# Petition for Writ of Certiorari — Carey v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1315%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 409 U.S. 990 ## Text Supreme Couri, . S. FIllLkED AUG 26 1972 RODAK, JR.,CL OCTOBER TERM, 1972 No WP=BLO JAMES B. CAREY and MARGARET CAREY, Petitioners, V. COMMISSIONER OF INTERNAL REVENUE PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT ELLIS W. MANNING, JR. 1625 K Street, N.W. Washington, D.C. 20006 Counsel for Petitioners Of Counsel: Lyman G. Friedman, Jonathan S. Cohen Wenchel, Schulman & Manning 1625 K Street, N.W. Washington, D.C. 20006 SPATE AO EGE SIE IO LTS EPI INDEX Page(s) Re ee ] CE Ee AGRE a a ee i ee Wiha eu al wb Wa Shim w vd Ok oS KK lo 0's 2 Statutes and Regulations Involved ...................... 2 ie edt a Os aris or UIE A a a dw KO ee we ee ww wee em 2 Reasons for Granting the Writ ......................... 4 ANSE at le an a eee 10 I a NR ee era re 12 REESE Fee pe ee ee eee 32 EE See e ah nee kas ES Read eo dwind sooo e Keown 33 Brrewdiy D PG CITATIONS Cases: Central Foundry Co. v. Commissioner, ee oe bees beware 6 Cremona v. Commissioner, a 5 Furner v. Commissioner, Ee ee 5 Graham v. Commissioner, OUD. 8 cn cenuccccccessccces 6 Haft v. Commissioner, RSIS BESET AIA ROCA Pay a Ae 5 Kenfield v. Commissioner, IN a 5 (ii) Locke Mfg. Companies v. United States, 237 F. Supp. 80 (D. Conn.,.1964) ....... rr rom 6 Maness v. United States, 367 F.2d 357 (C.A. 5, 1966), Ce OEE 6 ob ccc ewan wee dne baw ean 9 Maness v. Commissioner, Ee EEE Kn ba RKR Rds ee GOn cEeewe dene kas Qu Mays v. Bowers, 201 F.2d 401 (C.A. 4, 1953), cart, Gam., FAS US. SED (UGGS) . ww ccc ccc ces 9 McDonald v. Commissioner, Re OED vo bbs db weeks ee eedeuees deus 7, 8,9 Motto v. Commissioner, oe le a a ag ie Rina na 5 Primuth v. Commissioner, a so alae kl ge Oy GS ae 5 Sanderson v. Commissioner, SE Oo gn 6 ek se Ch ead oe eM EKO eS 7 Schmidlapp v. Commissioner, ee ee es Be WUD wk on oh eee wee wensensenves 7 Surasky v. Commissioner, ee a re 6 Commissioner v. Tellier, res ere ey rere 9 Trent v. Commissioner, Be a re Be BN oo vk ko sce ecucwaeaeunce 7 Vernon v. Commissioner, 18 T.C.M. 851 (1959), affirmed, per curiam, 286 F.2d 173 ee We Es 5 5 Oa oo no oe Oe ee ee ene 9 (iii) Statutes: Internal Revenue Code of 1954 (26 U.S.C. 1964 ed.): SE 6.54 5s sae abs oe ek oe Poe 33 Re I re eee he ner ee ear aes 33 Labor-Management Reporting and Disclosure Act of 1959 (Landrum-Griffin Act): EN hs Sak KOs aie Ob ewe El eee wkd ale 6 Re NR SEARO SR terete NN Sag At AS 7,3,4 SEE + We 5 05% ice Blan aw alae ee eee eae 6, 35 Miscellaneous: Treasury Regulations on Income Tax (26 C.F.R.): SOI og eS Ck es ck aon burke ieee wen 33 ry ne eae 34 acess ODOS. oO -+ nas IN THE Supreme Court of the United States OCTOBER TERM, 1972 No. JAMES B. CAREY and MARGARET CAREY, Petitioners, WV. COMMISSIONER OF INTERNAL REVENUE PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT Petitioners, by their counsel, hereby petition for a writ of certiorari to review the judgment of the United States Court of Appeals for the Fourth Circuit in this case. OPINION BELOW The opinion of the Tax Court (App. A, infra, p. 12) (R. 90-117)! is reported at 56 T.C. 477. The per curiam opinion of the Court of Appeals (App. B, infra, p. 32) is not yet officially reported. JURISDICTION The judgment of the Court of Appeals was entered on May 16, 1972 (App. B, infra, p. 32). A timely petition for ——q—qs I «R» refers to the reproduced record in the Court of Appeals entitled “Appendix to the Brief for Appellants.” l 2 aii Pee. ®, wera, e.2b- rehearing was Nled on May 30, 1972, and was denied on June 12. 1972.})The jurisdiction of this Court is invoked under 28 U.S.C. §1254(1). QUESTION PRESENTED Whether the petitioner, a career labor leader, who had held the position of President of the International Union of Electrical, Radio and Machine Workers for an uninterrupted period of 15 years, is entitled to deduct, for federal income tax purposes, amounts expended by him—which were un- challenged as to their reasonableness of amount—in an un- successful effort to retain his position for another term. STATUTES AND REGULATIONS INVOLVED The pertinent provisions of Section 162 and 212 of the Internal Revenue Code of 1954, of Section 481 of the Landrum-Griffin Act, and Treasury Regulations on Income Tax, Sections 1.162-20(c)(1) and 1.212-1(f), are set forth in Appendix C, infra, pp. 33-36. STATEMENT OF THE CASE For more than 30 years, petitioner has been deeply involved in and committed to the cause of organized labor in the United States.2 (App. A infra, p. 13; R. 13, 29.) From 1949 to 1964, petitioner served continously as Presi- dent of the International Union of Electrical, Radio and Machine Workers (the “IUE”), a major labor organization with a rank-and-file membership drawn from workers in the electrical machinery, electrical appliance, tool and die, 2 “Petitioner” refers to James B. Carey. His wife, Margaret Carey, is a party hereto because she and her husband filed a joint return for the tax year in question. PONS OP ee REM TS) AE AY Ts TRF oe EI ae oF bee ee i " wre sa als machine tool and allied industries, and in related fields. '(R. 14, 33, 92.) In 1964, the membership of the IUE was nearly 300,000 persons. In each of the presidential elections held at IUE con- ventions prior to 1964, petitioner was unopposed for the position, and was elected to office by acclamation of the convention. (R. 14.) At the September 1964 convention, however, petitioner was seriously and vigorously challenged for the position he had held since the inception of the IUE. (R. 14.) Under the IUE constitution, the selection of the President was done by mail ballot, after nominations were made at the convention. In order to reach the huge IUE rank-and-file membership, the distribution of informational materials, setting forth a candidate’s views with respect to issues affecting the union, could be appropriately handled only by printing and distributing leaflets to the member- ship. (R. 68.) Under Section 481(g) of the Labor-Management Re- porting and Disclosure Act of 1959 (the “Landrum-Griffin Act”), 29 U.S.C. Sec. 481(g), however, neither union nor employer funds may be contributed to or applied to promote in any way the candidacy of any person in any election subject to the terms of the Act. (R. 16.) Peti- tioner, therefore, was forced to use his own personal funds to defray costs of printing and distributing leaflets among IUE members. (R. 27.) These funds amounted to slightly more than $14,000, which petitioner had to borrow from a bank. Petitioner lost the IVE election. He was forced to use substantially all of his severance pay, received when his service with the IUE