Earl Warren: Number 29, William B. Cammarano and Louise Cammarano, Petitioners, versus United States of America. Colonel Wiener, you may proceed.
Frederick Bernays Wiener: If the Court please, the issue in this case is whether expenditures made by taxpayers to save an existing business from destruction ceased to be deductible as ordinary and necessary business expenses because incurred in an effort to convey arguments to the taxpayers' fellow citizens to persuade them to vote against an initiative measure which would've destroyed their business. The facts are very simple. Petitioners husband and wife on a partnership interest in the firm of beer wholesalers in the State of Washington. In 1948, there was submitted to the voters of that State under the initiative provisions of its Constitution, an initiative measure which proposed to close all retail beer outlets and to place all retail sales of beer in state hands just as hard liquor had been under state control since repealed. Now, this measure closing all retail stores permitting retail sales of beer only by the State would've reduced the number of retail establishments in the State to one, to wit, the State of Washington and would've put all or nearly all of the beer supposed sellers out of business. So in order to defend themselves against this imminently threatened destruction of their livelihood, petitioners' expended money together with other similarly situated to persuade their fellow citizens to vote against this initiative. These arguments were presented in the form of radio broadcasts, newspaper advertising, streetcar cards and the like. They were successful. The initiative was defeated. They stayed in business and on their tax return for that year, they took as a deduction as an ordinary and necessary business expense the amount of money attributable to their interest in the partnership that had been expended for these purposes.
William O. Douglas: Were they retailers or wholesalers?
Frederick Bernays Wiener: They were wholesalers.
William O. Douglas: And the initiative would have --
Frederick Bernays Wiener: Closed the retail stores and made the State of Washington the only retail salesman in the State. The deduction was disallowed and this action was brought to recover the payment under -- made under protest, judgment went for the United States in the District Court. It was affirmed by the Court of Appeals in the Ninth Circuit and it's here on certiorari.
Felix Frankfurter: Could -- could the State itself not have participated going into the venture of business but if not have bought from these wholesalers?
Frederick Bernays Wiener: Yes, it could have bought from one but the testimony in the record was that with only one retailer in the State, 90% of the existing wholesalers would have been out of business.
Felix Frankfurter: Instead, they could have bought only from one and that's what, the statute?
Frederick Bernays Wiener: No, because only the State of Washington was the -- the State of Washington would be --
Felix Frankfurter: Well, there would've been only one retailer.
Frederick Bernays Wiener: That's correct.
Felix Frankfurter: Yes.
Frederick Bernays Wiener: Yes.
Felix Frankfurter: But -- but the consumptive capacity of the citizens of Washington (Voice Overlap) --
Frederick Bernays Wiener: Would not -- would not have been impaired but -- but the one retailer would -- would have kept in business only about 10% of the wholesalers. In other words, these people faced a 90% chance of the extinction of their business. Now, in the District Court, the -- the judge said, “It isn't clear to me how the destruct -- the closing of retail stores affects wholesale business.” And the Court of Appeals ceased on this as an alternative ground for affirmance, where we showed in our brief at some length, I'm afraid we labored the point pretty hard that of course if you close the retail stores, the wholesalers are out of business and the Government doesn't make any attempt here to support that alternative holding. So, we're all in accord that there was at least a 90% chance over this --
Felix Frankfurter: How does (Inaudible) judge said that?
Frederick Bernays Wiener: I am not familiar with Judge Boggs' views on the subject of -- even light wines or beer. I don't know. He may have been confused by the fact that there were two different words and he didn't think about it. At any rate, there is no attempt made here by the Government to support the alternative holding. So that we're all here in agreement on the fact that this had a 90% chance of destroying these taxpayers' business and we think that is the most important single fact in the entire case, that what they were fighting would have put them out of business. And reflexly, reflexly, the Government agrees with us because in the entire 50 pages of their brief, there is no reference to the business effect of this initiative on petitioner's business. Read -- reading the Government's brief, you would suppose that petitioner's were wholesale florists who like to go to the tavern and drink beer with the nature lovers and talk about motion, all the stuff -- a nasty backbreaking stuff you can have in a garden. But this had a business effect and that's what the Government doesn't admit. Now the leading case, the leading case here on the proposition that it is an ordinary and necessary business expense to expend money to save one's business from destruction is of course Commissioner against Heininger in the 320th United States, and we think that is the leading case and we discussed it at some length. And again, the Government reflexly agrees with us because they don't state the Heininger case, they don't discuss it, they cite it twice as a compare and wants us to see also. Now, this being a measure that threatened the taxpayer's business which we think as a matter of law involved in expenditures that's ordinary and necessary, what is there to support the result below? Well, there's a regulation. There is a three-throng regulation and I will take each of the throngs in order. First, it says that some spent for lobby may not be deducted. Well, we don't quarrel with that at all. Lobbying in the sense of the use of personal influence on and personal solicitation of members of a legislature is so far against public policy that a contract for it is unenforceable and it's been held here over many years. And of course in the Textile Mills case in the 314th United States, that regulation was sustained. Now we say, the decision goes on the unenforceability, on the -- the -- of lobbying. The fact that lobbying is against public policy on the illegality of the practice because the opinions speaks of insidious influences and legislative halls and that family of contracts to which the law has given those sanction. And of course if it's unenforceable, it's illegal and we don't borrow of course with the regulation that says that kind of an expenditure is not ordinary and necessary. But, when the regulation goes on to condemn some spent for the promotion or defeat of legislation not involving lobbying, then we have something else. We have a two-fold argument on that branch of the regulation. We say first, it's invalid and second, that if it's thought to be applied to an initiative provision, it would raise a serious constitutional question.
Earl Warren: And before you -- you proceed farther, may I ask if the regulation implies that it would be illegal for your clients to spend money on this cause or does it just say that the -- the expenditures are not deductible?
Frederick Bernays Wiener: It says the expenditures are not deductible and we say the only way you can properly deny an expenditure which in every other way qualifies within the statute is because of the semblance of the illegality, the Textile Mills lobby, the Tank Truck Rentals penalty, but -- but that to say that simply because the activity concerns legislation, it is not ordinary and necessary we think is arbitrary. It -- it say -- it carves out, attempts to carve out one particular type of expenditure without any reasonable ground for differentiation. Now --
Earl Warren: May -- may I -- may I ask this and that do you make any -- any differentiation between affecting a man's business and affect -- affecting his personal rights let us say. Or do you -- do you contend that any expenditure by anybody in a -- in an initiative election should be deducted.
