Document: 343 U.S. 90 72 S.Ct. 497 96 L.Ed. 769 LILLY et ux.v.COMMISSIONER OF INTERNAL REVENUE. No. 158. Argued Dec. 3, 1951. Decided March 10, 1952. Mr. Randolph E. Paul, New York City, for petitioners. Philip B. Perlman, Sol. Gen., Washington, D.C., respondent. Justice BURTON delivered the opinion of Court. 1 Petitioners, Thomas Lilly and Helen W. Lilly, his wife, were engaged in optical business North Carolina Virginia 1943 1944. Pursuant to agreements reflecting an established widespread practice that industry those localities, they paid respective doctors, who prescribed eyeglasses which sold, one-third retail sales price received glasses. The question here is whether such payments deductible by petitioners as ordinary necessary expenses under § 23(a)(1)(A) Internal Revenue Code.1 For reasons hereafter stated we hold were. 2 Petitioners owned operated partiners City Optical Company with offices Wilmington, Fayetteville Greensboro, Carolina, Richmond, Virginia. Petitioner also Duke Fayetteville. 3 Since long before 1922 when eye locality a substantial extent throughout comparable communities elsewhere United States, not only examined their patients' eyes glasses, but sold them doctors bought frames lenses at wholesale, prepared fitted glasses patients profit. 4 other opticians offered fill prescriptions supply fit patients. To compensate loss profit on sales, generally While information this arrangement was volunteered patients, it freely disclosed inquiry. made ask bring new verification enable see properly fitted. Without further charge, whatever reexaminations modifications needed. 5 income tax purposes, treated carrying deducted from gross incomes. turn, included taxable However, 1944, respondent Commissioner disallowed these deductions petitioner's returns thereby increased petitioners' follows: 1942..........$57,063.452 1943.......... 61,601.95.$6,568.87 1944.......... 60,021.65. 4,798.35 6 Tax Court sustained ground contrary public policy. One judge dissented. 14 T.C. 1066. resulting deficiencies totaled $124,107.78. Appeals affirmed. 188 F.2d 269. We granted certiorari, 342 808, 45, resolve disputed statutory construction pass upon application facts principles announced Textile Mills Corp. Securities v. Revenue, 314 326, 62 272, 86 249, Heininger, 320 467, 64 88 171. 7 are dispute. monthly regular course business. Under long-established localities where did business, payments, normal, usual customary size character. transactions arose common or frequent occurrence type involved. They reflected nationwide practice.3 Consequently, 'ordinary' accepted meaning word. See Deputy Du Pont, 308 488, 495, 60 363, 367, 84 416; Welch Helvering, 290 111, 114, 54 8, 9, 78 212. 8 likewise 'necessary' It through making had been able establish Discontinuance would have meant, either resumption sale doctors' reference competing shared profits them. Several testified recommended competitor, American Company, simultaneously. Both sharing substantially same basis. If stopped while continued them, there no reason doubt thereafter omitted recommendation nonpaying optician. In 1944 continuance essential expenses. As has said legal somewhat circumstances, 'To say conduct involved extraordinary unnecessary be ignore ways forms speech prevailing world.' 472,4 253, 9 There statement Act, its accompanying regulations, prohibiting deduction violate frustrate 'public policy.' 10 instant case finding fact Commissioner's disallowance deductibility because held that, matter law, contracts violated policy.5 11 do us issue presented expenditures themselves federal state law incidental violations.6 could argued outlawed expenditures, virtue illegality, 'ordinary necessary' within 23(a)(1)(A).7 12 interpretation section Treasury Regulation certain lobbying purposes. doing so, referred some types condemned it, interpretative regulation itself effect many years congressional acquiescence. does come precedent. 13 171, asked go disallow attorneys' fees reasonable amount lawfully incurred licensed dentist (1) resisting issuance Postmaster General fraud order destroyed dentist's (2) connection subsequent proceedings judicial review controversy. services resulted injuntion stayed during time received, final result litigation unsuccessful taxpayer. Nevertheless, permitted taxpayer's reviews position Bureau Board courts. Id., pages 473—474, page 253. refers narrowing 'the language used Section 23(a) consequences might sharply defined national policies proscribing particular conduct.' (Emphasis supplied.) 473, concludes 'language contains express lawful unlawful character declared deductible. * respondent's denied deduction, must allowance 39 U.S.C. §§ 259 732, U.S.C.A. 259, authorize orders.' 474, 254. Neither decision nor rule suggested requires case. Assuming sake argument meanings words may 'frustrate conduct', supra, nevertheless now fall class. frustrated evidenced governmental declaration doctors. 15 Customs actions organized professional organizations appropriate place determining factual sense what given place. example, materially affect competitive standards determine necessary. Evidence admissible issue. not, however, constitute 'sharply policies' frustration may, preclude expense 23(a)(1)(A). 16 voice approval ethics policy us. recognize province legislatures translate progressive into note legislation passed recent states outlawing considered.8 activities medical profession dealing subject.9 A abolition will reflect parties without retroactive hardship complained here.10 17 judgment reversed cause remanded directions remand instructions set aside insofar inconsistent opinion. 18 so ordered. 19 Judgment instructions. 20 DOUGLAS took part consideration '§ 23. Deductions income. 'In computing net shall allowed deductions: '(a) Expenses.— '(1) Trade expenses.— '(A) General.—All year any trade *.' 53 Stat. 12, 56 819, 26 23(a)(1)(A), 1942 calculation sec. Current Payment Act 1943, 57 145-149, 1622 note. more than 250 outlets distributed over 47 states, followed practice, both competition elsewhere. also, Snell, Some Principles Medical Ethics Applied Practice Ophthalmology, 117 A.M.A.J. 497—499 (1941); 'What Do You Pay Eyeglasses?' Fortune Magazine, Oct. 1940, p. 103. '* expense, he income, tax. gives life necessary.' Heininger Cir., 133 567, 570. 'We conclude between two businesses, composed petitioners, oculists 1086. cover penalties Rvenue Longhorn Portland Cement Co., 148, 276 (penalties violation antitrust laws); Great Northern R. Co. 40 372 against railroad violating statutes regulations). Cf. Jerry Rossman 175 711, 713—714 (where overcharge Emergency Price Control 50 U.S.C.A.Appendix, 901 seq., Act). incident defense taxpayer charges illegal conduct, 567; Kornhauser 145, 48 219, 505; supra; Mertens, Law Federal Income Taxation, 384—389; generally, Note, Harv.L.Rev. 852—860. Government calls attention prosecution 1946, violations Sherman Antitrust 1—7, note, due price-fixing interstate commerce. consent decrees cases lend little support Government's contention fact, recitals tend confirm existence long-established, widespread, undisturbed kind described. States Bausch & Lomb 97 F.Supp. 71; 66; House Vision-Belgard-Spero, Inc., Civil Action 48C 607; Uhlemann Illinois, 608 (all U.S.D.C.N.D.Ill.). Remington's Wash.Rev.Stat., 1949 Supp., 10185—14; Deering's Cal. Business Professions Code, 1951, 650, 652; N.C.Laws c. 1089, 21, present trend lead complete practice. accomplished largely direct action qualified justification. This gradually increasing opposition bears witness times Resolution Ophthalmology Association adopted June, 1924, then A.M.A. Delegates, quoted 498 Address Chairman Albert C. M.D., (1943 1949); editorials 131 1128 (1946); 136 176—177 (1948). case, courts below, amounted 56% 72% thus taxed transferred ago it.

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