Court Opinion

ID: 4481732
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:03.896969+00
Date Added: 2024-06-11T14:54:00.921490
License: Public Domain

Raum, /., concurring: I agree with the result in this case, but for a wholly different reason, namely, that to the extent that the expenses incurred in the operation of petitioner’s recreational facilities exceeded its revenues therefrom they failed to qualify as “ordinary and necessary” expenses and were therefore not deductible under section 162. The underlying support for this view was spelled out at length in our opinion in Anaheim Union Water Co., 35 T.C. 1072. I recognize, of course, that our decision was reversed by the Ninth Circuit, 321 F. 2d 253; and if the present case were within that circuit we would be obliged to follow it here. Cf. Jack E. Golsen, 54 T.C. 742. But this case is appealable to the Second Circuit, and since I think- that our own opinion in Anaheim was sound, I would articulate again the reason that led us to the conclusion therein, so that the matter might thus be brought into sharper focus. To be sure, the Commissioner has not relied upon that reason in this case, but it has been firmly established that a deficiency may be approved on the basis of reasons other than those relied upon by the Commissioner and indeed even where his reasons may be incorrect. Blansett v. United States, 283 F. 2d 474, 478-479 (C.A. 8); Bernstein v. Commissioner, 267 F. 2d 879, 881-882 (C.A. 5); Acer Realty Co. v. Commissioner, 132 F. 2d 512, 514-515 (C.A. 8); Alexander Sprunt & Son v. Commissioner, 64 F. 2d 424, 427 (C.A. 4); Crowell v. Commissioner, 62 F. 2d 51, 53 (C.A. 6); J. & O. Altschul Tobacco Co. v. Commissioner, 42 F. 2d 609, 610 (C.A. 5); Hughes v. Commissioner, 38 F. 2d 755, 757 (C.A. 10); Wilkes-Barre Carriage Co., 39 T.C. 839, 845-846, affirmed 332 F. 2d 421 (C.A. 2); John I. Chipley, 25 B.T.A. 1103, 1106; Edgar M. Carnrick, 21 B.T.A. 12, 21; cf. Helvering v. Rankin, 295 U.S. 123, 132-133. I turn therefore to Anaheim. There, the taxpayer, a nonexempt water company, sold water exclusively to its shareholders at prices considerably below its expenses in relation thereto. However, it received substantial income from the successful exploitation of oil deposits in its property, and it fixed its water charges to its shareholders below cost in such manner that the excess of its water expenses over water revenues would be approximately equal to its oil profits. In effect, the corporation thus sought to avoid tax upon its oil income and concomitantly to distribute its oil profits tax-free to its shareholders by charging them less than cost for the water that it was selling to them. We sustained the Commissioner’s determination to the effect that to the extent that the water expenses exceeded the water revenues they were not deductible. In so holding, we said (35 T.C. at 1076-1077): Although the question for decision has been variously stated by the parties from time to time — and subtle differences may perhaps be thought to turn upon the form of the statement — we think that the real issue before us is whether the water costs or expenses incurred by Anaheim are ordinary and necessary expenses on this record to the extent that they exceeded the amounts which Anaheim obtained for such water from its shareholders. We hold that to the extent of such excess they do not qualify as “ordinary and necessary” expenses. The question is not whether such expenses might be “ordinary and necessary” in other situations. The question rather is whether such expenditures in this case, known in advance to be in excess of what the corporation would obtain for the water sold to its shareholders, can fairly be classified as “ordinary and necessary.” We think that they are neither “ordinary” nor “necessary.” Indeed, it appears to us to be “in a high degree extraordinary,” cf. Welch v. Selvering, 290 U.S. 111, 114, for a corporation to incur business expenses in connection with goods or services in an amount greatly in excess of what it knows it will obtain for such goods or services. To be sure, exceptional circumstances may exist in other situations that would justify the deduction where expenses exceed anticipated income. For example, extraordinarily large outlays may be made by a business when introducing a new product where the reasonable expectation exists that sales in later years will more than compensate for losses in the early years. But no such exceptional circumstances exist here. In essence, the entire setup is merely a device to distribute the oil and other unrelated income to the shareholders. Although Anaheim was clearly not incorporated for that purpose in 1884, the fact nevertheless remains that it has been used for that purpose in recent years.2 Cf. United States v. Joliet & Chicago Railroad Co., 315 U.S. 44, where the controlling indenture was executed in 1864. And we are of the opinion that the water expenses incurred herein in excess of the amounts which the directors reasonably expected to obtain for the water were not “ordinary and necessary” expenses, but were merely part of a plan to distribute otherwise taxable income to the shareholders. [Footnote omitted.] Notwithstanding the Ninth Circuit’s reversal I think that reasoning is correct, and that it finds at least some support in such cases as International Trading Co. v. Commissioner, 275 F. 2d 578 (C.A. 7), where expenses incurred by a corporation in respect of certain lakeside property leased to its principal shareholders exceeded the rents therefrom. The Seventh Circuit disallowed the claimed deduction of the difference between the expenses and rent as an ordinary and necessary expense, stating (p. 585) “the property was purchased and improved with the knowledge that it would not earn a profit, and was not expected to earn a profit, but was maintained primarily for the personal benefit of the families of the corporation’s stockholders, without a corresponding benefit to the corporation.” Although there may be differences in detail, the instant case presents substantially the same situation as was before us in Anaheim. Here, petitioner deliberately determined the rates it would charge for its recreational facilities in such manner that they would inevitably yield revenues in an amount less than the expenses incurred to produce such revenues, and the difference was absorbed by the profits from its lumber business. I cannot believe that the statute was ever intended to support the bizarre result for which petitioner seeks approval here; to the extent that the expenses exceeded the revenues from the recreational facilities they were not “ordinary and necessary” within the meaning of the governing statutory provisions. Scott, Hott, Tannenwald, and Simpson, agree with this concurring opinion.   In the scheme of the tax the obvious purpose of Congress is to tax net business income. The business expense deduction provided in sec. 162 is a reflection of that purpose, and its manifest function is to assist in the determination of net business income. Obviously, expenses not connected with profit endeavors have no relevance to a determination of net income from profit-motivated endeavors, and their allowance, therefore, is inconsistent with and distorts, rather than assists, in the determination of net business income.