Frederick Bernays Wiener: No, no, Your Honor.
Earl Warren: And I'd like to know the distinction between the two.
Frederick Bernays Wiener: We make only the -- we make only the point that a -- an expenditure and -- and I will narrow -- narrow my arguments to the sole ground that is necessary here. That an expenditure made by a taxpayer to save his business from destruction does not cease which is otherwise deductible under the rule of the Heininger case. It doesn't lose its deductibility when he is engaged in a legitimate over an open effort to defeat legislation which would have destroyed that business. And the reason is this, we say quite briefly, legislation isn't a dirty word. Now contacts for lobbying are unenforceable but if I am retained by a client to appear before Committees and procure the passage of legislations even if I have that contract on a contingent basis, that contract is enforceable, that contract is valid and this Court has upheld those contracts so that there is nothing reprehensible about legislative activity as such. There is no taint and to exclude legitimate legislative activity from the reach of the statute is just as arbitrary as the attempt in being on distrust which was the nonbusiness expense of attempting to preserve property and the Commissioner had said, “Yes. You can deduct all the expenses incurred in protecting your property except -- except in expenses incurred in fighting an additional tax assessment which we put upon you.” That's wrong. Well of course, the Court held that invalid because it was contrary to the statute and we say the same thing is here as long you don't have lobby. Now, a fortiori when you get -- and this is the second thought -- second branch of our argument under that clause of the regulation when you get to legislation pending not before a legislature but before the people, then you have something entirely different. And I recall, to Your Honors' minds the -- the tremendous struggle in the last -- last years -- the last century and then the early years of this century to introduce under the constitutions of so many States' provisions for initiative and referendum. And the purpose was -- the purpose was to free the people from the frailties of their legislators, to make it possible for the people to legislate directly, and to make it impossible for particular interests to buckle up measures in a legislature through pressure directed against a very few people so that --
Felix Frankfurter: Of these -- one of the advertisements constitutionally protected is a form of free speech?
Frederick Bernays Wiener: Well, a great --
Felix Frankfurter: Could it be a point -- could -- could an individual citizen putting to one side the corporations, could a citizen be prohibited from getting a full page ad as to endorse (Inaudible) why a private enterprise is better than public entitlements?
Frederick Bernays Wiener: No. Of -- of course not. But the line we've drawn and the -- and I will answer the question now. The line we draw is the business advertising. Now, if as I say, if my clients had been wholesale florists who like to go to the tavern, they couldn't claim this as a business expense. The regulation, the very same regulation which allows trade advertising as a business expense denies the deduction of a non-trade advertising and I don't quarrel with that. I mean, the non-trade advertising isn't a business expense. But what we're dealing with here is the business expense of something to save the business from destruction. And when you have the -- when you're dealing with an initiative, I say unless you're prepared to say that this great struggle in the early years of this century was the term ballot, then there is a -- a marked difference between legislation pending in the legislature and legislation pending before the entire direct and that to -- to say as the Government does that here, “Oh, well the people were the legislators is to -- could realize a basic distinction and to resort to the techniques of the late Kurt Goldstein.”
Charles E. Whittaker: (Inaudible)
Frederick Bernays Wiener: Yes sir. That is -- Your Honor has quoted from 23 (o) which is the contribution section. We are claiming under 23 (a) the business expense section. There are three basic differences. The business expense deals with the activity of the taxpayer. The contribution section deals with the activity of the person to whom the payment is made. The two subjects are entirely different. And finally, there is a percentage limitation in 23 (o) on the amount of contributions that can be taken as a deduction and there is no such percentage contribution in 23 (a) and we say it is just as wrong to try to write the -- the substantive limitation of 23 (o) into 23 (a) as it would be to write to -- to attempt to write the percentage limitation of 23 (o) into 23 (a). Now for instance, if I am a Rockefeller, Rockefeller , I cannot give 60% of my gross income to worthy charitable causes such as foundations, colleges, churches and the like. There's a limitation in percentage. But if I am an unsuccessful businessman with a poorly developed acquisitive instinct and 60% of my gross goes for expenses, not even the Commissioner of Internal Revenue will say, (Inaudible) if they're otherwise proper expenditures.
Charles E. Whittaker: (Inaudible)
Frederick Bernays Wiener: Exactly. And I say that -- that the Commissioner can no more write the percentage limitation of subsection O into subsection A than he can write the substantive limitations on contributions into a business expenses that are otherwise ordinary and necessary.
Charles E. Whittaker: That also comes to due processes?
Frederick Bernays Wiener: We don't have a due process, sir.
Charles E. Whittaker: (Inaudible)
Frederick Bernays Wiener: No, no. I think the regulation is invalid because it's not warranted by the statute. It's not authorized by the statute. The -- the statute says ordinary and necessary and although, that -- those aren't words of art. But we do know that ordinary and necessary includes expenditures necessary to save one's business even if that business is as doubtful as the business of Dr. Heininger who was not only guilty of inaccurate statements to pass through the mails but also a very incompetent damage. Now, that --
Charles E. Whittaker: (Inaudible)
Frederick Bernays Wiener: It was the attorney's fee to try to keep Heininger in business. He was facing a postal fraud order and if Your Honor will read the report of Heininger against Farley in the 105 F.2d, you will see that the postal authorities had ample grounds for shutting him down. And then he was permitted to deduct his attorney's fee and the Court said, “Well, his business was about to be destroyed. The normal response to that threat was to try to save his business. The attorney's fee being otherwise reasonable, he can deduct it even though in fact he was put out of business.” Now, this was just as much a threat to our business as Postmaster General Farley was to Dr. Heininger's business and there's nothing -- there was nothing wrong about our business. Our business was lawful.
Charles E. Whittaker: Where efforts to influence legislations were involved in one and not the other.
