*279 Decisions will be entered for the respondent.
Income -- Deduction -- O. P. A. Overcharge -- Public Policy -- Ordinary and Necessary Expense -- Sec. 23 (a) (1) (A), I. R. C. -- A partnership which deliberately, knowingly, and wilfully violated an O. P. A. regulation and continued until stopped by the O. P. A., may not deduct under section 23 (a) (1) (A) the amount of the resulting overcharges which it was forced by suit to pay into the Treasury of the United States.
*777 The Commissioner determined deficiencies in income tax for 1946 of $ 2,078.02 against Joseph Salzman and $ 2,069.16 against Harry Salzman. The only issue for decision is whether the partnership in which these two petitioners were equal partners was entitled to deduct $ 7,142.42 paid into the Treasury of the United States for violations of the Emergency Price Control Act of 1942.
FINDINGS OF FACT.
The petitioners filed their returns for 1946 with the collector of internal revenue for the first district of New York.
They were equal partners engaged in the manufacture of dresses under the*280 name of Stratford Dress Co. The partnership was organized on May 1, 1943, and filed its returns on the basis of a fiscal year ending April 30.
The Director of Economic Stabilization in May 1943 approved an order of the War Labor Board granting an increase in wages retroactive to April 26, 1943, to all labor employed in the industry of which the partnership was a part. The petitioners complied with that order.
The partnership was a member of the National Dress Manufacturers Association, hereafter referred to as the Association, at all times material hereto. The Association, on February 15, 1943, during the pendency of the wage increase negotiations, had applied to the Office *778 of Price Administration requesting that Maximum Price Regulation 287, hereafter referred to as MPR 287, be amended so that the wage increase, if granted, would be recognized as an item in the computation of direct labor costs under MPR 287.
The Association sent its members a letter dated June 3, 1943, advising them of the wage increase and stating that the O. P. A. had not taken any action on the Association's petition for an amendment permitting the industry to include the wage increase in the computation*281 of direct labor costs, but that the Association was making every effort to obtain an early and favorable decision.
Those members of the Association, including the partnership, which inquired of officers of the Association, were told orally, but not otherwise, by the officers of the Association to include the wage increase in calculating their direct labor costs for purposes of computing their maximum prices because the officers of the Association believed and had been told by New York representatives of the Office of Price Administration that their application for a change in MPR 287 to permit that practice would probably be granted.
The partnership included all payments of increased wages in calculating its direct labor costs for the purpose of computing its maximum prices. That was in direct violation of the provisions of MPR 287 as it was then in effect and was done intentionally with full knowledge that it was contrary to MPR 287. It did not increase the price of its products but eliminated some other part of its former costs and offset that cost by the increased labor cost.
The Association advised the Office of Price Administration on April 25, 1944, that certain of its members*282 had been including the wage increase in calculating direct labor costs for purposes of computing their maximum prices and requested that they be permitted to continue that practice. The Office of Price Administration in a letter to the Association dated May 16, 1944, advised the Association that the wage increase could not be included in calculating direct labor costs of garments and refused to grant the permission requested.
The Association received a letter from Chester Bowles, Price Administrator, dated June 6, 1944, denying its application for the amendment of MPR 287 to include the wage increase in costs.
An O. P. A investigator, in the latter part of June 1944, after examining the books and records of the partnership, declared that the inclusion of the increased labor cost was an overcharge. The petitioners then discontinued their violation of MPR 287. Thereafter, the O. P. A. instituted an action against the petitioners for alleged violations of the Emergency Price Control Act of 1942 claiming triple damages. A settlement was entered into between the O. P. A. and the petitioners, after negotiations in which a representative of the Association *779 took part, pursuant*283 to which the O. P. A. accepted $ 7,142.42, the actual overcharges made by the petitioners in violation of MPR 287. Payment of that amount was made directly to the Treasurer of the United States during the fiscal year of the partnership ended April 30, 1946.
The partnership on its return for its fiscal year ended April 30, 1946, reported as gross receipts from its business the actual gross receipts less the $ 7,142.42 paid into the Treasury of the United States.
