*97 Decision will be entered for the respondent.
Payments made to the Administrator of the Office of Price Administration in compromise of a claim for treble damages for alleged violation of price ceilings held not deductible as an ordinary and necessary business expense.
*439 This proceeding involves a deficiency of $ 9,150.16 in petitioners excess profits tax for the year ended October 31, 1944. The only question in issue is whether the petitioner is entitled to deduct as an ordinary and necessary expense payments of $ 7,709 which it made to the Office of Price Administration in settlement*98 of a claim for treble damages arising from alleged violations of price ceilings.
*440 FINDINGS OF FACT.
The petitioner is an Ohio corporation, with its principal place of business located at Newark, Ohio. It filed its return for the taxable year ended October 31, 1944, with the collector for the eleventh district of Ohio, at Columbus, Ohio.
The petitioner conducts a wholesale meat packing and slaughtering business. It cures, smokes, and otherwise prepares various types of meats. Its total output for the taxable year involved was about 3,000,000 pounds.
In January 1944 several representatives of the Office of Price Administration, hereinafter referred to as OPA, appeared at the petitioner's plant to make an audit of its books and accounts. The audit was completed in about a week. Thereafter, the petitioner received the following letter from OPA, dated April 12, 1944:
The report of investigation of your Company, recently conducted by this office, discloses considerable overcharges in sales of meats and other practices in your business operations which are not in conformity with the Regulations.
We request that you appear in this office on Wednesday, April 19 at 10:00 a. m., *99 in order that we may discuss this matter.
In response to the above letter three of the petitioner's officers, the president, plant superintendent, and office manager, appeared at the designated office at the time specified. Several representatives of OPA were present, including one of the auditors who made the examination of petitioner's books. The petitioner's officers were told that the audit revealed several violations of OPA's regulations, as follows:
(1) An overcharge of freight rates;
(2) An upgrading of beef; and
(3) Selling hamburger meat under a different name, or as a different product, at above the hamburger price ceiling.
The officers were further told that they had a choice of paying OPA $ 9,309 or facing a suit in court for treble damages and the possible revocation of their slaughtering license.
The petitioner's officers felt that it was for the best interests of the company to pay the amount demanded as overcharges, rather than to stand the expense and risk of a suit in court. The petitioner's financial condition at that time was such that it could ill afford to make the cash payment demanded and OPA agreed to extend the payments.
The amount of $ 9,309 was*100 a compromise figure which the parties agreed upon at the conference. By further agreement the computation of the alleged overcharges was based on an accounting for one month only and multiplied by eight, the total number of months within the period involved.
*441 Under date of April 20, 1944, OPA wrote the petitioner the following letter:
Confirming your conference with Mr. George Kelly, Price Specialist, Mr. L. R. Reinhart, Cost Accountant and Mr. Francis B. Douglass, Chief of the Industrial Materials & Apparel Enforcement Branch, relative to the audit made of the sales of meats by your company during the month of November 1943, we are prepared to recommend a settlement of the treble damage claim of Chester Bowles, Administrator of the Office of Price Administration, against your company on the following terms:
Payment by your company of the sum of $ 9309 to the Treasurer of the United States, payable $ 3309 at once, $ 2,000 in 30 days, $ 2,000 in 60 days and $ 2,000 in 90 days.
The above sum is made up of the following items:
1. Ceiling price overcharges on beef, fresh and smoked pork, which item originally included 1/4 cents overcharge on freight, based upon the erroneous*101 freight rates given to your company by the freight agent of the B&O railroad company at Newark, Ohio. The original amount shown by the auditor's report for this item was $ 446.45. Two adjustments were made at the conference, one of $ 82.82 correcting erroneous ceiling prices used in the audit for items indicated at the conference and a freight allowance of $ 100 for the 1/4 cents per pound freight item referred to immediately above, which estimate was used to eliminate the necessity of recalculating the actual amount received by your company through the erroneous information given by the freight agent. Deducting these two items leaves a balance of $ 263.63, which extended for a period of 8 months, using the $ 263.63 figure as an average, amounts to $ 2109.