terminated, to repay the loan. (R. 19, 27.) The expenditures made in connection with the IUE election by petitioner have not been challenged as un- reasonable or excessive in amount. Po ens ae Yowe i The Commissioner determined that the money ex- pended in 1965 in connection with the petitioner's effort to retain the [UE presidency was not deductible for federal income tax purposes. Petitioner filed a timely petition for redetermination of the deficiency (R. 3-7), and litigated his case in the Tax Court, which, by virtue of a concurring opinion, held in favor of the Commissioner, in a divided opinion reviewed by the whole Court, with two dissents. The Fourth Circuit affirmed the Tax Court’s decision, per curiam. (App. B, infra, p. 32). REASONS FOR GRANTING THE WRIT The decision below denies to labor leaders and union administrators equality of tax treatment with corporate executives and other taxpayers. It is demonstrable that such result is wholly inconsistent with applicable precedents. Such a glaring inequity is plainly wrong, and presents a significant Federal question to be resolved by this Court. 1. The decision below, in denying petitioner a deduc- tion for his costs of seeking re-election to the Presidency of the IUE, is in direct conflict with the tax treatment given to comparable employment-elated expenses incurred by salesmen, engineers, corporate executives, teachers and many other individuals pursuing a particular vocation or profession. One unavoidable consequence of the decision below is to establish, without any legislative direction or approval, 2 judge-made, inequitable tax advantage in favor of corporate managers, inasmuch as costs incurred in order to secure their reelection as corporate directors and officers are al- lowed as income tax deductions, while entirely similar costs incurred by union administrators have now been disallowed. — ea NTC IT PS ee 8 LT : Indeed, union officials and administrators are in a uniquely unfavorable position, for the courts have consist- ently held that an individual may be in the “trade or business” of being engaged in a particular kind of work and that the ordinary and necessary expenses of protecting his employment relationship, or of finding a new job, are tax deductible under Section 162(a) of the Internal Revenue Code. See, e.g... Primuth v. Commissioner. 54 T.C. 374 (1970); Haft v. Commissioner, 40 T. C. 2 (1963); Trent vy. Commissioner, 291 F.2d 669 (C.A. 2, 1961); Schmidlapp v. Commissioner, 96 F.2d 680 (C.A. 2, 1938): cf Furner vy. Commissioner, 393 F.2d 292 (C.A. 7, 1968). This rule of deductibility has been broadened and developed in a substantial number of recent cases, and it can now be said that, on the basis of the decision below, only labor union officials are denied its benefit. See, Ken- field v. Commissioner, 54 T.C. 1197 (1970); Motto vy. Commissioner, 54 T.C. 558 (1970). It applies even in the situation where the individual, seeking new employment within his profession, fails to obtain a job. Cremona y. Commissioner, 58 T.C. No. 20 (1972).3 However, the court below failed to follow these set- tled lines of precedent. Moreover, the decision below results in an unfair and anomalous distinction between officals employed by busi- ness eecorporations and officials employed by labor unions, although in both cases the individuals in question are en- gaged in the task of administering large and complex organ- izations.. In the former case, the tax law allows a corpora- tion a deduction for expenses, incurred on behalf of its management, in seeking to secure their positions in a proxy contest. Locke Mfg Companies v. United States, 237 F. Supp. 80 (D. Conn., 1964); Central Foundry Co. v. Com- missioner, 49 T.C. 234 (1967). And where an individual office-seeker or office-holder must pay proxy fight contests out of his own pocket, he is allowed the deduction person- ally. See, eg., Graham v. Commissioner, 326 F.2d 878 (C.A. 4, 1964); ct. Surasky v. Commissioner, 325 F.2d 191 (C.A. 5, 1963). The basis of this deduction is the acknowl- edged profit-making, income-producing motive which occa- sions the outlay of expense. However, a career labor union official, who is also required by the nature of his job, and by federal law, to stand regularly for re-election,’ is now denied a deduction for reasonable expense incurred in seeking to retain his job. 2. The decision below is one of importance from the standpoint of the interaction of federal tax and labor law. Labor unions are prohibited by the terms of Section 481(g) of the Labor-Management Reporting and Disclosure Act of 1959 (Landrum-Griffin Act),5 from incurring ex- 4 Section 481 (a) of the Labor-Management Reporting and Disclosure Act of 1959 (Landrum-Griffin Act) provides: pense on behalf of a union official who is seeking re... = a tinuous union employment is to be regarded as seeking such employment for the first time upon each occasion on which he stood for re-election throughout his career, or if the courts are willing to hold that a labor union officer is a public official. Upon a careful reading, it is clear that the decision below has not attempted to base application of the McDon- ald case upon a finding that the petitioner was trying to become a union official for another term. (App. A, infra p. 27). Nor can it realistically be asserted that petitioner, as a career union official holding the same position continu- ously since 1949, was seeking a new form of employment. However, the Tax Court has held the public policy argument of McDonald to be controlling here. For it has held that the legislative interest evinced in union adminis- tration by the Landrum-Griffin Act requires the conclusion that there is a “national policy” that union offices are sufficiently “akin to a public office” to justify the applica- tion of the McDonald rule. (App. A, infra, pp. 21, 22). Nowhere in the Landrum-Griffin Act, nor in its legisla- tive history, is there any assertion or suggestion of such a “national policy” or legislative purpose. The Tax Court acknowledged that there is no express statement of such a purpose, and it was forced to base its finding of such a policy upon the general “sentiments” of public interest in union activities reflected in the Senate and House Commit- tee Reports accompanying the Landrum-Griffin Act. (App. A, infra pp. 20, 21). Those “sentiments,” however, are directed to the express legislative purposes of the Lan- drum-Griffin Act, and do not reach the level of a sharply- defined policy with respect to income tax deductibility. If union officials are properly to be treated as holders of public offices for federal tax purposes, it should follow that OT Ee ot. the courts are willing to regard