Source: https://www.legalcrystal.com/case/97606/mcdonald-vs-commissioner
Timestamp: 2018-05-20 14:18:17
Document Index: 549763727

Matched Legal Cases: ['§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 121', '§ 48', '§ 121', '§ 48', '§ 23', '§ 48']

Mcdonald Vs Commissioner - Citation 97606 - Court Judgment | LegalCrystal
Mcdonald Vs. Commissioner - Court Judgment
LegalCrystal Citation legalcrystal.com/97606
Case Number 323 U.S. 57
mcdonald v. commissioner - 323 u.s. 57 (1944) u.s. supreme court mcdonald v. commissioner, 323 u.s. 57 (1944) mcdonald v. commissioner of internal revenue no. 36 argued october 20, 1944 decided november 20, 1944 323 u.s. 57 certiorari to the circuit court of appeals for the third circuit syllabus the judgment of the circuit court of appeals affirming a decision of the tax court disallowing, in computing petitioner's income tax for 1939, a deduction of campaign expenses -- including an "assessment" by the political party of which he was a candidate -- incurred in contesting unsuccessfully an election for a judgeship which he had been holding temporarily by appointment, is affirmed. opinion of frankfurter, j., in.....
McDonald v. Commissioner - 323 U.S. 57 (1944)
U.S. Supreme Court McDonald v. Commissioner, 323 U.S. 57 (1944)
1. Petitioner's campaign expenses were not deductible (1) under § 23(a)(1)(A) of the Internal Revenue Code as expenses incurred in "carrying on any trade or business;" (2) under § 23(e)(2) as a loss incurred in a "transaction entered into for profit;" nor (3) under § 23(a)(2) as expenses incurred "for the production or collection of income." P. 323 U. S. 60 .
2. Under existing legislation, an incumbent, is no more than others, entitled to deduction of campaign expenses. P. 323 U. S. 63 .
3. Affirmance of the decision of the Tax Court in this case is supported also by the rationale of Dobson v. Commissioner, 320 U. S. 489 . P. 323 U. S. 64 .
New Colonial Ice Co. v. Helvering, 292 U. S. 435 , 292 U. S. 440 . For these campaign expenses to be deductible, it must be found that they can conveniently come within § 23(a)(1)(A). To put it mildly, that section is not a clear provision for such an allowance. To determine allowable deductions by the different internal party arrangements for bearing the cost of political campaigns in the forty-eight states would disregard the explicit restrictions of § 23 confining deductible
expenses solely to outlays in the efforts or services -- here the business of judging -- from which the income flows. Compare Welch v. Helvering, 290 U. S. 111 , 290 U. S. 115 -116.
Petitioner next insists that, inasmuch as he was defeated for reelection, his campaign expenses constitute a loss incurred in a "transaction entered into for profit," and, as such, a deductible allowance by virtue of § 23(e)(2). [ Footnote 1 ] Such an argument does not deserve more than short shrift. In suffices to say that petitioner's money was not spent to buy the election, but to buy the opportunity to persuade the electors. His campaign contribution was not an insurance of victory frustrated by "an act of God," but the price paid for an active share in the hazards of popular elections. To argue that the loss of the election proves that the expense incurred in such election is a deductible "loss" under § 23(e)(2) is to play with words.
