Commissioner v. Weisman, 197 F. 2d 221 (1st Cir. 1952); Hofferbert v. Anderson Oldsmobile, Inc., 197 F. 2d 504 (4th Cir. 1952); Commissioner v. Guminski, 198 F. 2d 265 (5th Cir. 1952)

Gottesman, Robert S.

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Buffalo Law Review Volume 2 Number 1 Article 56 12-1-1952 Income Tax—Costs in Violation of Ceiling Prices Held Deductible Robert S. Gottesman Follow this and additional works at: https://digitalcommons.law.buffalo.edu/buffalolawreview  Part of the Taxation-State and Local Commons Recommended Citation Robert S. Gottesman, Income Tax—Costs in Violation of Ceiling Prices Held Deductible, 2 Buff. L. Rev. 162 (1952). Available at: https://digitalcommons.law.buffalo.edu/buffalolawreview/vol2/iss1/56 This Recent Decision is brought to you for free and open access by the Law Journals at Digital Commons @ University at Buffalo School of Law. It has been accepted for inclusion in Buffalo Law Review by an authorized editor of Digital Commons @ University at Buffalo School of Law. For more information, please contact lawscholar@buffalo.edu. BUFFALO LAW REVIEWgains, appears to be that of the principal case, which taxes thegain in the hands of the person who has the freedom to dispose ofit and who derives a "readily realizable economic value from it."Jerome D. AdnerINCOME TAX-COSTS IN VIOLATION OF CEILING PRICESHELD DEDUCTIBLEIn their income tax returns, taxpayers included amounts paidin excess of World War II ceiling prices in computing their deduc-tions for cost of goods sold. These over-ceiling payments weredisallowed by the Commissioner of Internal Revenue. In the firstappellate rulings on the question three Circuit Courts held that inthe absence of legislation to the contrary, such payments are de-ductible from gross receipts as a part of the cost of goods sold, indetermining gross income. Commissioner v. Weisman, 197 F. 2d221 (1st Cir. 1952); Hofferbert v. Anderson Oldsmobile, rnc., 197F. 2d 504 (4th Cir. 1952) ; Commissioner v. Guminski, 198 F. 2d 265(5th Cir. 1952).An income tax, levied by Congress under the Sixteenth Amend-ment to the Constitution, in order to be valid, must be based onlyupon income, and if other than income is used as the bais for sucha tax it is a direct tax requiring apportionment under Art. I § 9of the Constitution. Eisner v. Macomber, 252 U. S. 189 (1920).No income from business operations can be realized until the costof goods sold has been recovered, and therefore an income tax can-not reach receipts from which that cost has not been subtracted.Doyle v. Mitchell Bros. Co., 247 U. S. 179 (1918); Sullenger, 11T. C. 1076 (1948). Accordingly, the Internal Revenue Code§ 22 (a), and U. S. Treas. Reg. 111, § 29.22 (a)-5 (1943), providedthat the cost of goods sold should be offset against gross receiptsin determining gross income from business for income tax pur-poses.Considering the constitutional limitations of the SixteenthAmendment alone, it is clear that Congress could not pass anincome tax disallowing the deduction from gross receipts of anypart of the cost of goods sold. However, such an otherwise un-constitutional exercise of the taxing power may be found validwhen applied as incident to some other power of Congress. Thus,if the tax is an expedient regulation of commerce by Congress,and the end to be attained is one falling within the commercepower, then the tax is not void, although within a loose and moreextended sense than was used in the Constitution it was called a162RECENT DECISIONStax. Head Money Cases, 112 U. S. 580 (1884).- Such regulatorytaxes are not subject to the rules which would invalidate an ordi-nary tax. Teazie Bank v. Fenno, 8 Wall. 533, 549 (U. S. 1869).In 1942 Congress in a valid exercise of its war powers, Yalcusv. United States, 321 U. S. 414 (1944), enacted the EmergencyPrice Control Act, 56 STAT. 23, 50 U. S. C. App. § 901 (1942), underwhich the ceiling prices here violated were set up. At that time,or subsequently, Congress through use of its incidental powers,U. S. Const. Art. I § 8, could have implemented the act to include,among the other penalties imposed for violations, income tax dis-allowances for such parts of deductions for cost of goods sold asrepresented over ceiling payments. A similar penalty was imposedby the Stabilization Act of 1942, 56 STAT. 767, 50 U. S. C. App. § 965(a) (1942), disallowing deductions for wage payments made inexcess of wage ceilings, being held valid in-Weather-Seal Mfg. Co.,16 T. C. 1312 (1951)..Although allowing ceiling price violators deductions on incometax returns for such illegal payments would seem to be contraryto public policy, such deductions for cost of goods sold have beenallowed, in the absence of legislation to the contrary, even wherethe entire business carried on was illegal. United States v. Sid-livan, 274 U. S. 259 (1927) (illegal liquor business). Penalties arenot created by public policy or implication; they must be expresslyimposed or they cannot be enforced. Elliott v. East Penn. R., 99U. S. 573 (1878); United States v. Winchester & Co., 40 F. 2d 472(2d Cir. 1930).Thus in the principal cases the courts correctly found for thetaxpayers, since constitutionally the only way to justify the Com-missioner's disallowances would be as a penalty for price ceilingviolations, a penalty which Congress had not invoked. Today thisapparent conflict between public policy and the law has been cor-rected by the 1951 amendments to the Defense Production Act of1950, 65 STAT. 136 (1951), 50 U. S. C. App. § 2105 (a) (Supp. 1952),which empower the President to prescribe the extent to which pay-ments made in violation of price regulations may be disallowed bythe government for tax and other purposes. And the position ofthe principal cases has been adopted by the Bureau in I. T. 4104,5 CCH Fed. Tax Rep. 6336 (Nov. 12, 1952).Robert S. Gottesman

Income Tax—Costs in Violation of Ceiling Prices Held Deductible

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Income Tax—Costs in Violation of Ceiling Prices Held Deductible

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