them as public officeholders for all purposes. Petitioner submits that a Congressional mandate for such a position does not exist. It therefore follows, under this Court’s deicsion in Commissioner v. Tellier, 383 U.S. 687 (1966), that peti- tioner’s expenses are properly deductible, in the absence of any “sharply defined public policy” which would be frus- trated by the allowance of the deduction. The Commissioner of Internal Revenue himself appar- ently feels that there is little continuing vitality in the public policy dictum of McDonald. In Revenue Ruling 71-470, 1971-43 I.R.B. 9, the Commissioner ruled that expenses incurred by an elected public official in an active campaign to defend himself against a recall proceeding are deductible business expenses, and in so doing construed this Court’s decision in McDonald as resting upon the sole ground that the taxpayer there was seeking election as a judge and was not carrying on the business of “judging.” For the reasons set forth above, the decision below is in conflict with the established case law governing the deduction of expenses incurred by an individual as part of the requirements of his employment. It conflicts with the 7 On this basis, there is no support for the decision below on the “public office” campaign cases, such as Mays v. Bowers, 201 F.2d 401 (C.A. 4, 1953), cert. den., 345 U.S. 969 (1963); Maness v. United States, 367 F.2d 357 (C.A. 5, 1966), cert. den, 386 US. 932 (1966), and Maness v. Commissioner, 54 T.C. 1602 (1970). Nor is the decision supported by the holding in Vernon v. Commissioner, 18 T.C.M. 851 (1959), affirmed, per curiam, 286 F.2d 173 (C.A. 9, 1961), wherein a local union official was denied a deduction for expenditures incurred to “curry favor” with fellow members, for it was explicitly found as a fact in Vernon that the taxpayer's position as a business representative of the union did not constitute a trade or business, in contrast to the indisputable fact that in the present case the petitioner was in the business of being an elected, career union leader, and in no other. 10 established case law permitting the deduction of expenses of seeking a new job within a taxpayer’s established voca- tion. It establishes an unjustifiable distinction between corporate managers and union administrators. Finally, it raises fundamental questions as to the status of labor union officials under federal law. The matier is therefore appro- priate for review by this Court. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted, 2a AW Ellis W. Counsel for 1625 K Street, N.W. Washington, D.C. 20006 August 24, 1972 Of Counsel: Lyman G. Friedman, Jonathan S. Cohen Wenchel, Schulman & Manning 1625 K Street, N.W. Washington, D.C. 20006 a 1] CERTIFICATE OF SERVICE This is to certify that service of the foregoing petition for a writ of certiorari has been made thisQ¢thday of August, 1972 upon counsel for the government by deposit- ing three copies in a United States mail box, with first class postage prepaid, addressed to the Solicitor General, Depart- ment of Justice, Washington, D. C. 20530, and by deposit- _ ing three copies in a United States mail box, with first class postage prepaid, addressed to the Commissioner of Internal Revenue, Washington, D. C. 20224. Ellis W. Mafining, Jr. Counsel for ioners 12 APPENDIX A UNITED STATES TAX COURT JAMES B. and MARGARET CAREY, Petitioners v. COM- MISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5556-68. Filed June 14, 1971. OPINION TANNENWALD, Judge: The respondent determined a deficiency of $3,819.76 in petitioners’ Federal income tax for the calendar year 1965. The principal issue for our consideration is whether James B. Carey (hereinafter some- times referred to as “petitioner’’) is entitled to deduct expenditures which he made in connection with an unsuc- cessful attempt to be reelected president of the Interna- tional Union of Electrical, Radio, and Machine Workers, AFL-CIO-CLC (hereinafter referred to as the IUE).! All of the facts have been stipulated, and the stipula- tion and exhibits attached thereto are incorporated herein by reference. James B. and Margaret Carey, who are husband and wife, filed a joint Federal income tax return for the calen- dar year 1965 with the district director of internal revenue, Baltimore, Maryland. At the time of the filing of their petition herein, they resided in Silver Spring, Maryland. 1 The expenditures which were disallowed in the deficiency notice are detailed at p. 5, infra. Since petitioners have conceded that amounts paid in 1964 cannot be deducted in 1965 and respondent has conceded the deductibility of certain interest payments, we ad- dress ourselves only to the remaining expenditures. Se Paes 13 Petitioner has been active in the labor union move- ment since the early 1930’s. During that period, he served as secretary, and then as secretary-treasurer, of the Congress of Industrial Organizations (CIO) from its formation in 1938 to its merger with the American Federation of Labor (AFL) in 1955. Following that merger, he served as secre- tary-treasurer of the AFL-CIO Industrial Union Depart- ment, as vice president of the AFL-CIO, and as a member of the Executive Committee and Executive Council of the AFL-CIO. He is presently Director of Labor Participation for the United Nations Association of the United States. From 1949 to 1965, petitioner was elected by ac- clamation to eight consecutive two-year terms as president of the IUE, a major labor union. Petitioner, as chief execu- tive officer of the IUE, was charged with responsibility for directing union affairs, which included presiding over con- ventions of the union and meetings of the union’s Execu- tive Board. Along with the district president of each district of the union, he was responsible for the maintenance and improvement of conditions of employment for those per- sons within the jurisdiction of the IUE. The union’s constitution set the president’s maximum salary at $25,500 per year. In his 1965 return, petitioner reported receiving a salary of $25,499.76. Pursuant to the IUE constitution, the candidates for IUE president are nominated at the national convention. Election is by means of a referendum conducted by mail. At the 1964 convention, held in September of that year, Paul Jennings and petitioner were nominated for the presi- dency of the IUE. When the results of the referendum were finally tabulated, Jennings was declared the winner. ~ In December 1964, during the course of the counting of the ballots, Jennings filed suit in the United States District Court for the District of Columbia seeking to 14 enjoin further vote tabulation until adequate safeguards were provided to insure accuracy. The defendants