Frederick Bernays Wiener: Well I know, but -- but on the -- there is nothing in the business expense section that says efforts to influence legislation and my point is that if the expenditure is otherwise ordinary and necessary, you can't single it out on the ground that it involved efforts to influence legislation unless those efforts transgress the lines of public policies so that they became efforts of lobbying and hands on enforcement. And -- and that -- that's our position that the regulation is invalid as applied to legitimate efforts in the legislature but a fortiori, it is invalid as applied to attempts to -- where the legislation is pending before the people and where the taxpayers are bringing there if effort is to saturate the thinking of the community and not simply to deal with the legislature. In other words, we have a form of direct legislation. Now in the case of Luther Ely Smith which I think is worth more than passing mention.
Charles E. Whittaker: That's a Tax Court case.
Frederick Bernays Wiener: That is a Tax Court case. Luther Ely Smith was a Missouri lawyer who thought rightly or not, I cannot say that the public had lost confidence in the courts and --
Charles E. Whittaker: And you're talking about our Missouri (Inaudible)
Frederick Bernays Wiener: Exactly. And he spent money to adopt that constitutional amendment and the Tax Court said that this regulation was inapplicable, no action by the legislature was necessary. The Commissioner acquiesced and that acquiescence remained enforced for 14 years until Your Honors granted certiorari in this case and then the Commissioner did a hasty post like -- most enlightened flip-flop and said, “Oh well, the constitutional amendment is general legislation and therefore the legislature replied.” But we say, if you can address communications relating to the taxpayer's business to the public to say drink lots of beer or drink Acme beer or drink any other kind of Krispy Kreme thirst-quencher and that is the proper business expense then to say that when you address a -- an appeal to them to vote against this initiative which would put us out of business, that would raise the question which was pointed out in Speiser versus Randall, that there's a discrimination among identical types of speech and that certainly would raise the constitutional question. We say the only way to avoid raising that question is to construe this legislation if we get to the second stage of the argument as not as meaning legislation before a legislature which is the normal sense and not legislation before the people.
Earl Warren: Colonel, do you -- you make -- you stress the fact that this would put your clients out of business. Would your argument be different if it only affected them in a slight degree?
Frederick Bernays Wiener: That would be a difference of degree eventually and the question of fact. Now --
Earl Warren: Now, who would decide -- now, if it's a different question of fact, who would decide --
Frederick Bernays Wiener: Well --
Earl Warren: -- how seriously a man's business rights would be affected --
Frederick Bernays Wiener: I suppose --
Earl Warren: -- for the purpose of deduction of taxes?
Frederick Bernays Wiener: I suppose in the first instance, it would be the Commissioner and then the Tax Court and then ultimately this Court. Although I would find it difficult to make a -- get a fact question here on certiorari certainly after the decision of 10 days ago. But it would be a question of fact as to the business effect. I recur to my wholesale florist, the wholesale florist couldn't claim this. The wholesale grocer might because after all without the -- in the State of Washington the wholesale -- the grocer can sell beer. The manufacturer of tavern equipment I think could raise. It would be a question of degree how far it affects business, but we don't have to decide any of those questions on where to draw the line or how far in this direction, how far in that direction because here we have something clear. This would've destroyed their business or at least there was a 90% chance that they would have been among the wholesalers who would've been closed down. Now, finally there is the clause of the regulation that deals with propaganda. There are technical object -- obstacles in the way of that govern -- argument on the part of the Government which are fully discussed in the brief. I think it's foreclosed by the plaintiffs and I won't -- I'll rest on my brief there. But let me briefly deal with the question of propaganda. I don't think it adds anything except an epithet because after all what is propaganda? In a sense, any appeal to the people can be labeled propaganda. I've once worked for a cabinet officer since deceased who had a very simple life, anything in his -- his arguments were based on facts and his opponents' arguments were purely propaganda.
Speaker: (Inaudible)
Frederick Bernays Wiener: Yes. I think there's a -- in the companion case, they quote Judge Learned Hand in the Slee case, 42 F.2d propaganda being a polemic to denote the publicity of the other side. I think -- I think the other propaganda, the other fellow's arguments because ultimately, any kind of appeal to the people and that is what an argument addressed to the people in connection with an initiative is. Any argument addressed to the people in -- in a census propaganda, the Declaration of Independence, the Federalist, the Emancipation Proclamation, any attempt to persuade, if you happen not to like the -- the context of it is propaganda. But what we have here is business propaganda. Business propaganda that is quite like any other kind of advertising because this wasn't a -- an argument against the initiative brought by the rugged individualist who didn't want the -- the State of Washington in the retail beer business. This was a -- a campaign by the people who would have been placed out of business. And there again, the difficulty with the Government's arguments is not only that they appear to denigrate the very essence of popular Government but throughout, consistently and not accidentally, they are ignoring or seeking to ignore the basic business aspect of the taxpayer's appeal to their fellow citizens to vote down this measure which would have destroyed their business. And that's why we think that the judgment below was erroneous and should be reversed.
William O. Douglas: When did this spray, the exploiting exportation propaganda get into regulation?
Frederick Bernays Wiener: Oh, I think it's in -- in one sense, Mr. Justice it goes back great many, many years. And insofar as it is applied to -- in the -- to -- in the contribution section, I -- we don't quarrel with it. I mean, it's one thing if you can contribute to the national committee. It's different from contributing to -- to Georgetown University Law School. And -- and when the -- when Congress says it's got to be an educational, charitable, and so forth the institution, I'm not troubled by the regulation which says this excludes propaganda. But this has -- as a matter of fact, the corporate regulation has never been under business expenses except for one year since 1915 and the regulation, the -- against propaganda hasn't been in the individual taxpayers' regulations until 1938. And the -- it's -- the individual regulation has always been under contributions.
Felix Frankfurter: You talked a little out of this -- this interest with the devotion into biology, put in a front -- full-page ad in The New York Times saying that he wants to reserve this foolish notions that smoking is deleterious, prevention as to instability. That would not be propaganda, but if he doesn't as an expert with a tobacco interest, it would be.
Frederick Bernays Wiener: I suppose that's about the only line possible. And -- and -- and yet --
Felix Frankfurter: You mean disinterestedness.
Frederick Bernays Wiener: No, I don't think it's disinterestedness. They -- the -- the very core of this case is the -- is the deep and sharp interest that the petitioners had in the preservation of their business.
Felix Frankfurter: I was suggesting the little hypothesis to show on satisfaction, the notion of what is and what isn't propaganda.
