Reply Brief — Allen v. Grand Central Aircraft Co.

Supreme Court brief1954

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INDEX

I. The finding that the continuation of the administra-

tive proceedings would have caused appellee's

credit to be shut off and would disable it from con-

tinuing its operations is not supported by the

evidence ___

II. Neither the statute nor the Constitution are violated

by construing Section 405 (b) to permit maximum

disallowances as great as the entire unauthorized

payroll _ ; , . -

A. Section 405 (b) authorizes the disallowance

of the entire illegal payroll, not merely of

1. Section 405 (©: is substantially identi-

cal with Section 5 of the Stabiliza-

tion of 1942, which, as Congress

knew, had been construed as au-

thorizing the disallowance of the

entire unauthorized payroll _____ _

a. The administrative practice

under Section 5 of the Sta-

bilization Act of 1942.

b. Congressional acceptance of

this administrative inter-

pretation of Section 405 (b)_

2. Events following the enactment of

the Defense Production Act of 1950

indicate Congressional adherence to

the interpretation permitting disal-

lowance of the entire illegal pay-

ree ah Ata deems

tained in the statutory scheme of wage stabiliza-

tion enforcement established by Section 405 (b)__-

A. Congress may utilize administrative proce-

dure to impose the disallowance sanction_.

B. Section 405 (b) provides sufficient guidance

as to the sanction to be imposed_________

291511—54 1 (I)

Page

IV. The disallowance sanction is not in conflict with the

requirement of Art. I, Section 9, of the Constitution

that all direct taxes not covered by the Sixteenth

Amendment be apportioned..._-....-.

1. An income tax is not a direct tax to the ex-

tent that it is based upon business income__

2. The granting of deductions for business ex-

penses is completely within legislative con-

er griesetdenscwrcbsarscnunenscci.

Glascote Products Co., In re, June 3, 1952, Bureau of Na-

tional Affairs, Labor Relations Reporter Binder 7,WHM

Erkan ketgenkentdtpecntidreueeseeesiesse...

Matter of, Case No. 21-CA-1101, 103 N. L. R. B. No.

eaten manacharase wiseuapesbunnetinedese nace...

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Cases—Continued Page

Hampton & Co. v. United States, 276 U. §. ae 28

Hedin Construction Co., In re, April 11, 1952, Bureau of

National Affairs, Labor Relations Reporter Binder 7,

WHM 100:1153________. i ae 21

Helvering v. Bankline Oil Co., 303 U. 8. 362__...___ 34, 36

Helvering v. Winmill, 305 U.8.79_............ 19, 20

Hirabayashi v. United States, 320 U.S. 81... 31

Hofferbert v. Anderson Oldsmobile, Inc., 197 F. 2d 504____ : 36

Howard Menu Service, 13 Labor Relations Reporter 687

-ctaoptares, Aca Pete ip Pe EE 14

Interstate Transit Lines vy. Commissioner, 319 U. 8. 590____ 34

Lichter v. United States, 334 U.8.742......... 27, 28, 31

Lilly v. Commissioner, 343 U.8.90........ 35

McDonald vy. Commissioner, 323 U.8.57........_ 34

Missouri Pacific Railway Co. v. Tucker, 230 U. 8. 340_____ 23

Myers v. Bethlehem Shipbuilding Corp., 303 U. 8. 41______ 3

New Colonial Tea Co. vy. Helvering, 292 U. 8. 435.._______ 34

Norfolk-Newport News Contractors’, 15 Labor Relations

Reporter 237 (October 14, PE eetiew datetetese-aniexu 14

Norman-Frank, Inc. v. Arnall, 196 F.2d 502._... 4]

Norwegian Nitrogen Co. v. United States, 288 U. 8. 294___ 19, 30

Oceanic Navigation Co. v. Stranahan, 214 U.S. 320... ___- 27

Opp Cotton Mills v. Administrator, 312 U.S. 126... ____ 28

Oval & Koster, 16 Labor Relations Reporter 741 (June 30,

Teron enenewerdawenwbaseterssendoesisese....... 14

Parker Appliance Co., 13 Labor Relations Reporter 582

(Regional Board Decision) .-..................... __ 14

Parkland Sportswear Co., 13 Labor Relations Reporter

503 (December 1, 1943)............... 14

Passavant v. United States, 148 U.8.214...... 27

Pollack v. Farmers’ Loan & Trust Co., 158 U. 8. 601__.___ 32

St. Louis, Iron Mountain & Southern Railway Company v.

Williams, 251 U. 8. 68............................_. 23

Southwestern Tel. and Tel. Co. v. Danaher, 238 U. S. 482_- 24

Spaulding v. Douglas Aircraft Co., 154 F.2d 419... 31

Stanton v. Baltic Mining Co., 240 U.S. 103_._.._... 33, 36

Stratton's Independence v. Howbert, 231 U.S. 399.....____ 33, 36

Sullenger, Lela, 11 T.C,1076......................... 36

Sunshine Anthracite Coal Co. vy. Adkins, 310 U. 8. 381____ 28

Switchmen’s Union v. Mediation Board, 320 U. 8. 297_____ 27

Textile Mills vy. Commissioner, 314 U.S. 326... 35

United States v. Biwabik Mining Co., 247 U.S. 116_______ 36

United States v. Ju Toy, 198 U. 8. 253..........._ 27

United States v. Rock Royal Co-op., 307 U. 8. 583... __- 28

Von Baumbach v. Sargent Land Co., 242 U.S. 503_______ 36

Wadley Southern R. Co. v. Georgia, 235 U.S. 651__...___. 24

Cases—Continued Page

Weather-Seal Manufacturing Co. v. Commissioner, 16 T. C.

1312, affirmed without opinion, 199 F. 2d 376___.______ 35, 37

White v. United States, 305 U. S. 281_.__-.-..._._..-__- 34

Woodworth, N. A. v. Kavanagh, 102 F. Supp. 9, affirmed on

the opinion of the District Court, 202 F. 2d 154_______- 35

Yakus v. United States, 321 U. S. 414_............._.--- 28

Zehrig, J. C., 16 Labor Relations Reporter 742 (June 30,

ORR ria eee ran rsba sake ca sane bak teks eee aes 14

Constitution, Orders, Regulations and Statutes:

Constitution of the United States, Art. I, Section 9______- 32

Sixteenth AMONG... <<. ose xtecnwenncu sens cuces 32

Executive Order No. 9322 of March 26, 1943 (8 F. R. 3807) _ 14

Executive Order No. 9334 of April 19, 1943 (8 F. R. 5423)- 14

Executive Order No. 10434 (18 F. R. 809)_____- Pesca 4 &-

General Order No. 15, Section 4 (b)___-__- eee ae ee 5, 20, 38

Chee SON FRO Bo cn ee ooo oe oe eeu cae eee. 38

General Order No. 19 (17 F. R. 11368) Late oan cute lee 42

Enforcement Regulation No. 1, 16 F. R. 6028__________- 20, 38

General Wage Stabilization Regulation No. 1, 16 F. R. 816_ 46

National War Labor Board Regulations of September 15,

1944, Section 802.73 (c), 9 F. R. 11422___..___.___.__- 14

Office of Economic Stabilization Regulations:

October 27, 1942, 7 F. R. 8748:

Section 4001.4____- es en ee SE et 15

OWI Csi kes oc eke os oo ceccase ssn 12, 13, 15

Section 4001.10, superseded October 1, 1943, 8

ae CI Se ke ee ga ye 13

As amended November 30, 1942:

Section 4001.5, (a), 7 F. R. 10024__.._________- 14

As amended November 30, 1944:

Bection 4001.25, OF: H. 14087... ...4<-.-:..--. 13

Revised General Procedural Regulation No. 1_____-_---- 38

T. D. 5186 of December 2, 1942, Section 102.28, 7 F. R.

a ook he ease eerie onkos 5

T. D. 5243 of March 12, 1943, 8 F. R. 3158___-________- 5

T. D. 5435 of February 2, 1945, Section 1002.28, 10 F. R.

SE er Rae ne ce hs pee WER eS ok ohne Nee _ a 15

T. D. 5446 of March 17, 1945, 10 F. R. 3008_______- ae 15

Treasury Regulations 111, Section 29.23a-16, 26 C. F.

