Source: https://www.law.cornell.edu/supremecourt/text/320/467
Timestamp: 2019-04-23 22:02:49+00:00

Document:
COMMISSIONER OF INTERNAL REVENUE v. HEININGER.
Mr. Valentine Brookes, of Washington, D.C., for petitioner.
Mr. Floyd Lanham, of Chicago, Ill., for respondent.
The fees and expenses were incurred under the following circumstances. From 1926 through 1938 respondent, a licensed dentist of Chicago, Illinois, made and sold false teeth. During the tax years 1937 and 1938 this was his principal business activity. His was a mail order business. His products were ordered, delivered, and paid for by mail. Circulars and advertisements sent through the mail proclaimed the virtues of his goods in lavish terms. At hearings held before the Solicitor of the Post Office Department pursuant to U.S.C. Title 39, §§ 259 and 732, 39 U.S.C.A. §§ 259, 732, respondent strongly defended the quality of his workmanship and the truthfulness of every statement made in his advertisements, but the Postmaster General found that some of the statements were misleading and some claimed virtues for his goods which did not exist. Thereupon, on February 19, 1938, a fraud order was issued forbidding the Postmaster of Chicago to pay any money orders drawn to respondent and directing that all letters addressed to him be stamped 'Fraudulent' and returned to the senders. Such a sweeping deprivation of access to the mails meant destruction of respondent's business. He therefore promptly sought an injunction in a United States District Court contending that there was no proper evidential basis for the fraud order. On review of the record that Court agreed with him and enjoined its enforcement. The Court of Appeals drew different inferences from the record, held that the evidence did support the order, and remanded with instructions to dissolve the injunction and dismiss the bill. Farley v. Heininger, 70 App.D.C. 200, 105 F.2d 79. Respondent's petition for certiorari was denied by this Court on October 9, 1939. Heininger v. Farley, 308 U.S. 587, 60 S.Ct. 110, 84 L.Ed. 491.
The Bureau of Internal Revenue, the Board of Tax Appeals, and the federal courts have from time to time, however, narrowed the generally accepted meaning of the language used in Section 23(a) in order that tax deduction consequences might not frustrate sharply defined national or state policies proscribing particular types of conduct. A review of the situations which have been held to belong in this category would serve no useful purpose for each case should depend upon its peculiar circumstances. 7 A few examples will suffice to illustrate the principle involved. Where a taxpayer has violated a federal or a state statute and incurred a fine or penalty he has not been permitted a tax deduction for its payment. 8 Similarly, one who has incurred expenses for certain types of lobbying and political pressure activities with a view to influencing federal legislation has been denied a deduction. 9 And a taxpayer who has made payments to an influential party precinct captain in order to obtain a state printing contract has not been allowed to deduct their amount from gross income. 10 It has never been thought, however, that the mere fact that an expenditure bears a remote relation to an illegal act makes it non-deductible. The language of Section 23(a) contains no express reference to the lawful or unlawful character of the business expenses which are declared to be deductible. And the brief of the government in the instant case expressly disclaims any contention that the purpose of tax laws is to penalize illegal business by taxing gross instead of net income. Cf. United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037, 51 A.L.R. 1020.
If the respondent's litigation expenses are to be denied deduction, it must be because allowance of the deduction would frustrate the sharply defined policies of 39 U.S.C. 259 and 732, 39 U.S.C.A. §§ 259, 732, which authorize the Postmaster General to issue fraud orders. The single policy of these sections is to protect the public from fraudulent practices committed through the use of the mails. It is not their policy to impose personal punishment on violators; such punishment is provided by separate statute, 11 and can be imposed only in a judicial proceeding in which the accused has the benefit of constitutional and statutory safeguards appropriate to trial for a crime. Nor is it their policy to deter persons accused of violating their terms from employing counsel to assist in presenting a bona fide defense to a proposed fraud order. It follows that to allow the deduction of respondent's litigation expenses would not frustrate the policy of these statutes; and to deny the deduction would attach a serious punitive consequence to the Postmaster General's finding which Congress has not expressly or impliedly indicated should result from such a finding. We hold therefore that the Board of Tax Appeals was not required to regard the administrative finding of guilt under 39 U.S.C. 259 and 732, 39 U.S.C.A. §§ 259, 732, as a rigid criterion of the deductibility of respondent's litigation expenses.
Whether an expenditure is directly related to a business and whether it is ordinary and necessary are doubtless pure questions of fact in most instances. Except where a question of law is unmistakably involved a decision of the Board of Tax Appeals on these issues, having taken into account the presumption supporting the Commissioner's ruling, 12 should not be reversed by the federal appellate courts. 13 Careful adherence to this principle will result in a more orderly and uniform system of tax deductions in a field necessarily beset by innumerable complexities. Cf. Hormel v. Helvering, supra. However, as we have pointed out above, the Board of Tax Appeals here denied the claimed deduction not by an independent exercise of judgment but upon a mistaken conviction that denial was required as a matter of law. We therefore affirm the judgment of the Circuit Court of Appeals reversing and remanding the cause to the Board of Tax Appeals.
