Commissioner of Internal Rev. v. Textile Mills S. Corp.

CLARK, Circuit Judge

(concurring).

The writer of this opinion concurs in the judgment reversing the decision of the Board of Tax Appeals. He is furthermore satisfied about the right of the court to sit en banc and with the careful and clearly stated analysis of the facts. He wishes, however, to express a somewhat different legal emphasis from that of his brethren constituting, with him, the majority of the court.

The task of interpreting the obscurities of the various taxing statutes always holds one’s technical attention. It does not so generally hold one’s human interest as well. In the case at bar, however, both parts of the judicial nimbus are involved. The exact practices of the case at bar have received the unanimous condemnation of the courts, 1 of the legal text and periodical writers, 2 of the political scientists, 3 and finally of the intended victims, as various statutes for the regulation of lobbyists bear witness. 4 The particular victims were the *72 Senators and Representatives of the United States who expressed their feelings in 1934 in other tax legislation where they denied exemption to organizations, a “substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation”, 26 U.S. C.A. Int.Rev.Code, § 101(6).

The reason is plain. If argument was a matter of the critique of pure reason, it might be appraised apart from its source. As most argument depends upon disputed premises the burden of verification depends upon (is proportionate to) the impartiality of the arguer. Furthermore there exists the imponderable of sincerity. If a cause is espoused by a person you know or know of, his sincerity or insincerity is bound to affect the weight you give to his presentation. These considerations are particularly applicable in a democracy which tends increasingly away from Burke’s theory of representation and toward the continental theory of a mandat imperatif. The thought the writer is attempting to express has been well phrased: “A different element is infused when the nexus between the propagandist and his principal is hidden, for tribunals have developed a policy adverse to the exertion of secret influences upon public bodies. The question of the legality of not disclosing the identity of those seeking to influence public action first arose in connection with lobbying contracts. Though without the slightest hint of fraud or dishonesty, many contracts were declared void as against public policy. Secrecy doomed the agreement. The cases demand frank dealing, where public interests are concerned. Secret efforts to touch the minds of the legislators, secrecy concerning the connection between lobbyist and client, these are the evils in the eyes of the tribunals. This same attitude towards legislative activities of agents whose principals are undisclosed is revealed by stat-. utes in many states requiring the registration of all lobbyists”. Public Utilities: Expenditures To Influence Public Opinion, 14 Cornell Law Quarterly 233-234 (note).

Although the Board saw fit to ignore the circumstance, it might be noticed that the cases generally stress contingency of compensation as a sinister element in this class of contracts, Noonan v. Gilbert, 63 App.D.C. 30 , 68 F.2d 775 , and cases therein cited. The logic of this last position has been criticized in 14 Boston University Law Review 834 (note), above cited, but may, the writer should think, be justified on the ground that the necessary size of a contingent fee adds to the temptation of impropriety. Whatever, then, the ultimately correct decision, it must be based on a repudiation of the Board of Tax Appeals’ theory of legitimacy.

The writer proceeds, then, on the as-, sumption that the expenses here claimed deductible have met with the condemnation of every student, judicial or otherwise, of public affairs in a democracy, who has expressed his thoughts on the matter. Does that universal condemnation constitute a mandatory gloss of the adjectives “ordinary” and “necessary” ? The writer thinks it does and he says further that the contrary view expressed by some judicial personalities rather shocks him. One of the latter speaking for the majority of a divided court puts that position thus, “The revenue laws of the United States are not over-squeamish”, Alexandria Gravel Co. v. Commissioner, 5 Cir., 95 F.2d 615, 616 . Well, as far as the writer is concerned they are. The writer suggests to the learned Circuit Judge above quoted that the Congress will probably not thank him for his somewhat gratuitous interpretation of their legislative morals. The writer may say that the learned court seems to have had some of the very same qualms they refuse to attribute to Congress. Anyway, they weakened their own decision by naively asserting that the State Senator of Louisiana employed to sell “sand and gravel” to the Highway Commission of the “kingfish” domain did not exert any “personal influence” (he was undoubtedly employed because of his expert knowledge of geology).