Be. se a os ne a rama ce awd wa ewomaten 15, 19

War Food Administration Regulations of January 17,

1004, Section 1100.18, 9 F. BR. G09....-......-.<--.<5- 15

War Food Administration Regulations of June 23, 1945,

Section 1100.16, 10 F. RB. Y61S.....-....-....2-.....- 15

SEARO DIP TW CT. yee

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Constitution, Orders, Regulations and Statutes—Continued

Defense Production Act of 1950: Page

Section 403 (b)__._______. RE Wee Ke kh oe a are 40, 43

Section 404 ______ na Sete MiNi nal tr in aes eso reece Sate sc 41

NGI isn ive edinnddwutinewccwn 11, 19, 23, 29, 44

, re en eae 44

EE aeickacacdoeusp ceo tues. c cel ee 37, 38, 41

SE hia eid re cree te eS! ie 11

Defense Production Act Amendments of 1951___..______. 21, 37

Defense Production Act Amendments of 1952....._____. 21

Emergency Price Control Act of 1942:

Section 2 (a) (50 U.S. C. App. 902 (a))............. 40

Internal Revenue Code, Sec. 23 (a) (1) (A)__.._._____. 34

Stabilization Act of October 2, 1942:

eli iie eddinas dads aoe cocks see enaad cudkuwn 19, 29

Miscellaneous:

I MN, RUE sie ccc cn cecaccccccuanucuees. 38

96 Cong. Rec. 14064-14065__........._._....... 38

Pe I Miia no oe rows ccc vccccwe ncocesecsc... 20

Federal Rules of Civil Procedure, Rule 52__......._____. 3

Hearings before the Committee on Banking and Currency,

United States Senate, 79th Cong., Ist Sess., on S. J. Res.

ese oe cece eresc fh 7S a Epa h RcRe ee ee 18

Hearings before the Subcommittee of the Committee on

Appropriations, House of Representatives, 78th Cong.,

2d Sess., on the National War Agencies Appropriations

Bill for 1945, pp. 240-241__..........._. 16, 17

Hearings before the Subcommittee of the Committee on

Appropriations, House of Representatives, 79th Cong.,

BW Ns I Pas on can ccikvvancareccdauccacces - me, 19

Hearings before a Subcommittee of the Committee on

Appropriations, United States Senate, 78th Cong., 2d

Sess., on H. R. 4879, pp. 132-133__._.__________. “i 17

National Wage Stabilization Board, The, January 1, 194

February 24, 1947, pp. 230-231.......______- a ed 7 13

S. Rept. 2250, 81st Cong., 2d Sess.:

PME a Sea eewn ae dole ken a6 ue son anc kasd teceleuds 26

SR RRSP een O_O CN ae a 12

Termination Report of the National War Labor Board, Vol. I,

pp. 455-496; Vol. U1, p. 749... 13

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—

Guthe Supreme Court of i.e Gnited States

OcToBER TERM, 1953

No. 450

ArTHUR P. ALLEN, CHAIRMAN, TWELFTH REGION

WAGE STABILIZATION BOARD, ET AL., APPELLANTS

GRAND CENTRAL AIRCRAFT Co., A CALIFORNIA

CoRPORATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

REPLY BRIEF FOR APPELLANTS

In our main brief, we have discussed the three

points necessarily before the Court on this appeal.

We have there argued: (1) that the court below

lacked equitable powers to enjoin, in view of the

well established doctrines of exhaustion of remedy

and prematurity; (2) that Section 405 (b) of the

Defense Production Act of 1950 provides an ad-

ministrative means of enforcement of wage sta-

bilization regulations; and (3) that the power to

conduct administrative enforcement proceedings

continues. The first two of these points were de-

(1)

cided, adversely to the Government, by the court

below. The third point is important in connec-

tion with possible contentions as to the mootness

of the cause.

The court below noted (R. 35-36) that appellee

had raised other defenses on which it did not

pass." Appellee presents these contentions to the

Court as additional grounds for sustaining the de-

cision below (Appellee’s Brief, pp. 67-90). This

brief will deal with these arguments, and show

that they are without merit. First, however, we

will revert to an aspect of the exhaustion of rem-

edy point upon which we did not elaborate in our

main brief, but which now becomes appropriate

for discussion in view of certain overstatements of

the evidence made by appellee (Appellee’s Brief,

pp. 9, 19, 91, 97).

?, In view of the intimations in appellee’s brief (pp. 10, 54),

that the wage increases here involved were “merit” increases,

or increases given “under pressure from their employees or

their union representatives”, attention is called to the Deci-

sion and Order of the National Labor Relations Board in Jn

the Matter of Grand Central Aircraft Co., Inc. and Interna-

tional Union, United Automobile, Aircraft and Agricultural

Implement Workers of America, CIO (UAW-CIO), Region

6, Case No. 21-CA-1101, and Jn the Matter of Grand Central

Aircraft Co., Inc. (Employer) and International Union,

United Automobile, Aircraft and Agricultural Implement

Workers of America, CIO (UAW-CIO) (Petitioner) , Case

No. 21-RC-1813, 103 N. L. R. B. No. 101, presently pending

on review in the Ninth Circuit. The Board found that the

principal wage increases here involved were unfair labor

practices because granted in order to induce the employees

to oppose representation by the complaining union.

OE TEC Caen a ea tpn PREECE, PERN EE NOE PRG Ca Ay LOA SPE gtr ra sy caepieectnrnet ne

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I. THE FINDING THAT THE CONTINUATION OF THE

ADMINISTRATIVE PROCEEDINGS WOULD HAVE CAUSED

APPELLEE S CREDIT TO BE SHUT OFF AND WOULD

DISABLE IT FROM CONTINUING ITS OPERATIONS IS

NOT SUPPORTED BY THE EVIDENCE

The court below found (R. 37) that

*** the continuance of the threatened

administrative proceedings will cause

plaintiff’s bank credit to be shut off and

will disable plaintiff [appellee] from con-

tinuing its operations.

Although this finding of fact has no support

in the undisputed evidence and is thus not pro-

tected by Rule 52, Federal Rules of Civil Pro-

cedure, we did not argue the evidentiary point

in our main brief,’ but directed our discussion to

the legal issues of general importance which

would resolve the questions raised in the entire

group of cases of which this is representative.

However, in its effort to distinguish this case

from Myers v. Bethlehem Shipbuilding Corp., 303

U.S. 41, appellee has placed such stress on this

finding, and so overstated the evidence on which

it was based, that it has become imperative to

challenge the pertinent finding of fact and to re-

duce the pertinent evidence to its proper propor-

tions. If the evidence is insufficient to support

* The Government had assigned as error the district court's

finding of irreparable injury, of which this was a part. See

Assignment of Error No. 2, R. 38, Specification of Error No.

1, Main Brief, p. 15.

291511542

eh ated PPR FL UA aren eet, Lin yey

7 7

this finding, appellee’s argument on irreparable

injury in large part disappears. But even if the |

finding is allowed to stand, the underlying evi-

dence is significant as indicating how speculative

a showing of injury would be sufficient to escape

from the exhaustion rule. At the very least, the

finding must be interpreted in the light of the

undisputed evidence on which it rested.

Actually the evidence, far from establishing

that the continuance of the proceedings would

cause the shutting off of appellee’s bank credit,

shows that the bank loans had been renewed

once before during the pendency of the proceed-

ings; that the holding of the hearing by the En-

forcement Commissioner would not affect the

bank’s credit policy; that the bank might change

the terms of the credit if the Enforcement Com-

missioner should recommend a high disallowance

figure and if the chances of a modification by the

National Enforcement Commission were slight;

and above all that in no circumstances would the

bank “take injurious action and deliberately wipe

a company out’’ (R. 71). The evidence in ques-

tion is that of Mr. Lawler, executive vice-presi-

dent and a member of the loan committee of the

Farmer’s and Merchant’s National Bank of Los

Angeles; it comprises only 11 pages of the record

(R. 62-72).

Upon direct examination (R. 62-64), Mr. Law-

ler testified that his bank and two other banks

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—

extended a substantial credit to appellee which

was up for renewal on September 30, 1953; that

generally speaking his recommendations were

usually and normally followed by the Board of

Directors (R. 62-63) ; and that his recommenda-

tion for a renewal of the loan would be negative

if the Enforcement Commissioner should recom-

mend a disallowance of any amount between

$5,000,000 and $750,000 (R. 63-64).2 Mr. Lawler

stated that “cf an enforcement commissioner of

the National Enforcement Commission * * *

should make findings and determinations that

wages in the amount of $5,000,000 or more should

be disallowed for income tax and or an alterna-

tively contract reimbursement purposes for the

year 1951”’ (R. 63), he “would recommend that

the bank not extend the credit agreement” (R.

64). In answer to further questioning he stated

that the same would be true “if the enforcement

commissioner’s findings and determinations was

that the amount of such disallowance should be

$3,000,000,’’ $1,000,000 or *¥/, of a million dollars,

*The entire payroll for the period under consideration

amounted to $5,561,484.11, the alleged excessive payment to

$959,857.50 (R. 17-78) ; appellee (Br., p. 8) states that cor-

rection of mathematical errors reduces the latter amount

to $755,305.50. While General Order No. 15, Section

4 (b) (Main Brief, p. 92) provides that “the usual and gen-

eral policy shall be to disallow an amount at least equal” to

the excess payment, it plainly envisages the imposition of a

sanction for a lesser amount, and, as we have shown in our

main brief (p. 7, fn. 7), such disallowances have constituted

a substantial portion of the cases handled by the National

Enforcement Commission.

—

or if the findings were made by the National

Enforcement Commission instead of by the en-

forcement commissioner (R. 64). Mr. Lawler

did not make any statement that the holding of

the hearing would impair appellee’s credit stand-

ing, and there is no evidence in the record to that

effect. This in itself disproves the finding that

‘continuance’ of the proceeding ‘‘will cause

plaintiff’s bank credit to be shut off.’’

Of obvious significance in this connection is the

disclosure on cross-examination that the banks’

credit to appellee had been extended in December

1952, although the bank knew at that time of the

pendency of the instant proceedings and of the

resulting potential liability (R. 65-67).

