouraged in any manner by allowing the petitioner a theft loss deduction arising out of a distinctly different act. At best, the relationship is more remote than that in Sullivan, for the term “theft” presupposes that the victim has not voluntarily parted with his property. 4

The majority seems to indicate that a deduction can be denied where there is any relationship between the loss or expense and the illegal activity, a position specifically rejected by Bullivcm. Such reasoning does not readily lend itself to being “sharply limited” or “carefully defined.” Had petitioner contracted pneumonia on his New York excursion, would the majority also deny him a medical expense deduction?

Or assume that customers on the premises of the bookmaking establishment involved in Sullwan were robbed by an outside intruder. Would the majority deny them a theft loss because they were engaged in an illegal activity ? Or would the majority have this Court of special jurisdiction add to its assigned duties of interpreting the Internal Revenue Code the task of grading criminal activity, a task for which we obviously have no particular expertise. The authority for undertaking such additional duties remains obscure to me and would also be, I suspect, obscure to Congress.

Congress has authorized the imposition of severe punishment upon those found guilty of counterfeiting United States currency. It is designed to repress such criminal conduct. In the interest of uniform application of the Internal Revenue Code, where the frustration of State or national policy is neither severe nor immediate, we must not be tempted to impose a “clean hands doctrine” as a prerequisite to deductibility. To hold otherwise, especially in light of the broad brushstroke of public policy applied by the majority opinion, makes the taxing statute an unwarranted instrument of further punishment.

FoRRestbk, Featherston, Hall, and Wiles, JJ., agree with this dissent. Nines, a portion of treble damages under antitrust laws, bribes to public officials, and other unlawful bribes and kickbacks.

We note that our decision in Richey did not mention or discuss Edwards v. Bromberg, 232 F. 2d 107 (C.A. 5, 1950), decided 3½ years earlier.

Sec. 902, Tax Reform Act of 1969 had retroactive effect with respect to fines, penalties, and bribes and kickbacks to Government officials. See see. 902(c), Pub. L. 91-172 (Dec. 30, 1909), 1909- 3 C.B. 147 .

This should be contrasted with the situation where a counterfeiter has money and equipment confiscated during a legal search by police. Allowance of a casualty loss would frustrate public policy by lessening the adverse affect of proper governmental action directly related to the counterfeiting. Cf. Hopka v. United States, 195 F. Supp. 474 (N.D. Iowa 1961).