Bellingrath v. Commissioner , 46 B.T.A. 89 ( 1942 )

MARY E. BELLINGRATH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bellingrath v. Commissioner

Docket No. 100965.

United States Board of Tax Appeals

46 B.T.A. 89; 1942 BTA LEXIS 911;

January 15, 1942, Promulgated

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Petitioner was a member of certain partnerships engaged in the business of bottling soft drinks in the State of Alabama. In 1935 certain legislation was proposed in the Alabama Legislature imposing a 20 percent tax on the sale of soft drinks. The Alabama Bottlers' Association, of which petitioner's partnerships were members, employed an attorney to prepare statistics and arguments to be presented to the proper committees of the legislature, and to be used by individual members of the association in presenting the contentions of the bottlers to their respective representatives. The activities of the association and its attorney continued through 1936. Petitioner and other members of the association were opposed to the passage of the legislation as originally proposed, and it was not passed in that form. Petitioner, in 1936, made certain contributions through her partnerships, to defray the expenses of the association in this regard, and deducted such contributions from her gross income. Held, such contributions are not deductible under article 23(q)-1, Regulations 94. Textile Mills Securities Corporation v. Commissioner,314 U.S. 326">314 U.S. 326; held further, the deductibility of such contributions is not res adjudicata by reason of a decision of this Board that similar contributions made by petitioner in 1935 were deductible in that year.

Robert A. Littleton, Esq., for the petitioner.

Frank M. Thompson, Esq., for the respondent.

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KERN

The Commissioner determined a deficiency in petitioner's income tax liability for the year 1936 in the amount of $347.97. The sole issue is whether the respondent erred in disallowing as a deduction in 1936 certain amounts paid to the Alabama Bottlers' Association by partnerships of which petitioner is a member, which expenditures were claimed by petitioner to have been ordinary and necessary business expenses. By amended petition, the petitioner has pleaded that this issue is now res adjudicata.

FINDINGS OF FACT.

Petitioner is a resident of Montgomery, Alabama, and filed her income tax return for the calendar year 1936 with the collector of internal revenue for the district of Alabama. Petitioner is a member of five different partnerships engaged in the business of bottling and distributing soft drinks known as "Coca-Cola." Each of these partnerships is a member of the Alabama Bottlers' Association, a nonprofit organization functioning as a trade association for the purpose of promoting the best interest of persons, firms, and corporations engaged in the business of bottling and distributing soft drink beverages in Alabama.

In the year 1935 a bill imposing a 20 percent tax on the sale of soft drinks was pending before the Alabama Legislature. During the year 1935 the partnerships of which petitioner is a member contributed to the association, in addition to the regular membership fees, amounts totaling $1,486.41 to defray certain expenses of the association. The major part of the funds contributed to the association was paid by it to E. W. Pettus, an attorney, to secure information concerning legislation which might affect the business of the bottlers and keep them posted on the currently proposed legislation and all facts pertinent thereto. Pettus had an understanding with the association that it was no part of his duty to solicit votes of senators of legislators for or against any measure.

Pettus appeared before the state tax commission and consulted with the educational department, which would have been the beneficiary of any special bottling tax. He supervised the preparation of questionnaires to determine the financial investment of the bottlers and the amount of taxes paid by them and competitive businesses. He acted as legislative and tax consultant to the partnerships; but he did not present the bottlers' case before any legislative committee. The material prepared by him was used by the individual members of the association in appearing before committees of the state legislature at public hearings. Pettus received no stated salary. He sent the association a bill once or twice a year, basing his fees on the amount of time consumed and expenses incurred.

The foregoing facts were found to be true by this Board in Mary E. Bellingrath, a memorandum opinion of April 27, 1940. In that proceeding it was held that the payments under consideration were not made for lobbying purposes, but were ordinary and necessary expenses of the partnerships, and, as such, deductible. No appeal was ever taken from the decision of the Board, and the decision became final.

During 1936 the partnerships in which petitioner had an interest made further contributions to the association in the aggregate amount of $1,311.28, which they deducted as part of the ordinary and necessary expenses of their businesses. Petitioner's share of this amount was $543.72.