Finally, reliance is placed on an amendment to the Internal Revenue Code introduced by § 121 of the Revenue Act of 1942, 56 Stat. 798. 819. [ Footnote 2 ] This amendment was proposed by the Treasury (1 Hearings before Committee on Ways and Means, Revenue Revision, 1942, 77th Cong., 2d Sess., p. 88) to afford relief for a specifically defined inequitable situation which had become manifest by the decision of the Court in Higgins v. Commissioner, 312 U. S. 212 . In that case, this Court held that, by previous enactments, Congress had made no provision for allowable
deductions from profitable transactions not covered by the statutory concept of "business" income. But, of course, earnings from "the performance of the functions of a public office" had specifically been so covered. § 48(d). [ Footnote 3 ] Congress adopted the Treasury proposal for the restricted purpose which originated it. And so here, the difficulty is not that petitioner's expenditures related to "nonbusiness" income, and thus were excluded from the legislative scheme before the 1942 Amendment, but that they were not incurred in "carrying on" his "business" of judging. The amendment of 1942 merely enlarged the category of incomes with reference to which expenses were deductible. It did not enlarge the range of allowable deductions [ Footnote 4 ] of "business" expenses. In short, the act of 1942 in no wise affected the disallowance of campaign expenses as consistently reflected by legislative history, court decision, Treasury practice, and Treasury regulations. [ Footnote 5 ] Nothing whatever in the circumstances attending the adoption of § 121 of the Revenue Act of 1942 warrants the suggestion that Congress unwittingly initiated a radical
candidates challenging existing officeholders. And so we cannot recognize petitioner's claim on the score that he was a candidate for reelection. [ Footnote 6 ]
Even if these conclusions, in the setting of federal income tax legislation, derived less easily than they do from the statutory provisions under scrutiny, we should not be inclined to displace the views of the Tax Court with our own. [ Footnote 7 ] Of course, the Tax Court cannot define the limits of its own authority. And in cases like Commissioner v. Heininger, 320 U. S. 467 , where the Tax Court mistakenly felt itself bound by superior judicial authority, we must give corrective relief. But, as a system, tax legislation is not to be treated as though it were loose talk or presented isolated abstract questions of law casting upon the federal courts the task of independent construction. Tax language normally has an enclosed meaning or has legitimately acquired such by the authority of those specially skilled in its application. To speak of tax determinations made in the system of review specially designed for federal tax cases as technical is not to imply opprobrium.
for these considerations is the underlying rationale of Dobson v. Commissioner, 320 U. S. 489 . We are therefore relieved from discussing the numerous cases in which the Tax Court or its predecessor, the Board of Tax Appeals, allowed or disallowed deductions and their bearing on the situation before us. To do so involves detailed analysis of the special circumstances of various "businesses" and expenses incident to their "carrying on." We shall not enter this quagmire of particularities.
" Losses by individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise . . . if incurred in any transaction entered into for profit, though not connected with the trade or business."
" Non-trade or nonbusiness expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."
" Trade or business. -- The term "trade or business" includes the performance of the functions of a public office." This amendment, added by the Revenue Act of 1934, § 48, 48 Stat. 680, 696, was merely "declaratory of existing law." S.Rep. No. 558, 73d Cong., 2d Sess., p. 29. It had "nothing to do" with campaign expenses, 1 Hearings before Committee on Finance on H.R. 8735, 73d Cong., 2d Sess. (March 6, 1934), p. 29, which continued to be outside deductions allowed by § 23(a)(1).
That the Tax Court may, as is sometimes true even of other courts, indulge in needless and erroneous observations is basis the point. See Helvering v. Gowran, 302 U. S. 238 , 302 U. S. 245 -246.
income for expenses incurred unless they were "ordinary and necessary expenses, paid or incurred . . . in carrying on a trade or business." Congress, by this new section, introduced a new type of deduction, for, as the House and Senate Committees said, it allowed ". . . a deduction for the ordinary and necessary expenses of an individual paid or incurred . . . for the production and collection of income. . . ." Before the 1942 Act, an expense, to be deductible, had to be "ordinary and necessary" in its relationship to the taxpayer's business; under the new section, it need only be "ordinary and necessary" in its relationship to the taxpayer's efforts to produce income. Hence, while the words "ordinary and necessary expenses," defining permissible deductions, remained unchanged in the new section, they were given added content in their new relationship. Obviously, Treasury regulations and decisions, limiting the scope of "ordinary and necessary" as applied to business expenses under the old law may be wholly unsuited to define the meaning of those words in their new context, and such rulings and decisions can throw little if any light on the meaning of Section 121. Since the enactment of the new section, the two questions essential to determination of deductibility are: were the expenses incurred in an effort to produce income? Were these expenses, or part of them, "ordinary and necessary" in connection with that effort? These are, in most instances, pure questions of fact, and, in cases such as this, are to be determined by the tax court. See Commissioner v. Heininger, 320 U. S. 467 , 320 U. S. 475 . The Tax Court did not make findings of fact on these crucial issues, but categorically denied that campaign expenses could be deducted at all. This, I think, was an erroneous interpretation of Section 121.