in this suit were the petitioner, the union trustees charged with supervision of the election, the IUE’s secretary-treasurer, and the IUE itself. The complaint alleged, inter alia, that petitioner, as the incumbent president of the IUE, would not act impartially to insure an accurate tabulation of the votes. In defending against this action, which was dismissed, petitioner incurred expenses of $260 which were paid in 1965S. On their income tax return for the year 1965, peti- tioners deducted the following amounts as “Employee busi- ness” which were incurred by petitioners as president of the IUE and which were disallowed by respondent in the deficiency notice: Date Paid Description Amount 9/29/64 Petitioner's contribution to his campaign : $ : fund $ 680.16" 9/30/64 Petitioner Margaret Carey's contribution to petitioner's campaign fund 700.00" 1/28/65 _— Petitioner's personal assumption and payment of accrued but unpaid campaign fund expenses 14,108.19 1965 _ Petitioner's payment of interest on $14,108.19 loan used to repay unpaid campaign expenses 296.84"" 1965 _ Petitioner's payment of legal fee in defending action brought by Pau! Jennings 260.00 1965 Petitioner's payment of accounting fee for election expense audit. 25.03 $16,070.22 * Petitioners concede that these amounts are not proper deduc- tions in the year 1965 only because they were in fact paid in 1964 and petitioners used the cash receipts and disbursements method of accounting for the year in question. ** Respondent concedes that, regardless of the outcome of the instant case, this amount is deductible under section 163, I.R.C. 1954. —_ : We are again confronted—this time in the context of campaign expenditures made in the course of an unsuccess- ful attempt by petitioner to be reelected president of an international labor union—with the extent of the allowable deductions under sections 162 and 212.? In essence, the determination of this issue rests upon the extent to which our recent decision in David J. Primuth, 54 T.C. 374 (1970), or that of the Supreme Court in McDonald y. Commissioner, 323 U.S. 57 (1944), is applicable. In McDonald, the Supreme Court held that the ex- penditures made by a state court judge, who had been given an interim appointment, in seeking election for a full term were not deductible under the predecessor of section 162 (section 23(a)(1) of the Internal Revenue Code of 1939)? on the ground that they were not incurred in the business of judging but ‘“‘in trying to be a judge.” See 323 U.S. at 60. 2 all references unless otherwise specified, are to the Internal Revenue Code of 1954, as amended. SEC. 162.. TRADE OR BUSINESS EXPENSES. (a) In General.—There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year— (1) for the production or collection of income; 3 The decision in McDonald was based on the provisions of the Internal Revenue Code of 1939. However, insofar as this case is concerned, the 1939 Code provisions are identical to provisions of the Internal Revenue Code of 1954. Compare section 23(a) (1) and section 23(a)(1) and section 23(a) (2), I.R.C. 1939, with section 162(a) and section 21 2(1), LR.C. 1954. — — PAE IIT TE, oes ae , 16 In reaching this decision, however, the Court strongly indicated its deep concern for the powerful considerations of public policy involved in allowing a deduction for ex- penses incurred in running for public office. Moreover, the Court emphasized the history of “disallowance of campaign expenses as consistently reflected by legislative history, court decision, Treasury practice and Treasury regulations.” See 323 U.S. at p. 62.4 As a consequence, and in light of the additional fact that the actual majority in McDonald was Obtained by a simple concurrence in result by Mr. Justice Rutledge, it is questionable whether the legal theory espoused in the opinion of the Court has as wide an application as respondent would have us believe. Indeed, the Court itself indicated that the broad brush stroke of its opinion might be more apparent than real, when it stated that it would leave to this Court the “detailed analysis of the special circumstances of various ‘businesses’ and ex- penses incident to their ‘carrying on’”’ and the consequent determination of the “allowed or disallowed deductions.” See 323 U.S. at 65. It seems to us that the Court clearly 4 Since McDonald, the deductibility of campaign expenditures has been uniformly denied. Maness v. United States, 367 F. 2d 357 (C.A. 5, 1966); Shoyer v. United States, 290 F. 2d 817 (C.A. 3, 1961); Mays v. Bowers, 201 F. 2d 401 (C.A. 4, 1953). See also Long v. Commissioner, 277 F. 2d 239 (CA 8, 1960); Davenport y. Campbell, 238 F. Supp. 568 (N.D. Tex. 1964), William H. Maness, 54 T.C. 1602 (1970); Ronald W. Shotund, 5Q T.C. 503 (1968). Compare Vernon v. Commissioner, 286 Fld 173 (C A. 9, 1961), affirming per curiam a Memorandum Opinion of this Court, Robert Edward Kleinschmidt, 12 T.C. 921 (1949) Saeilarly, Congress has continued to evidence a national policy of denying tax benefits to expenditures made in connection with political campaigns, including unsuccessful efforts in recent years, too numerous to detail, to obtain the enact- ment of legislation permitting the limited deduction of contributions to political parties. See sections 27! and 276. See also 4A Mertens, Law of Federal Income Taxation (Riordan Rev.), secs. 25.38 and 25.135. LE OV SD EM PENG ae ee _— 17 left room for different results in different factual situations. Compare Caruso v. United States, 236 F. Supp. 88 (D.N.J. 1964). It was in the spirit of this qualification to the thrust of McDonald that our decision in Primuth was rendered. In that case, we allowed the deduction, under section 162, of employment agency fees paid by the taxpayer in the course of obtaining a new position of a type similar to the one he occupied. In so doing, we emphasized that such an expense “must be deemed ordinary and necessary from every realis- tic point of view in today’s marketplace” and that “the business expenses which an employee can incur in his own business are rare indeed.” See 54 T.C. at 379. Moreover, we noted that the expenditures involved were in an area in which respondent’s rulings had constructed cloudy distinc- tions. See 54 T.C. at 380 and concurring opinions at 383 and 384. The critical question is whether, in light of the fore- going, the campaign expenditures herein are more analogous to the expenses in McDonald or to the expenses in Primuth. Unlike employment agency fees, we do not think that common understanding in the ordinary affairs of life would consider that campaign expenditures should be en- compassed as “ordinary and necessary expenses * * * in carrying on any trade or business” (Sec. 162) within the “usual, ordinary and everyday meaning of the term.” See Old Colony R. Co. y. Commissioner, 284 U.S. 552, 561 (1932). Under these circumstances, even taking into ac- count whatever flexibility McDonald may allow by charging us with “detailed analysis” of various situations (see p. 8, supra), we think that the frame of reference herein is so closely analogous that the thrust of McDonald is highly persuasive in favor of the conclusion that petitioner’s ex- penditures fall within McDonald and should therefore not be deductible. 