*240 Decision will be entered for the respondent.
Payment made to Office of Price Administration in settlement of a cause of action for price ceiling violations resulting from disclosures voluntarily made by the petitioner, held, not deductible either as a business expense, or as a reduction of sales income, or as a contribution to the United States.
*468 This proceeding involves deficiencies in declared value excess profits tax and excess profits tax for the fiscal year ended June 30, 1943, in the respective amounts of $ 703.58 and $ 3,701.28. Among other adjustments not here in controversy, the respondent disallowed a deduction of $ 3,330.78 representing a payment which the petitioner made to the Office of Price Administration in settlement of a cause of action resulting *469 from overcharges to its customers on goods sold to them during a portion of 1942 and 1943.
FINDINGS OF FACT.
The parties have submitted a written stipulation of facts, which reads, in material part, as follows:
It is hereby stipulated and agreed by and between the parties hereto, by their respective counsel, that for the purposes of this proceeding the following facts are admitted and shall be taken as true, without prejudice to the right of either party to present other and further evidence not inconsistent with the facts*242 herein stipulated to be taken as true:
1. Petitioner is a corporation organized under the laws of the State of New York, with offices at 1412 Broadway, New York, N. Y.
2. Petitioner's income, declared-value excess profits tax and excess profits tax returns for the fiscal year ending June 30, 1943 were filed with the Collector of Internal Revenue for the Third District of New York on or before September 15, 1943. Petitioner keeps its books and records, and files its tax returns on the accrual basis.
3. Petitioner, during the fiscal year ending June 30, 1943, was a converter of rayon and cotton fabrics. It purchased cloth in the grey state and, under its order and direction, such goods were dyed or dyed and printed. In this process cloth shrinks or stretches so that the yardage in the finished state differs from the grey state. The extent of the difference is not determinable accurately in advance as it varies due to type of cloth, type of finish, and the efficiency and equipment of the dying and finishing plant.
4. Under the Emergency Price Control Act of 1942, approved January 30, 1942, the Office of Price Administration regulated the selling price of the class of merchandise *243 sold by the petitioner. The selling prices of finished piece goods were subject to Maximum Price Regulation No. 127, promulgated April 27, 1942, effective May 4, 1942. This regulation provided that the selling price of a fabric was to be determined on a cost plus formula.
5. In applying the formula, Section 1400.82 (d) of Maximum Price Regulation No. 127 provides that the working allowance shrinkage which may be used is the actual figure specified by the finisher in his contract, except that if the working allowance specified in the finisher's contract exceeds the actual shrinkage of the fabric by more than 2 per cent, then such actual shrinkage plus such 2 per cent tolerance shall constitute the maximum working allowance to be used in computing maximum price for the finished piece goods. * * *
6. Petitioner computed the selling price of its merchandise in accordance with the method prescribed by Maximum Price Regulation No. 127, making allowance for shrinkage in accordance with the actual figures specified in the finishers' contracts.
7. Early in May, 1943, petitioner voluntarily advised the Office of Price Administration that in certain contracts for finished piece goods, shrinkage*244 had been less than the tolerance allowable, so that, as a result, prices had exceeded the maximum allowable under Office of Price Administration regulations. No Office of Price Administration investigation was under way at the time nor had petitioner been informed that any audit or investigation was contemplated.
8. Early in May, 1943, the president of petitioner visited the Office of Price *470 Administration in New York City for information as to the proper procedure for making price adjustments, if any.
9. As a result of said visit and upon the basis of information obtained, petitioner on May 17, 1943 paid to the Treasurer of the United States the sum of $ 3,330.78 because of overcharges by petitioner caused by finished piece goods shrinkage being less than the tolerance allowable. The period covered by the payment was from August 1, 1942 to May 17, 1943. * * *
* * * *
11. The payment of $ 3,330.78 represents an adjustment on sales of 775,339 yards of piece goods. Total net sales for the fiscal year ending June 30, 1943 were in excess of $ 1,680,000.
12. The customers of petitioner who purchased the finished piece goods referred to herein did so in the regular course of*245 their trade or business.
In addition to the above stipulated facts, the following facts are found from the oral testimony of the petitioner's president and its accountant.
The petitioner's president and sole stockholder, Jerome I. Rossman, has been a prominent figure in the textile converting industry for a number of years. He served on the industry's advisory board in Washington, D. C., during the war period and assisted in the preparation of OPA regulations pertaining thereto.