When questioned about the effect of the lifting

of the injunction and the concomitant resumption

of the proceedings upon appellee’s credit stand-

ing, the witness did not state that this would re-

sult in an automatic or sure withdrawal of the

bank credit. To the contrary, he testified that

the bank’s action would depend, in his opinion,

on many contingencies, including the evaluation

by counsel of appellee’s chances to refute the

charge, saying (R. 69):

That would present, in my opinion, a

contingency that would require very seri-

ous consideration and depending upon the

4 The witness also did not deny that the loan had been con-

tinued despite a previous disallowance of $548,000 by the Air

Force (R. 72, 58-59).

Se te ne

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_—

amounts involved, depending upon the re-

view of the matter by our legal counsel, I

would be then in a position where I would

have to appraise the degree of the contin-

gency and the size and amount and that

might give me cause and it certainly would

change the position that the company is

now in.

As J understand it, I am advised that the

company is now protected by an injunction

from further pursuit of this action which

involves a sizeable sum of money which

might very conceivably effect the financial

condition of the company in a serious way.

That is all a matter of opinion; I am ex-

pressing my opinion.

The contingent significance of Mr. Lawler’s

views is enhanced by his admission that the “de-

cision is not entirely up to me,’’ that the ques-

tions were only as to ‘‘what my recommendation

would be to my bank”’ (R. 68). Not even a lead-

ing question on redirect examination could cause

the witness to commit himself beyond this vague

statement (R. 70).°

*“Mr. Lunp. Mr. Lawler, speaking of contingency, I as-

sume, looking at it from your view and the banker's view,

with reference to possible recommendations to your Board

of Directors, the seriousness of this contingency or potential

liability is much greater, is it not, after an enforcement com-

missioner has heard the case and made recommendations for

disallowance in the substantial amount than the seriousness

of this contingency before such determination adverse to the

company.

“Mr. Lawxer. In my opinion, that would be the case. I

haven’t made an analysis.” (R. 70.)

—_—— LOO LA IE LIEN ETERS ILE, SIL ALME SELLE ES SEE IONE I ACNE LER

UNREST GRR OPT SOs PPS ay ey DORE Me ss Sata 2 a Be Be FS ara

“=

Nor were his answers with respect to the effect

of a recommendation made by the Enforcement

Commissioner any more precise. When ques-

tioned by counsel for appellant as to what his

credit recommendation would be if an adverse

determination had been made by the Commis-

sioner and the company had appealed from it

with assurances, believed by the witness, that

there was a good chance of success, he testified

(R. 69):

Mr. Lawter. You haven’t named an

amount involved. I can’t answer your

question until I know what amounts are in

your mind.

Mr. Groner. Why does the amount make

a difference ?

Mr. Law er. Obviously, if it is 25 cents,

it is going to make a difference to $250,000

or two and a half million. My recom-

mendation, if the amount is 25 cents, is

going to [be] entirely different than my

recommendation if the amount is two and

a half million.

When questioned from the bench about a hypo-

thetical recommendation to disallow $500,000, Mr.

Lawler disclosed that his testimony that he would

recommend against the renewal of the loan had

to be taken with more than a grain of salt; that it

really meant that he ‘“‘would recommend that our

bank would not renew the agreement on the pres-

ent terms and conditions” (italies supplied) (R.

71-72). This is far from a statement that there

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_ ne!

would be an unconditional cancellation of the

loan. And then, in a continuation of his answer,

the witness stated that the bank would not “take

injurious action and deliberately endeavor to

Wipe a company out” (R. 71). This in itself

refutes the court’s finding that (R. 37):

*** the continuance of. the threatened

administrative proceeding will cause plain-

tiff’s bank credit to be shut off and will

disable plaintiff [appellee] from continuing

its operations.

Mr. Lawler was the only witness who gave testi-

mony with respect to when bank credit might be

withdrawn. His testimony was not disputed and

no one challenges his credibility. But this testi-

mony must be read in the light of the facts that he

Was appellee’s witness, and that the burden of

proving irreparable injury was on appellee.

The finding of the court below must be ap-

praised on the basis of the testimony on which

it must have rested. Absolutely nothing in this

testimony supports the broad findings which the

court made on this issue.

Since the findings has no support at all in the

evidence, it is clearly erroneous. At most, the

evidence indicates that if the Enforcement Com-

missioner made a large enough award * against

*Such an unprecedently large disallowance would be un-

likely unless the Enforcement Commissioner found that ap-

pellee had been guilty of substantially all the violations

charged, and that these violations had been deliberate and

appellee, after the hearing the banks would con-

sider changing the terms and conditions of the

loans, but not in a manner which would wipe the

company out. Such evidence of injury is, we sub-

mit, plainly insufficient to warrant a departure

from the doctrine of the Myers and other cases.

Il. NEITHER THE STATUTE NOR THE CONSTITUTION

ARE VIOLATED BY CONSTRUING SECTION 405 (b) To

PERMIT MAXIMUM DISALLOWANCES AS GREAT AS

THE ENTIRE UNAUTHORIZED PAYROLL

Appellee contends (Br. pp. 73, 83, 86) that Sec-

tion 405 (b) does not authorize the disallowance

of the entire illegal payroll but merely the disal-

lowance of the unauthorized excess, and that, ac-

cordingly, regulations issued under Section

405 (b) are in conflict with the statute as to the

amount of disallowance. Appellee also argues

that, if either Section 405 (b) or the regulations

issued thereunder do authorize disallowance of the

entire illegal payroll, its constitutional rights have

been infringed.

The issues thus raised are abstract. As we have

shown, the certification by the National Enforce-

ment Commission of a disallowance larger than

the excess wages has been the rare exception (Ap-

pellants’ Brief, p. 7, fn. 7). Hence, in the absence

intentional (cf. Main Brief, fn. 7, pp. 7-8). In such cir-

cumstances, where the irreparable injury asserted by appellee

would be contingent upon a deliberate violation of the law,

the clean hands doctrine should preclude any relief (cf. Main

Brief, fn. 18, p. 29).

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of any indication to the contrar *, it cannot be

assumed that if in the instant case the administra-

tive processes had been permitted to run their

normal course the Commission would have certi-

fied a disallowance larger than the excess wages.”

That appellee must base its arguments on specula-

tion as to the size of the disallowance emphasizes

the prematurity of the points in the case. See

the discussion of the legal principles in our main

brief (pp. 26-32). Reference might also here be

made to the separability clause of the Defense

Production Act (Section 715, Appellants’ Brief.

p. 86), which evidences a clear Congressional de-

sire to limit constitutional challenges to conerete

cases. Putting these considerations aside, we will

discuss the abstract questions presented.

A. SECTION 405 (hb) AUTHORIZES THE DISALLOWANCE OF THE EN-

TIRE ILLEGAL PAYROLL, NOT MERELY OF THE UNAUTHORIZED

PORTION OF THE WAGES

Section 405 (b) gives the President the author-

ity to

prescribe the extent to which any wage,

salary, or compensation payment made in

contravention of any such regulation or

order shall be disregarded * * P

Appellee’s position is that the statutory lan-

guage permits only the disallowance of the illegal

portion of the wage payments. Since 1942 this

language has been consistently construed as pro-

viding for the disallowance of the entire wage

payment made in contravention of the regulation

“We are advised that the largest disallowance by the

National Enforcement Commission in a contested case has

been $47,838 (Jn re Beacon Marine Co. (Ovcan Marine Re-

CLAS

irs, Inc..)L. R. R. Binder 7, WHM 100: 1200, a a

or order, and not merely of the unauthorized

portion thereof. Any doubt as to the meaning

of the statutory language is resolved by the legis-

lative history, which fully supports this admin-

istrative construction.

1. Section 405 (b) ts substantially identical with

Section 5 of the Stabilization Act of 1942,

which, as Congress knew, had been construed

as authorizing the disallowance of the entire

unauthorized payroll

As we have pointed out in our main brief (pp.

44-45), when Congress enacted Section 405 (b)

it adopted ‘‘the language of [Section 5 of] the

Stabilization Act of October 2, 1942, respecting

the penalties to be applied for violations of the

wage and salary stabilization program.’’* Sec-

tion 5 had been interpreted and applied from the

very beginning as authorizing the disallowance

of the entire unauthorized payroll. The perti-

nent regulations repeatedly were brought to the

attention of Congress at appropriation hearings

and at hearings concerned with the extension of

the stabilization legislation. The continued ap-

propriation of funds for the National War Labor

Board and the extension of the Act without

amendment amount to the legislative ratification

of this administrative practice.

a. The administrative practice under Section 5

of the Stabilization Act of 1942. Section 4001.10

7S. Rep. 2250, 81st Cong., 2d Sess., p. 39.

SPIES ES pos ea

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of the Office of Economie Stabilization Regula-

tions of October 27, 1942 (Main Brief, p. 88),'

issued shortly after the enactment of the Stabili-

zation Act, provided expressly that, where wages

had been increased in contravention of the Act,

the amount to be disallowed was

the amount of the wage or salary paid or

accrued and not merely an amount repre-

senting an increase in such wage or salary.

Experience in the actual enforcement of the

statute indicated that the strict and unalterable

application of this maximum disallowance to each

violation was unduly harsh. On July 13, 1943,

the National War Labor Board, charged with the

enforcement of Section 5, obtained permission

from the Economie Stabilization Director, the

late Chief Justice Vinson, to take the cireum-

stances surrounding the violation into consider-

ation and to mitigate the amount of disallowance

in appropriate cases.”

