Tax deduction

“ The deduction for income tax purposes stands on no better footing. Congress permitted a deduction of that part of gross income 'which pursuant to the terms of the will * * * is during the taxable year * * * permanently set aside' for charitable purposes. In view of the explicit requirement that the income be permanently set aside, there is certainly no more occasion here than in the case of the estate tax to permit deduction of sums whose ultimate charitable destination is so uncertain. ”

“ Accordingly, to avoid that result in this case, the deduction allowable in the year of repayment must be reduced by the percentage depletion allowance which respondent claimed and the Commissioner allowed in the years of receipt as a result of the inclusion of the later-refunded items in respondent's 'gross income from the property' in those years. Any other approach would allow respondent a total of $1.27 1/2 in deductions for every $1 refunded to its customers.
Under the annual accounting system dictated by the Code, each year's tax must be definitively calculable at the end of the tax year. ”

“ The power to tax income like that of the new corporation is plain and extends to the gross income. Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.
The statutes pertaining to the determination of taxable income have proceeded generally on the principle that there shall be a computation of gains and losses on the basis of a distinct accounting for each taxable year ”

“ Moreover the basis must be reduced by that amount even though no tax benefit results from the use of depreciation as a deduction. Wear and tear do not wait on net income. Nor can depreciation be accumulated and held for use in that year in which it will bring the taxpayer the most tax benefit. ”

“ It is urged that want of due process results from the provision allowing individuals to deduct from their gross income dividends paid them by corporations whose incomes are taxed, and not giving such right of deduction to corporations.
5. Want of due process is also asserted to result from the fact that the act allows a deduction of $3,000 or $4,000 to those who pay the normal tax, that is, whose incomes are $20,000 or less, and does not allow the deduction to those whose incomes are greater than $20,000 ”

“ On the return for the first year in which advances are received, a taxpayer will have to report an unrealistically high net income, since he will have to include unearned receipts, without any offsetting deductions for the future cost of earning those receipts. On subsequent tax returns, each year's unearned prepayments will be partially offset by the deduction of current expenses attributable to prepayments taxed in prior years. ”

“ This history suggests it is the voluntary assumption of the burden of the tax, rather than acting as tax collector and paying it for another on whom the burden falls, which underpins the deduction. And this is plainly demonstrated by the requirement that to be entitled to the deduction the corporation must not be reimbursed by the shareholder for paying the tax. To pay the tax with sums which have been deducted and withheld from dividends declared and distributed amounts to obtaining the reimbursement which renders the deduction unavailable. ”

“ Here the Constitution expressly forbids diminution of the judge's compensation, meaning, as we have shown, diminution by taxation as well as otherwise. The taxing act directs that the compensation-the full sum, with no deduction for expenses-be included in computing the net income, on which the tax is laid. If the compensation be the only income, the tax falls on it alone; and, if there be other income, the inclusion of the compensation augments the tax accordingly. ”

“ The term 'net income,' as herein used, means the gross income less the deductions allowed.' (No deduction, however, is allowed for interest received from federal, state, municipal or other tax-exempt bonds.) The foregoing is so plain that comment or elucidation would seem unnecessary. The bare recital of the facts, in our opinion, shows how unreasonable it is to hold that the aim and purpose of the legislation was not, by indirection, to impose a tax upon income derived from tax-exempt securities which, constitutionally, could not be imposed directly. ”

“ In computing net corporate income subject to tax, a deduction is permitted for '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 * * *.' Sec. 23 (a) Revenue Acts of 1932, 1934, and 1936, 26 U.S.C.A. Int.Rev.Code, § 23 (a) . 47 Stat. 179; 48 Stat. 688; 49 Stat. 1658. 'Dividends' distributed from net corporate profits are not allowable deductions. ”

“ On the contrary, it perverts recoupment by pyramiding income spread in receipt over many years into 'income' received in a single, entirely different one. And in a day when the tax rate mounts more often than yearly the skyrocketing effect of the process operates with wholly incalculable effect on the taxpayer, who it will be noted has no control over the contingency which brings it into play.
A regulation which would require the taxpayer to pay the taxes deducted for the prior years together with the usual interest and penalties would be harsh enough in discouragement of taking the deduction. ”

“ The ruling was based upon the position that the tax on such interest was the same as that imposed by the 116th section of the act of 1864, viz., a part of the income tax, and that as the 116th section did not include non-resident aliens, the tax on interest spoken of in the 122d was not chargeable against them-the deduction of 5 per cent. being only a mode of collecting the income tax. ”

“ With this understanding of the power in virtue of which the two taxes are inposed, we are of opinion that neither the United States nor the state is under any constitutional obligation in determining the amount of its tax to make any deduction on account of the tax of the other. With both the matter of making such a deduction rests in legislative discretion. In their present statutes both direct that such a deduction be not made. It is not as if the tax of one, unless and until paid, presented an obstacle to the exertion of the power of the other. ”

“ In other words, the tax is imposed upon the doing of business of the character described, and the measure of the tax is to be income, with the deduction stated, received not only from property used in business, but from every source. This view of the measure of the tax is strengthened when we note that as to organizations under the laws of foreign countries, the amount of net income over and above $5,000 includes that received from business transacted and capital invested in the United States, the territories, Alaska, and the District of Columbia. ”