Frederick Bernays Wiener: Well if -- it's utterly unsatisfactory. It's utterly -- it doesn't add anything except an epithet.
Earl Warren: Mr. Davis.
Oscar H. Davis: Mr. Chief Justice, may it please the Court. This is a federal income tax case arising under the ordinary and necessary business expense provision of the Internal Revenue Code of 1939. It is not a case involving prohibition or direct restriction of any kind upon the use of advertising in political campaigns. And as a income tax case, as what most income tax cases, it comes here with a great long history which I believe has not been fully opened to the Court. If I may, I would like to summarize at the beginning of my argument the four factors which we believe have to be taken into consideration and which lead inevitably in our view to a conclusion opposed to that advanced by Colonel Reiner -- Wiener. The first factor is the statutory term "ordinary and necessary." When this -- when that term first came before this Court, Justice -- or not first -- in the classic case in which it came before the Court, Justice Cardozo said it doesn't impose a rule of law or a verbal formula. He called it a way of life in fact. And in the Textile Mills case to which Colonel Wiener referred, the Court ref -- said it's certainly not clear and unambiguous. The words are general, indefinite, imprecise. And because they are general, definite -- indefinite and imprecise, they are capable of specific diminution through the course of years by judicial decision, by regulation and that is what has happened. They're not only capable and susceptible of that, that has been the course of history under this regulation. If I may use an analogy from the Sherman Act, I don't -- the Sherman Act uses the general expression contract in -- in restraint of trade. Now today, we don't look at -- at a particular case before the Court and decide whether fresh de novo, looking at it as a matter of dictionary definition a particular contract or combination isn't restraint of trade -- trade because various per se rules of law had been developed over the years such as a -- a combination to fix prices is a perceived violation of the Sherman Act. Well similarly in -- in this field, the ordinary and necessary business expenses, certain rules of law have been developed over the years and one rule of law that has been developed both by regulation and by judicial decision is that you cannot deduct as a business expense these expenditures for advertising and publicity campaigns for the promotion or defeat of legislation. Now, about the statutory terms, more than unnecessary, I'd like to say just two other things. One is that they do not cover capital expenses. Justice Cardozo also said that there are many necessary payments which are capital charges and therefore not deductible under this phrase. And the last thing I'd like to say about the statute is that it's recently as the Sullivan case at -- handed down by this Court last term, the Court said that deductions are a matter of grace and you have to fall within the statutory terms as they have been interpreted over the years. Now the important thing in this case is the regulation. The regulation to which Colonel Wiener has adverted. I will -- I hope to go into that at greater length. What I want to say in the beginning is this is not a -- a baby infant regulation untested in the courts which comes here for the first time. This is a regulation which goes back to the beginning of the Income Tax Act. The first Income Tax Act under the Sixteenth Amendment was passed in 1913. In 1915, the Commissioner published a regulation or published a decision in which he said that lobbying expenses and campaign contributions are not deductible as business expenses. That was not a regulation, it was a decision. But in 1918, still under the original 1913 Act, he published the regulation which is identical with the regulation which is in effect today, or the regulation which was in effect at that time the -- this case -- this case and the succeeding case arose. He added to the phrases lobbying and contribution of campaign expenses, the two phrases "promotion or defeat of legislation" and the "exploitation of propaganda" including advertising other than trade advertising. So the regulation comes down to us from 1918 issued successively under the various -- various Income Tax Acts that have been passed. There had been 13 re-issuances of this regulation under each of the Income Tax Act that was -- have been enacted since 1918. So, it is a regulation that comes down to us with not only the Commissioner's sanction behind it but with the rule of this Court relating to reenactment and congressional acquiescence in federal income tax regulations. Then there are -- the third factor I'd like to mention are the judicial decisions. There is the Textile Mills decision of this Court in 1941, almost 17 years ago which we believe is almost wholly, almost but not quite because it didn't deal with an initiative. But otherwise, we believe it's wholly dispositive of this -- of this case. And then that decision from 1941 on has been generally followed in the Tax Court and in the Courts of Appeals so that I think I can fairly say, leaving out for one moment the Luther Ely Smith case to which the Tax Court case to which Colonel Wiener referred. I think that -- with that possible exception which I do not think is an exception but with that -- leaving that aside, there is no dispute or conflict among the Circuits or the Tax Court that this kind of expenditure for publicity cam -- campaign to promote or defeat legislation is not deductible under the regulation on the statute. And finally, the fourth factor that I'd like to mention is the congressional policy. I have already referred to the -- the constant reenactment of this -- of the Income Tax Act in the light of this continuing regulation. Mr. Justice Whittaker adverted to the specific enactments by Congress with relations to -- with relation to charitable contribution and ex -- exemption of charitable organizations. And then there is -- the further fact that I would like to mention preliminary and that is, that this is not a -- what shall I say a capricious or arbitrary determination by Congress and Congress' delegate the Commissioner acting together. There is a very decided public policy behind -- behind this regulation. And that public policy also adverted to I believe in a question by the Chief Justice is the -- is the policy of tax equilibrium that the federal fist for Treasury will stand apart from all -- from attempts to defeat or promote legislation, that either businessmen or non-businessmen who seek to have legislation change will have to bear the entire burden of their own expenses. That is the policy which has been properly referred to as the Policy of Tax Equilibrium.
Felix Frankfurter: You -- you think it might implicate the Federal Government in being for or against prohibition?
Oscar H. Davis: No. No it's a -- it's a financial matter that the -- the Federal Government --
Felix Frankfurter: It's trying to -- every question that arises here was whether the Government could get the money or not get the money.
Oscar H. Davis: No, no. But it has to do with both sides in a -- in a controversy. Take this initiative before the State of Washington. It was supported by the -- the beer wholesalers and the wine wholesalers, restaurants, groceries and so forth. It was opposed by the temperance people and they formed a committee. Now the temperance people, if they had advertising, would not get a deduction because it would not be part of any business of which they -- of which they were carrying on. They would have to bear the full 100% dollar cost of all the publicity that they issued in the course of their campaign.
Felix Frankfurter: For the same reason that U.S. Steel and all the big industries had not support universities and colleges as being good for business, I suppose he deduct those things in business expenses.
Oscar H. Davis: Yes, but --
Felix Frankfurter: And people advertise their money, can't deduct the small -- except to the limit of charitable deductions.
