*1 be reversed. and MAGRUDER, Judge, Chief Before HARTIGAN, Circuit WOODBURY

Judges.

HARTIGAN, Judge. Circuit petitions two cases These for review of in the Tax Court of United States were REVE- INTERNAL OF COMMISSIONER joint motion consolidated and heard al. NUE v. WEISMAN et in- single case. The this court as cases No. 4621. asserted in individual volve deficiencies Appeals United States Court of penalty and fraud income taxes First Circuit. corporate in- year calendar June 1952. come, profits, and declared value excess taxes, profits together negli- excess penalties, gence and for the fiscal fraud petitioner is 1944. ended Internal Revenue Commissioner of jurisdiction Court is invoked 1141(a) of under § Code, amended. 26 U.S.C. as § question, petitioner, stated as whether or a tax- payer ceilings set of Price Administration Office are de- required by (1943), 1. amended, Failure to file returns Stat. 26 U.S.O. (1939), (part Stat. U.S.C.A 187 A. 1626. Failure to make deductions nership returns) pun reports required by is a federal offense 53 Stat. 175 (1939), amended, (1939), ishable under 53 Stat. 290 1400- U. U.S.C.A. §§ subjects employer penal- S.C.A. report 2707. Failure to withhold and employees’wages the taxes on un enumerated in 26 ties U.S.C.A. (1943), amended, der 57 Stat. 126 and 26 U.S.C.A. § punishable U.S.C.A. under 57 *2 argues used as an The that or are otherwise to be this hold- ductible for arriving ing in at taxable erroneous and for reversal. asks illegal year fiscal The tax- He asserts in ended substance ex- that penditures payers whether question purchases state in violation of that payments” scrap not, may or “side automo- control law extent te they ceiling in that prices, bile tires excess of lawful serve exceed Price established under item in or offsetting' may included in the taxable income. He that dis- contends materials, regarding, together computation, cost of in illegal of purchase payments paid for at the estab- amounts materials in excess of lawful price, purpose prices, ceiling lished for the of unconstitutional and ceiling is not income, upon determining gross the resale not intend Congress did further that purchaser. ceiling prices of said materials lawful excess of in the offsetting item constitute an should The issue facts relevant to the computation. corporate briefly The stated follows: Co., Inc., taxpayer, Rubber Colonial antitheti- taxpayers’ are The contentions corporation having a Massachusetts its They of cal to those the Commissioner. place During Cambridge. of business in legal no assess- maintain that there can be in the busi- engaged it was deficiency taxable ment in taxes under of patches and tire making rubber of the Constitution ness Sixteenth Amendment such purpose making For reliners. under the Internal Revenue Code or scrap commodities, purchased automo- Congress did not intend that over- tires, which were refabricated payments should be disal- bile fabric separate the rubber from lowed. make blow- fabric was used The tires. unnecessary pass find reliners, patches and tire out tire question constitutional raised here because which concerns scrap rubber opinion of the rubber. reclaimed intend that over-ceiling such they be disallowed. it had intended that Benjamin If taxpayer, individual The be disallowed have done so could as it did Weisman, practically all the stock owned of the Defense Production Act taxpayer. corporate He did amended in 50 U.S.C.A. Battery Lead West with the Side Appendix, 2105(a). This section reads scrap Company tires and which dealt as follows: scrap supply of tires a source of it became for Colonial. 2105. Violation title and regu- “§ lations thereunder through taxpayer, Weis- corporate payments” man, made cash “side knowingly “(a) unlawful, regard- of the established amounts any obligation less or heretofore ceiling price, in addition P. A. O. into, any person entered hereafter the rate about prices, P. A. O. deliver, regular or or to sell per total amount tire. The extra cents to 'buy or or of business trade course during taxable payments” “side cash receive, service, any or material or Tax Court by The year was found any act, omit to do to do or otherwise $2934.25. any reg- or of violation of title ulation, order, requirement issued or case of that the Lela Tax Court held offer, solicit, thereunder, attempt or to is control- (1948) T.C. 1076 Sullenger, any foregoing. agree to do of materials “costs ling Colonial’s prescribe shall also pay- The President include resold which made, payment which any and that extent the amount of $2934.25” ments property, any money either Rubber is entitled to include Co. “Colonial regula- person in violation into its entering of materials its costs requirement order, tion, sum of $2934.25.” costs depart- provides sanctions control disregarded by the executive not con- we are agencies for such violations and governmental ments and other they Congress intended expenses costs or vinced *3 in the supplemented tax laws by be person purposes any such for including suggested by the Commissioner manner regulation, any other law or pur- here. gain bases for poses.” (Italics supplied.) support little get The can Commissioner Treasury Under 31, Regulations from the 111. not prior did The law to 1951 (a), 29.21-1(1), 29.21-1 26 CFR empower the ex- prescribe § the President to “ * * * is sense as defined the broad payments violation tent to which made in taxpayer all wealth which flows to etc., regulations, disallowed capital other than as a mere return by government pur- and other for * * problem poses. portion This the crux of the 2105(a) is italicized of § appear although its as we see it and with diffi- did not Act besets the issue the 1950 relating counterpart appear both as 2105(b) culties constitutional and in § by prescribe presented well to to as with difficulties of the President illegal wage payments very language regulations the extent to which themselves just disregarded determining costs as 29.22(a)-5, indicated. Under 26 § expenses employer. 