The petitioner is not and was not at any time charged with violation of OPA regulations. The overcharges resulting in the payment under consideration were due to variations in the actual shrinkage of goods sent to the finisher from the estimated shrinkage specified in the finisher's contract. The petitioner sent its grey goods to the finisher weekly and received the goods back with a statement of the number of yards returned in each lot. The shrinkage might vary with each lot, sometimes being over and sometimes being under the estimate. The net result of the period August 1, 1942, to May 17, 1943, was an "overage" of goods and consequently a gross profit in excess of the maximum percentage allowed under*246 OPA regulations.
When petitioner's president, Jerry Rossman, discovered this overage a short time prior to May 17, 1943, he took the matter up with an OPA official at the latter's offices in New York City, and this official advised Rossman that the overcharges would have to be returned to petitioner's customers. Rossman pointed out that this would necessitate going back through all of petitioner's customers' accounts, numbering over 200, and calculating the small portion of the overcharge which each customer had paid. Rossman also pointed out that petitioner's customers were not consumers, but were purchasers in the course of trade or business and requested that petitioner be permitted to pay the entire amount of the overcharge to the Government in settlement of its cause of action in connection therewith. This was agreed upon by the parties and on May 17, 1943, a letter and check in the amount of $ 3,330.78, together with a list or schedule showing *471 the amount of the overcharges, were forwarded to the Office of Price Administration in the Empire State Building in New York City. The schedule, which was prepared under direction of petitioner's accountant, showed the amount*247 as an "allowance on sales." The letter of transmitttal read as follows:
May 17, 1943
Office of Price Administration
Empire State Building
New York City
Attention: Mr. D. Jacobson
Gentlemen:
In computing our loss of yardage in processing for the past year, we have found instances where the percentage of working loss has been less than that upon which we based our selling prices to our customers. We are therefore enclosing a list showing these discrepancies in detail.
We hereby tender our check for $ 3,330.78, to the order of the Treasurer of the United States, in settlement of the Price Administration's cause of action in connection with overcharges through the period August 1, 1942 to date, and certified by our Mr. Adrian J. Weil.
Very truly yours,
Jerry Rossman Corporation
[Signed] Adrian J. Weil
The payment was charged to petitioner's sales account in its books and was reflected in the amount of sales, which were reduced by that amount, as shown in the petitioner's income tax return.
OPINION.
In its amended petition herein the petitioner alleges as error:
(a) The Commissioner has failed to allow as a deduction under Section 23 (a) or (q) of the Internal Revenue Code or in the*248 computation of gross income under Section 22 (a) of the Internal Revenue Code a payment of Three Thousand Three Hundred Thirty Dollars and Seventy-eight Cents ($ 3,330.78) made to the Treasurer of the United States (Office of Price Administration).
Section 23 (a) deals generally with expense deductions, while section 23 (q) relates to "Charitable and Other Contributions by Corporations." Section 23 (q) (1) authorizes the deduction of "contributions or gifts" to "The United States, any State, Territory, or any political subdivision thereof."
We held in Scioto Provision Co., 9 T. C. 439, that an amount paid to OPA in settlement of a claim for treble damages asserted for alleged violation of ceiling price regulations on meat products was not deductible as a business expense. In Garibaldi & Cuneo, 9 T. C. 446, we disallowed the deduction of an amount paid to the United States Government in settlement of a suit brought by OPA for violation of ceiling price regulations on bananas. We said in the Scioto Provision Co. case that to allow the deduction claimed would result in a *472 partial mitigation of the penalty to*249 which the taxpayer had subjected itself and would be contrary to public policy.
The petitioner here seeks to distinguish both of the cited cases on the facts. It points out that the OPA had never instituted any action against it for violation of OPA regulations and that the payment to OPA was made voluntarily to correct overcharges that were unavoidable.
It is not too clear from the evidence that the overcharges in question might not have been avoided if the petitioner had adopted other more appropriate accounting measures.
While it is stipulated in paragraph 6 of the stipulation that the petitioner computed the selling price of its merchandise "in accordance with the method prescribed by Maximum Price Regulation No. 127, making allowance for shrinkage in accordance with the actual figures specified in the finishers' contracts," it is further stipulated in paragraph 7 that, due to undershrinkage of certain lots of goods, "prices had exceeded the maximum allowable under Office of Price Administration regulations."