Oscar H. Davis: But Congress has indicated -- Congress has indicated that if U.S. Steel gives -- gives a contribution to a charity which is engaged substantially in propaganda for the promotion or defeat of legislation, it cannot deduct it. So that this is an area in which Congress has been particularly interested. Congress has -- Congress and the Commissioner working together, I think that the analogy I would use is of a tree and a vine, a vine having really become part of the tree in the course of the 40 years since this regulation was first promulgated, that the policy here is that in the field of a electoral matters, in the field of legislation, in that particular field, the Federal Treasury should stay aside.
Felix Frankfurter: This is a brand new question as you indicate mainly whether the considerations of policy begins to align contributions but they aren't being pressured to bear upon Congress all or some are difficult that are involved in that. All the abuses that we know may fairly be transferred to those dates which allowed the initiatives.
Oscar H. Davis: That issue is a -- is a novel issue.
Felix Frankfurter: What issue?
Oscar H. Davis: But the background is not novel, Mr. Justice Frankfurter.
Felix Frankfurter: But the -- but the facts maybe so different that the background that we see swaying about it.
Oscar H. Davis: That may be so. Well, I would try to explain it on the course of my argument, that is not so, that the same factors apply.
Potter Stewart: Now isn't it true though, Mr. Davis that part of the vine and part of the tree has been the Tax Court decision in the -- what's his name, Leonard Smith, the Missouri lawyer.
Oscar H. Davis: The Leonard Smith case. That was a decision in 1944.
Potter Stewart: Yes, so for 14 years --
Oscar H. Davis: It -- that -- that's right. We think that the decision is clearly distinguishable. We also think it is wrong. Those are two separate arguments. That this -- that this --
Potter Stewart: On any event, that -- that decision has been on the books --
Oscar H. Davis: Yes.
Potter Stewart: -- for 14 years --
Oscar H. Davis: Yes.
Potter Stewart: -- and any reenactments -- reenactments by Congress during that period would be subject to whatever worth in this case, the reenactment doctrine at hand.
Oscar H. Davis: Well there's a difference, Mr. Justice Stewart between --
Potter Stewart: Because of the Tax Court, I understand.
Oscar H. Davis: Between a single decision of the Tax Court. In fact --
Potter Stewart: Yes.
Oscar H. Davis: -- this Court indicated in the Glenshaw Glass case --
Potter Stewart: I see.
Oscar H. Davis: -- that the reenactment doctrine doesn't apply to a single decision of the Tax Court. A difference between that and the consistent history of -- of regulations that you have here. But relate -- with relations to the Luther Ely Smith case, I would say this, one is, it related to a constitutional provision of the Missouri Constitution. And the Tax Court went on that ground. It says that it was a self-operating constitutional provision of the Missouri Constitution. We do not have here a constitutional provision. This was an initiative which is going to become a statute of the State of Washington. So there is a -- there is that distinction between a constitutional provision and then -- and a -- and a statute. The Tax Court itself in later decisions, applied its -- it's -- the other rule, the rule in which we advocate to referenda and -- and initiatives. In fact, it even applied it to a constitutional provision of the State of Kansas which brings me to my second point that the Luther Ely case -- Excuse me?
Charles E. Whittaker: Do you really think that's what he construed (Inaudible)
Oscar H. Davis: I -- I don't think it is and that's why I think the decision is wrong, Mr. Justice [Laughter] Whittaker. But I will -- I will think -- I will say that's the distinction which the Tax Court thought was the -- was the appropriate one. And that is why the Commissioner finally was convinced that he ought to withdraw his acquiescence from the --
Charles E. Whittaker: (Inaudible) Commissioner did acquiesce the Smith case, didn't he?
Oscar H. Davis: Yes, he did.
Charles E. Whittaker: And that was in 1944?
Oscar H. Davis: Yes, that's right.
Charles E. Whittaker: And that acquiescence continued until he granted (Inaudible)
Oscar H. Davis: That's right. And I --
Charles E. Whittaker: (Inaudible) I don't believe as much to the argument that there's been congressional acquiescence (Inaudible)
Oscar H. Davis: There -- there are two different passage. Leaving aside the initiative, I'm saying that there's been congressional acquiescence in the general part of the regulation which deals with promotion or defeat of legislation.
Felix Frankfurter: Not that we denied that.
Oscar H. Davis: But Colonel Wiener did and that's what --
Felix Frankfurter: Well not legislation.
Oscar H. Davis: Yes. He -- he had two arguments. He -- his first argument was that the only part of the statute which was valid was the lobbying, the direct lobbying but that any publicity campaign as in the Textile Mills case for the promotion of defeat of -- of legislation enacted by a -- a legislature could be still deducted --
Felix Frankfurter: I don't see how you can make a protest -- how you can promote legislation by conventional legislature without getting into the territory of lobbying.
Oscar H. Davis: Well, it was done in the -- in the Textile Mills case which I would like to -- to go into a greater detail.
Felix Frankfurter: Do -- do you think you --
Oscar H. Davis: I -- I would do it right now, Mr. Justice, because I -- as I say we stand in large measure on that case. That case did not involve direct lobbying. That case did not involve any approaches to legislatures at all. What happened there was that the Textile Mills Corporation was a company which engaged to -- to put on a publicity campaign in order to secure the return of assets which had been invested during the World War I to -- by -- enemy alien assets which have invested. The Textile Mills Company hired the famous publicist Ivy Lee to put on a publicity campaign and they hired two lawyers to write law review articles without disclosing the -- the personal interest of the --
Felix Frankfurter: Which is already --
Oscar H. Davis: -- of the company.
Felix Frankfurter: (Inaudible)
Oscar H. Davis: That we have here too.
Felix Frankfurter: All right. (Inaudible) when you come to that.
Charles E. Whittaker: (Inaudible) wasn't it?
Oscar H. Davis: Pardon me?
Charles E. Whittaker: It was -- it was quite strong.
Oscar H. Davis: It was very so. The -- but there was no direct approach to the --
Felix Frankfurter: (Voice Overlap) --
Oscar H. Davis: -- to the Congress in any way. It was --
Felix Frankfurter: They didn't write letters to Congressmen.
Oscar H. Davis: They didn't talk to Congressmen.
