CAMMARANO ET UX. v. UNITED STATES
No. 29
Supreme Court of the United States
Argued November 19, 1958. Decided February 24, 1959.
358 U.S. 498
*Together with No. 50, F. Strauss & Son, Inc., of Arkansas v. Commissioner of Internal Revenue, on certiorari to the United States Court of Appeals for the Eighth Circuit.
Oscar H. Davis argued the causes for respondents. On the brief were Solicitor General Rankin, Assistant Attorney General Rice, Joseph F. Goetten and Myron C. Baum.
Hart H. Spiegel filed a brief for the Bay Cities Transportation Co., as amicus curiae.
MR. JUSTICE HARLAN delivered the opinion of the Court.
These cases, coming to us from two different Circuits, present identical issues, and may appropriately be dealt with together in one opinion. The issues involve the interpretation and validity of Treas. Reg. 111, § 29.23 (o)-1 and § 29.23 (q)-1 as applied by the courts below to deny deduction as “ordinary and necessary” business expenses under
The Treasury Regulations in question each provides in pertinent part that no deduction shall be allowed to “sums of money expended for lobbying purposes, the promotion
A brief review of the facts in the two cases is necessary to an understanding of the issues.
No. 29: In 1948 petitioners William and Louise Cammarano, husband and wife, jointly owned a one-fourth interest in a partnership engaged in the distribution of beer at wholesale in the State of Washington. The partnership was a member of the Washington Beer Wholesalers Association. In December 1947 the Association had established a trust fund as a repository for assessments collected from its members to help finance a statewide publicity program urging the defeat of “Initiative to the Legislature No. 13,” a measure to be submitted to the electorate at the general election of November 2, 1948, which would have placed the retail sale of wine and beer in Washington exclusively in the hands of the State.
In preparing their joint income tax return for 1948, petitioners deducted as a business expense the $886.29 paid to the Association‘s trust fund as their share of the partnership assessment. The deduction was disallowed by the Commissioner, and petitioners paid under protest the additional sum thus due and sued in the District Court for refund. That court ruled that the payments made to the trust fund were “expended for . . . the . . . defeat of legislation” within the meaning of Treas. Reg. 111, § 29.23 (o)-1 and were therefore not deductible as ordinary and necessary business expenses under
The initiative measure was defeated in the November election. On its 1950 income tax return Strauss deducted the $9,252.67 as a business expense. The Commissioner disallowed the deduction and Strauss filed a timely petition in the Tax Court seeking a redetermination of the deficiency asserted. That court upheld the action of the Commissioner in disallowing the claimed deduction, and the Court of Appeals unanimously affirmed. 251 F. 2d 724.
Since 1918 regulations promulgated by the Commissioner under the Internal Revenue Code have continuously provided that expenditures for the “promotion or defeat of legislation ...,” or for any of the other purposes specified in the “corporate” Regulation now before us, are not deductible from gross corporate income; and
Petitioners suggest that Textile Mills is not dispositive of the present cases, either as to the applicability of the Regulations upon the facts disclosed by these records or as to the validity of those Regulations under the statute if they are found to be applicable. Essentially, petitioners’ contentions are (1) that the Regulations cannot properly be construed as applicable to expenditures made in connection with efforts to promote or defeat the passage of legislation by persuasion of the general public as opposed to direct influence on legislative bodies, that is “lobbying“; (2) that in any case the Regulations are inapplicable to expenditures made in connection with initiative measures; and (3) that if construed as applicable to the facts here presented the Regulations are invalid as contrary to the plain terms of
We need not be long detained by the question of the applicability of the Regulations to petitioners’ expenditures. First, we see no justification for reading into these regulatory provisions the implied exceptions which petitioners would have us there find. We cannot accept petitioners’ argument that Textile Mills should be read as limiting such provisions to direct dealings with legislators, insidious or otherwise. The deductions whose propriety was before the Court in that case were for expenditures, characterized by the Court of Appeals as being for “matters of publicity, including the making of arrangements for speeches, contacting the press, in respect of editorial comments, and news items,” and for the preparation of “brochures” involving “a comprehensive study of the history of the treatment of persons and property in war,” 117 F. 2d 62, 63, 65, all designed to influence
Likewise unpersuasive is petitioners’ suggested distinction between expenses incurred in attempting to promote or defeat legislation pending before legislatures and those incurred in furthering or combatting an initiative measure. We think that initiatives are plainly “legislation” within the meaning of these Regulations. Had the
A contrary reading of the Regulations would, indeed, be anomalous, for it would mean that expenses of publicity campaigns directed to the public to influence it in turn to persuade its legislative representatives to vote for or against pending bills would be encompassed by the Regulations and denied deductibility, whereas a less-
The cornerstone of petitioners’ argument is that Treas. Reg. 111, § 29.23 (o)-1 and § 29.23 (q)-1 are invalid if interpreted to apply to the expenditures here at issue. It is contended that sums expended by a taxpayer to preserve his business from destruction are deductible as ordinary and necessary business expenses under the Code as a matter of law, and that therefore a regulation purporting to deny deductibility to such expenditures is plainly contrary to the statute and ipso facto invalid. Petitioners rely upon Commissioner v. Heininger, 320
