Opinion ID: 1938987
Heading Depth: 2
Heading Rank: 1

Heading: Deductibility of Legal Expenses

Text: A blind vendor's net proceeds from the operation of a vending facility are used as a basis for determining the amount of the administrative levy each vendor is assessed. 20 U.S.C. § 107b(3). Although not defined in the Act, net proceeds are defined by regulations as the amount remaining from the sale of articles or services of vending facilities, and any vending machine or other income accruing to blind venders after deducting the cost of such sale and other expenses .... 34 C.F.R. § 395.1(k) (emphasis added). In a 1984 letter responding to an inquiry from RSA as to whether these other deductible expenses included local taxes and legal fees incurred by a vendor in operating a vending facility, the regional commissioner of the Rehabilitation Services Administration of DOE, Ralph N. Pacinelli, interpreted the regulations as prohibiting the deduction of legal fees. Pacinelli stated: With regard to the use of gross profit to pay business taxes and legal fees, we provide the following understanding. The D.C. Unincorporated Business Franchise Tax is a required business tax which all vendors must pay to maintain their vending facility operations. Therefore, it seems appropriate that such a tax would be covered under the guide for deducting operating expenses, as outlined in the instructions for completing [form] RSA-15.... Pursuant to the above clarification, it appears that legal fees would not be considered required operating expense [sic], and therefore could not be charged against gross income. Legal fees acquired by a vendor as a result of a grievance are considered a personal expense and thus the payment should appropriately be the vendor's responsibility. In making this determination, the Commissioner relied in part on previously issued instructions for completing form RSA-15. [12] These instructions stated that the operating expenses to be deducted from gross income should include but not be limited to non-reimbursed expenditures by the vendor for state approved purchases of equipment, repairs and maintenance of equipment; merchandise and supplies; wages to stand assistants or relief operators; rent; utilities; various kinds of insurance such as public liability, theft, fire, social security, and workmen's compensation; extermination or pest control services; delivery services; business licenses; state and local taxes and janitorial services. Based upon this interpretation of legal fees as personal expenses, RSA refused to allow Schlank to deduct her legal fees as an operating expense. In her motion for summary judgment, Schlank contended that the fees were incurred to protect her license and while litigating her rights to certain income and business opportunities; they therefore were necessary business expenses which, under basic and normally accepted accounting principles, should be deductible when determining gross and net profits. Since she had been forced to seek legal protection in order to preserve her business interests, she argued, her expenses could not properly be considered personal. While acknowledging that Schlank's arguments had force, Judge Weisberg concluded that the agency's less liberal reading of the statute was at least as persuasive, and so he deferred to what he considered a reasonable interpretation of the Act by an agency charged with its administration. In so doing, the judge agreed with the agency's argument that if Schlank's interpretation were adopted, it would favor vendors who freely resort to litigation seeking to vindicate what they believe to be their legal rights, to the possible detriment of all other vendors who would, in effect, be forced to subsidize these activities.... The judge therefore concluded that the agency could fairly characterize legal fees as personal expenditures not deductible as a business expense in computing the net proceeds subject to levy. In Chevron, U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837, 843-44, 104 S.Ct. 2778, 2782-83, 81 L.Ed.2d 694 (1984), the Supreme Court held that where an administrative agency has construed a statute with regard to an issue upon which Congress has not spoken, the only question for a reviewing court is whether that interpretation reflects a permissible and reasonable construction of the statute. The court need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the one the court would have reached if the question had arisen in a judicial proceeding. Id. at 843 n. 11, 104 S.Ct. at 2783 n. 11. This court follows the same principle. E.g., Superior Beverages, Inc. v. District of Columbia Alcoholic Beverages Control Board, 567 A.2d 1319 (D.C.1989) (this court should defer to any reasonable construction of a statute even if our interpretation would be different); District of Columbia Dep't of Corrections v. Teamsters Local No. 246, 554 A.2d 319, 323 (D.C.1989) (court will defer to a reasonable interpretation of a statute by an agency charged with its enforcement if the reading is not inconsistent with the statute itself); Hager v. District of Columbia Dep't of Consumer and Regulatory Affairs, 475 A.2d 367, 368 (D.C. 1984) (same). Thus, the court's role is not to substitute its construction of the statute for that of DOE and followed by RSA, but to determine whether, in the context of the Randolph-Sheppard program, that interpretation was a reasonable one. We conclude that it was. On appeal Schlank relies primarily on the argument that, since it is black letter law that legal fees incurred by a taxpayer in the course of operating a business are deductible business expenses for both federal and state taxation purposes, see 26 U.S.C. § 162(a) (1988); D.C.Code § 47-1803.3(a)(1) (1987), it was unreasonable for RSA to deny her the same deduction for the purposes of the administrative levy. [13] In construing the Act, however, neither DOE nor RSA was bound by the normal classification of legal expenses for taxation purposes. [14] They were free to reach a different result that was reasonable and consistent with the Act itself. The administrative levy assessed against the net proceeds of vendor sales is very different from an ordinary tax. The levy is placed into a fund for the exclusive benefit of participating vendors, including appellant, where it is used for such things as health insurance, paid sick leave, vacation time and a guaranteed minimum income to operators of vending facilities. 20 U.S.C. § 107b(3). As structured by the Act, the levy is an accommodation between a key purpose of the Act of stimulating the blind to greater efforts in striving to make themselves selfsupporting, 20 U.S.C. § 107(a), and a recognition that in important respects the unsighted vendor still requires a governmental safety net. Hence, for example, while levied funds must be set aside to subsidize needy vendors (to [a]ssur[e] a fair minimum of return to vendors), they may be set aside for items such as pension funds, health insurance, and paid vacation time only if a majority of the licensed vendors so agree. See 34 C.F.R. § 395.9(b). This delicate balance in the Act between vendor autonomy and residual dependency on government support demonstrates that the levy serves purposes quite distinct from a general tax assessment, and so its collection without allowance for deduction of legal expenses is not, as appellant maintains, a penalty against vendors who assert self-sufficiency by pursuing their legal rights. Schlank may be correct that her struggle with the agency has yielded results beneficial ultimately to all licensed vendors, but we cannot hold unreasonable the agency's conclusion that deductibility of expenses that in the main are a matter of personal choice and not incurred by all vendors would risk depleting the fund at the expense of the beneficiary class in general. [15] Because DOE's interpretation of the Act and regulations and RSA's reliance on that interpretation were reasonable and consistent with the Act itself, District of Columbia Dep't of Corrections v. Teamsters Local No. 246, supra, 554 A.2d at 323, we must affirm the grant of summary judgment.