29.22(a)-5, of an Likewise CFR Income From “Gross § * * * sales, Act of the Price Control Business means the 4(a) total * * 1942, U.S.C.A.Appendix, less the goods cost of 50 § over-ceiling contained as to no such In dispute the instant case there is no but Stabiliza- although payments taxpayers paid that the over-ceiling U.S.C.A.Appendix, 1942, 50 language in the amount of $2934.25. cognizance of this “deterrent” 965(a), took Treasury Regula- 29.22(a)-5 of the of § Act directive that included such and is 111, goods sold” “less the cost of tions employees. to wage payments as'to not feel unambiguous and we do clear and knew of this phrase read that duty to It evident is our 1950 in 1942 and in as a deterrent lawful cost of sold” device as “less disallowance In petitioner it authorized have do. Eisner us since doing 189, 206, cost of payments Macomber, wage 252 S.Ct. illegal v. U.S. those acts of stabilization 189, 193, court said: 64 L.Ed. inso doing refrained from Yet it years. regard genesis, as “A for its until payments materials for to regard very language, re- well as its Con- The absence of 2105(a). quires also amendment respect would in this action gressional construction, loose not extended that disallowance indicate seem modify, except repeal -as so as unnecessary except to excessive deemed provisions those applied Furthermore, specific leg- payments. wage require appor- an the Constitution appear to matters would both islation population for according tionment unnecessary strong if been upon property, real direct taxes policy public were sharply defined personal. This limitation still taxpayers or frustrated thwarted function, important appropriate wages costs excessive not to overridden Con- and is agree are constrained to materials. disregarded by the courts.” gress or plain inference taxpayers that we are con- remembered must 1951, over-ceiling that until penal not tax measure and struing a be disallowed as not to materials Furthermore, a tax on in- statute. so, goods”. doing “cost an item gross receipts tax on and not a come approve imply that we mean we do consideration here. is under capital which taxpayers’ violations with deductions Oldsmobile, concerned We are Anderson See regulations. Code, 23 of the Hofferbert, D.C., F.Supp. Inc., v. depend respect rent in U.S.C. which axiom taxes was wage upon legislative grace. ent New Colonial Stabilization of 1942 to' excess payments. Again Helvering, Ice v. 292 U.S. S.Ct. reenacted. 1950 was Co. concept employees has The recovery L.Ed. 1348. Even this interpreted taxpayer wage payments favorably obviously been not so amen- years. Thus, in recent re- Jerry Rossman able to successful enforcement as Corporation Rev., covery of Int. Commissioner sellers of excess Cir., payment gross goods prices. 175 F.2d of a overcharge to the United in one States argues dis- *4 was a sum allowed as its since tinction between deductions and cost of any sharply allowance not frustrate goods in significance, is lacking tenuous is public policy. defined See Commissioner liability diminishes tax unless the Heininger, v. U.S. 64 S.Ct. wiped distinction disregarded. out or Lilly Commissioner, L.Ed. 171. Cf. disagree with this we contention for U.S. 72 S.Ct. 497. a believe there is real between distinction offsets, if constitutionally Even were cost goods sound of under § the disregard the deductions under 23. It dif- not a illegal over-ceiling price ference increment a without 'substance and has more support merely part goods” would still have its existence than being “cost of of capi- not the inclusion historical problem whether or accident. return of of the guaranteed by frus- tal is goods goods” of “cost increment cost the of of public policy. receipts sharply against gross defined and thus is any offset trates capi- charge that it a the tax on avoided gives results say such frustration To above, and not income. As indicated tal on the imputation that enforcement to the rise tax consideration is not a the tax under Emergency Price Control provisions of the Law Federal gross receipts. Mertens’ of short, In inadequate. 1942 were' Act of Taxation, 1, 5.06, Vol. 5.10. Income runs, pro price control argument the the of tax The decisions the Tax the Court gram must have assistance operations. affirmed. “black market” laws to deter method and useful such desirable However yet imposed in be, not be it should may MAGRUDER, Judge (concur- Chief in the absence of here the circumstances ring). Congressional authorization.1 view, expressed I concur interpre- opinion, court’s on the only speculate why Con- canWe accompanying of the of tation and of a disallowance 1942 authorized gress in Treasury taxpayer Regulation, here payments as an of cost wage item excess entitled, gross income its was the disal- authorize and did until business, to from total sales subtract goods. from of excess lowance goods full cost to of even ques- serious constitutional Aside taxpayer regulation though violated thought de- a tion, perhaps it was Emergency Price Control Act Price