Felix Frankfurter: They wrote law review articles then they got to Congressmen.
Oscar H. Davis: Law review articles were -- were directed to the general public. The -- there were no -- they were directed to the public in the sense that the lawyers and other people interested. They weren't directed to the Congressmen directly. And the case came here on that basis and the Court decided that this regulation which -- which I'm talking apply and was valid. And so we have there, we think the -- at least this much of this case. We have a general publicity campaign, Ivy Lee and legislation, the settlement of War Claims Act which returned the -- enemy alien assets to Germans. And the Court held not this -- that this was nondeductible because it was illegal. It said specifically we -- it -- it's a material whether it was illegal that the regulation was properly adopted by the Commissioner, and the regulation covers this situation. So, it carried this, I say this far. It carries us to a publicity campaign such as we have here and it carries us to a statute. It does not carry -- carry us to the initiative but it does carry us beyond the button holding problem with -- which -- on which Colonel Wiener rested part of his case. Now, if I can return for a moment to the -- the Luther Ely Smith Case about which you questioned Mr. Justice Whittaker. The Tax Court itself made that distinction. I agree with you, the Commissioner now agree with you that that is not much of a distinction but the Tax Court thought it was because it applied it only in the case of a constitutional amendment. It continued to apply the regulation in cases relating to initiatives and in cases relating to publicity campaigns relating to acts of State legislatures or -- or of Congress. So the Tax Court thought that was the distinction, a -- a self-operating provision of this -- of the constitution. The reason why the Commissioner acquiesced because at that time he thought that was a proper distinction. He had seen the light. He withdrew his acquiescence because it was thought that it would be embarrassing to us to come up here and have to defend both throngs of the -- of the situation in which it would -- because there was no sound distinction between the two just as you pointed out. But I do think that this much is true that these petitioners and other similarly situated could not properly rest on the Luther Ely Smith case because they don't have a case involving a constitutional amendment.
Charles E. Whittaker: Would that be a white horse case?
Oscar H. Davis: No, but the -- that's the distinction which the Tax Court itself made in -- in other cases that have -- that have gone on. Since 1944, there have been at least two, maybe three cases by the Tax Court in which they themselves did not apply the Luther Ely Smith Case to an initiative, in fact, to this initiative in another earlier case, and to a canvas situation so that whatever the rightness or the wrongness, and I think it is wrong, these petitioners had no right to rely upon it. As far as congressional reenactment, there has been no congressional reenactment relating to them since the -- the Luther Ely Smith -- Luther Ely Smith case came down in 1944, date here was 1948 and there was no statute in between 1944 and 1948.
Speaker: Did you say that this in fact a court decision (Inaudible)
Oscar H. Davis: Yes and it did.
Speaker: (Inaudible)
Oscar H. Davis: No, not many. One is the Tax Court case in the companion case, the Strauss case which is a -- which is a initiative in the State of Arkansas. Then there was case in the Tax Court involving this same initiative in the State of Washington in the McClintock-Trunkey case cited in our brief. And then there is the Tax Court case involving a Kansas -- in fact it's a Kansas Constitutional Amendment, the Moseley Hotel case. There are three Tax Court cases involving -- in addition to the Luther Ely Smith case, involving the problem of referendum initiative of votes by the people on.
Potter Stewart: One was the Moseley case.
Oscar H. Davis: Moseley case was the -- was the -- an amendment to the Kansas Constitution.
Potter Stewart: And that's when?
Oscar H. Davis: When? 1954.
Potter Stewart: Mr. Davis, I've never read the McClintock-Trunkey case but it's indicated in your brief that the -- the Tax Court decision was reversed by the Court of Appeals.
Oscar H. Davis: On another ground sir.
Potter Stewart: On another ground.
Oscar H. Davis: On a -- this issue was not taken to the -- to the Court of Appeals.
Potter Stewart: I see.
Oscar H. Davis: Now, let me go at once to the congressional policy which is probably at the heart of -- of this case. As it's been pointed out, Congress in 1934 to 1936 adopted two provisions which we believe have a bearing. One is the provision which Mr. -- Mr. Justice Whittaker referred to, forbidding the deduction of contributions to charitable organizations of those charitable organizations engaged in propaganda to promote or defeat legislations. The second provision was a provision saying that charitable organizations which engaged in that kind of promotion or defeat of legislation would no longer be tax exempt. Now, these two legislative provisions I think are clear indication that Congress does not want federal subvention, federal support, federal subsidy for the promotion or defeat of legislation. And this general policy was foreshadowed in the decision by Justice -- Judge Learned Hand in 1930 in the Slee case, S-L-E-E, that involves the American Birth Control League, involved the contributions of the Birth Control League. And the Second Circuit Court consisting of Judge Hand, Judge Mack and Judge Chase refused to allow the charitable deduction even though at that time there was no such statutory provision, just came in to the statute later. At that time, it was simply a provision for deduction for charitable contributions. Judge Hand said as Mr. Wiener has referred to and I -- in alignment to that, I'd like to reach the Court. Political agitation as such is outside the statute, that is outside in the Internal Revenue Code. However innocent the aim though -- though it had nothing to doubt -- to doubt a propaganda which is a polemical word used to describe a publicity of the other side. Controversies of that sort much be conducted without public subventions. The Treasury stands aside from that. That we think is the basis of the -- of the entire policy of this regulation and of the statute which Congress has enacted. Let me -- let me point out to the Court if I may how our view which I think I can fairly say is the prevailing view works in this situation. Petitioners -- Mr. Wiener's client and other similar situated can certainly go out and spend money for a publicity campaign to defeat this initiative in the State of Washington. They are certainly free to do that within the limits of Federal and State legislation.
Felix Frankfurter: What does that mean?
Oscar H. Davis: I mean if there are -- if they may -- maybe limits on the amount -- on -- on the amount of expenditures. I -- I just want to leave that issue out of the case because it isn't here. The --
Felix Frankfurter: Are you also putting to one side any suggestion of any kind of blackening aspects to this kind of activity?
Oscar H. Davis: No, I -- I do not because we --
Felix Frankfurter: You do not?