Office of Economie Stabilization Regulations

of November 30, 1944, Section 4001.15 (9 F. R.

14547) accordingly provided that although the

Act authorized the disallowance of the entire

wage payments, extenuating circumstances could

* Section 4001.10 was superseded on October 1, 1943, by the

substantially identical Section 4001.15. 8 F. R. 11960,

* Termination Report of the National War Labor Board,

Vol. I, pp. 435-436; Vol. 11, p. 749. See also The National

Wage Stabilization Board, January 1, 1946-February 24,

1947, pp. 230-231.

justify the imposition of a lesser sanction.” The

few decisions of the National War Labor Board

cases in disallowance matters which have been

reported indicate that the Board openly publicized

and applied the rule that the entire illegal payroll

could be disallowed in the absence of mitigating

circumstances.”

Moreover, the National War Labor Board was

not the sole agency charged with the enforcement

of the Stabilization Act. The determination of

violations of agricultural wages and salaries and

the certification of the amounts to be disallowed

were assigned to the Secretary of Agriculture,”

later the War Food Administrator." The Com-

” See also National War Labor Board Regulations, Sec-

tion 802.73 (c), of September 15, 1944, 9 F. R. 11422. provid-

ing that where the Enforcement Division finds that the Act

has been violated it shall make, in appropriate cases, findings

as to the existence of extenuating circumstances, and a recom-

mendation whether less than the full disallowance sanction

should be imposed. -

" For instances in which the entire illegal payroll was dis-

allowed, see, e. g.. Parkland Nportsiwear Co., 13 Labor Rela-

tions Reporter 503 (December 1, 1943): Howard Menu Nerv-

ice, 13 Labor Relations Reporter 687 (January 28, 1944) ;

Norfolk-Newport News Contractors, 15 Labor Relations Re-

porter 237 (October 14, 1944). For mitigation cases, see,

e. 9. Parker Appliance Co., 13 Labor Relations Reporter 582

(Regional Board decision) ; Oral & Koster, 16 Labor Rela-

tions Reporter 741 (June 30, 1945) : Cosden Petroleum Corp.

16 Labor Relations Reporter 741 (June 30, 1945): J. C.

Zehrig, 16 Labor Relations Reporter 742 (June 30, 1945).

* Office of Economic Stabilization Regulations of October

27, 1942, 7 F. R. 8748, as amended by the Regulations of

November 30, 1942, Section 4¢ O1.da, 7 F. R. 10024,

“ Executive Orders No. 9322 of March 26, 1943 (8 F. R.

3807) and No, 9334 of April 19, 1943 (8 F. R. 5423).

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missioner of Internal Revenue was given the dual

functions first of administering the Act with re-

spect to salaries in excess of $5,000," and, second,

of actually giving effect to the certificate issued by

the appropriate agency in the computation of

taxes." In all three instances the implementing

regulations originally directed the disallowance of

the entire illegal payroll;” later amendments,

however, permitted the disallowance of a lesser

amount in the presence of mitigating or extenuat-

ing circumstances.” One of these regulations,

T. D. 5446 of March 17, 1945, governing the effect

to be given to certificates of disallowance by the

tax authorities, is still in effect, having been em-

egg in the permanent Income Tax Regulation.

Cf. Treasury Regulations 111, See. 29. 23a-16; 26

C. ¥ R. 29.23a-16.

4 Office of Economic Stabilization Regulations of October

27, 1942, Section 4001.4, 7 F. R. 8749.

'’ Office of Economie Stabilization Regulations of October

27, 1942, Section 4001.10, Main Brief, pp. 87-89.

* Agricultural Labor: War Food Administration Regula-

tions of January 17, 1944, Section 1100.15, 9 F. R. 659. Sal-

aries in Excess of $5,000: Commissioner of Internal Rev-

enue, T. D. 5186 of December 2, 1942, Section 1002.28, 7 F. R.

10056. Effect to Be Given Certificates of Rela

Commissioner of Internal Rev enue, T. D. 5243 of March 12,

wa, 8 F. R. 3158.

® Agviculteral Labor: War Food Administration Regula-

tions of June 23, 1945, Section 1100.15, 10 F. R. 7615. Sal-

aries in Excess of $5,000: Commissioner of Internal Revenue,

T. D. 5435 of Febeuary 2, 1945, Section 1002.28, 10 F. R. 1475.

Effect to Be Given to Certificates of Disallowance : Commis-

sioner of Internal Revenue, T. D. 5446 of March 17, 1945,

10 F. R. 3008.

b. Congressional acceptance of this administra-

tive interpretation of Section 405 (b). As we

have shown in our main brief (pp. 46-48), the

Stabilization Act was subject to searching Con-

gressional scrutiny on the frequent occasions of

its extension and also in connection with the

appropriations for the National War Labor

Board. Even in the absence of specific proof

that Congress was actually advised of the inter-

pretation of Section 405 (b) to the effect that the

entire illegal payroll could be disallowed in the

absence of mitigating circumstances, it would

have to be assumed that Congress knew of this

vast body of consistent regulations issued by dif-

ferent agencies and of the actual practice fol-

lowed by them.

As a matter of fact, however, this interpreta-

tion of Section 405 (b) was brought to the at-

tention of various Congressional Committees and

explained to them to their satisfaction. Thus,

at the hearings held in March 1944 in connection

with the National War Agencies Appropriations

Bill for 1945, referred to in our Main Brief at

page 47, Mr. William H. Davis, Chairman of the

National War Labor Board, pointed out to the

House Subcommittee:

So, in the Executive order and the regula-

tions of the Economie Stabilization Direc-

tor it was provided that the entire amount

of wages paid in violation of law would be

disallowed, not just the excessive part, but

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—

the whole of it would be disallowed by

these agencies of Government; provided,

however, that the action of the War Labor

Board, in cases which we cover, and the

Treasury in case of salaries above $5,000,

and so forth, gave us the power, if we

found extenuating circumstances, to say to

what extent those wages will be taken into

account.”

Later on,” Mr. Davis pointed out that the

question of disallowing the entire payroll came

up only in 5% of the cases tried by the Board.

The question whether the entire illegal payroll

or only the illegal excess was to be disallowed

came up again in June 1944 at the Senate hear-

ings for the 1945 War Agencies Appropriations

Bill.” After Mr. Freidin, General Counsel of

the National War Labor Board, had explained to

the Committee that, while the October 27, 1942

Regulations permitted the disallowance of the

entire illegal payroll, authority had been obtained

from the Director of Economic Stabilization to

impose a lesser sanction in the presence of miti-

gating circumstances, Senator Hayden remarked

Hearings before the Subcommittee of the Committee on

Appropriations, House of Representatives, 78th Cong., 2d

Sess., on the National War Agencies Appropriations Bill for

1945, pp. 240-241.

® Id., at p. 241.

* Hearings before a Subcommittee of the Committee on

Appropriations, United States Senate. 78th Cong., 2d Sess.,

on H. R. 4879, pp. 132-133.

18 }

that it would be arbitrary if an overpayment of

$88 in a $3,500 case necessarily led to a $3,500 tax

disallowance. Mr. Freidin and Mr. Garrison, a

pubhe member of the Board, explained to the

Senator that the mitigation practice was designed

to prevent such arbitrary results. Senator Hay-

den summarized these assurances with apparent

approval.

It would be possible, under your procedure,

if you say this was done innocently, to

waive it entirely. But if you believe it is

done deliber ‘ately, you want to make the

penalty enough io discourage a repetition

of the act.

Mr. FrReEmIN: P? ‘ecisely so.

Similar advice as to the operation of the dis-

allowance sanction of Section 405 (b) was given

the 79th Congress in connection with the 1945

Extension of the Stabilization Act ”’ and the Na-

tional War Agencies Appropriations Bill for

1946.”

*1 Statement of Mr. William H. Davis, Chairman of the

National War Labor Board of March 7 (, 1945, Hearings be-

fore the Committee on Banking and Currency, United States

Senate, 79th Cong., Ist Sess., on S. J. Res. 30, p. 216:

If the tripartite divi ision finds that a violation exists, it

considers all such extenuating circumstances in re: whing

its determination as to the amount of the unauthorized

Wages to be disallowed. It has been relatively rare in

the experience of the Board that, the violations by an

employer have been deemed suftic ‘iently willful or inten-

tional to justify lisallowance of the entire amount of

wages paid in violation of the act.

“Statement of Dr. George W. Taylor, Chairman of the

National War Labor Board, April 23, 1945, Hearings before

the Subcommittee of the Committee on Appropriations,

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_ ——_————

In these circumstances the repeated extensions

of the Stabilization Act and the several appropri-

ations of funds for the operation of the National

War Labor Board and later for the National

Wage Stabilization Boar.! indicate that Congress,

too, interpreted Section 5 of the Stabilization Act

as authorizing the disallowance of the entire

illegal payroll. And the reenactment of Section

5 as Section 405 (b) of the Defense Production

Act carried with it the approval of their earlier

interpretation of the statutory language. Helver-

ing v. Winmill, 305 U. S. 79, 83; Commissioner v.

Flowers, 326 U.S. 465, 469; Norwegian N itrogen

Co. v. United States, 288 U. 8. 294, 308-315.

