LOCATION:Alabama State Capitol
DOCKET NO.: 95
DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Sixth Circuit
CITATION: 356 US 38 (1958)
ARGUED: Jan 29, 1958 / Jan 30, 1958
DECIDED: Mar 17, 1958
Audio Transcription for Oral Argument – January 29, 1958 in Hoover Motor Express Company, Inc. v. United States
Number 95, Hoover Motor Express Company, Incorporated versus United States of America, and number 109, Tank Truck Rentals, Incorporated versus Commissioner of Internal Revenue.
Mr. Chief Justice and Associate Justices.
In view of the fact that these two cases have been consolidated, would I be out of order to ask a question, shall we argue currently and, I understand the Court will adjourn at 4:30.
And I naturally would prefer not to use all of my argument today in — if the case is going to be concluded tomorrow.
I don’t know what order in which the Court would want to hear the argument of the case as I understand I have 25 minutes, or 24 minutes to go.
Well, I don’t understand your question.
Would I be permitted for my half of it to reserve —
You may reserve what —
— a substantial portion of my argument.
— whatever portion of your time.
Or a rebuttal particularly in view of the fact —
— if the cases will go until tomorrow.
You may — you may reserve what portion of your time you wish after stating your case.
If it please the Court, this is a case for the recovery of corporate income taxes.
The petitioner here is a motor carrier of freight and it holds a license from the Interstate Commerce Commission and operates pursuant to certificates issued by the Commission.
In the industry, it’s referred to as a draft freight or general commodity carrier, that is that it carries in — in all commodities tendered to it by the public with a few exceptions such as articles and book and things of that nature.
The years involved or for the years 1951, 1952 and 1953, the question here insofar as this case is concerned is strictly a legal question and it was not necessary to bring to this Court or to the Court of Appeals any of the record below except the technical record.
In 1942, the Commission of Internal Revenue promulgated a regulation or an interpretation.
The effect of which was to permit a motor carrier to deduct under Section 23 (a) of the Revenue Act sums that it was required to pay to various States because its vehicles had in some way violated the weight limitation laws of the States.
That ruling was — remained in effect until December 1, 1950.
At that time, the Commissioner, and I might say a new or different Commissioner of Internal Revenue, reversed the earlier ruling and held that such sums were not deductible as ordinary and necessary expenses under Section 23 (a) of the — the Revenue Act.
As a result of that latter interpretation, the agent of the Bureau of Internal Revenue audited the tax returns for the petitioner, Hoover, for the years 1951, 1952 and 1953.
And insofar as we are here concerned, the only change was that certain sums paid by the petitioner as fines under the various statutes of the various States through which it operated, were disallowed as an operating expense, an additional tax was assessed against petitioner by reason of the disallowance of these items which had been claimed as expenses.
The petitioner paid the additional tax, filed a claim for refund which as you know is a prerequisite to a suit for recovery.
When the claim for refund was denied, a suit for recovery was filed in the District Court for the Middle District of Tennessee.
The case was there tried, evidence was introduced and the Court decided the case adversely to the contentions of petitioner.
And in doing so, it made it unnecessary to transcribe the testimony in the case.
The petitioner, as a matter of fact, offered substantial evidence that — to the effect that its violations or the fines resulted not from any willful act on its part or not from any negligent act but in spite of all reasonable care that it could take.
Now, the court below, in deciding the case, predicated its decision upon the assumption that the petitioner did not act willfully in anyway in overloading any truck nor it was — did it fail to take all reasonable precautions consistent with a practical operation of its business.
Did in spite of those — of that assumption, the District Court held that to allow the deduction would frustrate the enforcement of state — state weight acts and therefore were not deductible.
Now, this Court has never expressly held that, if I may refer to it as a frustration theory, was or was not valid.
This Court has had two cases in which it is discussed and the first one was referred to as the Heininger case and Judge Learned Hand of the Second Circuit in the Rossman case, construed that case as we contend it should be construed.
Later, this Court, in the case of — in the Lilly case in passing on that question, expressly limited the effect of that decision insofar as the Commissioner here attempting to invoke it.
I won’t read that now but it states in substance that assuming for the purpose of argument that there may be a situation where an expense is ordinary and necessary and still it would not be allowed as a deduction because it would frustrate some sharply defined public power that the facts in the Lilly case did not — were not in that category.
Now, it is our position here, one, that the Revenue Act is a revenue producing statute and it is not a policing statute.
Congress never intended for the Revenue Act to be used as a supplement to enforce all of the laws of all of the States.
Second, even if the frustration theory as — has been referred to by this Court on two occasions is sound which we deny that even that would not permit or would not forbid the deductions in this case.