“ But in these cases I think that as a matter of law the line should not be located where the Tax Court has placed it.
Tax liability should depend upon the subtle refinements of corporate finance no more than it does upon the niceties of conveyancing. [12] Sheer technicalities should have no more weight to control federal tax consequences in one instance than in the other. The taxing statute draws the line broadly between 'interest' and 'dividend.' This requires one who would claim the interest deduction to bring himself clearly within the class for which it was intended. ”

“ Although the mere presence of an incidental future benefit—"some future aspect"—may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is undeniably important in determining whether the appropriate tax treatment is immediate deduction or capitalization. ”

“ As compared with the company deriving its income only from taxable sources, the enterprise with the same total amount of investment income derived partly from exempt and partly from taxable sources would pay more tax per dollar of taxable gross income, i.e., taxable income before deduction for the reserve. ”

“ Section 1341 retains those principles where they benefit the taxpayer but allow recomputation of the taxes of a prior year if that method would result in a greater tax saving.↑ Judicial assumptions that Congress did not intend liberal benefits for taxpayers are particularly suspect in the area of percentage depletion, perhaps the most generous business deduction in the Code. And Congress had the recipients of percentage depletion specifically in mind when it drafted § 1341. ”

“ There, the salvage value, if anything, is ordinarily nominal. Furthermore, the 'profits' of the taxpayers here are capital gains and incur no more than a 25% tax rate. The depreciation, however, is deducted from ordinary income. By so translating the statute and the regulations, the taxpayers are able, through the deduction of this depreciation from ordinary income, to convert the inflated amounts from income taxable at ordinary rates to that taxable at the substantially lower capital gains rates. This, we believe, was not in the design of Congress. ”

“ This being so, it is but a reasonable construction of the language of the statute to hold that the payment of an excise tax due upon the property, and made a lien thereon, was a lawful expense attending the trust, which the secretary was justified in deducting. The deduction of the tax may be assumed to be made at the time of the payment of the proceeds of the sale of the cotton into the treasury, and as the statute makes the amount due certain no technical assessment of the tax was necessary. ”

“ Hence, whether the measure of the tax be technically described as taxable net worth or as taxable assets less an allowed deduction representing liabilities to which they are subject, the state, in fixing the tax, does not infringe any constitutional immunity by requiring liabilities to be deducted from all the assets, including tax-exempt bonds, or, what comes to the same thing, by deducting from taxable assets their proportionate share of the burden of policy liabilities. ”

“ Commissioner, 2 Cir., 175 F.2d 711, 713, the test of nondeductibility always is the severity and immediacy of the frustration resulting from allowance of the deduction. The flexibility of such a standard is necessary if we are to accommodate both the congressional intent to tax only net income, and the presumption against congressional intent to encourage violation of declared public policy.
Certainly the frustration of state policy is most complete and direct when the expenditure for which deduction is sought is itself prohibited by statute. ”

“ Any inference of disapproval of these expenses as deductions is absent here. The Regulations, indeed, point the other way, for they make the federal excise tax on wagers deductible as an ordinary and necessary business expense. [3] This seems to us to be recognition of a gambling enterprise as a business for federal tax purposes. The policy that allows as a deduction the tax paid to conduct the business seems sufficiently hospitable to allow the normal deductions of the rent and wages necessary to operate it. ”

“ Congress, however, has taken no such action here. It has not undertaken to penalize taxpayers for certain types of advocacy; it has merely allowed some, not all, expenses as deductions. Deductions are a matter of grace, not of right. Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27, 78 S.Ct. 512, 2 L.Ed.2d 559. To hold that this item of expense must be allowed as a deduction would be to give impetus to the view favored in some quarters that First Amendment rights must be protected by tax exemptions. ”

“ Congress has passed no tax statutes which compel me to conclude that it intended to reward ingenuity in paper work by granting multiple tax deductions for a single money payment to discharge a single corporate obligation. ”

“ The income tax acts have consistently allowed deduction for exhaustion, wear and tear, or obsolescence only in the case of 'property used in the trade or business.' The taxpayers in these cases could not, therefore, have claimed any deduction on this account for years prior to that in which the casualty occurred. For this reason they claim they may deduct upon the unadjusted basis,-that is,-cost. As the income tax laws call for accounting on an annual basis ”

“ How many times have we heard about profitable companies paying little or no taxes, or seen advertising for sophisticated tax shelter schemes that enable individuals to avoid paying their fair share of taxes, or seen luxuries being written off that must eventually be paid for by somebody else-that somebody, of course, being you. I wonder how many Americans realize that tax deductions are available for seminars and conferences held on cruise ships. We know that our tax code is unfair. ”

“ I. The Provisions of the Tax Code Governing Charitable Contribution Deductions Do Not Appear to Permit the Deduction Claimed by the Sklars The Sklars assert that the deduction they claimed is allowable under section 170 of the Internal Revenue Code which permits taxpayers to deduct, as a charitable contribution, a "contribution or gift" to certain tax-exempt organizations. ”

“ But we find no suggestion that 'allowed', as distinguished from 'allowable', depreciation is confined to those deductions which result in tax benefits. 'Allowed' connotes a grant. Under our federal tax system there is no machinery for formal allowances of deductions from gross income. Deductions stand if the Commissioner takes no steps to challenge them. Income tax returns entail numerous deductions. If the deductions are not challenged, they certainly are 'allowed' since tax liability is the determined on the basis of the returns. ”