300 F.2d 453 | Ct. Cl. | 1962
Lead Opinion
Plaintiff sues to recover an alleged overpayment of federal corporation income taxes for the year 1945 in the amount of $27,588 plus interest. The issue basic to liability is whether the plaintiff, a government contractor, may ■deduct as an “ordinary and necessary” business expense
From 1941 through 1943 the plaintiff’s Bussman Manufacturing Division was engaged in the performance of United States Government contracts calling for the manufacture of fuses and related products; each of these contracts, as required by the Walsh-Healey Public Contracts Act, 49 Stat. 2036, 41 U.S.C.A. § 35 et seq., contained provisions representational in nature but in effect prohibiting the employment of boys under 16 and girls under 18 yéars of age in the performance of the contract.
“Any breach or violation of any of the foregoing representations and .stipulations [including the representation relating to child labor] shall render the party responsible therefor liable to the United States of America for liquidated damages, . in addition to damages for any other breach of the contract, in the sum of $10 per day for each male person under 16 years of age or each female person under 18 years of age, * * * knowingly employed in the performance of the contract. * * * ” Finding No. 5.
Beyond question large numbers of underage girls and one underage boy, about 12% of the total force, had been employed by Bussman during the period in question. The foreladies were instructed not to permit underage employees to work on government contracts, but there was no evidence as to the success of this plan in forestalling violations of the agreement. Contrary to the regulations promulgated by the Secretary of Labor under § 4 of the Act, no records had apparently been kept which would show which individuals worked on these contracts. Under such circumstances the regulations provided:
“* * shall be presumed until affirmative proof is present to the contrary that all employees in the plant, from the date of award of any such contract until the date of delivery of the materials, supplies, articles or equipment, were engaged on such Government contract.” 41 CFR 50-201.501 (c).
In June of that year a complaint against plaintiff and certain of its officers charging a violation of the child labor provisions was filed within the Department of Labor. In December plaintiff offered $68,965 (10% of the amount alr leged to be due)
Recent decisions of the Supreme Court have adumbrated the issue now before us. Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27, 78 S.Ct. 512, 2 L.Ed.2d 559; Tank Truck Rentals v. Commissioner, 356 U.S. 30, 78 S.Ct. 507, 2 L.Ed.2d 562; Hoover Motor Express Co. v. United States, 356 U.S. 38r 78 S.Ct. 511, 2 L.Ed.2d 568. We believe that under these cases deduction of amounts assessed as penalties pursuant to specific legislation virtually always must be treated as frustrating “sharply defined national or state policies” unless those charged with the administration or interpretation of the statute have indicated that deductibility will not undercut the governmental punitive purpose.
The Secretary of Labor did characterize these Walsh-Healey Act payments as “remedial” and not penal in nature. In re Evalyn Fehrman De Wolfe, Case No. PC-250, April 15, 1946, 6 Wage and Hour Cases 1165. But we believe that he mistook the congressional purpose. The legislative history makes clear that these payments were designed as penalties. S.Rep.No. 1157, 74th Cong., 1st Sess. 2; H.R.Rep.No. 2946, 74th Cong., 2d Sess. 5; 79 Cong.Rec. 12074 (Senator Walsh); 80 Cong.Rec. 10002 (Representative Healey). Under such circumstances the Secretary’s determination is not determinative of the punitive nature of the enactment.
In the present context a penalty is any assessment not compensatory in nature and not designed to prevent unjust enrichment, as were the exactions of over
To be sure amounts paid by a contractor to a private party as “penalties” for failure to comply with its obligations under the contract would ordinarily be deductible since no specific legislation there expresses a state policy. Cf. Camloc Fastner, Inc. v. Commissioner, 10 T.C. 1024. Similarly amounts paid to a governmental agency as penalties to secure performance of a contract could properly be regarded as a “necessary” expense of doing business within the meaning of the Tank Truck case even if prescibed by statute. But here the sums paid under the Walsh-Healey provisions of the contract are wholly unrelated to the specific objectives designed to be secured by that particular agreement. The Government in requiring that the clauses in question be inserted in its contracts was not acting like a private purchaser of fuses, but was using, legitimately, its far-reaching power to contract as it pleases
Sums paid in compromise of such a liability take on the character of the underlying asserted obligation and in this case are similarly nondeductible. See Commissioner of Internal Revenue v. Longhorn Portland Cement Co., 148 F.2d 276 (C.A.5th). There is no force to the argument that since counsel fees may be deductible, because state or national policy would not thereby be frustrated,
It is so ordered.
JONES, Chief Judge, and DURFEE, Judge, concur.