The Commissioner, in determining the deficiency against Joseph, added $ 3,571.20 to income as additional partnership income and explained:
The payment by Stratford Dress Company, a partnership, in settlement of a suit upon violations of the Emergency Price Control Act of 1942, which was taken into account to the extent of $ 3,571.20 in computing the net income shown upon your return, does not constitute a deduction under the provisions of section 23 (a) (1) (A) or any other section of the Internal Revenue Code.
He added $ 3,571.22 in the case of Harry and gave a similar explanation.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
The partnership violated MPR 287 as it was in effect*284 in 1943 and 1944 by using the increased portion of the wages it paid in calculating its direct labor costs for the purpose of computing its maximum prices. It thereby overcharged for its products because the prices charged were then in excess of those permitted by O. P. A. on the costs of the petitioner recognized by O. P. A. in computing maximum prices. It was sued by O. P. A. and required to pay the overcharges into the Treasury of the United States in its taxable year ending in 1946. The petitioners, the two equal partners, are now claiming that the total of those payments was deductible by the partnership in 1946 as an ordinary and necessary expense of the business within the meaning of section 23 (a) (1) (A) of the Code.
A number of decided cases have dealt with this general subject. Those relating to the cost of goods sold and those where the violation was inadvertent or unintentional, either because the regulations were not understood or for some other reason, have no application here. It is not contended in this case that there was any failure to understand MPR 287 as it existed at the time these violations occurred nor in this a case where care was taken to avoid the*285 making of any overcharge. These petitioners, acting through their partnership, with full knowledge that MPR 287 prohibited them from including the wage increase in calculating their direct costs for the purpose of supporting the prices which they charged for their goods, deliberately, *780 knowingly, intentionally, and purposely included the wage increase as a part of their direct labor costs in order thereby to support the prices which they were charging for their goods. That was an inexcusably highhanded procedure. Their excuse, for thus violating the O. P. A. regulations, is that the Association of which they were a member had advised them to take that course because it had asked the O. P. A. on February 15, 1943, to amend MPR 287 to recognize the proposed increase as a part of the direct labor costs and was hopeful of favorable action. They may have felt that a retroactive amendment of MPR 287 would leave them with no remedy to recover lost profits and it would be better, for the partnership, to overcharge the consumers. However, it is not suggested herein that any such proposed amendment was expected to be made retroactive. The Association told O. P. A. officials that*286 some of its members were including the increase in wages in computing their direct labor costs, but the record does not show whether or not O. P. A. was told that the petitioners' partnership was one of those. An official of the O. P. A. wrote the Association on May 16, 1944, that the wage increase could not be included in calculating direct labor costs, but the petitioners' partnership kept right on in its deliberate violations and did not cease until an investigator for the O. P. A. examined its books and determined that overcharges had been made. It paid the overcharges in settlement of a suit brought by O. P. A. against it.
The partnership thus deliberately frustrated the purpose of the Emergency Price Control Act under which the O. P. A. operated and promulgated MPR 287, in that the overcharge was passed on to the customers of the partnership and to the ultimate users of its garments through intentional disregard of the regulation promulgated to control the price. Cf. Yakus v. United States, 321 U.S. 414; Scioto Provision Co., 9 T. C. 439. This conclusion has been reached after considering all of the facts, *287 including the fact that the O. P. A. accepted the exact amount of the overcharges in settlement of the suit and did not insist upon any additional amount as damages. Cf. Jerry Rossman Corporation v. Commissioner, 175 F. 2d 711. The record does not show that the incurring of this obligation to make restitution for the overcharges was an ordinary and necessary expense of the business of the partnership within the meaning of section 23 (a) (1) (A) but shows that it would be contrary to public policy to allow the deduction even if it did otherwise qualify under that provision of the Internal Revenue Code. Cf. National Brass Works, Inc., 16 T. C. 1051, affd. 205 F. 2d 104; Henry Watterson Hotel Co., 15 T. C. 902, affd. 194 F. 2d 539; Garibaldi & Cuneo, 9 T. C. 446.
Decisions will be entered for the respondent.