The important word is, of course, ordinary. Although the cases, 5 or most of them, 6 stress the conjunctive character of the phrase they are rather compelled to emasculate necessary, and for obvious reasons. After all, very few things (and very few people) are indispensable. The high *73 est authority 7 substitutes the milder “helpful” and certainly the practices in the case at bar were “helpful” to the respondent.

There are at least three possible methods of approach to a construction of the key adjective. They have all received judicial approval, but as they all, in the writer’s judgment, lead to the same Rome of non-deductibility, it is not important here which one is adopted. As a matter of English, the word is thus defined, “customary or established order, general, customary, usual or normal, such as is commonly met with, of the usual kind, often, not above, or rather below, the average level of quality, commonplace”, New Century Dictionary, p. 1197. It is clear that the writer is not in a position to determine whether the present practice is or is not a common occurrence in the American business world. The reported cases disapproving of the evil seem small in proportion to the extent of that world and the corresponding occasion for its exercise. That is, however, an unreliable guide as it does not take into account other factors which may have been producing causes. Testimony as to the reality of either the usual custom or the specific instance, although perhaps shameful, could like any other sad reality have been produced. A failure to offer the pleasanter evidence of an opposite tendency to a most ethical generosity cost the virtuous taxpayer his deduction in Welch v. Hel-vering, above cited.

A second interpretative test of ordinary is derived from the law of torts. The cases require the business act to be proximately caused. Alexander Sprunt & Son v. Com’r, above cited, Com’r v. Continental Screen Co., 6 Cir., 58 F.2d 625 . In so doing they seem, at any rate, to be prescribing the requirement of foreseeability held essential to recovery in cases of indirect causation. That foreseeability in the writer’s circumstance is, of course, the “reasonable contemplation of reasonable business men”, 3 Paul & Mertens, Law of Federal Income Taxation, p. 46. This theory would seem to stem from some association of ideas. The word ordinary smacks of the average reasonable man and leads to the thought of the cognate proximate cause. It is probably as •sensible to allow the deduction of foreseeable expenses as it is to allow recovery for foreseeable harm. It seems, nevertheless, a novel canon of statutory construction. The "reasonable contemplation of reasonable business men” like “reasonable care under the circumstances” sets up something of an imponderable standard. As juries and courts wrestle with the latter, so the courts must perhaps struggle with the former. To do so, they must be equipped with weapons in the shape of testimony and so under this test also the writer is confronted with the same failure of business proof he has already spoken of.

The third angle of incidence is to the writer’s way of thinking both the most satisfactory and most in accord with sound principles of legislative interpretation. It postulates an understanding of and a desire for the effective working of the democratic process on the part of all the organisms of that process. From that follows the assumption that any word capable of an interpretation consistent with the said effective working must receive such an interpretation and no other. And from that follows the further assumption that the Congress will be held to have intended to include in the word ordinary at minimum no practices falling below the standards to which the courts have given their own approval. In other words the courts will take for granted that the Congress did not intend to use a word capable of being stretched to cover acts which both it and the courts condemn and to benefit actors which both it and the courts refuse to help. Both Congress and the courts, as the writer has pointed out, have many times expressed their unfavorable opinion of these attempts to sell the pig of public welfare in the poke of public service. Mr. Justice Cardozo in Welch v. Helvering, above cited, with his usual felicity said, “The standard set up by the statute is not a rule of law; it is rather a way of life”, 290 U.S. 111, 115 , 54 S.Ct. 8, 9 , 78 L.Ed. 212 . The writer refuses to sanction the Congressional way of life envisaged for the Congress by the Board of Tax Appeals.

So much for what the writer thinks to be principle. How much for what the petitioner claims to be the authority? Many more decisions than are cited in the briefs can be found in volume 3 of Paul & Mertens, Law of Federal Income Taxation. The learned authors thereof note the struggle that has shaken the courts in their efforts to arrive at what the writer is declaring to be the sound conclusion. “ * * * *74 Underlying the whole question is the conflict between two major forces. On the one side is the desire to stultify or discourage .criminal acts by denying the taxpayer even incidental benefits therefrom as, for example, the deduction for income tax purposes of the expenses incurred in connection with the criminal act. This is the ‘pu'blic policy’ force. The conflicting force arises from the statutory warrant to deduct ordinary and necessary expenses of the business. One cannot predict with any degree of certainty the right to such deductions. If the act necessitating the expenditure is wholly tainted with criminality, public policy prevails and the deduction is denied. On the other hand, if the act does no great violence, tested by the mores of the day, the Court may, sometimes by tortuous .reasoning, emerge with a permission to deduct.” 3 Paul & Mertens, Law of Federal Income Taxation, p. 44.