18 We are not impressed with petitioners’ argument that the absence herein of the public policy considerations which underlay McDonald should be determinative. Aside from the fact that we would be inclined to apply Mc- Donald without regard to those considerations, we think that a comparable public policy element is involved in this case. The impact of labor unions in our modern industrial society is obvious. Deep legislative concern over the internal operations of labor unions, especially union election, is evidenced by the Labor-Management Reporting and Dis- closure Act of 1959, 73 Stat. 519, 29 U.S.C., sec. 401 ef seq. (hereinafter the Labor-Management Act of 1959). That Act enacted into law provisions covering some thirty-five subjects in the areas of public disclosure of union internal and financial affairs, falsification and destruction of union records; financial transactions, holdings, and expenditures by union officials and employees; involvement in union activities of persons with criminal records; standards for the establishment of union trusteeships and public disclosure and court proceedings in connection therewith; and union elections. Eleven of these provisions deal directly with union elections (73 Stat. 519, 533-534, 29 U.S.C., secs. 481-483) in the following manner: (23) Requires election of constitutional offi- cers and members of executive boards of interna- tional unions at least every 5 years by secret ballot or by delegates elected by secret ballot; (24) Requires election of constitutional offi- cers 4nd members of executive boards of local unions at least every 3 years by secret ballot; (25) Protects freedom of opportunity to nominate candidates in union elections; we - yer a OS _ 19 (26) Protects members’ right to vote in union elections without being subject to improper interference or reprisals; (27) Insures that every candidate for union office shall be afforded the opportunity to dis- tribute at his own expense literature in support of his candidacy to all the members of the union: (28) Requires that all candidates shall have the opportunity to have observers present at the balloting and at the counting of the ballots in a union election; (29) Prohibits use of union funds to promote individual candidacy in union elections; (30) Procedures whereby a union officer guilty of serious misconduct in office may be removed by a secret ballot vote after court pro- ceedings if the union’s constitution does not pro- vide adequate machinery for such removal: (31) Provides for investigations by the Secretary of members’ complaints of improper procedures in union elections and court actions by the Secretary to set aside improperly con- ducted elections; (32) Empowers Federal courts to direct new elections to be conducted under supervision of the Secretary where it finds union election was improperly conducted; (33) Preserves members’ rights to enforce union's constitution under State laws with respect to trusteeships and safeguarding fair procedures before an election. [S. Rept. No. 187, to accom- pany S. 1555, 86th Cong., Ist Sess. (1959), 2 20 U.S. Code Cong. and Adm. News (1960 ed.), p. 2320.] The House Report states that labor unions are “a balancing force in our free economy.” H. Rept. No. 741, to accompany H.R. 8342, 86th Cong., Ist Sess. (1959) [2 U.S. Code Cong. and Adm. News (1960 ed.), p. 2476]. It further states that the 1959 legislation was needed because: personal and autocratic. In some cases men who have acquired positions of power and responsi- bility within unions have abused their power and forsaken their responsibilities to the membership and to the public. The power and control of the affairs of a trade union by leaders who abuse their power and forsake their responsibilities in- evitably leads to the elimination of efficient, 3 f i | | legal guaranty of free and periodic elections. The responsiveness of union officers to the will of the members depends upon the frequency of elec- tions, and an honest count of the ballots. Guaran- ties of fairness will preserve the confidence of the public and the members in the integrity of ee i ee mere wen 21 union elections. [Emphasis added.] [2 U.S. Code ! i , it oe i ai pay uli 584 teeee if HE of union policy. This is not to say i aus © ee damauiety enone is necessary to have each union mem- make decisions on detail as in a New Enaland 1} No. 187, to accompany S. 1555, 86th Cong., Ist Sess. (1959), 2 U.S. Code Cong. and Adm. News, supra at 2323.] we believe that the presidency of a large international labor union is akin to a public office so that the considerations emphasized in McDonald and its progeny, while not deter- minative, may properly be taken into account herein We > We are not suggesting that such a point of view should be adopted in respect of every union office. In Ernest H. Vernon, TC. Memo. 1959-189, affirmed per curiam, 286 F. 2d 173 (CA. 9, 1961), we indicated that the office of business representative of a local union did not constitute a public office. 22 are satisfied that those considerations—reflecting as they do the view that the election process is a sensitive element in the fabric of our democratic way of life—constitute a na- tional policy which falls within the narrow delineation of the standard of nondeductibility set forth in Commissioner y. Tellier, 383 U.S..687 (1966). We hold that the campaign expenditures of petitioner are not deductible under section 162. Moreover, since the same policy considerations are involved, and more particu- larly since section 212 merely enlarges the categories of incomes with reference to which expenses are deductible and not the range of allowable types of deductible ex- penses, those expenditures are not deductible under that section. McDonald v. Commissioner, supra, 323 U.S. at 62-63. If a deduction is to be sanctioned, we think that the course of history and the paramount importance of the proper functioning of the election process, insofar as it involves not only public officers but offices of labor unions encompassed by the Labor-Management Act of 1959, de- mands that Congress should unequivocally so provide. Cf. Mays v. Bowers, 201 F. 2d 401 (C.A. 4, 1953), at 403. See also footnote 4, supra. We have no need at this point to address ourselves to the question of how far such public policy considerations should extend to other types of elections. We note, how- ever, that a deduction has been allowed, at least within the context of section 212, for expenses incurred by individuals in connection with general corporate proxy solicitation ex- penses. See Graham v. Commissioner, 326 F. 2d 878 (C.A. 4, 1964); Surasky v. United States, 325 F. 2d 191 (C.A. 5, 1963); Rev. Rul. 236, 1964-2 C.B. 64. We also note that Congressional regulation of such solicitation does not seem to have extended as far as has Congressional regulation of union elections. Compare 29 U.S.C., sec. 481(g), with Stock Exchange Regulation, Hearings before House PSO LP LEE OL Om , , 23 Committee on Interstate and Foreign Commerce on H.R. 7852 and H.R. 8720, 73rd Cong., 2d Sess. (1934), p. 141, and SEC Enforcement Problems, Hearings before a subcom- mittee of Senate Committee on Banking Currency, 85th Cong., Ist Sess. (1957), p. 115. Cf. 15 U.S.C., sec. 79 Ife) and Rule U-65 issued thereunder. Under the circumstances of this case, there also is no need to delve into the question whether there should be a distinction between an “in” candidate and an “out” candi- date and the elements of advantage that such a distinction would confer on a incumbent. Similarly, since the point was not argued by either party, we do not consider whether the fact that a fixed term of office was involved might convert an expenditure such as is involved herein, if it were otherwise deductible, into an amortizable capital item in the case of a successful candidacy or an abandon- ment loss in the case of an unsuccessful candidacy. Cf. Maness v. United States, supra; Mays v. Bowers, supra. Petitioner, however, is entitled to deduct the costs incurred in defending the action brought by Jennings. Peti- tioner was not joined as a defendant simply because he was Jennings’ opponent in the election. It was his position as the incumbent president of the IUE and Jennings’ allega- tion that petition, in performing his duties as an officer, was not abiding by the IUE’s constitution that was the basis of the legal action. As such, the expenses were © The IUE constitution entrusts supervision of elections to five trustees. (Article XXII, sections G-L.) The trustees are charged with sole custody of ballots (section G), tabulating the vote (section H), making an initial determination of the legality of ballots received (section JO, and reporting the results of the election of the Secretary- Treasurer of the IUE (section 1). If the legality of any ballots is contested, a final determination is made by the IUE Executive Board (section J). But see 73 Stat. 519, 534, 29 U.S.C., sec. 482. Although | Continued on next page nay 24 incurred because of an alleged illegal quality attributed to acts which were being performed by petitioner in the business of being the IUE president. It is well-established that such expenses constitute ordinary and necessary business expenses deductible under section 162. Commis- sioner v. Tellier, supra; United States v. Gilmore, 372 US. 39 (1963); Peoples-Pittsburgh Trust Co., 21 B.T.A. 588 (1930), affd. 60 F. 2d 187 (C.A. 3, 1932). Reviewed by the Court. Decision will be entered under Rule 50. RAUM, J., did not participate in the consideration or disposition of this case. TIETJENS, J., concurring: I agree in the result here. However, I do not think we have to go around Robin Hood’s Barn to keep from opening up Pandora’s Box as envisioned in Judge Tannenwald’s concurring opinion in David J. Primuth, 54 T.C. 374. This case may or may not depend on what we said in Primuth. It is does, I think Primuth was wrong—as I said in my dissent in Primuth, Supra and repeated in my concurrence in Guy R. Motto, 54 T.C. 558. But I think this case fits precisely in the mold of McDonald v. Commissioner, 323 U.S. 57; Vernon v. Com- missioner, 286 F.2d 173; and Mays v. Bowers, 201 F.2d 401—without reliance on “public policy.” I am not sure how much “public policy” had to do with the Supreme Court’s decision in McDonald. It was a close decision. | have some doubt about what the basis of the conclusion Footnote 6 continued from page A-11 it is not altogether clear, it appears that Jennings’ complaint, in part, was concerned with petitioner’s role as chairman of the TUE Execv- tive Board and his influence on its rulings on contested ballots. SL BALL OE ELE S * there was, but I’d rather have the Supreme Court take another look at it, then have us try to get around Primuth here by saying that “public policy” dictated the result in McDonald. DRENNEN, WITHEY, ATKINS, SCOTT and HOYT, JJ., agree with this concurring opinion. SIMPSON, J., dissenting: Although | respect the majority’s attempt to reconcile the decisions in Primuth and McDonald, | am not convinced; in my opinion, Mr. Carey’s expenses of seeking re-election should be deducti- ble. In general, I agree with the views of Judge Sterrett, but I would like to add the following comments. To me, it is indisputable that the expenses of seeking re-election were incurred by Mr. Carey in his business; they were reasonable in amount and were incurred in an unsuc- cessful attempt to remain as president of the union. Since he was unsuccessful, they should all be deductible in the year when paid, and we need not consider whether, if he had been successful, they should all be deductible in a single year or should be charged off over the term of his office. If a deduction for these business expenses is to be disallowed, it must be done on the basis that it is contrary to public policy to allow a deduction for such expenses. In Commissioner v. Tellier, 383 U.S. 687, 694 (1966), the Supreme Court reiterated the long-standing rule when it said, “Only where the allowance of a deduction would ‘frustrate sharply defined national or state policies proscrib- ing particular types of conduct’ have we upheld its disal- lowance.” When a payment is contrary to law, such as a bribe or a kickback, to allow a deduction for such payment would clearly frustrate the policy which makes the pay- ment illegal. Similarly, to allow a deduction for a fine or penalty would have the effect of mitigating the penalty and ~ thereby undermine the law which provided the penalty. However, when we were faced with the question of the deductibility of payments in settlement of a claim for compensatory and punitive damages under the “False Claims Act,” we held, in effect, that it was for the Con- gress, not the courts, to decide whether a deduction should be disallowed on the basis of public policy. Grossman & Sons, Inc., 48 T.C. 15 (1967). When