2. Events following the enactment of the De-

fense Production Act of 1950 indicate Congres-

stonal adherence to the interpretation permitting

disallowance of the entire illegal payroll

On June 13, 1951, the Wage Stabilization Board

issued its Enforcement Regulation No. 1,16 F. R.

6028 (cf. Main Brief, p. 4). Section 1 of this

House of Representatives, 79th Cong., Ist Sess., pp. 12-13,

pointing out that while the entire illegal payroll could be

disallowed, the Board had authority to reduce or entirely

eliminate these potentially severe penalties on the basis of

the facts in each particular case.

** In connection with the above cited cases dealing with

the weight to be given to Treasury Regulations of long

standing, it should be remembered that the administrative

interpretation of Section 405 (b) authorizing the disallow-

ance of the entire illegal payroll has been embodied in its

present form in Treasury Regulations 111, Section 29.23a-16

since 1945 and that it goes back to 1943.

291511—54—4

Regulation—like General Order N 0. 15, Section

4 (b), involved in the instant case (Main Brief,

pp. 91-92)—ealled for the disallowance of the

entire wage payment, not merely of the illegal

wage increase, in the absence of extenuating or

mitigating circumstances.

That Congress was well aware of this Enforce-

ment Resolution appears from the Congressional

debates resulting in the Defense Production Act

Amendments of 1951. Representative Davis of

Georgia quoted the pertinent portion of Enforce-

ment Regulation No. 1 and pointed out, on July

20, 1951 (97 Cong. Ree. 8555), that

Under the provision as it now is, the entire

wage or salary involved may be disal-

lowed * * *,

He introduced an amendment * to make (tbid.)

these heavy penalties possible to be invoked

only if the violation was intentional, for the

period prior to June 30, 1951, because of un-

certainty in the administration of the Act

prior to that time. (

It is significant that Mr. Davis felt that. total

disallowance was authorized by the statute and

that an amendment would be necessary to change

it.

“The amendment would have provided in part “That as

to any such payments made prior to June 30, 1951, this au-

thority shall extend and be applied only to payments made

in willful contravention of any such regulation or order” (97

Cong. Rec. 8555).

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Mr. Spence, the Chairman of the House Com-

mittee on Banking and Currency, which was in

charge of the bill, objected on the ground that

the amendment

would prevent effective enforcement and

destroy the effect we are trying to achieve

by this act.

The House thereupon rejected the Amendment

(ibid.”), thereby expressing its approval of the

imposition of a disallowance sanction amounting

to the entire payroll in appropriate cases.

Congress thereafter extended Section 405 (b)

twice.” By the time of the last extension (June

30, 1952), the National Enforcement Commission

had handed down its first decisions asserting its

authority to disallow the entire payroll where

warranted by the circumstances. In re Hedin

Construction Co., April 11, 1952, Bureau of Na-

tional Affairs, Labor Relations Reporter Binder

7, WHM 100: 1153, 1163; cf. In re Glascote Prod-

ucts, June 3, 1952, ibid., 1164, 1165-1166; In re

Boz Inc., June 24, 1952, cbid., 1167, 1168.

The material referred to in the preceding pages

shows that before the 1950 Act was passed Con-

gress knew that its predecessor had been con-

sistently construed as permitting disallowances

as high as the entire payroll, that Congress

* The rejected amendment also would have provided for

the judicial review of the determination of the disallowance

(cf. Main Brief, pp. 49-50).

* Defense Production Act Amendments of 1951 and 1952.

deliberately used this identical language in 1950,

and that it specifically refused to amend the Act

in this respect when the interpretation was called

to its attention, when the Act was extended and

otherwise amended. It thus seems clear that this

interpretation was both what Congress intended

when the Act was passed and ratified thereafter.

B. THE STATUTORY DISALLOWANCE SCHEME IS NOT

UNCONSTITUTIONAL

Since for the reasons stated the regulations

permitting administrative disallowance up to and

including the entire amount of the unauthorized

payroll are authorized by the statute, we put to

one side appellee’s attempt to separate regulation

from statute for purposes of constitutional at-

tack.” The constitutional challenge must be con-

sidered as relating to the statute.

We submit that there can be no doubt that

Congress can provide a varying or flexible system

of disallowances or sanctions to be imposed in

appropriate circumstances. Argument is unnec-

essary to prove that Congress may impose

monetary penalties substantially greater than the

amount involved in a particular violation; a fine

may exceed the amount stolen. Here, neither

Statute nor regulation go that far—sinee the

maximum disallowance is the amount of the un-

lawful wage payment.

* If the regulations were not authorized by the statute, the

constitutional question would not be reached.

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As we have shown, the disallowance of an entire

unauthorized payroll, the maximum permitted by

the statute, occurred only in a single case in whieh

there existed ‘“** * * a deliberate and intentional

violation after being expressly informed of * * *

obligations under the law.” Appellants’ Main

Brief, pp. 7-8, fn. 7. The sanctions applied in

the bulk of the cases fell well short of the per-

mitted maximum and were carefully designed to

fit the circumstances of each case. Ibid. Stand-

ards with regard to mitigating or extenuating

factors were set forth in wage enforcement regu-

lations at all times and were known to, discussed

with, and approved by Congress. Supra, pp.

16-22.

Appellee’s attack on this system of disallow-

ances, citing Missouri Pacific Rail way Co. Vv.

Tucker, 230 U. 8. 340, is based on considerations

precisely the opposite of those actuall y presented.

The Missouri Pacific decision means no more than

that a fixed and arbitrary penalty, to be applied

without discretion and without relationship to

the circumstances of the particular case, is bad.

Here, of course, no such problem arises. On the

contrary, Section 405 (b) provides flexibility, the

opportunity for the exercise of discretion in par-

tiewir cases. and the shaping of the sanction to

carry out the public policy involved. Far less

carefully designed systems have been sustained.

Cf. St. Louis, Iron Mountain dc: Southern Rail-

way Company v. W illiams, 251 U. S. 63, which

differs from the Missouri Pacific case chiefly in

that, just as here, the amount of the sanction lay

within the discretion of the enforcing tribunal.

Appellee also cites (Br. p. 79) Southwestern

Tel. and Tel. Co. v. Danaher, 238 U. 8. 482, and

Wadley Southern R. Co. vy. Georgia, 235 U. 8.

651, in support of an argument that the penalties

here are unlawfully oppressive. But those cases

and the principle for which they stand involve

penalties definitely imposed and rapidly accumu-

lating by the day or otherwise. If the carrier

violated the law, it would subject itself to these

heavily mounting penalties during the period in

which the order was being tested in court; where-

as if it complied, it would also suffer financial

loss. Here there are no cumulative penalties and,

indeed, only a possibility of a large tax disallow-

ance, even assuming what has not yet been deter-

mined, that appellee has violated the law. The

amount does not become greater during the period

of litigation. In addition, it does not appear that

compliance with the wage ceilings would have

been costly; on the face of things, it should have

been more economical. The N ational Labor Rela-

tions Board decision in the case cited at page 2,

fn. 1, supra, implies that what appellee was seek-

ing to avoid was the lawful unionization of its

employees.

Such a system permitting the exercise of dis-

cretion in determining the amount to be disal-

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lowed, depending on the flagrance of the viola-

tion, with the total illegal payroll as a maximum,

obviously violates neither the Eighth nor the

Fifth Amendments.

III. NO IMPROPER DELEGATION OF LEGISLATIVE POWER

IS CONTAINED IN THE STATUTORY SCHEME OF WAGE

STABILIZATION ENFORCEMENT ESTABLISHED BY SEC-

TION 405 (B)

Appellee has suggested (Br. p. 88) that Sec-

tion 405 (b) is unconstitutional on the ground

of unlawful delegation. This contention seems to

fall into two parts. First, appellee contends that

Congress lacked power to utilize administrative

procedure for enforcement purposes. Second,

appellee charges that Section 405 (1) contains no

adequate standard with respect to the sanction to

be imposed in the event a violation of wage stabil-

ization regulations is found to have occurred.”

These contentions have little merit.

A. CONGRESS MAY UTILIZE ADMINISTRATIVE PROCEDURE TO

IMPOSE THE DISALLOWANCE SANCTION

As we have shown, Congress deliberately chose

an administrative procedure culminating, in the

event of violation, in a certification of appropri-

* Appellee also argues that the President lacked authority

to delegate the enforcement function to the Office of Defense

Mobilization after Title IV had expired (Br., pp. 56-58).

In support of this contention appellee refers to the provision

in Section 403 requiring the President, when he “determines

that it is necessary to impose price and wage controls gen-

erally over a substantial portion of the national economy”

to administer such controls “through a new independent

agency created for such purpose.” Section 403 itself expired

; ate disallowance, as the only effeetive method of

} insuring adherence to wage stabilization regula-

4 tions and orders, a crucial need in a war or emer-

r gency economy (Appelljants’ Main Brief, pp.

41-64). And there can be no doubt that the con-

i seious selection of this enforcement technique,

; based upon the conclusive experience gained dur-

ing World War II, was open to Congress.