We do not think that Heininger governs the present cases, nor that it establishes as broad a rule of law as petitioners suggest. In Heininger this Court held no more than that expenditures without which a business enterprise would inevitably suffer adverse effects, and the granting of deductibility to which would frustrate no “sharply defined national or state policies,” 320 U. S., at 473 (see also Commissioner v. Sullivan, 356 U. S. 27), were deductible as ordinary and necessary business expenses under the statute.11 Here the deductions sought are prohibited by Regulations which themselves constitute an expression of a sharply defined national policy, further demonstration of which may be found in other sections of the Internal Revenue Code.12
As was said in Textile Mills, “the words ‘ordinary and necessary’ are not so clear and unambiguous in their meaning and application as to leave no room for an interpretative regulation. The numerous cases which have come to this Court on that issue bear witness to that.” 314 U. S., at 338. In the present cases there is before us regulatory language of more than 40 years’ continuous duration expressly providing that sums expended for the activities here involved shall not be considered an ordinary and necessary business expense under the statute. The provisions of the Internal Revenue Code which underlie the Regulations have been repeatedly re-enacted by the Congress without the slightest suggestion that the
In 1934 the Court of Appeals for the Ninth Circuit denied deduction to expenses incurred in connection with a referendum which would, if passed, have increased the taxpayer‘s business. Old Mission Portland Cement Co. v. Commissioner, supra.14 And in 1936 the same court in Sunset Scavenger Co. v. Commissioner, supra, reversed the Board of Tax Appeals to hold that the regulatory language now before us, through repeated re-enactment by Congress of the underlying legislation, already had acquired the force of law, and applied it to deny deductibility to expenditures made by an incorporated association of garbage collectors for a publicity program directed to the general public urging the defeat of legislation which would have injured the business of the Association‘s membership. The court recognized that the Board of Tax Appeals had twice previously held similar expenditures deductible so long as not made for an illegal purpose,15 but pointed out that in both of those cases the effect of the Regulation had been entirely disregarded, and that
It is also noteworthy that Congress, in its 1954 re-enactment of the Internal Revenue Code, again adopted the “ordinary and necessary” provision without substantive change,16 following consistent rulings by the courts subsequent to the 1939 re-enactment holding these Regulations applicable to sums spent in efforts to persuade the general public of the desirability or undesirability of proposed legislation affecting the taxpayer‘s business. See Textile Mills; American Hardware & Eq. Co. v. Commissioner, supra; Roberts Dairy Co. v. Commissioner, supra; McClintock-Trunkey Co. v. Commissioner, supra. Although the tax years involved in the cases before us are 1948 and 1950, and a 1954 re-enactment of course cannot conclusively demonstrate the propriety of an administrative and judicial interpretation and application as made to transactions occurring before the re-enactment, the 1954 action of Congress is significant as indicating satisfaction with the interpretation consistently given the statute by the Regulations here at issue and in demonstrating its prior intent. Cf. United States v. Stafoff, 260 U. S. 477, 480.
Under these circumstances we think that the Regulations have acquired the force of law. This is not a case where the Government seeks to cloak an interpretative regulation with immunity from judicial examination as to conformity with the statute on which it is based simply because Congress has for some period failed affirmatively to act to change the interpretation which the regulation gives to an otherwise unambiguous statute. Cf. Jones v. Liberty Glass Co., 332 U. S. 524. Nor is it a case where
In these circumstances we consider that what was said in Massachusetts Mutual Life Ins. Co. v. United States, 288 U. S. 269, 273, applies here:
“This action [of Congress in re-enacting a statute] was taken with knowledge of the construction placed upon the section by the official charged with its administration. If the legislative body had considered the Treasury interpretation erroneous it would have amended the section. Its failure so to do requires the conclusion that the regulation was not inconsistent with the intent of the statute [citations] unless, perhaps, the language of the act is unambiguous and the regulation clearly inconsistent with it. [citation].” 18
This Court has heretofore recognized that the “ordinary and necessary” language of the Code is hardly unambiguous, see Textile Mills Securities Corp. v. Commissioner,
The statutory policy is further evidenced by the treatment given by Congress to the tax status of organizations, otherwise qualified for exemption as organized exclusively for “religious, charitable, scientific, literary, or educational purposes,” which engage in activities designed to promote or defeat legislation. As early as 1934 Congress amended the Code expressly to provide that no tax exemption should be given to organizations, otherwise qualifying, a substantial part of the activities of which “is carrying on propaganda, or otherwise attempting, to influence legislation,” and that deductibility should be denied to contributions by individuals to such organizations. Revenue Act of 1934, §§ 101 (6), 23 (o) (2), 48 Stat. 700, 690. And a year thereafter, when the Code was for the first time amended to permit corporations to deduct certain contributions not qualifying as “ordinary and necessary” business expenses, an identical limitation was imposed. Revenue Act of 1935, § 102 (c), 49 Stat. 1016. These limitations, carried over into the 1939 and 1954 Codes,19 made explicit the conclusion derived by Judge Learned Hand in 1930 that “political agitation as such is outside the statute, however innocent the aim .... Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them.” Slee v. Commissioner, 42 F. 2d 184, 185. The Regulations here contested appear to us to be but a further expression of the same sharply defined policy.
