Court Opinion

ID: 9654066
Source: CourtListenerOpinion
Date Created: 2023-08-23 18:05:14.769374+00
Date Added: 2024-06-11T18:13:05.685036
License: Public Domain

MADDEN, Judge.
These actions are for the recovery of income taxes alleged to have been improperly assessed for the year 1952 against plaintiffs Sam and Rose Pedone, jointly as husband and wife, and against plaintiffs Charles and Marian Pedone, jointly as husband and wife, in the amounts of $2,756.64 and $2,797.64, respectively, plus interest. Since the actions were instituted, plaintiff Sam Pedone has died and his wife, Rose *289Pedone, has been substituted as executrix of his estate.
During the period in question, plaintiffs Sam and Charles Pedone, weré equal partners in the Pedone Lathing & Plastering Company, whose business was prD marily that of a plastering contractor. The operations of the business consisted of employing plasterers and laborers to apply rough and finish coats of plaster to the interior walls and ceilings of buildings. The materials necessary to do the jobs were also supplied by the partnership.
At all times herein pertinent, the above referred to employees were subject to the jurisdiction of the Economic Stabilization Agency and its Wage Stabilization Board, which were organized and operated pursuant to the Defense Production Act of 1950, 64 Stat. 798, 803-812, as amended, 50 U.S.C.A.Appendix, §§ 2061 et seq., 2101-2110. The pertinent provisions of title IV of that act are as follows:
“Sec. 401. * * * Whenever the authority granted by this title is exercised, all agencies of the Government dealing with the subject matter of this title, within the limits of their authority and jurisdiction, shall cooperate in carrying out these purposes.
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“Sec. 405. * * * (b) No employer shall pay, and no employee shall receive, any wage, salary, or other compensation in contravention of any regulation or order promulgated by the President under this title. The President shall also prescribe the extent to which any wage, salary, or compensation payment made in contravention of any such regulation or order shall be disregarded by the executive departments and other governmental agencies in determining the costs or expenses of any employer for the purposes of any other law or regulation.” (Emphasis supplied.)
Specific penalties for violation of the provisions of the act are provided for in section 409 thereof:
“Sec. 409. * * * (b) Any person who willfully violates any provision of section 405 of this title shall be guilty of a misdemeanor and shall, upon conviction thereof, be subject to a fine of not more than $10,000, or to imprisonment for not more than one year, or both. Whenever the President has reason to believe that any person is liable to punishment under this subsection, he may certify the facts to the Attorney General, who may, in his discretion, cause appropriate proceedings to be brought.
“(c) If any person selling any material or service violates a regulation or order prescribing a ceiling or ceilings, the person who buys such material or service for use or consumption other than in the course of trade or business may, within one year from the date of the occurrence of the violation, except as hereinafter provided, bring an action against the seller on account of the overcharge. In any action under this subsection, the seller shall be liable for reasonable attorney’s fees and costs as determined by the court, plus whichever of the following sums is greater: (1) such amount not more than three times the amount of the overcharge, or the overcharges, upon which the action is based as the court in its discretion may determine, but in no event shall.such amount exceed the amount of the overcharge, or the overcharges, plus $10,000, or .(2) an amount not less than $25 nor more than $50 as the court in its , discretion may determine: *
Sections 409(a) and 706 of the act also provide for the availability of injunctions, restraining or other orders of a temporary or permanent nature, whenever any person has engaged or is about to engage in any act violative *290of section 405 or any other section of the act.
The Economic Stabilization Agency on April 3, 1952, issued its General Order No. 15, 17 Fed.Reg. 2994, effective April 5, 1952, dealing with policy and procedure with respect to disallow-ances for violation of title IV of the Defense Production Act, supra, and that order provides in part as follows:
“Sec. 4. Disallowance policy— (a) Purposes ‘of disallowance. The disallowances under the authority granted by sections 2 and 3 may be made for one or more of the purposes of:
“(1) Calculating deductions or the basis for determining gain under the Revenue Laws of the United States;
“(2) Determining costs and expenses under any contract made by or on behalf of the United States, 'either directly or indirectly; * * ”
From March 1, 1952, through September 12, 1952, the partnership paid wages in excess of the máximums established pursuant to the authority granted by section 405(b) of the Defense Production Act quoted above. The partnership’s wage scales for journeyman plasterers ran from about $3.00 per hour to $3.50 per hour during the period when the approved area rate was only $2.97 per hour to $3.07 per hour. The partnership paid its laborers at rates varying from $2.125 per hour to $2.50 per hour when the approved area rate was $2.10 per hour to $2.35 per hour. The record shows that the plaintiffs cooperated with the Enforcement Division of the Wage Stabilization Board in cutting back to the legal area rate upon request to do so. The record also shows that it was the custom of the employer to pay premium rates since it began operations and that the employees had received raises proportionately since that date.
On or about November 25, 1952, the partners entered into a stipulation with the Wage Stabilization Board with respect to the excessive' wage payments. That stipulation contained a provision that the parties agreed that the stipulation be transmitted to the National Enforcement Commission of the Economic Stabilization Agency for the issuance and transmittal of a Certificate of Dis-allowance to the appropriate executive departments or other agencies of the Government pursuant to section 405(b) of the Defense Production Act, supra, and section 4 of the Economic Stabilization Agency’s General Order No. 15, supra. It also contained an agreement that the National Enforcement Commission could forthwith certify to the Commissioner of Internal Revenue that for the purpose of calculating deductions or the basis for determining gains of the employer under the revenue laws of the United States the sum of $13,535 should be disregarded for the employer’s taxable year ending December 31, 1952, and that the deduction should be charged against the income of the partners, plaintiffs in these cases. On December 16, 1952, the National Enforcement Commission sent a Certificate of Dis-allowance to the Commissioner of Internal Revenue and advised him as here-inbefore noted.