However that may be, the petitioner itself discovered, belatedly, that it had overcharged for its goods in violation of OPA regulations and made the payment in dispute, *250 as stated in its transmittal letter, in "settlement of the Price Administration's cause of action." In the Scioto Provision case, supra, the payment was made to OPA in settlement of a like cause of action. The only difference between the cases is that OPA there had asserted a claim for treble damages, whereas no claim had been asserted against the petitioner and no violation of the regulations had been charged against it. We do not think that fact can distinguish the cases. While the petitioner's voluntary and forthright disclosure of its violation and the forfeiture of the overcharges were highly commendable on its part, they add nothing to the petitioner's right to a deduction under the income tax laws. This Court has no power to reward litigants for their commendable conduct, as do courts with penal jurisdiction, or to mitigate in any way the hardships that sometimes result from application of the taxing statutes. As to considerations of public policy, a payment made in settlement of a cause of action resulting from voluntary disclosures stands on no different footing from one made under compulsion of the law; otherwise, a morally guilty person who resorts to the expediency*251 of disclosing his offense might be favored over an inadvertent violator who protests his innocence.
There is no merit in either of the petitioner's contentions that the amount of the overcharges should be treated as a credit to sales account, in determining gross income under section 22 (a), or deducted as a contribution to the United States Government under section 23 (q). *473 Obviously, the payment did not result in any abatement of sales. Nothing was ever refunded or credited to sales customers. The evidence is that it would have been impracticable to make refunds to petitioner's customers, and for that reason the payment was made to OPA. Since petitioner's customers purchased the goods from the petitioner in their regular course of trade or business, they had no right of action against the petitioner. The OPA alone had that right of action. See section 205 (e) of the Emergency Price Control Act of 1942.
The payment to OPA had no element of a public donation such as may be deducted under section 23 (q). It was actuated not by philanthropic motives, but by the desire of petitioner's president to absolve the petitioner from any stigma of price ceiling violations and, *252 as stated by the petitioner in its letter of transmittal, to settle OPA's cause of action against it. Undoubtedly, the settlement of the cause of action constituted valid consideration for the payment.
We think that the respondent did not err in disallowing the amount in dispute as a deduction from gross income.
Decision will be entered for the respondent.
Opper, J., dissenting: The historic process of the common law sometimes described as "pricking out the line" calls for zealous alertness on the part of courts to recognize and seize upon sets of facts which, though superficially repetitious and similar, are actually novel and opposite. That seems to me a lesson we are failing to apply here.
The underlying issue of principle in such cases as the present is solely one of public policy. See Heininger v. Commissioner, 320 U.S. 467">320 U.S. 467. Unless a policy can be ascertained which condemns petitioner's conduct and hence requires that the disputed amounts be included in petitioner's gross income or be denied as a deduction, their treatment as ordinary business items is proper. Heininger v. Commissioner, supra.*253 But it is difficult to perceive where petitioner's actions fell short of the highest degree of conscientious and painstaking compliance with morals as well as law.
In Hecht Co. v. Bowles, 321 U.S. 321">321 U.S. 321, the opinion points out that "there is no doubt, however, of petitioner's good faith and diligence." The facts would amply warrant an identical finding here. In the Hecht Co. case it further appeared, as it does here, that "Petitioner undertook to make repayment of all overcharges brought to light by the investigation in case of customers who could be identified. It proposed to contribute the remaining amount of such overcharges to some local charity," rather than as here to the Government itself. *474 Under those circumstances "The District Court concluded that the issuance of an injunction * * * would be 'unjust' to petitioner and not 'in the public interest.'" Its refusal was sustained by the highest Court.
A similar approach serves if we deal with the issue as one of precedent rather than of principle. The cases apparently thought to be those marking out the line to be followed here are readily seen to fall upon the opposite side. *254 In neither was there any such factor as that appearing from the stipulation before us that "Petitioner computed the selling price of its merchandise in accordance with the method prescribed by the Maximum Price Regulations * * *." In fact, in the Garibaldi & Cuneo case 1 the opinion takes pains to point out "that they [the violations] could have been avoided by the exercise of reasonable care."
Nor was there in either of those cases such a voluntary disclosure by petitioner as we have here, made as soon as the unavoidable violations had been discovered and under circumstances where one suspects the violations could and probably would have escaped discovery or at least prosecution. See Hecht Co. v. Bowles, supra. The language of the Scioto2 case is that "The petitioner was charged with violation of the price ceilings fixed by OPA and, under threat of a suit for treble damages and revocation of its slaughtering license, it agreed *255 to pay * * *." Certainly that approach is not admissible here.
