Court Opinion

ID: 4483742
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:16.139389+00
Date Added: 2024-06-11T07:58:22.544627
License: Public Domain

Chabot, J., dissenting: The issue is whether the rebates paid or the discount given by petitioner James Alex (a) may be taken into account as downward adjustments to gross income or (b) are to be taken into account, if at all, only as trade or business expenses under section 162(a). Petitioners concede that section 162(c) bars deduction of the rebates and discounts under section 162(a). I agree with the majority that this case is not fairly distinguishable from Schiffman v. Commissioner, 47 T.C. 537 (1967). Under Schiffman, the rebates and discounts would be gross income adjustments — a decision on this issue for petitioners. However, the majority in this case choose to overrule Schiffman. For the following reasons I believe the majority is wrong in overruling Schiffman: (1) The majority’s only stated reason for overruling Schiffman is insufficient. (2) The Court’s holding in this case is likely to have an impact in many cases unrelated to the majority’s only stated reason for overruling Schiffman. (3) Schiffman is not properly distinguishable from the line of cases including Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), and Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173 (1961), recently affirmed by a majority of this Court. (4) The overruling of Schiffman is not required by cases such as Ostheimer v. United States, 264 F.2d 789 (3d Cir. 1959), and Williams v. Commissioner, 64 T.C. 1085 (1975). 1. Insufficiency of Stated Reason for Overruling Schiffman The only reason set forth in the majority opinion for overruling Schiffman is that failure to do so “would open the door to wholesale evasion of the purposes of section 162(c).” During the taxable years dealt with in Schiffman (1961,1962, 1963), section 162(c) provided that no deduction was allowable under section 162(a) for any payment to a foreign official or employee if the making of the payment would be unlawful under United States law if United States law were applicable. This provision was enacted in 1958 (Pub. L. 85-866). The Tax Reform Act of 1969 (Pub. L. 91-172, 83 Stat. 710) amended section 162(c) to provide, in paragraph (1), that the prohibition of section 162(a) deduction was to apply also to illegal payments to domestic governmental officials and employees. The 1969 Act also added a paragraph (2) to forbid section 162(a) deduction of illegal bribes and kickbacks if the taxpayer is convicted of making the illegal bribes or kickbacks. Paragraph (2) was modified by the Revenue Act of 1971 (Pub. L. 92-178, 85 Stat. 525) to remove the requirement of a criminal conviction.1 The 1971 Act also added a paragraph (3)2 to forbid section 162(a) deductions for kickbacks, rebates, or bribes under Medicare and Medicaid. No showing has been made that Schiffman has vitiated the purpose of any part or all of section 162(c) as it was in effect in 1967 (when the Schiffman opinion was published), as it was amended in 1969, or as it was further amended in 1971. This is so despite the fact that, for a decade, respondent acquiesced in Schiffman, this Court cited and relied on Schiffman, and no court criticized Schiffman. Surely, if our 1967 decision in Schiffman has so much capacity for mischief now, that capacity would have manifested itself in some manner which could be clearly demonstrated to this Court. 2. Pittsburgh Milk and Atzingen-Whitehouse The majority draw a line between Schiffman and the Pittsburgh Milk and Atzingen-Whitehouse line of cases. Apart from the reference to section 162(c), the majority opinion does not state why that line should be drawn. In Schiffman (47 T.C. at 541) this Court analyzed “respondent’s efforts to distinguish Atzingen-Whitehouse Dairy, Inc., supra, and Pittsburgh Milk Co., supra,” and concluded that we were not “impressed” with those efforts. The explanation in Schiffman of why it should not be distinguished from the Pittsburgh Milk and Atzingen-Whitehouse line of cases appears to me to be persuasive and need not be set forth at length at this point. The majority opinion does not state why we should reject the explanation in Schiffman and I see no reason for doing so. 3. Effect on Other Situations Although the majority opinion states its concern with respect to the impact of Schiffman on section 162(c), the majority correctly notes that the issue before the Court is as to whether the discount given by petitioner “constitutes a downward adjustment to the amount of gross income received” or is deductible under section 162(a). The distinction between the gross income adjustment route and the business expense deduction route is not affected by the provisions of section 162(c). This distinction applies in many cases which are unrelated to either the reach or the policy of any of the paragraphs of section 162(c).3  The majority do not suggest that their holding in this case is mandated by the statute. The majority do not suggest that their holding must be adopted regardless of the consequences to other taxpayers. Under these circumstances, it seems to be a peculiar exercise of judicial discretion for this Court to overrule Schiffman and change the law without considering the effect of this action on other taxpayers. Indeed, this aspect of the case suggests that the appropriate forum for making the particular change in the law which the majority make is the Congress, and not this Court. 4. Distinction Between Schiffman and Ostheimer, etc. It has been suggested that petitioners must include the amounts of the discounts and rebates in gross income because in Ostheimer v. United States, 264 F.2d 789 (3d Cir. 1959), Williams v. Commissioner, 64 T.C. 1085 (1975), and other cases, this Court and other courts required inclusion in full of commissions in gross income where life insurance agents themselves purchased life insurance policies. This issue, also, was faced squarely by this Court in Schiffman, where the Court distinguished the Ostheimer and Williams type of case as follows: In those cases, it can at least be maintained that the taxpayer did receive something as compensation in connection with his employment, namely, the excess of the fair market value of the item over what he paid for it. By way of contrast, petitioner herein neither realized nor could have realized anything beyond the amount he actually reported as income. [47 T.C. at 542.] This distinction seemed persuasive in 1967; no reason has been offered as to why this Court should now reject the analysis we stated in Schiffman. For the reasons discussed above, I would hold that our decision in Schiffman continues to represent the law and that the issue presented in this case should be decided in favor of the petitioners. Fay and Goffe, JJ., agree with this dissenting opinion.   The disallowance provision also was broadened to apply where the sanction may be “loss of license or privilege to engage in a trade or business” as well as where the sanction may be “a criminal penalty.”    The 1969 Act added a paragraph (3), to provide a special statute of limitations rule. The 1971 Act deleted that paragraph (3), replacing it with the present provision, described above.    For example, this distinction applies to salespeople who give rebates or discounts which are not illegal. The result of the majority opinion in this case will be that such legal rebates and discounts are to be taken into account, if at all, only by way of trade or business expense deductions and not by way of exclusions from gross income. Since Treasury Department regulations provide that employee trade or business expenses of part-time salesmen cannot be deducted in arriving at adjusted gross income (sec. 1.62 — 1(b), Income Tax Regs.), it follows that, under those regulations, any such legal deductions can be taken by part-time salespeople only if they itemize their deductions in arriving at taxable income. Less than 25 percent of individual income tax returns itemize deductions. Tax Reduction and Simplification Act of 1977: H. Rept. 95-27 (Part 1) p. 40,1977-1 C.B. 507; S. Rept. 95-66, p. 50,1977-1 C.B. 479; H. R.(Conf. Rept.) 95-263, p. 24,1977-1 C.B. 519. Consequently, the holding of the majority in this case results in potentially increased tax liabilities for what may be substantial numbers of people under circumstances not remotely related to those dealt with in any of the three paragraphs of sec. 162(c).