: It is well settled, as a matter of principle, that

Congress may, where it deems the method appro-

priate, rest the enforcement of statutes, up to

and including the imposition of sanctions, ex-

clusively with an executive or administrative

agency. ‘‘* * * Congress has long delegated to _

executive officers or executive agencies the deter-

mination of complicated questions of facet and of

on April 30, 1953. Moreover, Congress would not have

intended to require that the carrying through to completion

of enforcement proceedings after expiration of Title IV

would have to be carried through by a “new” agency. The

| committee report shows that the reason for requiring the use

of a “new” agency was to insure coordination in the admin-

istration and enforcement of price, wage and other controls

involved in “the various aspects of this vast program.”

S. Rep. 2250, 81st Cong., 2d Sess., p. 38. Such coordination

was obviously desirable during the period of active admin-

istration, while the programs were in effect, but it was

unnecessary when all that was left to be done was the comple-

tion of specific enforcement proceedings against past viola-

tions. This does not mean that the expiration of Section

405 (b) precluded the President from authorizing the com-

pletion of enforcement by the Office of Defense Mobilization.

His authority stems from the savings statutes discussed at

pages 66-77 of our main brief, together with the authority

conferred upon him by Title VII which does not expire.

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law. * * *.7’ Switchmen’s Union v. Mediation

Board, 320 U.S. 297, 303; Estep v. United States,

397 U. S. 114, 120; Lichter v. United States, 334

U.S. 742.

The availability of this selection of remedy or

sanction is not affected by the use, in the enforce-

ment scheme, of a money penalty. ‘** * * [T]he

legislation of Congress from the beginning, not

only as to tariff but as to internal revenue, taxa-

tion and other subjects, has proceeded on the

conception that it was within the competency of

Congress, when legislating as to matters exclu-

sively within its control, to impose appropriate

obligations and sanction their enforcement by

reasonable money penalties, giving to executive

officers the power to enforce such peialties with-

out the necessity of invoking the judicial power.”’

Oceanic Navigation Co. vy. Stranahan, 214 U.S.

320, 339; see, also, Lichter v. United States, supra;

United States v. Ju Toy, 198 U.S. 253; Passavant

v. United States, 148 U.S. 214.

Thus, the power of Congress to utilize admin-

istrative enforcement in the wage stabilization

program is clear. Congress has certainly gone no

further here, where enforcement culminates in

the familiar tax collection processes.

B. SECTION 405 (b) PROVIDES SUFFICIENT GUIDANCE AS TO THE

SANCTION TO BE IMPOSED

It is also well settled that constitutional pro-

hibitions against unlawful delegation of legisla-

tive power are not infringed where Congress has

<8) |. tN ate me nae

wy Sa

PONE PGE Te NEE CA” PAN Saline Seca ee pi

a as

provided intelligible principles to guide the exer-

cise of the delegated authority. Lichter v. United

States, supra; American Power Co. vy. S. E. C.,

329 U. S. 90, 104; Sunshine Anthracite Coal Co.

v. Adkins, 310 U. S. 381; Opp Cotton Mills vy.

Administrator, 312 U. S. 126; Hampton &: Co. v.

United States, 276 U. 8. 393. Flexibility of ad-

ministration is not only permitted but desirable,

particularly where, as here, Congress seeks to

deal with a complex and difficult subject under an

emergency program. Lichter v. United States,

supra; Yakus v. United States, 321 U. S. 414,

423-424; United States v. Rock Royal Co-op., 307

U.S. 5338, 574. Charges of unlawful delegation

for want of precise standards, such as _ that

leveled by appellee herein, must be approached in

the light of these principles.

First, we turn to the language of Section 405 (b).

We think that if the problem of construction had

to be approached in a vacuum, sufficient guidance

would be found to exist in the language of the

section itseil. By the first sentence of the section,

as we have seen (pp. 10-22, supra), Congress

made illegal the entire wage payment in con-

travention of a maximum wage regulation. ‘No

employer shall pay, and no employee shall re-

ceive, any wage in contravention of any

regulation or order promulgated by the President

under this title.”’ The second sentence of the

section not only provides the method of enforce-

ment, namely, a Presidential directive as to ex-

* * *

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a ———

ecutive or administrative disallowances, but also

creates in the President the power to remit some

or all of the illegal payment thus prescribed.

Specifically, Section 405 (b) directs the President

to prescribe ‘‘* * * the extent to which any wage

* * * payment made in contravention * * * shall

be disregarde

This statutory enforcement scheme parallels

a7? 2%

the familiar method of enforcing the criminal law

by allowing the court to prescribe a maximum

sentence or a lesser sentence in its discretion.

This statute is no more unconstitutional as a dele-

gation of legislative power than is that familiar

device.

But here the problem cannot be approached in

a vacuum. As we have shown, Section 405 (b)

was consciously and specifically copied by Con-

gress in 1950 from the substantially identical text

of Section 5 of the 1942 Stabilization Act; this

1950 utilization by Congress of the language of

the 1942 section took place with actual knowledge

of the interpretation and application of the earlier

section, in thousands of cases, on every point here

material; and Congress was specifically aware of,

and approved, the interpretation and application

of Section 405 (b) during the Korean emergency

period. This close and continuous familiarity

with the interpretation and application of Section

5 and Section 405 (b), specifically included knowl-

edge that the statutory language had been con-

strued as permitting the disallowance of the en-

tire illegal payroll of a violating employer as a

maximum, with a power to remit or mitigate the

amount of sanction to he imposed in appropriate

circumstances.”

Given these circumstances, no genuine question

of delegation arises. On the contrary, there is

here presented the clearest possible case of ratifi-

cation by Congress of the administrative inter-

pretation and application of statutory language

precisely reenacted with full knowledge of such

i prior interpretation and application. Helvering

' v. Winmill, 305 U. 8. 79, 83; Commissioner v.

Flowers, 326 U. S. 465, 469; Norwegian Nitrogen

Co. v. United States, 288 B.S 294, 308-315. The

conscious recognition and approval by Congress,

in enacting Section 405 (b), of the minutely de-

tailed pattern worked out during World War II

with regard to wage stabilization enforcement

would, in and of itself, give more than sufficient

content to the language of Section 405 (b) in so

far as standards are concerned. This means that

the words of the statute are to be read as if they

expressly authorized the method of determining

the amount to be disallowed—described in the

antecedent regulation—and copied into the pres-

ent one.

In far more stringent circumstances than are

here present, general congressional approval by

statute of prior detailed executive orders and

ee PS ee te eee

* See Appellants’ Main Brief, pp. 6, 92, for a detailing of

the factors in mitigation.

: ° - ern eeeeran

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proclamations has been upheld against a charge

of unlawful delegation for want of standards.

Hirabayashi v. United States, 320 U. 8. 81, 102-

104. And this Court has recently held that the

adequacy of a statutory standard can be measured

by reference to an administrative practice known

to the enacting Congress and projected into the

statute under enactment. Lichter v. United States,

334 U. S. 742, 777, 783. The renegotiation

field furnishes a strikingly similar sequence of

statute, administrative interpretation and reen-

actment. The Lichter decision (pp. 777, 783)

followed the reasoning of Spaulding v. Douglas

Aircraft Co., 154 F. 2d 419, 425 (C. A. 9) that

“* * * Twlhatever difficulties may be found in

the original act, the amendments of October 21,

1942, merged the detailed administrative practice

with the statute in a manner to foreclose all pos-

sibility of further doubt.” Here both the 1950

Act in relation to the administrative regulation

and practice under the 1942 Act and the later

amendments and reenactments in relation to the

regulation and practice after 1950 merged the de-

tailed administrative practice into the law.

IV. THE DISALLOWANCE SANCTION IS NOT IN CONFLICT

WITH THE REQUIREMENT OF ART. I, SECTION 9, OF

THE CONSTITUTION THAT ALL DIRECT TAXES NOT

COVERED BY THE SIXTEENTH AMENDMENT BE

APPORTIONED

On p. 87 of its brief appellee makes an involved

argument to the effect that hy disallowing deduc-

tions for wages in the computation of its income,

its income tax ceases to be levied upon *‘ineome”’

and is outside the scope of the income tax author-

ized by the Sixteenth Amendment. Accordingly,

appellee concludes that the tax is unconstitu-

tional because Art. I, Section 9, of the Constitu-

tion requires that all direct taxes be apportioned.

There are two short answers to this argument,

(1) the taxes levied upon business income, in

particular that of corporations, never has been

considered a direct tax, and, (2) the ‘‘ineome”’

specified in the Sixteenth Amendment is gross

income; hence, the allowances of income tax

deductions for business expenses are a matter of

legislative grace.

1. An income tax is not a direct tax to the extent

that it is based upon business income

The basie premise of appellee’s argument is

that the income tax levied upon it is a direct tax

which requires apportionment unless it comes

within the terms of the Sixteenth Amendment.

This analysis fails at the very threshold since

this Court has held consistently that a tax im-

posed upon business income is not a direct tax.

Thus, in Pollack vy. Farmers’ Loan & Trust Co.,

158 U. 8. 601, in which the Income Tax of 1894

was held unconstitutional, this Court was careful

to point out (at pp. 635, 637) that an income tax

is a direct tax only to the extent that it is levied

Ak SKN ty sua PSE LSE IERIE S (RIE NEUE

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}

upon income derived from real estate and personal

property, and refused to comment

on so much of it as bears on gains or profits

from business, privileges, or employments,

in view of the instances in whith taxation

on business, privileges, or employments has

assumed the guise of an excise tax and been

sustained as such.