In the year 1936 the legislation was still pending in Alabama, and the association was still gathering material and information for use by its members at the legislative committee hearings, to which the bottlers had been invited to divulge information relative to the burden of the proposed legislation and the income that might be expected therefrom. The members of the association, including petitioner were opposed to the passage of the proposed legislation.

The individual members of the association testified before the legislative committee from the data collected for them by Pettus. They also used this data in presenting the contentions of the bottlers to their respective representatives in the legislature. Pettus did not testify.

Eventually the legislature passed an act providing for a 2 percent sales tax on luxuries of the retail trade, including the retail sale of bottled soft drink beverages, instead of the originally proposed 20 percent sales tax on soft drinks.

The sums in question were not expended by the partnerships or the association for lobbying purposes. They were expended for the defeat of the legislation as originally proposed in the state legislature.

The association, as such, did not undertake to advocate the enactment of any particular kind of legislation. It did seek to persuade members of the Alabama Legislature to vote against the legislation as originally proposed, then being considered by the committee, but only by presenting facts before that committee in open hearings on the measure, and furnishing data and material to individual members for their use in presenting the arguments of the bottling industry to their respective representatives in the legislature. The members of the association did not desire passage of the pending bill because they knew that, if passed, it would work a hardship on their businesses.

OPINION.

KERN: The ultimate question presented here for our determination is whether certain contributions made by petitioner through partnerships of which she was a member to the Alabama Bottlers' Association in the taxable year, are deductible as ordinary and necessary business expenses under section 23(a) of the Revenue Act of 1936, ¹ or are not deductible by reason of being expended for the defeat of legislation and, therefore, coming within the purview of article 23(q)-1 of Regulations 94. ²

Petitioner urges that a decision of this question on its merits is unnecessary and improper because it is res adjudicata by reason of our decision in the case of Mary E. Bellingrath, Docket No. 97947 (memorandum opinion, April 27, 1940), in which we held that contributions made by this petitioner in 1935 to the same association were deductible. With this contention we do not agree. Engineer's Club of Philadelphia v.United States, Fed.Supp. (Ct. Cls., Nov. 3, 1941). While the activities of the association in 1936 were comparable and similar to those of 1935, they were not identical. "They were a different, though similar, set of events. They consisted of a whole course of conduct from day to day in all its details of an enterprise of considerable scope." Loc. cit. In such circumstances the principle of res adjudicata does not apply.

We proceed, therefore, to a consideration on its merits of the ultimate question presented.

Petitioner's partnership and other bottlers of soft drinks in the State ofAlabama were concerned over proposed legislation which would have imposed on them a considerable additional tax burden. They proceeded to take legitimate and unobjectionable steps through their association to forestall the passage of this legislation in its proposed form. These steps consisted of gathering facts, figures, and arguments to be presented before the proper committees of the legislature, which would also be available to individual members of the association in presenting the question from the standpoint of the bottlers to their respective representatives in the legislature. All these activities were normal and in no way sinister or objectionable. They were not engaged in "lobbying" for hire and there is no evidence that they were attempting to debauch the public morals of the legislators of Alabama. They were engaged in a proper and legal attempt to prevent injury to their business by persuading the legislature that the proposed legislation was unwise, unfair, and unwarranted. In order to defray the expenses of these activities of the association, petitioner made the contributions in question.

It seems evident to us that such contributions were "money expended for * * * the * * * defeat of legislation", and therefore come within the phraseology of the quoted regulation.

The question thereupon arises whether this regulation has the force and effect of law. We have, in the past, felt that "obligatory application of the regulation would result [under certain circumstances] in misapplication of the statute", and have refused to recognize the validity of the regulation in cases where the expenditures were, apart from regulation, ordinary and necessary business expenses. . However, the Supreme Court of the United States, in the recent case of , has unequivocally approved the regulations as a valid exercise of the rule-making authority making nondeductible the "special group of expenses" set out in the regulation.

Whatever may have been our views on this subject before the Supreme Court spoke, we must now accord complete validity to the regulation. Since we have already held that the regulation is applicable to individuals as well as to corporations, ,

Decision will be entered for respondent.

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Footnotes

• 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions:

  (a) EXPENSES. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * * ↩

• 2. * * * Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income. ↩