Now, the District Court and the Court of Appeals, which affirmed him in a very short per curiam opinion and adopted the decision of the Court of Appeals, they did not hold that these expenses were not ordinary and necessary.
They did not — they based the decision solely on the fact that even if they are ordinary and necessary, and to allow them would frustrate the enforcement of the state statute.
Now, it is our position that that is an erroneous legal conclusion.
If a carrier has done what the District Court assumed that it did, that is that it took all reasonable precautions to comply with all of the state weight limitation laws.
They could reasonably be expected of it consistent with the practical operation of its business.
If you take that assumption of fact, then the allowance or disallowance of these fines as an expense is going to have absolutely no bearing on future violations or future compliance.
If it has no bearing on future violations or future compliance, then it cannot frustrate the enforcement of that act.
So it is our position that even if this Court should find that ordinary and necessary expenses are not deductible if they would — if the allowance would tend to frustrate the sharply defined policies or public policies of the State that even in — that would not preclude the recovery under the factual situation under which we’re trying this case.
But if they deductible, doesn’t that in effect reduce the burden upon the — the effect stated (Voice Overlap) —
That is the theory on which some of the lower courts have denied.
Now, if the Court please, the case that I think best analyzes the entire situation is the case of Rossman Corporation versus Commissioner 175 F.2d.
That decision was written by Judge Learned Hand and it did involve a penalty under the OPA statute.
Now, I have quoted at length at pages 6, 7 and 8 of our brief the — that opinion.
Judge Hand in substance says, “There are penalties and penalty.
Some are deductible and some are not.”
That’s the way he construes this Court’s decision in the Heininger case.
And he also recognizes the distinction between an unlawful activity which has resulted in an expenditure that was willful or negligent and one that was non-willful or non-negligent.
He states on the other hand, “Lack of proper care would be relevant to whether the allowance would frustrate the act.”
Now, the Commissioner in the lower courts and in his brief here has made substantial argument out of the fact that the OPA statute, by its very terms, drew a distinction between a willful violation and a non-willful.
Well, if the Court please, that is true but the distinction only went to the degree of the punishment.
If you were willfully violating that act, you paid one thing.
If you — if the administrator found that your violation was not willful, you paid another thing.
You paid a smaller amount.
But if you’ll interpret the acts of Congress as making these deductibles, you can say not only did Congress to that extent reduced the burden on the taxpayer but it assumed it by the Federal Government.
If the Court please, we don’t think so.
Now, if you analyze it the — in this case while the transcript is not here, the pleadings and the admission show, this carrier operates some 200 trucks, five or six nights a week.
The District Court found as a fact in this case, not the assumption that the vast majority of the fines which were imposed upon this carrier, resulted in — from situations where the vehicle was well within the weight limitation prescribed by the law of the States that imposed the fine.
But during the transit, that load in these large tractor-trailers can shift just a few inches one way or the other, and by reason of that shifting, an actual violation had occurred.
Now, insofar as Mid —
Hugo L. Black:
For all the fines — for all the fines of that kind — for that —
The vast majority were.
Now, the breakdown of the fines is not in the record because of the way the Court decided the case, of course, it is below.
The Court found as a fact that the vast majority of them were that category.
Now, there were — the others where there was an entire overload on vehicle, the proof showed three category — three causes.
The Court mentioned two in its opinion.
They were that this carrier has its authority issued by the Interstate Commerce Commission not only authorizes it but requires it to serve a large segment of population out in the old highway.
Well, the only way they can pick up freight is to have a truck rundown through a lot of small crossroad communities and pick it up.
They rely on the weights as shown on the bill of lading until they get to a terminal to weigh it.
Quite frequently, a shipper will not include in his weight all of the weight of the article.
Frequently, they do not take into consideration the weight of the container.
Another cause was that this being a continually changing industry and a growing industry, the power units that are used from time to time changed and the newer units were substantially heavier than the old ones.
And there were instances where an older tractor which is a power unit would breakdown on the road and the only other unit available sent after it was a new one which weighed more.
Hugo L. Black:
Were all the fines for an overweight or unbalanced weight, you have expedience, anything of that —
It’s — it’s all involves the weight limitation, either on an actual basis or the whole vehicle basis.
These statutes provide that you can’t carry one vehicle with more than so many found and you can’t put more than so much of it on a particular axle.
You have to distribute the weight.
Now, it is our position that the — that this Court in the Lilly case, has expressly reserved this so-called frustration theory.
And before reading the language of this Court, I’d like to point out that a number of cases have held that certain expenditures were not deductible, but if you get right down to it, the basis of the decision was that they were not ordinary and necessary.