Congress recently amended section 162 to pro- vide that certain punitive damages were not deductible, it also included in the statute the rulings that certain other payments were not deductible because they were contrary to public policy. Sec. 902, Tax Reform Act of 1969. At that time, the report of the Senate Finance Committee included that statement that: The provision for the denial of the deduction for payments in these situations which are deemed to violate public policy is intended to be all in- clusive. Public policy, in other circumstances, generally is not sufficiently clearly defined to justify the disallowance of deductions. * * * [S. Rept. No. 91-552, 91st Cong., Ist Sess., p. 274 (1969), 1969-3 C.B. 423.] The committee apparently felt that it was for Congress to decide when deductions should be denied for reasons of public policy, and I generally agree. It is true that Congress has undertaken to regulate the conduct of union elections, but in those provisions, I see nothing indicating that the expenses of conducting an elec- tion should not be deductible for tax purposes. Clearly, anyone who seeks election to a union office is likely to incur expenses, and the payment of such expenses is surely not illegal. On the contrary, anyone who stands for such an office must present himself and his views for the considera- SLEPT eS OPS MO NT ri od 27 tion of the members of the union, and to do SO is altogeth- er consistent with our democratic traditions. If there is any risk that some candidates might engage in undue campaign- ing and incur excessive expenses in an attempt to secure union office, it seems to me that the appropriate remedy is not to disallow a deduction for all such expenses. So far, Congress has manifested no concern over such possibilities, but if it does become concerned, it can fashion a far more suitable remedy. ; As a court, we have a responsibility to implement the general policies declared by the Congress, but here we have no policy declared by Congress. The majority of the Court has decided, for reasons of public policy, to deny a deduc- tion for the expenses of seeking a union office. I consider that a policy question which should be decided by the elected members of the Congress. FAY, DAWSON AND STERRETT, JJ., agree with this dissent. STERRETT, J., dissenting: I respectfully dissent from the holding reached by the majority for the reasons set forth below. As has been made clear the issue here is the deducti- bility under section 162 of certain election expenses in- curred in 1965 by petitioner James Carey. Paraphrased, section 162(a) allows a deduction for all expenses which are (1) ordinary and necessary, and (2) incurred in carrying on (3) a trade or business. Treating these requirements in reverse order, it cannot be fairly disputed that petitioner was in the trade or busi- ness of being a labor leader. This conclusion is made ap- parent by reference to the majority’s own Findings of Fact found on page [3], and I do not interpret its opinion to hold to the contrary. Further, such a determination is in 28 accord with the many court decisions which have held that an individual may be in the trade or business of being a corporate executive. See Trent v. Commissioner, 291 F.2d 669, 674 (C.A. 2, 1961) and cases cited therein. Moving backward to (2) above, it has been frequently stated that “‘* ** carrying on any trade or business’, within the contemplation of [sec. 162] * * * involves hold- ing one’s self out to others as engaged in the selling of goods or services.” Deputy v. DuPont, 308 U.S. 488, 499 (1940), concurring opinion of Justice Frankfurter. Since the early 1930’s petitioner has held himself out to be labor leader and has over the years engaged in continuous activi- ties in furtherance of his trade in mostly elected, but some non-elected, capacities. That such service was at all times profitable in terms of receiving a salary can be safety assumed. - It seems clear, then, that the funds expended in 1965 were an integral part of his activities in carrying on his trade or business and bore the requisite nexus to income. Nothing could be less remote, no connection could be more taut than the relationship between election expenditures and the compensation accompanying the office sought. With his long success as a labor leader, petitioner could reasonably anticipate that any dollar spent in an election expense would result in his continuing to draw a salary as president of the union. Surely when an established labor | leader compaigns for a union office, he is carrying on a basic element of his trade. Finally, even though it is found that the expenses at issue were incurred by petitioner in carrying on his own trade, such expenses still must be ordinary and necessary to be deductible. Here, we must be realistic, election expen- ditures are frequently the sine qua non of winning. Any income flowing from victory can, almost inevitably, be PRN AGE IE RTT PEF . ? g — attributed in part to the campaign expenditures. To be “ordinary and necessary”’ the expenses must be reasonable. Commissioner v. Lincoln Electric Co., 176 F. 2d 815 (C.A. 6, 1949). Petitioner deducted an amount of $16,070.22 as his share of the campaign expenses designed to re-elect him to an office bearing a 2-year term with an annual salary of $25,500. The expenses in relation to the prospective income must be deemed reasonable. There was no effort here to “buy” an election, and the restriction on “reason- ableness” would present anyone from deducting election expenses if there were such an effort. The majority would position this case somewhere between McDonald v. Commissioner, 323 U.S. 577 (1944) and David J. Primuth, 54 T.C. 374 (1970). I view the case as being more between McDonald, supra, which disallowed a deduction for election expenses of a would-be judge, and Graham v. Commissioner, 326 F. 2d 878 (C.A. 4, 1964)!, which allowed the deduction of proxy expenses designed in part to elect the taxpayer to a corporate board of directors. The McDonald disallowance of election expenses in- curred in running for public office has been interpreted as being based on public policy.” Mays v. Bowers, 201 F. 2d * 1. While the Graham case dealt with the deductibility under section 212 of the expenses there in issue, “[n]o reason appears why a different construction should be given to the same language in Section 162(a).” Locke Manufacturing Companies v. United States, 237 F. Supp. 80, 87 (D. Conn. 1964). It must be conceded that the court in Graham discussed the question of deductibility mainly in terms of the taxpayer’s stock holdings. Nevertheless, part of the expenses at issue related to his seeking election to the board of directors and, as noted above, were allowed. . 