Nevertheless, the weight of authority, if that is important, is on (the writer’s side. The cases both in the Board of Tax Appeals and in the courts are collected and collated in 3 Paul & Mertens, above cited, under the headings, Fines and Penalties § 23.45, Counsel Fees § 23.46, Cost of Legislative Representation: ‘Lobbying’ Fees § 23.47, and under the cognate titles, Charitable Contributions § 23.66, Gambling Expenses and Exchanges in Illegal Transactions § 23.156, Statutory Provision for Losses § 26.02, Nature of Organizations Which Are Exempt § 32.14. It is perhaps interesting to note that the same general problem has arisen under a somewhat similarly framed English statute, 8 and that the cases appearing in 17 Halsbury’s Laws of England, 2d Ed., p. 152 et seq., seem to be in harmony. with the ethical view for which the writer is contending. See Inland Revenue Commissioners v. Warnes, & Co., 2 K.B. 444, Inland Revenue Commissioners v. Von Glehn, 2 K.B. 553. There is also one case in the Privy Council on Appeal from New Zealand wherein the expenditure denied deduction was by a brewery, for canvassing, advertising and printing directed to swaying the voters in a referendum on local option, Ward and Company Ltd. v. Conn., 1 English Law Reports, Appeal Cases, p. 145. 9

The Board of Tax Appeals, in one sense, two judges of this court and other judges of other courts, in another sense, 10 stress the rule of administrative construction. They refer, of course, to Regulation 74, Article 262, which forbids any deduction, or at least a sort of quasi-charitable deduction, to corporations expending money “for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses”. 11 The writer of this opinion has little faith in this rule. He quite agrees with the learned author of an article in the Yale Law Journal who says:

“Among the innumerable fictions which have formed a part of the science of law, that which holds the record for unrealism is the doctrine that where a statute has been reenacted in the same form after an administrative construction, Congress has silently approved and incorporated the existing ruling. Our tax laws are reenacted so repeatedly that this rule is invoked more often that the general statement as to the validity of regulations standing alone. Unfortunately, 'the reenactment rule presumes an attention on the part of Congress in connection with tax legislation which is more ideal than real. The thought is that Congress, each time it passes a revenue act, has omniscience as to all outstanding regulations and judicial decisions and that it will be thoroughly diligent to correct by legislation any interpretation with which it disagrees. There follows the thought that inaction is action in that a failure to legislate implies an agreement with all outstanding'regulations, without any apparent distinction as to their interpretative or legislative character.

“Anyone cognizant of the processes and exigencies of tax legislation is perfectly familiar with the simple fact that any *75 such presumption is not only artificial, but in large part unfounded. * * * ” Paul, Use and Abuse of Tax Regulations in Statutory Construction, 49 Yale Law Journal 660, 663, 664. 12

The writer finds no lack of logic in taxing income from illegal sources, 13 and refusing a deduction for the same type of expenses. After all, the word applicable to one face of the medal, income, is the broadest possible, whereas the words applicable to the other have the many limitations the writer has tried to indicate. Further, the medal as a whole embodies policies and a probable Congressional intent which must have consistent application. Any discouragement of ill-gotten gains entails a corresponding lack of sympathy with the means of getting them. Thus everything the rascal takes in must be taxed, and as little as possible of what he expends must be exempted. In conclusion, the writer might note that the decision of the Board of Tax Appeals runs contrary to their recent holdings. 14

Trist v. Child, 21 Wall. 441 , 22 L.Ed. 623 .