Petitioners suggest that if the Regulations are construed to deny them deduction, a substantial constitutional issue under the First Amendment is presented.
Affirmed.
MR. JUSTICE DOUGLAS, concurring.
Valentine v. Chrestensen, 316 U. S. 52, 54, held that business advertisements and commercial matters* did not enjoy the protection of the First Amendment, made
In spite of the overtones of Valentine v. Chrestensen, supra, I find it impossible to say that the owners of the present business who were fighting for their lives in opposing these initiative measures were not exercising First Amendment rights. If Congress had gone so far as to deny all deductions for “ordinary and necessary business expenses” if a taxpayer spent money to promote or oppose initiative measures, then it would be placing a penalty on the exercise of First Amendment rights. That was in substance what a State did in Speiser v. Randall, 357 U. S. 513. “To deny an exemption to claimants who engage in certain forms of speech is in effect to penalize them for such speech.” Id., at 518. Congress, however, has taken no such action here. It has not undertaken to penalize taxpayers for certain types of advocacy; it has merely allowed some, not all, expenses as deductions. Deductions are a matter of grace, not of right. Commissioner v. Sullivan, 356 U. S. 27. To hold that this item of expense must be allowed as a deduction would be to give impetus to the view favored in some quarters that First Amendment rights must be protected by tax exemptions. But that proposition savors of the notion that First Amendment rights are somehow not fully realized unless they are subsidized by the State. Such a notion runs counter to our decisions (Grosjean v. American Press Co., 297 U. S. 233, 250; Murdock v. Pennsylvania, 319 U. S. 105, 112; Follett v. McCormick, supra, at 578), and may indeed conflict with the underlying premise that a complete hands-off policy on the part of government is at times the only course consistent with First Amendment rights. See McCollum v. Board of Education, 333 U. S. 203.
With this addendum, I concur in the opinion of the Court.
Notes
Ҥ 23. Deductions from gross income. In computing net income there shall be allowed as deductions:
“(a) Expenses.
“(1) Trade or Business Expenses.
“(A) In General. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business....”
The prohibition against individual deductibility of such expenditures first appears in Art. 23 (o)-1 of Treas. Reg. 101, promulgated under the Revenue Act of 1938, and thereafter in §§ 19.23 (o)-1, 29.23 (o)-1, and 39.23 (o)-1 of Treas. Reg. 103, 111, and 118, respectively, promulgated under the Internal Revenue Code of 1939.
In the proposed Income Tax Regulations under the 1954 Code the prohibitions are consolidated in § 1.162-15.
“Art. 2, Sec. 1. Legislative Powers, Where Vested—The legislative authority of the state of Washington shall be vested in the legislature, consisting of a senate and house of representatives, which shall be called the legislature of the State of Washington, but the people reserve to themselves the power to propose bills, laws, and to enact or reject the same at the polls, independent of the legislature....”
Amendment 7 of the Arkansas Constitution contains a virtually identical provision.
The Tax Court appears to have modified its view since the Smith case even as to expenditures made in connection with constitutional amendments. See Mosby Hotel Co. v. Commissioner, decided October 22, 1954, P-H 1954 TC Mem. Dec. ¶ 54,288. And the Commissioner has recently withdrawn his acquiescence in the Smith decision. See Rev. Rul. 58-255, 1958-1 Cum. Bull. 91.
After this Court‘s decision in Textile Mills the Board of Tax Appeals recognized that the Regulation was applicable to expenditures incurred in a “proper and legal attempt to prevent [business] injury” by endeavoring to secure the defeat of legislation. Bellingrath v. Commissioner, 46 B. T. A. 89, 92.