Oscar H. Davis: We think it exists in this case and I -- I don't have time to -- to go into it at length but the -- we have printed it in the -- at the end of the record the various or selection from the various advertisements which are published. The thing that I would like to call to the attention of the Court is that nowhere, nowhere and this is the finding of the trial court isn't indicated that the people who are publishing these advertisements are really the beer and wine wholesalers in the State 0of Washington. It is put out under the title, Men and Women Against Prohibition with an executive secretary's --
Felix Frankfurter: Would it --
Oscar H. Davis: -- names and so forth.
Felix Frankfurter: Then why don't you -- why don't you say they have no standing to understand this. Maybe -- I don't -- I don't -- I guess I don't apprehend what you've said.
Oscar H. Davis: No, I believe you do, Mr. Justice. What I'm saying -- no. But they -- they --
Felix Frankfurter: It did more to me than they're there.
Oscar H. Davis: No, they -- they published -- they were the -- the publishers of these advertisements in reality. They did not put their names to it. They did not indicate to the people of Washington that they -- the liquor interests were opposing the State initiative.
Felix Frankfurter: So you mean --
Oscar H. Davis: They made it appear --
Felix Frankfurter: They concealed that there was --
Oscar H. Davis: They concealed their interests. They -- they made it appear that they were the -- “The men and women against -- of Washington against prohibition." As if they were a -- an organization of disinterested organization and their advertisements --
Felix Frankfurter: I should think a lot of adversary would have to be condemned as reprehensible, is that so?
Oscar H. Davis: No. I don't condemn it as reprehensible but I condemn it as -- with it -- I -- I state that it was with the --
Felix Frankfurter: Was stated to you --
Oscar H. Davis: No.
Felix Frankfurter: Was it stated the way lobbying is to you?
Oscar H. Davis: It is -- it is within the -- the thing with which Congress has always been concerned that is advertising in electoral campaigns which does not reveal the source of it.
Felix Frankfurter: I'm not -- I'm not rejecting your legal conclusion. What I want to know is whether it carried within the sea of mystery that lobbying -- and that's the other thing there.
Oscar H. Davis: It carries partially within. It is not as bad as lobbying in the old-fashioned sense but it carries --
Felix Frankfurter: Or do they find idealist sense?
Oscar H. Davis: Well yes, it carries within it the same refined -- the refined idealist sense, exactly that because what -- what happens is that a large amount of money is spent for some advertising, some of which is quite lurid. There are pictures of some of which I think can fairly be said to be cut.
Felix Frankfurter: Understanding that that domain it (Inaudible)
Oscar H. Davis: Yes, but I mean this -- this is -- this is the idealist sense. Advertising which it -- the source of which is concealed from the general public of the State of Washington so that the public has no means of evaluating the interests of the writ of the publisher of the advertisement.
Felix Frankfurter: They could guess that these people didn't want to be put out of business or that --
Oscar H. Davis: There is no indication that it's these people.
Felix Frankfurter: Well, they -- they certainly could guess they didn't want the State of Washington to go into the (Inaudible)
Oscar H. Davis: Yes, but -- as Colonel Wiener says they might just have been people who like taverns.
Felix Frankfurter: (Voice Overlap)
Oscar H. Davis: The suggestion is that -- that these were the brewers or -- or the wholesalers and that they did not reveal their interests. The second point I have to make on this issue is that there is a degree of personal solicitation. You will see in these advertisements as in the companion case lists of people of the State of Washington who support these advertisements. Now these people didn't arise out of the blue. They were solicited. People -- in fact the -- the records shows that on -- on the -- the trust fund, the beer wholesalers' trust fund which published this advertisement on behalf of these taxpayers and other similarly situated had field men who apparently went out and collected names or -- or got people --
Felix Frankfurter: You mean, you had --
Oscar H. Davis: -- who had agreed to do --
Felix Frankfurter: -- what happens with deductibility of those two before doing it?
Oscar H. Davis: We have the deductibility of the advertisements --
Felix Frankfurter: Yes.
Oscar H. Davis: No. That all -- of all the expenses, yes, we have all the expenses including -- you see, these people made a contribution to a trust fund. The trust fund paid all these expenses so they -- they have a pro rata share of all the expenses of the trust fund.
Felix Frankfurter: I have great difficulty with general proposition being out that -- that if legislation comes to the people, that the people most affected by the action to be taken shouldn't be able to address this.
Oscar H. Davis: Oh yes. I don't deny that for a moment.
Felix Frankfurter: And could we -- and is that just -- just as much of a business expense as -- as paying for the raw materials that goes into manufacturing?
Oscar H. Davis: Well on the first half of your -- of your statement Mr. Justice Frankfurter, I -- I agree perfectly. They have the right to it -- to address -- address the public.
Felix Frankfurter: And that's -- myself I should be clear, it could not be prohibited constitutionally, myself.
Oscar H. Davis: I don't suggest for a minute that it will --
Felix Frankfurter: I'm not saying you do.
Oscar H. Davis: Yes.
Felix Frankfurter: If it has that measure of legal protection then I find it very hard to deny the quality of a business expense.
Oscar H. Davis: Well, the reason why it should be denied the quality of a business expense, in addition to the history which I have -- have in mind is the fact that there is a policy of tax equilibrium that the brewers and the wholesalers should not get a business expense where the temperance -- temperance advocates would not. Particularly since the brewers will be able to spend more money on this -- on this basis being wealthier organizations and -- and the graduated income tax will allow them to really pay only perhaps 52% of the cost of all these advertising whereas the temperance advocates, the people on the other side will have to bear 100% of the cost here.
Felix Frankfurter: No. But it's the usual experience in life, advertently it's own reward, that you don't get paid for with (Voice Overlap).
Oscar H. Davis: Well that -- that is –-
Felix Frankfurter: We're a -- we're a private enterprise society.
Oscar H. Davis: That maybe true and I would not say that Congress couldn't adopt the other view. My position is --
Felix Frankfurter: What I'm suggesting is it -- it may have adopted the other view in saying, “People who are in it mainly for (Inaudible) should have on reward converging. People who are in business should be allowed to conduct their business enterprise.
Oscar H. Davis: They did but they -- Congress has also acquiesced as this Court has said several times, acquiesced over a long period of years in a -- in a regulation which says gladly that if you expend money for the promotion or defeat of legislation -- legislation, you cannot deduct it.
Felix Frankfurter: I'm supposing, what is the case where this Court had to decide or to initiate that the referendum was legislated.