15 Amer. & Eng. Ency. of Law, 2d Ed., p. 969; Legislation — Control of Lobbying, 45 Harvard Law Review 1241 (note); Public Utilities: Expenditures to Influence Public Opinion, 14 Cornell Law Quarterly 233 (note); Contracts — Illegality-Lobbying, 12 Texas Law Review 85 (note); Lobbying Contracts — Contingent Fees — Public Policy, 14 Boston University Law Review 834 (note).

Bryce, The American Commonwealth, Vol. 1, p. 555, Vol. 2, pp. 66, 514, 520, 653; Odegard, Political Parties and Group Pressure, 179 Annals of American Academy of Political and Social Science (Pressure Groups and Propaganda), p. 68; Bernays, Molding Public Opinion, p. 82; McKean, A State Legislature and Group Pressure, p. 124; Catlin, The Role of Propaganda in a Democracy, p. 219; Bernays, Crystallizing Public Opinion; Herring, Lobbying, 9 Ency. of the Social Sciences 565; Odegard, Pressure Politics; Herring, Lobbying in Congress; Crawford, Inside Story of Lobbying; Muller, Lobbying in Congress (The Reference Shelf, Vol. 7, No. 3).

Ga.Code Ann. (Michie, 1926) Pen.Code §§ 325(l)-(5); Ind.Ann.Stat. (Burns, 1926) §§ 8108-16; Kan.Rev.Stat.Ann. (1923) c. 46, §§ 201-10; Key.Stat. (Carroll, 1930) §§ 1999a 1-8; Me.Rev.Stat. (1930) c. 2, §§ 43-48; Md.Ann.Code (Bagby, 1924) art. 40 §§ 4-14; Miss.Code Ann. (1930) § 5477-84; Mo.Rev.Stat. (1919) § 7154; Neb.Comp.Stat. (1929) §§ 50-302 to 304; N.H.Pub.Laws (1926) c. 4, §§ 28-33; N.Y.Legis.Law (1909) § 66; Ohio Gen.Code (Pago 1932) §§ 6256-1 to 8; Okla.Stat.1931, § 2292 (modified); R. I.Gcn.Laws (1923) c. 123, §§ 1776-73; S.D.Comp.Laws (1929) §§ 5092-5100; Wis.Stat. (1929) §§ 346.20-26.

Hubinger v. Comm., 2 Cir., 36 F.2d 724 ; Seufert Bros. Co. v. Lucas, 9 Cir., 44 F.2d 528 ; Lloyd v. Com’r, 7 Cir., 55 F.2d 842 ; Alexander Sprunt & Son, Inc. v. Com’r, 4 Cir., 64 F.2d 424 ; 30 Words and Phrases, Permanent Edition, pages 169-175.

A. Harris & Co. v. Lucas, 5 Cir., 48 F.2d 187 .

Welch v. Helvering, 290 U.S. 111 , 54 S.Ct. 8 , 78 L.Ed. 212 .

8 & 9 Geo. 5, c. 40, Oases I & II, Sched. D, r. 3(a).

Taxation — Income Tax — Corporations —Deductions From Gross Income For Charitable Contributions as Ordinary Business Expense, 30 Columbia Law Review 1211 (note); Taxation — Income Tax Deduction — Commercial Bribery as an “Ordinary and Necessary” Expense, 35 Columbia Law Review 125 (note); Taxation — Income—Deductibility of Counsel Fees Paid by Corporation in Defense of Prosecution, 17 Virginia Law Review 831 (note).

Vide Sunset Scavenger Co., Inc. v. Com’r, 9 Cir., 84 F.2d 453 .

See 3 Paul & Mertens, above cited, § 23.60.

Cf. The Supreme Court On Administrative Construction as a Guido in the Interpretation of Statutes, 40 Harvard Law Review 469 (note).

United States v. Sullivan, 274 U.S. 259 , 47 S.Ct. 607 , 71 L.Ed. 1037 , 51 A.L.R. 1020 .

Easton Tractor and Equipment Co. v. Comr., 35 B.T.A. 189 ; Mrs. William P. Kyne v. Comr., 35 B.T.A. 202 ; Alexandria Gravel Co. v. Comr., 35 B.T.A. 323 ; T. G. Nicholson v. Com’r, 38 B.T.A. 190 .