. The Internal Revenue Code of 1939 provided a deduction for “[a]ll the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other com
. This claim for refund was filed with the District Director in 1953, more than 3 years after the return was filed and more than 2 years from the time the tax was paid. Therefore, § 322(b) (1) of the 1939 Code would ordinarily bar recovery. Plaintiff relies upon § 3801(b) (6) of the 1939 Code which provides that under certain circumstances an adjustment in the tax shall be made if a determination disallows a deduction “which should have been allowed to, but was not allowed to, the taxpayer for another taxable year * * Plaintiff had filed a suit for refund with respect to its 1944 excess profits tax in the federal District Court for the Northern District of Illinois on the ground that the deduction here in question should have been allowed to reduce that tax; the suit was dismissed with prejudice on October 1, 1952 by stipulation of the parties. The United States makes two arguments peculiar to this issue. It contends, first, that § 3801(b) (6) contemplates that the same kind of tax must be involved in the prior determination and in the present suit, and thus does not here apply because plaintiff contested liability for excess profits tax in the District Court while income tax liability is here in issue. Second, the Government argues that a dismissal with prejudice pursuant to stipulation does not constitute the required “determination.”
. On April 21, 1942, the Secretary of Labor issued an order under which 16 and 17-year-old females could be employed on government contracts. 7 Fed.Reg. 3003. This order is not here material because it only applied if these employees did not work in excess of 8 hours per day. By plaintiff’s own admission it utilized them on a 9-hour shift.
. This figure was arrived at, it seems, by determining the proportion of WalshHealey production to the total (about 9%) and offering approximately that percentage of the amount claimed.
. E. g., penalties assessed because of innocent violation may be deductible if the Administrator himself distinguishes between willful and innocent violations. See 356 U.S. at 37, 78 S.Ct. 507.
. The Supreme Court may be thought to have approved the result in Davenshire, Inc. v. Commissioner, 12 T.C. 958, by citing it among other cases in a note following the above-quoted portion of the opinion. In Davenshire the Tax Court held, in a factual situation similar to the one presented here, that the “damages” paid were not deductible.
. See Perkins v. Lukens Steel Co., 310 U.S. 113, 127, 60 S.Ct. 869, 84 L.Ed. 1108. But cf. United States v. Butler, 297 U.S. 1, 72, 56 S.Ct. 312, 80 L.Ed. 477. See also Note, Unconstitutional Conditions, 73 Harv.L.Rev. 1595, 1602.
. See Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171.
Dissenting Opinion
(dissenting).
I respectfully dissent for the following reasons: The majority opinion states: “We have no way of knowing whether and to what extent plaintiff in fact violated the Act, and trial of that issue would obviously defeat the very purpose of the compromise.” [emphasis supplied] I have no quarrel with this statement. As a matter of fact, I completely agree, especially in view of the
From the quoted statements, I conclude that what plaintiff did by way of compromise was to merely “buy his peace” and at no time did it admit to any violations of the Walsh-Healey Act. This, I believe, is especially true because there can be no evidentiary significance accorded to a compromise agreement; i. e., an admission of liability by the compromiser unless, within the agreement, there are independent admissions of fact by the compromising party. Hawthorne v. Eckerson Co., 2 Cir., 77 F.2d 844; National Battery Co. v. Levy, 8 Cir., 126 F.2d 33, cert. denied, 316 U.S. 697, 62 S.Ct. 1294, 86 L.Ed. 1767; Milton S. Kronheim & Co., Inc. v. United States, 163 F.Supp. 620, 143 Ct.Cl. 390, 401-402; Wigmore on Evidence (3rd Ed.) Vol. IV, §§ 1061, 1062.
Thus, we have in this case a compromise agreement which contains no admissions of fact and which, in my opinion, cannot be construed against the plaintiff.
Furthermore, even assuming there was a violation of the Walsh-Healey Act, the record is completely void of any evidence that the violation was in any sense willful. Since it has not been found to be willful, it follows that a violation, if any, was an innocent violation.
Therefore, since I do not believe the statute of limitations is a bar to plaintiff’s claim, and inasmuch as a violation, if there was one, has not been shown to be willful, in my opinion the sum paid as the result of the compromise agreement is deductible as an ordinary business expense and in no way can be construed as frustrating a clearly defined Federal or State policy. Milton S. Kronheim & Co., Inc. v. United States, supra.
Concurrence Opinion
(concurring in the dissent).
I am in complete agreement with this dissent, and I wish to supplement it with this observation.
The majority correctly says the so-called liquidated damages provision is in fact a provision for a penalty. It is a penalty for the violation of a law. It is civil in nature, it is true, but it is, at the same time, tantamount to a fine for the violation of a law. This being true, I do not think the regulation of a department can set aside the presumption of innocence and east upon the accused the burden of proving that it is not guilty.
If this regulation is invalid, there is no proof whatever of plaintiff’s guilt. The money it paid was not in satisfaction of a penalty validly assessed, but, as Judge LARAMORE says, to “buy his peace”, to avoid, at the least expense, the unjustified demand made upon it.