Accordingly, the Corporation Tax Act of 1909,

which preceded the Sixteenth Amendment, was

held constitutional as ‘‘an excise tax upon the

conduct of business in a corporate capacity, meas-

uring, however, the amount of tax by the income

of the corporation.’’ Stratton’s Independence v.

Howbert, 231 U.S. 399, 414; Flint v. Stone Tracy

Co., 220 U. S. 107, 151-152.

Similarly, the decisions interpreting the Income

Tax Acts enacted subsequent to the Sixteenth

Amendment are careful to point out that except

for their incidence upon income derived from real

or personal property, income taxes are in the na-

ture of indirect excise taxes. Brushaber v. Union

Pacific R. R., 240 U. 8S. 1, 16-17; Stanton v.

Baltic Mining Co., 240 U. 8. 103, 114. The latter

ease is of particular import, since it rejected the

argument similar to the one advanced here, that

an income tax statute which does not allow for an

adequate depletion allowance is not authorized by

the Sixteenth Amendment.

Since the appellee’s income sought to be taxed

here is derived from business and not from real

or personal property, the application of the in-

come tax to it would be in the nature of an

indirect excise tax, and appellee’s reliance on the

Sixteenth Amendment is utterly misplaced.

. 2. The granting of deductions for business ex-

‘ penses 1s completely within legislative control

; The second branch of appellee’s argument is

that the income tax authorized by the Sixteenth

Amendment is a tax upon net income and does

not permit Congress to disregard any costs of

doing business.

Pursuant to Section 23 (a) (1) (A) of the

Internal Revenue Code, ‘ta reasonable allowance

for salaries or other compensation for personal

services actually rendered * * * shall be allowed

as deductions.”’ Appellee appears to argue thai

it has some vested, constitutional right to this

deduction and that it is beyond the power of

Congress to disallow it. This Court, however,

has held consistently that ‘‘every deduction from

gross income is allowed as a matter of legislative

grace’ (White v. United States, 305 U. S. 281,

292; New Colonial Tea Co. v. Helvering, 292 U. S.

435, 440; Helvering v. Bankline Oil Co., 303

U.S. 362, 366; Interstate Transit Lines v. Com-

missioner, 319 U. S. 590, 593; McDonald vy. Com-

missioner, 323 U. 8. 57, 60), and ‘‘does not turn

on general equitable considerations’’ (Deputy v.

du Pont, 308 U.S. 488, 493).

wey OES d

¥ ES NSS FOR ELL LEE NDT L IT ROE EL BI See

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Moreover, even in the absence of a direct statu-

tory command, deductions for expenses tainted

with illegality may be disregarded. Teztile Mills

v. Commissioner, 314 U. S. 326, 335-339, and see

Lilly v. Commissioner, 343 U. 8. 90, 97, stressing

the difference between an unethical and an illegal

business expenditure.

Hence, since Congress has the power completely

to disallow deductions for wage payments, and

since even without a statute wage payments made

in violation of anti-inflationary legislation could

be disallowed as deductions, Congress without

doubt had the power to provide for the disallow-

ance sanction of Section 405 (b). The courts

accordingly have upheld tax disallowances which

came up under Section 5 of the Stabilization Act

of 1942. Weather-Seal Manufacturing Co. V.

Commissioner, 16 T. C. 1312, affirmed without

opinion, 199 F. 2d 376 (C. A. 6); N. A. Wood-

worth v. Kavenagh, 102 F. Supp. 9 (EB. D. Mich.),

affirmed on the opinion of the District Court, 202

F. 2d 154 (C. A. 6).

The cases cited by appellee do not hold to the

contrary. Doyle v. Mitchell Bros. Inc., 247 U.S.

179, involved the extent to which the proceeds

of a sale of a capital asset constitute income.

This Court held as a matter of statutory inter-

pretation, using the term ‘‘income”’ in its “nat-

ural and obvious sense,’’ that the determination

of income derived from the sale of property re-

quired the deduction from the proceeds of the

36 }

sale of an amount equal to the costs of the asset.

; (247 U. S. at 184, 185.) No constitutional ques-

tion was involved. There was no oceasion to

pass on the proposition asserted here by appellee

that a statutory computation of income which

: did not leave the capital investment intact would

be unconstitutional. To the contrary, as we have

pointed out above” this Court has held repeatedly

in the related field of wasting assets such as mines

or gas that Congress is under no constitutional

obligation to provide for a depletion allowance,

large enough to restore the capital investment.

Stratton’s Independence vy. Howbert, 231 U. S.

399; Stanton v. Baltic Mining Co., 240 U. 8. 103;

Von Baumbach vy. Sargent Land Co., 242 U. S,

903, 521-526; United States v. Biwabik Mining

Co., 247 U. 8. 116; H elvering v. Bankline Oil Co.,

303 U.S. 362, 366-367.

Nor is appellee aided by decisions such as Lela

Sullenger, 11 TC 1076; Commissioner vy. W eis-

man, 197 F. 2d 221 (C. A. 1); Hofferbert y. An-

derson Oldsmobile, Inc., 197 F. 2d 504 (C. A. 4).

In these instances the tax authorities unsuccess-

fully sought to disallow as costs of goods sold

those portions of the purchase prices paid by the

taxpayer which exceeded the OPA ceiling. In

all three instances the decisions were largely in-

fluenced by the consideration that, in contrast to

wage and salary stabilization, prior to the Defense

— as

Bia he

ahaa Men Kink ROM tsa matistil re sats

Po Nh eal Sis ag ey’ Rae De og Ce Re aT

*° Supra, pp. 33-34.

POISE LS RIN NMI E TAILLE NEE DAY ORE RTE RITE aHae ERNE rt

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Production Act Amendment of 1951 Congress had

not expressly provided for tax disallowance in

the case of price control violations (main brief

p. 50, 61-64). The courts were reluctant, in the

absence of an express statutory direction, to

sanction a computation of income which did

not provide for the reimbursement for capital

expenditures.”

V. THE ABSENCE OF RECITALS AS TO INDUSTRY CON-

SULTATION DOES NOT AFFECT THE VALIDITY OF THE

INSTANT PROCEDURAL REGULATIONS

Section 709 of the Defense Production Act pro-

vides in pertinent part (Appellants’ Main Brief,

pp. 85-86) :

* * * Any rule, regulation, or order, or

amendment thereto, issued under authority

of this Act shall be accompanied by a state-

ment that in the formulation thereof there

has been consultation with industry rep-

resentatives, including trade association

representatives, and that consideration has

been given to their recommendations, or

that special circumstances have rendered

such consultation impracticable or contrary

to the interest of the national defense, but

no such rule, regulation, or order shall be

invalid by reason of any subsequent find-

ing by judicial or other authority that such

a statement is inaccurate.

Cf. the comment on the Sullenger case in Weather-Seal

Mfg. Co. v. Commissioner, 16 TC 1312, 1320, affirmed, 199 F.

2d 376 (C. A. 6).

Appellee contends (Br. p. 67) that the pro-

cedural regulations, under which the administra-

tive proceedings here involved were to have taken

place, violate Section 709 in that they fail to re-

cite that industry consultation took p'ace in con-

nection with their formulation or that such

consultation was impracticable. Specifically, the

regulations thus attacked are General Orders 15

and 18 and Revised General Procedural Regula-

tion No. 1, described in detail in our main brief

at pp. 5-10.”

In the first place, Section 709 is not applicable

to general procedural regulations such as we have

here. The reference to ‘‘industry” and ‘‘trade

association” representatives indicates that Con-

gress was thinking of regulations of particular

industries with respect to business practices. See

96 Cong. Ree. 12176-7, 14064-5. Such a refer-

ence would not be appropriate for general rules

of procedure, as to which business men are not

experts and which do not pertain to particular

industries. Which trade association representa-

tives and which industries, for example, would

* These procedural regulations, covering procedure before

the National Enforcement Commission, all stem from En-

forcement Regulation No. 1, 16 F. R. 6028 ( Appellants’ Main

Brief, p. 4) which was issued by the tripartite Wage Stabili-

zation Board on June 13, 1951, at which time enforcement

was a function of the Board. As we have shown, on July 28,

1952, enforcement was transferred to the National Enforce-

ment Commission, a separate entity created by the Economic

Stabilization Administrator. Appellants’ Main Brief, p. 5.

stich incmeatl ie nee OTRAS Depew Toe ed Na a eas

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rages

Hale e

be consulted in framing such procedural regula-

tions?

The establishment of enforcement machinery and

procedure is purely governmental business, to be

worked out with due regard for controlling rules of

law. No one would have expected that business or

industrial representatives should be consulted as to

the method of proceeding against violators of ad-

ministrative regulations. The regulations here in-

volved, in summary, provide that the National

Enforcement Commission shall determine, on com-

plaint by other governmental agencies, whether the

wage stabilization requirements have been violated,

describe the procedure to be followed by that Com-

mission (in conformance with customary pro-

cedural standards for administrative agencies), and

define the policies to be followed by the Commission

in determining the amounts to be disallowed in par-

ticular cases. Obviously the requirement in Sec-

tion 709 for consultation with industry and trade

association representatives cannot have been meant

to cover regulations such as these.