Revenue Act of 1936, c. 690, 49 Stat. 1658.
§ 23. Deductions from gross income.
Section 23(a) of the Revenue Act of 1938, c. 289, 52 Stat. 460, is identical with Section 23(a) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code, § 23(a).
Helvering v. National Outdoor Advertising Bureau, Inc., 2 Cir., 89 F.2d 878; Helvering v. Superior Wines & Liquors, Inc., 8 Cir., 134 F.2d 373.
Helvering v. National Outdoor Advertisement Bureau, Inc., supra, Note 3. In that case the taxpayer had incurred legal expenses, defending a suit begun by the United States to enjoin violations of the Sherman Act, 15 U.S.C.A. §§ 17, 15 note. It had successfully defended part of the charges against it, but had agreed to the entry of a consent decree of injunction as to the balance. The Board held that all of the legal expenses were ordinary, and were proximately connected with the taxpayer's business, and that to allow them as deductions would not be against public policy. The Circuit Court reversed as to that portion of the expenses attributable to the consent decree. See also Helvering v. Superior Wines & Liquors, Inc., supra, Note 3, where the Board was reversed for allowing a taxpayer in the liquor business to deduct lawyer's fees incurred in connection with a compromise of liability for civil penalties assessed for improper bookkeeping under U.S.C. Title 26, § 2857 et seq., 26 U.S.C.A. Int.Rev.Code, § 2857 et seq.
Malpractice: C.B.V.-1, 226; Fraud: Helvering v. Hampton, 9 Cir., 79 F.2d 358; Breach of fiduciary duty: Isaac P. Keeler v. Commissioner, 23 B.T.A. 467. See also the examples of deductible expenses set forth in Kornhauser v. United States, 276 U.S. 145, 48 S.Ct. 219, 72 L.Ed. 505.
For a collection and analysis of many of the cases see Note (1941) 54 Harv.L.Rev. 852; 4 Mertens, Law of Federal Income Taxation (1942) §§ 25.35-25.37, 25.102-25.105.
Great Northern R. Co. v. Commissioner, 8 Cir., 40 F.2d 372; Bonnie Bros., Inc., v. Commissioner, 15 B.T.A. 1231; Burroughs Bldg. Material Company v. Commissioner, 2 Cir., 47 F.2d 178; Appeal of Columbus Bread Company, 4 B.T.A. 1126. A taxpayer who has been prosecuted under a federal or state statute and convicted of a crime has not been permitted a tax deduction for his attorney's fee. Estate of Thompson v. Commissioner, 21 B.T.A. 568; Burroughs Bldg. Material Company v. Commissioner, supra. But if he has been acquitted, a deduction has been allowed. Commissioner v. People's Pittsburgh Trust Co., 3 Cir., 60 F.2d 187; cf. Citron-Byer Co. v. Commissioner, 21 B.T.A. 308; Hal Price Headley v. Commissioner, 37 B.T.A. 738. Cf. Helvering v. Superior Wines & Liquors, Inc., supra, Note 3.
Textile Mills Securities Corp. v. Commissioner, 314 U.S. 326, 338, 62 S.Ct. 272, 279, 86 L.Ed. 249. Cf. Sunset Scavenger Co., Inc., v. Commissioner, 9 Cir., 84 F.2d 453.
Rugel v. Commissioner, 8 Cir., 127 F.2d 393. Cf. Kelley-Dempsey & Company v. Commissioner, 31 B.T.A. 351, where deduction was denied for the expense of commercial extortion.
Criminal Code, Section 215, 25 Stat. 873, 35 Stat. 1130, U.S.C. Title 18, § 338, 18 U.S.C.A. § 338.
See Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212.
Cf. Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255, 60 S.Ct. 209, 210, 84 L.Ed. 226; Dobson et al v. Commissioner, Nos. 44-47, 320 U.S. 489, 64 S.Ct. 239, decided this day.
INDOPCO, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. LINCOLN SAVINGS AND LOAN ASSOCIATION.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Walter F. TELLIER et ux.
TANK TRUCK RENTALS, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Neil SULLIVAN and Grace Sullivan; James Ross and Ann Ross; Sam Mesi.
DONALDSON, Postmaster General, v. READ MAGAZINE, Inc., et al.
McDONALD v. COMMISSIONER OF INTERNAL REVENUE.
COMMISSIONER OF INTERNAL REVENUE v. SCOTTISH AMERICAN INV. CO., Limited, and five other cases.
LILLY et ux. v. COMMISSIONER OF INTERNAL REVENUE.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Mose DUBERSTEIN et al. Alden D. STANTON et al., Petitioners, v. UNITED STATES of America.
COMMISSIONER OF INTERNAL REVENUE v. WEMYSS.
COMMISSIONER OF INTERNAL REVENUE v. COURT HOLDING CO.
BINGHAM'S TRUST v. COMMISSIONER OF INTERNAL REVENUE.
COMMISSIONER OF INTERNAL REVENUE v. FLOWERS.
COMMISSIONER OF INTERNAL REVENUE v. TOWER.

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