2. Item 2 consists of the claim of up-grading as shown in the auditor's report originally calculated by the auditor as $ 786.96 for November 1943, accepting your explanation that a portion of the beef shown as up-graded was boned and used in your so-called prepared meat loaf. This item is adjusted to the sum of $ 400 for the month of November and using that basis as an average, multiplied by 8 to cover the 8 months from June*102 15 to February 15, is computed at $ 3200.
3. Item 3 is the sale of prepared meat loaf shown by the accountant's report at $ 988.09 for the month of November 1943. Since it is conceded that November was not an average month and that the sales for that month were approximately double the average monthly sales, the figure agreed upon as representing an average month is $ 500, which multiplied by 8 amounts to $ 4,000.
The sum of the above three items makes up the agreed upon figure of $ 9309. Upon the receipt of the full amount of $ 9309 a proper release will be executed by this office and forwarded to you. The release to be in the form heretofore approved by the National Office of OPA and a copy of which will be forwarded to you upon the receipt of the first payment outlined above.
We further advise that the Regional Office will probably require that a License Warning Notice be sent to your company for the violations outlined herein which will have no effect providing your company is not involved in future violations. This settlement is also subject to the approval of the Regional and National Offices of OPA, however, for your information, the Chief of the Food Unit Enforcement Branch*103 of the Regional Office was in Columbus yesterday and has reviewed the proposed settlement and given it his approval.
It is further understood that your company will immediately take the necessary steps to place its future operations in complete compliance with all the regulations of the Office of Price Administration.
*442 We appreciate your cooperation in permitting an estimate to be made of the overcharges based upon a one-month audit as it has eliminated the necessity of considerable work in completing an audit for the entire 8 month period.
After the conference with the OPA officials, the petitioner's officers made their own audit of the company's books and discovered that there were errors in the Government's audit. They communicated these findings to OPA and in reply received the following letter, dated June 6, 1944:
Confirming our telephone conversation of today, the Regional Office has approved an adjustment of our recent settlement with your company of the Administrator's treble damage claim in the total amount of $ 9,309.
Because of the error made in the original audit, which included the figures for the month of November 1942 in with the figures for November 1943 *104 on the portion of the claim that beef had been up-graded, an allowance has been made of $ 1,600, to be deducted from the last check due from your company.
This allowance is arrived at by reducing the estimate of $ 400 per month to $ 200 per month for the eight month period.
We trust that you will forward your check immediately, in the sum of $ 2,000 payable to the Treasurer of the United States, which check was due on May 26, 1944. This settlement will require another check in the sum of $ 2,000 payable on June 26, 1944 and the last check due July 26, 1944 will be reduced from $ 2,000 to $ 400.
In a letter from OPA, dated December 14, 1945, the petitioner was informed that the freight rates used by that office in determining the amount of the alleged overcharges were erroneous. The petitioner received a further communication from OPA, dated October 25, 1945, setting forth the correct freight rates applicable to the period for which the investigation was made. The rates authorized in this communication were 25 cents per 100 pounds higher than those which the petitioner had used before the investigation and 50 cents per 100 pounds higher than the rates which petitioner had been required*105 to use after that time.
The amount of the overcharges attributed to "upgrading," as agreed upon in the conference, was $ 3,200. On June 6, 1944, the OPA wrote the petitioner a letter admitting that its auditors had made a mistake of $ 1,600 in computing the overcharges due to upgrading, and to offset the error the last payment due from the petitioner under the settlement agreement would be reduced from $ 2,000 to $ 400. Payments in the aggregate amount of $ 7,709 were made to the Administrator of OPA by the petitioner during the taxable year ended October 31, 1944.