Now, in this particular instance and in this industry, it is impossible for a carrier to prevent freight from shifting within a vehicle.
Now, if you were carrying only one commodity with one size and shape or package that would be different.
But a general commodity carrier that has all sorts of sizes and shapes of — of shipments on its truck has to stack them in the best way that it can.
Is it — is it fair to say that if your view prevailed, somebody, even the treasury of the courts, I don’t know who, would have to consider — would have to determine whether these are inevitable incidents of the enterprise, quite innocent, whatever maybe the policy of restriction, rather than a blockade running, running your chances from not being (Voice Overlap) —
Now, if the Court please, the companion case here is that case.
No, I know, but isn’t — wouldn’t every case require —
I think the burden of — if — if — I think this Court can decide this case properly for the tax payer on either of two theories.
One is that if a carrier has incurred an expense that is inevitable in the practical operation of its business —
The inevitability depends on — on the state of mind or the diligence of — of the employees or the extent to which he wants to run the risk of —
That is —
— to be overweight, isn’t that true?
There is certainly some truth in there.
Some truth but there has —
I think that it —
— must the particular quantity, volume of truth in it, will that be open for determination of each one of these tax cases?
If the Court please, if the Court decided it on that basis, then I think if the burden of proof in each instance would be on the carrier to show that he would — did not act with willful intent and that he took all reasonable precautions that he could.
To whom would he have to show that?
He would have to show it to the satisfaction of the Commission of Internal Revenue and if the Commissioner —
Or is it locality and then he goes up all the way up, maybe to consider it in the treasury?
Well, you have — in the department, you have certain conference procedures, but if you’re not able to show it to his satisfaction and you still think that you’ve shown it, then you would have to put — carry that burden in Court if — either the tax court or in the District Court depending on which way you proceed.
Have you — are you suggesting a rule by which the necessity of making those determinations would be avoided — could be avoided?
Well, in one sense of the word, the Court — and in — this is particularly true in this companion case.
If the Court takes the position that Congress did not intend by passing the Revenue Act to differentiate between lawful and unlawful expenditures.
It says, all ordinary and necessary expenses are deductible.
Now, the limitation on that that the courts have put, if you really analyze it, go back to the proposition if they hold that they not necessary or not ordinary.
But now in this case, neither court has said that they are not ordinary and necessary, that is neither the lower courts.
On the contrary, if it’s an expense that cannot be avoided in spite of all reasonable care, then it is certainly ordinary and necessary.
Now, this Court knows the — the Interstate Commerce Commission fixes the rates that these carriers can charge.
They have all sorts of rates.
They have volume rates.
And those volume rates are fixed on what a carrier can hold in one load — what it cost him to hold it, of course, is the determining part of what the rate will be.
Now, you can avoid it if you want to run half loaded trucks.
Of course, you wouldn’t have any income tax problems if you did that, if the Court please.
You’ve got to try to operate your business with a practical viewpoint.
Now, if the Court please, we don’t — I don’t have too much time but I would like to emphasize two things.
This Court in the Lilly case says this, neither — referring to the Heininger case, says, “Neither that decision nor the rule suggested by it, requires disallowance of petitioner’s expenditures as deduction in the instant case.”
Now, this is the importance.
Assuming for the sake of argument, that’s all this Court has ever said about the so-called frustration doctrine.
Assuming for the sake of argument that under some circumstances, business expenditures which are ordinary and necessary in the generally accepted meaning of those words may not be deducted as ordinary and necessary expenses under 23 (a) (1) (A) when they frustrate, sharply define national or state policies.
The conduct here does not fall within that category.
Now, in our case, if — if this case go, it would — if you — if Your Honor should agree with us, it would have to go back to the District Court.
I don’t know whether you would go through the Court of Appeals or not.
But if the District Court finds this effect, which I’m sure you will, that we did not act with willful intent and that we did take all practical precautions, then they can’t under any — and as I see it, there can be no frustration.
Now, we have one or two things that I think are material to show the congressional intent.
The Revenue Act, by expressed terms, permits you to deduct gambling losses up to the extent of gambling games.
Well now, the Court, gambling is unlawful in most of the States, it’s unlawful in Tennessee.
But I can win a thousand dollars in a crap game and I’ve got to report it as income.
I can go over and lose $800 in another crap game and I can deduct it, but that’s — that is violating the law of Tennessee.
Now, if you carry this to its ultimate conclusion, the allowance of that deduction is going to frustrate the enforcement of the gambling laws in Tennessee.
But Congress says, gambling is that losses are deductible up to that extent without regard to the law of the State.
So we think that is material in determining, “Did Congress intend for an unavoidable expense that is certainly a business expense?”