Oscar H. Davis: Now that -- that this Court has never decided. No.
Felix Frankfurter: Oh, it can. There's one (Inaudible)
Oscar H. Davis: Oh -- oh, yes.
Felix Frankfurter: Certainly at times.
Oscar H. Davis: Oh, well, I -- it had decided. It is clear that initiative in referendum are legislation in the general sense. We have cited in our brief cases from the Supreme Court of California, Washington, North Dakota which makes it very clear that on -- in those days and I presume this is true generally of initiative in referendum States that initiative in referendum aside from constitutional amendments are ordinary legislation of the State. The -- that -- that's --
Felix Frankfurter: But not decided by a State in -- of this (Inaudible) it is at most initiative States. The State itself puts out supporting arguments for the adoption.
Oscar H. Davis: Yes. And that's indicate -- that that's -- that the State is going to bear the cost of -- of the -- the publicity campaign for the -- the promotion or defeat of the particular legislation and -- and the Federal Government should not be required to bear that another additional portion through the use of the deduction for ordinary and business expense. Before my time is up, I just like to say in this case that perhaps this Court has never passed upon the issue of whether this business deduction is -- is allowable with respect to an initiative of referendum but three Federal Circuit Courts repeal have done. The two involved in this case and the next case, that is the Eighth and the Ninth Circuit, not only in these two cases but in earlier cases going back 1934 and the Ninth Circuit at least went back to two cases in 1934 and 1936 and the First Circuit in a recent case involving a greyhound referendum in -- in Suffolk County in -- in Massachusetts, the Revere Racing Company case in which there is a referendum as to whether greyhound racing should be continued in the -- in that particular county and publicity campaign was indulged in as here and the expenses of that campaign were not allowed to be deducted under this record.
Potter Stewart: Mr. Davis, were all these cases 23 (a) (1) (A) cases or were they --
Oscar H. Davis: Yes.
Potter Stewart: -- 23 (o) cases?
Oscar H. Davis: No, they were all 23 (a) (1) cases.
Potter Stewart: Because you've addressed a good deal of your argument to the -- to this proposition as though it were a 23 (o) case.
Oscar H. Davis: I have not tried to Mr. Justice. If --
Potter Stewart: Perhaps you have tried to but you haven't for example as -- so far as I know even mentioned the Heininger case.
Oscar H. Davis: Well, I -- I will in -- in the second case and I will --
Potter Stewart: Very well.
Oscar H. Davis: I will -- I will certainly deal with that.
Earl Warren: Colonel Wiener.
Frederick Bernays Wiener: The Court please. I was about to say what Mr. Justice Stewart said namely that Mr. Davis kept as far away from the Heininger case and from the business effect of this initiative on my client's business in his argument as his colleagues did in their brief, and he talked public subvention. This has nothing to do with public subvention of legislative activity anymore than the decision in the Heininger amounted to public subvention of third rates and fraudulent dentists. Now about these advertisements in the allegation which is an afterthought that the source wasn't revealed. In the first place, the argument circulated against the initiative that State expends under the Washington statute particularly pointed out at 100 page, 101 of this record that it would put a lot of people out of business including not only the beer capitalists but the poor working men and the laborers who carted the kegs and who brewed the beer and who turned the handles on the -- at the bar. Now, so the business interests of these people was clearly expressed. Men and women against prohibition, who is to say whether that wasn't an accurate collective description of the people who contributed. The important thing here is that the composition of the group was never mentioned at the trial. It was never litigated. The District Court specifically found that everything that was done was perfectly legitimate. And as a matter of fact, these advertisements were not in the printed record in the Ninth Circuit and weren't brought here in any form until after certiorari was granted. And of course it isn't surprising that being afterthoughts they -- these arguments have some very obvious defects.
Earl Warren: Colonel, could I ask you this? If we should decide that these expenditures are deductible, would it not follow that expenses of a -- an organization like your own putting an initiative measure on the ballot for the benefit of its own business should be deductible?
Frederick Bernays Wiener: Well, possibly so but that's a further step.
Earl Warren: Well -- but --
Frederick Bernays Wiener: That -- if that --
Earl Warren: It seems to me that it would follow. I -- I don't see --
Frederick Bernays Wiener: Well --
Earl Warren: -- what difference it would make --
Frederick Bernays Wiener: -- I --
Earl Warren: -- what side of the fence you're on.
Frederick Bernays Wiener: I --
Earl Warren: There's so many -- there's so many businesses that -- that contend that if there's any regulation of their business at all, it will destroy their business and many of them contend that there are shackles on them at the present time. And if your people decided to initiate a measure and pay the expenses of it to take off the shackles of the businesses they claim, why wouldn't that be just as deductible as this?
Frederick Bernays Wiener: Well, in one sense, it might be, in another sense, it might not be. Now, the McDonald case, the campaign expenditures back in 323 U.S.
Earl Warren: Well, then, I take it as entirely different.
Frederick Bernays Wiener: Yes, but the -- the prevailing opinion said his expenses were incurred not in being a judge but in trying to become one. There might be a difference there but on the other hand, there might also be this line. Suppose a concerned puts out a new product, why can't it -- is its deductibility for advertising expenses limited to existing products or can forth -- put out the ad so on trying to sell that to the public. Also on the shackles, we -- there is a case that we have cited, a very interesting case in the House of Lords where a -- and in England, they have virtually the same ordinary and necessary deductibility provision that we have here. The difference is verbal, there is no difference in substance. This was a firm of sugar manufacturers who campaigned to resist nationalization by the British Parliament. And the House of Lords said the money expended to resist that nationalization was an expense incurred to save their business and therefore it was deductible. But the -- the point here is we don't have to delimit at this time the outer reaches of the contention that my clients are making. All we are relying on is the Heininger case, the doctrine of a right of business self-defense to protect an existing business against destruction, and to protect it against destruction by appealing to the people and not appealing to the legislature. Now, that being so, whether the arguments are lurid as my Brother Davis contends, whether they were "lurid" in response to some rather extreme views put forth in there on the record by the proponents of the -- of the measure, I don't think we have to decide because I take it that's the -- the merit of the argument isn't the deciding factor whether you have the right to make it nor in this case, whether you have the right to deduct the cost.