Secondly, the consultation requirement of See-

tion 709 is properly limited to those regulations

which pertain to the control of industry and trade,

such as the regulation of prices, credit, and the

allocation of materials. Wage stabilization, how-

ever, imposes ceilings on the wages paid to labor,

and thus impinges primarily upon the rights of em-

ployees. If Section 709 had been meant to reach

the subject of wage stabilization, it presumably

iitiiart cnn

would have required consultation with represent-

atives of labor and not merely with industry and

trade association representatives.

A reason why this was not required is disclosed

in the framework of the statute. The regulation

with respect to prices, priorities and the like was

to be by Government officials representing only the

public. There was good reason to require such per-

sons to seek the views of the groups to be regulated.

Where wage stabilization was concerned, Title IV

established a different and far more direct pro-

cedure. Section 403 (b) (1) created the Wage

Stabilization Board to be composed “* * * in equal

numbers, of members representative of the general

public, members representative of labor, and mem-

bers representative of business and industry. * * *”’

This provision for direct participation by industry

and labor in the promulgation of regulation in the

field of wage stabilization would have made further

consultation with representatives of industry and

labor both unnecessary and repetitious.

A word should be said as to the history of the

predecessor of Section 709, Section 2 (a) of the

Emergency Price Control Act of 1942, 56 Stat. 23,

50 U.S. C. App. 902 (a), which also required consul-

tation with industry.” This provision was inapplic-

* The pertinent sentence in Section 2 (a) provides that :

Before issuing any regulation or order under the fore-

going provisions of this subsection, the Administrator

shall, so far as practicable, advise and consult with rep-

resentative members of the industry which will be af-

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I AAT ROHN :

able to the wage stabilization program which was

created by the subsequently enacted Stabilization

Act of 1942, 56 Stat. 765, 50 U. S. C. App. 961,

et seq. But even with respect to price control,

the Emergency Court of Appeals has stated that

“we never found occasion to set aside a regulation

on this ground [failure to consult with industry ],

even assuming the provision in question could

have been deemed mandatory, and not directory

merely.” Norman-Frank, Inc. v. Arnall, 196 F.

2d 502, 504 (BE. C. A. 1952), a case under the

1950 Act which cites the cases under the earlier

act. The court went on:

At any rate, the point has been rendered

academic by a provision in the Defense

Production Act of 1950 which had no

counterpart in the Price Control Act of

1942.

The court then quoted Section 709, italicizing

the last clause which provides that:

but no such rule, regulation, or order shall

be invalid by reason of any subsequent

finding by judicial or other authority that

such a statement is inaccurate.”

fected by such regulation or order, and shall give con-

sideration to their recommendations.

* Section 404 of the 1950 Act also provides:

In carrying out the provisions of this title, the Presi-

dent shall, so far as practicable, advise and consult with,

and establish and utilize committees of, representatives

of persons substantially affected by regulations or orders

issued hereunder.

This section does not contain the provision, such as

that in Section 709, for “a statement” that there has been

Piste: awh web

VI. THE RESIGNATION IN DECEMBER, 1952, OF THE

INDUSTRY MEMBERS OF THE WAGE STABILIZATION

BOARD HAS NO RELATIONSHIP TO THIS PROCEEDING

It is argued by appellee that **the collapse of

the tripartite Wage Stabilization Board destroyed

the statutory scheme for administration of wage

controls.”’ (Br. p. 70).

On December 6, 1952, the Chairman of the

Wage Stabilization Board in Washington re-

signed and, on the same day, the industry mem-

bers of the Board also resigned. On December

15, 1952, the Economic Stabilization Administra-

tor designated the remaining public members of

the Board as the Wage Stabilization Committee.

General Order 19, 17 F. R. 11368. The stated

purpose of this order was to provide an interim

administration of the wage stabilization program

while the Board was rendered inoperative by the

resignation of the industry members. The in-

terim administration was to terminate as soon as

the Board was again rendered operative by the

appointment of industry members.

The change in the organization of the wage

stabilization agency is irrelevant here. The only

functions which the statute required to be per-

consultation with industry representatives, and, we sub-

mit, was purely precatory or directory, not mandatory.

In any event, for the reasons set forth above, Section 404,

like Section 709, could not appropriately be applied to

general procedural or wage regulations.

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Ae NC RANI IRN ce Hts Sone

formed by a tripartite board are defined in Sec-

tion 403 (b) (5) of the Act as follows:

(5) The Board shall, under the super-

vision and direction of the Economic Stabi-

lization Administrator—

(A) formulate, and recommend to such

Administrator for promulgatien, general

policies and general regulations relating to

the stabilization of wages, salaries, and

other compensation; and

(B) upon the request of (i) any person

substantially affected thereby, or (ii) any

Federal department or agency whose furc-

tions, as provided by law, may be affected

thereby or may have an effect thereon,

advise as to the interpretation, or the ap-

plication to particular circumstances, of

policies and regulations promulgated by

such Administrator which relate to the

stabilization of wages, salaries, and other

compensation.

For the purposes of this Act, stabilization

of wages, salaries, and other compensation

means prescribing maximum limits there-

on. Except as provided in clause (B) of

this paragraph, the Board shall have no

jurisdiction with respect to any labor dis-

pute or with respect to any issue involved

therein. * * *

Although this subsection vests the authority to

issue general wage stabilization regulations in the

tripartite board, nothing in the law requires the

use of such a board as a part of the enforcement

Bitiesirns.c te

machinery in wage stabilization cases. Section

405 (b) grants to the President the authority to

enforce wage stabilization by disallowances, and

Section 703 authorizes him to delegate such au-

thority, without in any way limiting him to the

Wage Stabilization Board.

Furthermore, this proceeding was instituted

on November 4, 1952, on behalf of the tripartite

board prior to the Board’s reorganization in

December, 1952 (R. 3, 10). The case was to be

heard by the National Enforcement Commission,

a separate component of the Economie Stabiliza-

tion Agency from the Wage Stabilization Board.

The case was to have been prosecuted, if it

had been allowed to go on, by a regional attor-

ney for the Wage Stabilization Board or its sue-

cessor. But no further action by the Board itself

Was necessary.

Appellee does not appear to claim that a tri-

partite board must necessarily participate in the

enforcement process. Its argument seems to be

that only such a board could rule on contentions

that appellee’s wage increases were authorized

under the applicable regulations or could have

given an interpretation as to the application of

the regulations in the particular circumstances.

And it is said that such advice from the Board

might have precluded the commencement of the

enforcement proceeding.

But the fact that an agency was not available

to “‘advise as to the interpretation, or the applica-

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eteeeeenin tee ee =

I ne tilt il Ni ea aia

tion to particular circumstances” of the regulations

plainly does not mean that they cannot be enforced

by other agencies having enforcement authority. If

this were not the ease no statute subject to adminis-

trative interpretation could be enforced after it

had expired, despite the general saving statute

and other saving provisions, which prove the

contrary.”

Even if appellee’s contention were not defective

for all of the reasons stated above, it would lack

substance. It amounts to a suggestion that an

industry or labor boycott of a tripartite Board

automatically cuts off the agency’s power to func-

tion without regard to the importance of the con-

tinuanee of that function in the public interest.

Where such a boycott or withdrawal occurs, an

interim administration must be provided, as it

was here, to protect the public. Even if such an

interim administration be considered as not free

to engage im new matters, it clearly would have

the power to continue proceedings authorized by

the tripartite Board.

VII. THE REGULATIONS ARE NOT INVALID AS

RETROACTIVE

Appellee argues (Br. pp. 74-76) that the regu-

lations would be invalid as applied to wage in-

creases occurring before June, 1951, when the

Wage Stabilization Board’s resolution prescrib-

*® Here the executive order terminating substantive con-

trols specifically saved the procedure for administrative en-

forcement. Executive Order No. 10434, 18 F. R. 809.

Bist. or Ee Ale Tate ee

ing enforcement procedure was issued. But the

substantive wage stabilization regulation which

fixed the maximum wage level was issued on

January 26, 1951 (16 F. R. 816), prior to any of

the alleged violations. See p. 4, main brief. The

fact that it teok some time to set up the agency

necessary to administer the controls, including the

enforcement machinery, did not mean that the

appeliee was suffering penalties for conduct

which it did not know was illegal. Moreover, the

regulation merely implemented the statute, which

itself authorizes the imposition of an appropriate

disallowance in the event of violation of the sub-

stantive regulation. The fact that the amount to

be disallowed would not be determined until after

the circumstances of the case had been developed

in the administrative proceeding did not consti-

tute the imposition of a penalty improperly retro-

active, any more than does the defendant’s un-

certainty in an ordinary case as to the amount

of the fine or damages which may ultimately be

imposed by a tribunal having discretionary

authority.

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PA EONS A VON pin Bare sob crt

CONCLUSION

For the reasons set forth herein as well as for

the reasons set forth in our main brief, we re-

spectfully submit that the judgment below should

be reversed.

Simon E. Sospe.orr,

Solicitor General.

WarREN E. BURGER,

Assistant Attorney General.

Rosert L. STERN,

Special Assistant to the Attorney General.

SAMUEL ). SLADE,

HERMAN MARCUSE,

Attorney?

CHARLES H. KENDALL,

General Counsel,

Office of Defense Mobilization.

Marcu 1954.

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