Finally, we know that an embezzler violating both the moral and the legal code is not chargeable with the enjoyed proceeds of his wrongdoing. Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404. But this petitioner, conforming in every respect to the highest standards of decent conduct, is to be taxed upon income which it does not claim and has refused to retain. From the conclusion that any such inconsistency is required, I respectfully dissent.
Harlan, J., dissenting: The distinction between the case at bar and Scioto Provision Co., 9 T. C. 439, and Garibaldi & Cuneo, 9 T. C. 446, would seem to be obvious. In both of the above cases the violation of the law was patent. In fact, in the Garibaldi & Cuneo case there was some evidence of a flaunting of the law and in both of these cases the process of presenting and collecting*256 a penalty had actually been instituted. In the case at bar the record does not disclose that there was ever a violation of the OPA law. If there was, the record discloses *475 that it would be difficult, if not impossible, to prosecute and neither had the Government presented a claim, nor is there any evidence that the Government anticipated presenting a claim for penalty.
When the taxpayer herein reported its mistake in pricing, the representative of the OPA, far from claiming that any violation of law or regulations had occurred, merely "advised" the taxpayer to return the overcharge to the various customers. The taxpayer, for reasons not disclosed by the record, claimed that this would be "impracticable." We can only infer that probably the amount of shrinkage in each case would be little more than guesswork and, since the amount of shrinkage apparently varied with each sale, with the average overcharge amounting to less than two-tenths of 1 per cent of the purchase price, it would probably not only be impracticable, but impossible, to compute this minuscule variation from OPA price levels to each customer. At any rate the taxpayer evidently convinced the OPA representative*257 of the utter lack of feasibility of making these computations and at the taxpayer's suggestion the OPA agreed that the taxpayer, to remove from itself all possible breath of suspicion or criticism from its competitors, should give the money to the Government. The record discloses that the plan to give the money to the Government was "agreed upon by the parties." There was no contention that such gift was in satisfaction of any cause of action by the Government. Indeed the record clearly shows that the Government had no cause of action and, if it had, it would have lacked the certainty of proof necessary to establish it in court. The stipulation of facts says:
Petitioner computed the selling price of its merchandise in accordance with the method prescribed by Maximum Price Regulation No. 127, making allowance for shrinkage in accordance with the actual figures specified in the finishers' contracts.
Surely, if the taxpayer complied with the regulations, any judge, or jury, if the question could ever get to a jury, would conclude that it had done all that the law could reasonably require of any citizen. Furthermore, since the taxpayer contended, and the Government agreed, that *258 it would be "impracticable" to compute the overcharges so as to make the individual refunds, and since the action for penalty would necessarily be based upon the sales to each individual customer and not upon the composite overcharge for the entire year, it would certainly be far more "impracticable" for the Government to prove a case for a penalty in the event such an unthinkable action would be undertaken and in the face of the certainty of the proof that would be required of the Government for a recovery.
The fact that the letter from the taxpayer enclosing the check to the Government stated that the check was "in settlement of the Price *476 Administration's cause of action" does not thereby create a cause of action where none existed, nor does it present a claim from the Government where none had ever been presented and on the record none was in contemplation. All that can be drawn from this statement in the letter is that some overzealous lawyer or accountant was trying to cover all the possible numbers for his employer.
If the petitioner herein had made the rebates to its customers as suggested by the OPA, there would, of course, be no question as to the deductibility *259 of these amounts as "allowance on sales." We can not agree with the majority that the same amount should not now be allowed under section 23 (q), I. R. C., as a gift to the Government. The majority opinion denies this deduction because it lacked "philanthropic motives," but came from the "desire of petitioner's president to absolve the petitioner from any stigma of price ceiling violations."
The Supreme Court of the United States, in American Dental Co. v. Helvering, 318 U.S. 322">318 U.S. 322, held that the purpose of a gift was immaterial to its deductibility for income tax purposes as long as the distribution was in fact a gift.
The price control act was passed to prevent price inflation and unwarranted profits. The mistake by the taxpayer herein in its sales to dealers, who in turn sold to customers, was so microscopic in its amount that by the time the price for the wholesale account was divided up into retail sales to consumers it would take a superexpert mathematician to compute the infinitely small price increase. In fact, this taxpayer's mistake could not have affected the retail price. Furthermore, the taxpayer made no unwarranted profits, because*260 it turned 100 per cent of those profits back to the Government.
We feel that for the Government now to tax petitioner for income, 100 per cent of which was delivered to the Government as soon as possible after its mistaken receipt was discovered, is nothing less than treating a mistake as a misdemeanor and penalizing efforts at good citizenship.