2 A review of the briefs filed with the Supreme Court reveals that the parties framed the issue as one involving public policy. 30 401 (C.A. 4, 1953). See 4A Mertens, Law of Federal Income Taxation, sec. 25.21. Certainly, as the majority itself points out on page [8], the Supreme Court seemed to be limiting its opinion to the facts there at hand and leaving to other courts the detailed analysis of special circumstances. Respondent, too, it would seem, has limited his appli- cation of McDonald to its facts. Certainly his acquiescence in Furner v. Commissioner, 393 F. 2d 292 (C.A. 7, 1968), as stated in Rev. Rul. 68-591, 1968-2 C.B. 73, recognizes that an employee’s expenses, to be deductible, need not necessarily be related to any current employment. See also Rev. Rul. 60-223, 1960-1 C.B. 57. The application of public policy considerations to dis- allow the deduction of otherwise allowable items should be restricted. For the future, at least, it has been , see S. Rept. No. 91-552, 91st Cong., Ist Sess. (1969), 1969-3 C.B. 597, which accompanied the Tax Reform Act of 1969. There is no need to disallow the election expenses of a union official on the basis of public policy any more than those of a corporate officer. Unions are much like corporations. The majority emphasizes the governmental regulation of unions; the short answer to that is a reference to the Securities Exchange Commission as _ illustrative of the governmental regulation of the activities of corporations. Public policy considerations should be limited to campaign expenses incurred in running for public office. In Welch v. Helvering, 290 U.S. 111 (1933), at 115, the Supreme Court, in discussing a predecessor of section 162, said: The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle. _ a Surely it is a way of life, in any effort to win a contested union election (or any contested election for that matter), to cast “honest bread” upon the waters, hoping to bring to shore the emoluments and other perquisites of the office at stake. Where the “cast” has been reasonable in amount and in furtherance of one’s trade, there is no justification for ignoring the facts of life by denying the business nature of the expenditure. If the election effort proves unsuccessful the nature of the expenditures, obviously, has not been altered. For the foregoing, it is apparent that I would allow the deduction at issue as readily falling within the scope of section 162(a). FAY, DAWSON, SIMPSON and QUEALY, JJ, agree with this dissent. ' — oF a 32 UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 71-2047 James B. Carey and Margaret Carey, Appellants, Commissioner of Internal Revenue, Appellee On Appeal from the Decision of the Tax Court of the United States. (Argued May 10, 1972 Decided May 16, 1972) Before WINTER and FIELD, Circuit Judges, and BLATT, District Judge. PER CURIAM: For reasons sufficiently stated by the Tax Court, 212 or the Internal Revenue Code of 1954. AFFIRMED. rs VE ORT er re 33 APPENDIX C Internal Revenue Code of 1954 Section 162(a): (a) In general._There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carry- ing on any trade or business, * * * Section 212(1): In the case of an individual, there shall be allowed as a deduction all the ordinary and neces- sary expenses paid or incurred during the taxable year— (1) for the production or collection of in- come; * * * Treasury Regulations on Income Tax (1954 Code) Section 1.162-20(c\(1): (c) Taxable years beginning after December 31, 1962—(1) In general. For taxable years begin- ning after December 31, 1962, certain types of expenses incurred with respect to legislative mat- ters are deductible under section 162(a) if they otherwise meet the requirements of the regula- tions under section 162. These deductible ex- penses are described in subparagraph (2) of this paragraph. All other expenditures for lobbying purposes, for the promotion or defeat of legisla- tion (see paragraph (b\(2) of this section), for political campaign purposes (including the sup- port of or opposition to any candidate for public 34 office). or for carrying on propaganda (including advertising) relating to any of the foregoing pur- poses are not deductible from gross income for such taxable years. * * * Section 1.21 2-1(f): (f) Among expenditures not allowable as deductions under section 212 are the following Commuter’s expenses: expenses of taking special courses or training: expenses for improving per- sonal appearance; th cost of rental of a safe- deposit box for storing jewelry and other per- sonal effects: expenses such as those paid or in- curred in seeking employment or in placing one- self in a position to begin rendering personal services for compensation; campaign expenses of a candidate for public office, bar examination fees and other expenses paid or incurred in secur- ing admission to the bar, and corresponding fees and expenses paid or incurred by physicians. dentists, accountants, and other taxpayers for securing the right to practice their respective pro- fessions. See, however, section 162 and the reg- ulations thereunder. Labor-Management Reporting and Disclosure Act of 1959 Section 481(c): (c) Every national or international labor organization, except a federation of national or international labor organizations, and every local labor organization, and its officers, shall be under a duty, enforceable at the suit of any bona fide candidate for office in such labor organization in the district court of the United States in which such labor organization maintains its principal office, to comply with all reasonable requests of + Oey ITH HEMI PET Lo THE aH uly 3h Te HE tiene Usa JT Hn Pa a 36 of any person in an election subject to the provisions of this subchapter. Such moneys of a labor organization may be utilized for notices, factual statements of issues not involving can- didates, and other expenses necessary for the holding of an election. APPENDIX D UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 71-2047 James B. Carey and Margaret Carey, ; Appellants, : versus § Commissioner of Internal Revenue, : Appellee. —ORDER-— : on ; 2 The petition for rehearing filed on behalf of James B. | Carey and Margaret Carey having been read and considered, it is, with the concurrence of Judge Field and Judge Blatt, : O R DE RE D, that said petition be, and it is j hereby, denied. : For the Court: _3/ Harrison L. Winter United States Circuit Judge ‘A True Copy, Teste: FILED > Samuel W. Phillips, Clerk JUN 12 1972° > By s/ Diane Burke Samuel W. Phillips : Deputy Clerk CLERK — Ey at ——_-- - --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1315%3A1. Public record. Not legal advice.