Ordinarily, the grading of petitioner's meats was done by the Office of Marketing Services of the United States Department of Agriculture. A representative of that office would call at the petitioner's plant for that purpose at intervals of about five days. Duplicate records were kept of these gradings. All of the graded meats were sometimes disposed of before the representative's next visit and on those *443 occasions the petitioner would obtain permission from the Office of Marketing Services to do its own grading. Otherwise, the petitioner would have been forced to close down its plant, or, at least, to curtail*106 its business for the interim. In such instances it graded all of its meats below first and second grades. The petitioner kept no records of its own gradings and consequently its accounts showed sales of larger quantities of graded products than were shown by the records of the Office of Marketing Services. The alleged adjusted overcharges of $ 1,600 on account of upgrading were based upon this discrepancy.
The remaining $ 4,000 of the alleged overcharges was based on OPA's ruling that the product which the petitioner prepared and sold as a "meat loaf" should have been classified as "hamburger" and priced accordingly. This product was made of boned beef, ground and seasoned. It was sold in a cellophane casing, such as is used for bologna, and stamped, "Scioto Prepared Meat Loaf." No scraps or undesirable cuts, such as are customarily used in making hamburger, were used in the preparation of the meat loaf. No hamburger was prepared or sold by the petitioner during the period involved. OPA had no listed price ceiling on prepared meat loaf. The petitioner sold this product at approximately 10 cents per pound over the listed hamburger ceiling. The product was discontinued after*107 the OPA's ruling that it would have to be sold at the hamburger price ceiling.
On January 14, 1946, the petitioner wrote OPA the following letter:
In 1944 our company was charged with certain alleged price violations, a consent settlement for which was agreed upon between the Columbus District Office and this Company.
Recently it was brought to our attention that our settlement was based upon several erroneous calculations by O. P. A. all of which seriously affected the final disposition of the case.
With this in mind we are writing you to inquire if O. P. A. administrative regulations provide for the reopening of a case of this nature.
It will be appreciated if you can give us this information at your earliest convenience.
The petitioner never received any reply to the above letter. It has never been refunded any portion of the amount which it paid to OPA.
In its return for the taxable year ended October 31, 1944, the petitioner deducted the aforesaid amount of $ 7,709 as an ordinary and necessary business expense. The respondent disallowed the deduction in determining the deficiency herein asserted.
OPINION.
Our question here is a narrow one. The petitioner was charged with violation*108 of the price ceilings fixed by OPA and, under threat of a suit for treble damages and revocation of its slaughtering license, it agreed to pay, and did pay, to the Administrator of *444 OPA $ 7,709 as the amount of the alleged overcharges. Our question is whether the amount so paid is deductible as an ordinary and necessary business expense under section 23 (a) of the Internal Revenue Code.
The petitioner contends, first, that the amount in question was not a "penalty," but was in the nature of civil damages and, therefore, should not be disallowed for reasons of public policy. It argues, further, that in any event the deduction is allowable because the payment was made in compromise of a baseless claim and under threats of coercion, and was for the purpose of protecting its business.
As a general rule the deduction of a penalty imposed for violation of a penal statute is not allowable. See Great Northern Railway Co. v. Commissioner, 40 Fed. (2d) 372; Burroughs Bldg. Material Co. v. Commissioner, 47 Fed. (2d) 178; Standard Oil Co. v. Commissioner, 129 Fed, (2d) 363; and Helvering v. Superior Wines & Liquors, Inc., 134 Fed. (2d) 373.*109
The decided cases do not follow any clear-cut rule as to whether payments made in satisfaction of violations, or alleged violations, of OPA regulations are penal or are in the nature of civil damages. See Brown v. Cummins Distilleries Corporation, 56 Fed. Supp. 941; Bowles v. Beatrice Creamery Co., 56 Fed. Supp. 805 (reversed without discussion of the question under consideration, 146 Fed. (2d) 774); Bowles v. Berard, 57 Fed. Supp. 94; and Everly v. Zepp, 57 Fed. Supp. 303.
In Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, the Supreme Court said that the courts from time to time have "narrowed the generally accepted meaning of the language used in section 23 (a) in order that tax deduction consequences might not frustrate sharply defined national or state policies proscribing particular types of conduct." The Court ruled, however, that the taxpayer was entitled to deduct the attorney's fees and other expenses which he had incurred in an unsuccessful action to enjoin enforcement of a mail*110 fraud order by which he had been denied the use of the mails for the purpose of carrying on his business. Although no penalty was involved in that case, the Court pointed out that "Where a taxpayer has violated a federal or state statute and incurred a fine or penalty he has not been permitted a tax deduction for its payment." The Court further said that:
If the respondent's litigation expenses are to be denied deduction, it must be because allowance of the deduction would frustrate the sharply defined policies of 39 U. S. C. §§ 259 and 732, 39 U. S. C. A. §§ 259, 732, which authorize the Postmaster General to issue fraud orders. The single policy of these sections is to protect the public from fraudulent practices committed through the use of the mails. It is not their policy to impose personal punishment on violators; such *445 punishment is provided by separate statute, and can be imposed only in a judicial proceeding in which the accused has the benefit of constitutional and statutory safe guards appropriate to trial for a crime.
The policy of the Emergency Price Control Act, and OPA regulations promulgated*111 thereunder, was not merely to protect the public from financial loss, as was the mail fraud statute referred to in Commissioner v. Heininger, supra, but was "the prevention of inflation and its enumerable consequences." Yakus v. United States, 321 U.S. 414">321 U.S. 414, 423. Essentially, the act was a war measure which Congress considered of vital importance to the prosecution of the war. Undoubtedly, it represented a "sharply defined" national policy "proscribing particular types of conduct." Commissioner v. Heininger, supra. It is begging the question to say that enforcement provisions of the act authorizing the consumer or the Administrator of OPA to bring suit for treble damages for certain violations of price ceilings (sec. 205 (e)) were not penal in nature and that payments made thereunder should therefore not be disallowed for reasons of public policy.
We are aware that the respondent has ruled that damages paid on or after July 31, 1942, to the United States Government or to private consumers for violations of price ceilings for which the consumers had a right of action may be treated*112 as expense deductions, while those paid to the United States Government on account of sales made to the Government, or sales on which the Government, and not the consumer, has a right of action for damages, may not be deducted. See I. T. 3627, 1943 C. B. 111.
However, we are not required in this proceeding to pass upon the validity of that ruling in so far as it allows the deduction of such payments made to the United States Government on account of sales made to consumers other than the Government and on which the purchasers are not entitled to bring suit. The payment here in question was made in settlement of an action which the Government, and not the consumers, was authorized to bring and is, therefore, not deductible under the respondent's ruling.
In Commissioner v. Longhorn Portland Cement Co., 148 Fed. (2d) 276; certiorari denied, 326 U.S. 728">326 U.S. 728, the Circuit Court of Appeals for the Fifth Circuit held (reversing 3 T. C. 310 on this point) that a penalty paid to the State of Texas in compromise of a suit brought by the state for violation of its antitrust laws *113 was not deductible. The court was of the opinion that to permit the deduction would result in a partial mitigation of the penalty and would be against public policy. Both of those objections would apply against the deduction which the taxpayer seeks in this case.
*446 It is of no aid to the petitioner here that it paid the amount in dispute in compromise of the claim asserted by OPA. Even though the proof now before us in this proceeding indicates that the taxpayer may not have been guilty of any violation of price ceilings, as charged by OPA, we do not feel called upon to rule on that question here. The petitioner had ample opportunity to have the matter judicially determined at the time it was charged with the violations. It chose, instead, to pay the penalty, or damages, demanded.
We think that the deduction of the amount claimed by the petitioner was properly disallowed.
Decision will be entered for the respondent.