In its partnership income return for 1952, the amount the partnership paid its employees for performing the work of plastering was included as part of the partnership’s cost of goods sold and amounted to $257,720.72. This amount included the above $13,535.
The Commissioner of Internal Revenue, purportedly acting pursuant to the Defense Production Act, Economic Stabilization Agency General Order No. 15, and the Certificate of Disallowance, disallowed the inclusion of the $13,535 as part of the partnership’s cost of goods sold and assessed a deficiency against the respective taxpayers in an amount that such an exclusion would reflect.
On or about November 4, 1953, plaintiffs filed a claim for refund in the amounts specified above as the sum sought to be refunded by this suit. Six months expired without any action by *291the Commissioner, and the plaintiffs brought this suit.
The plaintiffs say that the Government, in refusing to subtract the wages actually, though illegally, paid, from the amounts received by the plaintiffs from their plastering contracts, is taxing them, not upon their income, but upon their gross receipts. They make an argument which is not easy to follow, that the services for which the wages were paid were the “goods sold” by them, and that, therefore, the wages were the costs of the goods sold and must be subtracted from the price received in order to determine the income or profit from the contracts. If it were material it should be pointed out that the plaintiffs were not selling services. They were selling finished jobs of plastering, not essentially different from finished books or storm doors. Materials and labor are necessary to produce any of these things, and the materials, improved and increased in value by the labor, are the things to which title passes.
But we think that these refinements of the law of title to property have nothing to do with our problem. There is no doubt that in the ordinary case the wages of the persons who work on the product sol,d are subtractable from the sale price, in determining taxable income. Whether that subtraction is made in this column or that column, or this schedule or that schedule, of the income tax form, does not, in the normal case, affect the amount of the tax. The rare case in which it does make a difference where the labor costs are placed in the income tax form is illustrated by Wood-side Acres, Inc., 46 B. T. A. 1124; affirmed, 2 Cir., 134 F.2d 793. But the question of the order of computation on the tax form, a question of the interpretation and application of the taxing statutes, is not important in relation to the constitutional question of whether certain receipts may be subjected to a Federal income tax at all.
It was not the intent of the 16th Amendment to authorize the Federal Government to lay an income tax upon everything of value that came into the ownership of the potential taxpayer. The common understanding of the word income is the amount which one has gained by his transaction or activity. His gains, not his gross receipts, are his constitutionally taxable income. Our question is whether the line of constitutional taxability is so sharply drawn that Congress has not the power, in order to promote some public policy, to provide that certain costs, the incurring of which is in violation of law or public policy, shall be disregarded in computing gains, i. e., taxable income. If Congress may so provide, the “gain” which is taxed is, one must admit, a fictitious one. If interested parties promise to pay a legislative representative $50,000 to secure the enactment of certain legislation, and if the representative spends $25,000 to bribe legislators in order to obtain or better insure the enactment of the legislation, is it constitutional to tax as income the $50,000, or only the $25,000 which the representative has left after he had spent the other $25,000 for bribes? See Supreme Court discussion in Lilly v. Commissioner, 343 U.S. 90, 72 S.Ct. 497, 96 L.Ed. 769.
Since as early as the Revenue Act of 1918, in sections 214(a) (1) and 234(a) (1)1 Congress has limited the amount which may be subtracted for income tax purposes, on account of salaries and labor, from the selling price of goods, to a “reasonable allowance” for salaries and wages. The Commissioner of Internal Revenue has, when necessary, reduced the amounts, particularly of executive salaries, to what he regarded as reasonable amounts in the circumstances. If the plaintiff’s contention is correct, this provision in the successive statutes has been unconstitutional. We do *292not think that such a constitutional infirmity has existed for all these decades without being discovered and exposed in litigation. Common opinion, and acquiescence by those affected by legislation over a long period is evidence of a community sense that its Government has not exceeded its lawful powers.
If the 16th Amendment gives the Government leeway to refuse to treat as a subtractable cost of goods sold a perfectly lawful wage or salary actually paid, because the Government rightfully concludes that it is unreasonably large, it'would seem that, a fortiori, the Government could accord similar treatment to payments made in violation of law or public policy. If it could not do so, it would find itself in the position of subsidizing the violation of its law or public policy, since a percentage of the improper payment, depending on the tax bracket of the taxpayer, would be recovered by him in the form of a reduction of his income tax. In this type of eases, as in the cases of unreasonable wages and salaries, we understand that the practice of refusing to allow the subtraction of such expenditures is almost as old as the income tax law.
Upon this background of history and common opinion we are not willing to impose the revolutionary doctrine which the plaintiff urges upon us. Our conclusion is that the plaintiffs did not overpay their taxes, and their petitions must be dismissed.
It is so ordered.
JONES, Chief Judge, and WHITAKER, Judge, concur.

. See 26 U.S.C. (1952 ed., Supp. II) 162(a) (1) for the corresponding provision in the Internal Revenue Code of 1954.