always been the broad basic policy of our income tax laws. Net income may be defined as what remains out of gross income after subtracting the ordinary and necessary expenses incurred in efforts to obtain or to keep it. In 1941, this Court upheld, in Higgins v. Commissioner, 312 U. S. 212 , a finding of the Board of Tax Appeals that one who managed, conserved, and maintained his own property was not engaged in a "trade or business," and, for this reason, was not entitled to deduct expenses incurred in producing his gross income. The effect of this holding was to impair the general Congressional policy to tax only net income. Congress, in its Revenue Act of 1942, supra, took note of this impairment and indicated in a most forthright manner its allegiance to the net income tax policy. Except for transactions carried on "primarily as a sport, hobby, or recreation," see Senate and House Committee Reports, supra, Congress provided a deduction for all ordinary and necessary expenses incurred in the production of income. The language it utilized was certainly far broader than was required to meet the narrow problem presented by the Higgins case. Congress specifically disposed of the Higgins problem by allowing a deduction for the expenses incurred in " . . . the management, conservation, or maintenance of property held for the production of income." Had Congress simply enacted these words, and nothing more, it might properly have been inferred that it intended to grant the type of deduction denied in the Higgins case, and no other. But it provided an additional deduction, in the very same section, for expenses incurred in "the production . . . of income." To hold, therefore, that Congress, in this new section, was concerning itself only with the restricted issue created by the Higgins case is to deny any meaning or validity to this latter clause; in a larger sense, such a construction carves out of the section a vital segment which Congress intentionally -- or so we must assume -- put there.
The Court interprets Section 121 as not permitting the deductions, without denying that the expenditures were made by petitioner for "the production . . . of income." This interpretation rests in part on the conclusion that the Section in no wise applies to expenses incurred in "business," and that the deductions claimed by the petitioner were in relation to a "business" explicitly so denominated by § 48(d) of the Internal Revenue Code. [ Footnote 2/1 ] The Court's construction would appear to be quite different from that of the House and Senate committees which reported their construction of the measure to their respective bodies. The reports expressly stated that
It is said that Dobson v. Commissioner, 320 U. S. 489 , gives some support to the Court's decision, and that we should not "displace the views of the Tax Court with our own." Cf. Security Flour Mills Co. v. Commissioner, 321 U. S. 281 . The Court's opinion does exactly that, for it rests in part upon its holding that McDonald, as a judge, was engaged in "business," while the Tax Court specifically found that he was not. Neither the Dobson case nor any other to which the Court's opinion points has indicated that we should automatically accept the Tax Court's construction of a statute, while repudiating the reasons on which its conclusion rested.
State officials all over this nation have been subject to federal income taxes since 1939. When they run for office, they must necessarily spend some money to advertise their campaigns. We permit private individuals to deduct expenses incurred in advertising to get business. If this petitioner had owned a factory, the operations of which were suspended because of war contracts, and had advertised goods which he could not presently sell, the expenses of such advertising would have been deductible under Treasury rulings. [ Footnote 2/2 ]
Cf. United States v. Pyne, 313 U. S. 127 . If the petitioner is to be denied the benefit of the deduction under the 1942 Amendment (Section 121(a)(2)) on the ground that these expenses were incurred in a "business," then it is difficult to understand why he should be denied the deduction under Section 23(a)(1)(A) of the Internal Revenue Code, which provides deductions for expenses incurred in carrying on a business. On the one hand, the Court denies the deduction because the expenses were incurred in relation to a "business;" on the other hand, the Court denies the deduction as a "business expense" on the ground that his expenses "were not incurred in carrying on' his `business.' . . ." This is a distinction without a difference, two phrases with but a single thought.