Should not be deducted because the various States by various legislation has denominated it a fine.
Now, in that regard, there are two or three things that I think are important.
First, Kentucky and Tennessee are the States to which most of these fines were paid.
During these years and up until the middle 1953, Tennessee and Kentucky had much more restrictive weight limitation laws District — than did the other States through which petitioner —
Are these fines pursuable and ordinary, old common law — of common conduct, ordinary (Inaudible) like a contract —
The statute —
— in passing of debt?
The statute just says that if you — if you operate a vehicle and permit it to be operated with so much weight, you’re guilty of a misdemeanor.
They don’t make any distinction between a willful and an innocent victim.
I didn’t mean that distinction but for instance, a number — fines, prohibitions by Congress with a fine shall define counsel, many of them, I don’t know how many but certainly some are suable in the ordinary — on the civil side of the District Court.
Our way and our practice at home, if the Court please and I understand in Kentucky, most of them have paid through a JP who is more interested in collecting his court cost than he is to fine.
But nevertheless they are — they are denominated under the statutes as — as —
I shouldn’t think —
— maybe the difference whether they are suable on the civil side or whether the Commission side.
I would — I — certainly, a business that is lawful to the extent that an instrumentality of the Government has issued it a special license to operate, is not a criminal.
Now, I’d like to point out three things very briefly.
One, in 1953, Tennessee amended its statute to increase the loads which resulted in 1953 being the smallest year that we involve with here dollar wise.
In 1956, Kentucky amended its law, all of which raised them up to the keeping — in keeping with the surrounding States.
Now, those changes don’t affect the liability for the finding but they do have a bearing on whether the allowance of these deductions are going to frustrate anything in these States.
And one thing I think is quite important, Kentucky and its amendment, if the Court please, had a special section which provides that a — an axle variation not to exceed 5% will not be a violation if the overall vehicle is within limits.
Now, there is a legislative recognition in Kentucky that a rigid axle weight is not realistic in this industry that you’re going to have some leeway and some shifting.
Now, there’s one State by expressed legislation has made lawful what we couldn’t help but do proud of that of that amendment.
Now, we think that’s material.
Delaware — I mean Indiana, a State through which we operate, in — amended its act to remove the stigma of a crime and they made them all subject to a flat $5 fine and the rest was called a civil penalty.
We think that is a legislative recognition that the trucking industry is not run by criminals.
Is this — is what is denominated civil penalty always — also nondeductible?
Well, now, in our case, that amendment occurred after the years involved.
I know, yes.
I’m just asking if you happen to know whether the treasury has ruled on this.
Well, the Commissioner has ruled in its regulation which is copied in the record here that a fine — and they treat fines and penalties in the same category in their brief and I assume their position would be that even if it’s called a civil penalty, it’s still would —
What made any difference?
— would not be deductible.
But we think, one, that Congress never intended for the Revenue Act to be used as a policing measure to enforce everybody else a statute.
Second, that even if this Court should find that there is merit to the frustration theory that if — if a taxpayer has done all that he can reasonably do, there can be no frustration.
And therefore, that in either view, the Court takes of it that we are entitled to recover and it’s an unfair and an undue burden to place on a carrier to say that he’s got to pay a fine out of net income after taxes of an item that’s just as much an expense item in this industry as is gasoline bill is.
Hugo L. Black:
Suppose you hired a lawyer and paid a fee, would you have to — to get him directly or —
Well, the Commissioner would — I assume if you want your lawsuits, you could deduct your fee, if you lost it, you couldn’t.
I say that seems to be the general theory of the department and I think that in a lot of these cases, the proof show that there —
Hugo L. Black:
I mean if you were tried.
And suppose they tried you to the offense and you hired a lawyer —
I don’t —
Hugo L. Black:
But you couldn’t provide a lawyer.
Well, I don’t have that here.
I don’t think that the department would recognize the legal fee if you were convicted of a crime.
Now, if you were acquitted, I think they would.
I haven’t briefed that theory too fully.
But our position is that this is a legitimate business and it’s a new business.
The states are constantly changing and I think that for — for many years, we will have a uniform statute that will be applicable all over the State.
But this carrier has to operate from Atlanta, Georgia across Tennessee and Kentucky and to the middle States and they’ve got four different weight laws.
They have to try to load efficiently in accordance with the minimum weight law or else they couldn’t possibly stay in business.
They have operated in good faith.
They have not taken a calculated risk as is the case in the companion case.
I think I don’t — I think his case has merit.
I think I was — has merit.
If he’s as good, certainly I was as good.
But in any event, now, we acted in good faith and we just don’t think Congress intended to deprive us f that deduction.