under supplied terrents paying established maxi- Pro- more than the the Defense 1942 and of hope opin- price. But I refunds, treble mum court’s such as duction impression give that there adequate to ion will not penalties, were damages and the constitutional any doubt of A serious price distinct deter- control. implement may possible ing, over-ceiling purchases it is be noted that here provisions (50 the new prior amendments to the 1951 2105(a)) U.S.C.A.Appendix, § of so Production Act Defense buys goods permitting his at all of merchant who application §of the disregard might entire made in violation goods” costs, item disallowed so that regulations “cost price a. levied amount in gross the tax effect constitutional us nor are the before is not receipts pass- legislation. tax. implications buy the in the Congress course of trade or to exclude any commodity,” sold receive in violation goods of the cost of the so much pursuant taxpayer regulation represented payment issued authority applicable price. 205(b) of the Act. Section excess of provided will- any person the Act re- gross be that a merchant’s fully any provision violated ceipts represent commodity from sales of a crime, subject guilty fine capital, gross a return of who, imprisonment, buyer A or both. cost least to the extent of the willfully business, trade course of view, sold. In this merchant commodity price in bought a at a by Congress gross on the merchant’s of the ceiling established in a such, receipts, as would not be a tax on regulation, seller, equally with income, sustainable under Sixteenth guilty of a crime. As an sanc- additional question Amendment. would be then case, such a of the Act 205(e) general whether such fell provided that Price Administrator taxing conferred might bring a civil action on behalf *5 I, 8, Constitution, Article or wheth- United States to recover from the seller it be er would deemed a “direct” tax which three times overcharge. the the amount of proportion popula- be laid in had to buyer Since the course of trade the tion, provided I, in Article 9. See act guilty an unlawful business also Spreckels Sugar McClain, Refining Co. v. price, it paying ceiling than the more 397, seq., et 1904, S.Ct. 192 U.S. might, Congress had would seem problem No such L.Ed. 496. chosen, provided a further sanction have here, ques- tax presented for the now too, against buyer subjecting him ato the tax, in which purports to income tion be an recovery the civil suit on behalf of point computing of for the starting the three United States of times amount of “gross income”, taxpayer’s overpayment. his receipts, with no gross not his Congress latter, If could have done present- qualification to the situation cover power provide appro- as incidental to its to applicable Treas- ed in this case. And the priate price pro- a sanctions for control from ury ‘‘Gross income Regulation defines gram, it hardly can that it would doubted qualifica- meaning, without business” provide power have had to less much sales, tion, cost of the “the total less the buyer, by rigorous against sanction goods sold”. merchant, enacting that controls, pro imposition business, from gross his take Emergency Control Act vided in the Price gross receipts as an offset to his from sales the con 23), was within (56 Stat. only so much of cost of the power Congress. Yakus stitutional lawfully paid might have been under States, 64 S.Ct. United 321 U.S. price regulation. Such an enactment would Congress has 834. Since 88 L.Ed. required pay the merchant to to I, power “make all Article to States, guise tax, United of a some- necessary Laws which pay than he have had what more would to powers carrying into Execution” all the had he not violation been by the Constitution the Govern vested regulation. might But violator con- States, would the United ment of subjected lucky to sider himself to such power Congress, the incidental required sanction, instead to limits, provide within broad what States; forfeit the United a civil appropriate to be sanctions deemed Administrator, brought action Price compliance control secure overpayment. the amount of the three times legislation. Congress me clear that seems to It impose Price have constitutional 4(a) Section sanction, applied it unlawful “for administra- laws, any "commodity, person to sell or deliver of the tax whether or tion not Con- impose gress would have applicable receipts, gross general tax violators. law-abiding as as to well asserted in the deficiencies

But the flaw at bar case the Commissioner question, as for the now clear, makes opinion of the court sanc- imposed no such additional more upon buyers paid than considering the prices, evidently Emergency Price provided in the

sanctions not for to be sufficient.

Control Act to add a the courts Commissioner or Congress did not sanction which

further provide.

choose to is government’s argument the matter

strengthened reference to 23(a) gross deductions income. Code, 26 U.S. (1) 'Congress allowed (1), C. § of all gross only of “All expenses, but

trade or *6 paid necessary expenses ordinary and taxable during the incurred This trade or business”.

carrying opens necessarily up a language interpretation, as line field for

wide what case to case between drawn necessary” “ordinary meaning of expense (1).

WALKER STATES. UNITED

No. 13932. Appeals States Court

United Circuit. Fifth 18, 1952.

June Miss., Dent, Collins, appellant.

W.W. Holmes, Jr., Atty., U. R. Asst. S. Edwin Brown, Atty., Jackson, E. U. S. Joseph appellee. Miss., for