
    CONSOLIDATED GAS, ELECTRIC LIGHT AND POWER CO. OF BALTIMORE v. THE UNITED STATES
    [No. D-723.
    Decided April 2, 1928]
    
      On the Proofs
    
    
      Income tax; return of corporation; deductions'; subscriptions to war funds; “ ordinary and necessary expenses.” — Payment by a corporation of its subscriptions to war funds of the Ked Cross, the Y. M. C. A., and similar agencies, was not an ordinary or necessary expense in the carrying on of business, which it was entitled to deduct in computing net income, as provided by the revenue acts of 1916 and 1918.
    
      The Reporter’s statement of the case:
    
      Mr. Charles Masrlcell for the plaintiff. Hartan, Gook, Ghesnut dá Marlcell were on the briefs.
    
      Mr. J. H. Sheppard, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. Mr. Alexamder H. McGormick was on the brief.
    
      The court made special findings of fact, as follows:
    I. The plaintiff is a corporation organized and existing under the laws of the State of Maryland and has its principal place of business at the city of Baltimore in said State. It is and was, during the period involved, engaged in the business of manufacturing and selling gas and generating and selling electricity. It has no competition in the supply of its particular service of gas and electricity. The volume of its business is largely dependent on the good will of the community. It gets a great deal of business through advertising and through various means of creating and maintaining the respect and good will of the people.
    II. During the years 1917 and 1918, but after April 6, 1917, the plaintiff made payments in the following amounts, which accrued within the following periods, respectively:
    July 3, 1916, to June 30, 1917:
    Baltimore fund_ $2, 750.00
    July 1, 1917, to June 30, 1918:
    Bed Cross- 100,000.00
    T. M. C. A_ 10,000.00
    Baltimore fund_ 2, 750.00
    112, 750.00
    July 1, 1918, to December 31, 1018:
    Bed Cross- 25, 000. 00
    War-work campaign_ 4,166. 67
    29,166.67
    Prior to June 30, 1918, the plaintiff kept its accounts and made income-tax returns on a fiscal-year basis, its fiscal year ending on the 30th day of June. Since June 30, 1918, the plaintiff has kept its accounts and made income-tax returns on a calendar-year basis. Income-tax returns were made for the half year beginning July 1, 1918, and ending December 31, 1918. Throughout the year's 1917 and 1918, as well as before and since, the plaintiff has kept its accounts and made its income-tax returns on an accrual basis.
    
      III.(a) The above-mentioned “ Bed Cross ” is the American National Bed Cross incorporated by the Congress of the United States. The above-mentioned sums of $100,000 and $25,000 paid to the Bed Cross were paid into the Bed Cross war fund and the second Bed Cross war fund, respectively.
    
      President Wilson, who was also president of the Eed Cross, on May 10, 1917, created the Eed Cross War Council consisting of seven members, as a board of managing directors for the war period. To this war council was delegated by the executive committee full and complete control, management, and administration of all affairs connected with or incidental to operations arising out of the war. The President also created a war finance committee, the purpose of which-was to direct the raising of $100,000,000 Eed Cross war fund. The terms of subscription to this fund provided generally that the local chapters might receive of the funds raised in the various communities an amount not exceeding 25 per cent of the subscriptions of each community for local war-relief purposes and the remainder should be collected through the war finance committee and turned over to the treasurer of the American Eed Cross. Appropriations for the first and second Eed Cross war-fund campaign were made only for war-relief work, including foreign war-relief work and war-relief work in the United States.
    
      (b) The above-mentioned sum of $10,000 paid to the Y. M. C. A. was paid into the 1917 fund raised by the national Avar work council of the Young Men’s Christian Associations of the United States to provide for the war work of the council among the enlisted men of the United States Army and Navy at home and abroad, and also to provide a similar Avork in the armies of France, Eussia, Italy, and other allies, and also for the prisoners-of-war work for a period of nine months ending June 30, 1918.
    In General Orders No. 313, issued by the Navy Department at Washington under date- of July 26, 1917, “ cordi’al recognition is hereby given the Young Men’s Christian Association as a valuable adjunct and asset to the service.” In a letter dated April 28, 1917, Secretary Baker said that the young men then engaged in the work of the Young Men’s Christian Association on behalf of the Army and Navy of the United States, and also in the Avork of the association on behalf of the men of the armies of the allied countries and in prisoners-of-Avar camps of the various belligerents undoubtedly were doing a service of high order for their country and their country’s cause, and that pending their actual call to the colors the War Department would recognize their service as directly in aid of the men in our own Army.
    
      (c) The above-mentioned sum of $4,166.67 paid to the war-work campaign was paid into the 1918 fund for war purposes, raised by the united war-work campaign conducted jointly, at the request of President Wilson, by the united action of seven organizations, viz, National War Work Council of the Young Men’s Christian Association, War Work Council of the National Board of the Young Women’s Christian Association, National Catholic War Council (Knights of Columbus), Jewish Welfare Board, War Camp Community Service, American Library Association, and the Salvation Army.
    Expenditures of this fund were strictly limited to war purposes. The united war-work campaign was conducted pursuant to a letter from President Wilson dated September 3, 1918, in which he requested that these seven organizations combine their approaching appeals for funds in a single campaign, so that in their solicitation of funds, as well as in their work in the field, they might act in as complete cooperation as possible. In the course of this letter President Wilson said:
    “The War Department has recognized the Young Men’s Christian Association, the Young Women’s Christian Association, the National Catholic War Council (Knights of Columbus), the Jewish Welfare Board, the War Camp Community Service, the American Library Association, and the Salvation Army as accepted instrumentalities through which the men in the ranks are to be assisted in many essential matters of recreation and morale.”
    
      (d) The two above-mentioned sums of $2,750 paid to the Baltimore fund were paid into that part of the Baltimore fund designated as the “ patriotic fund,” to be administered through the Bed Cross for the support of the families of men in the military and naval service. The Baltimore fund was raised in Baltimore, Maryland, for the express purpose, among others, of abridging the period before the Government made provision for the support of the families of men in its military and naval service.
    IV. The above-mentioned payments were duly authorized by the proper official agencies of the plaintiff corporation.
    
      The books of the plaintiff reflected these sums, not as of the time when the plaintiff subscribed thereto, but as of the date when the vouchers for the payment of the same were executed. Checks authorized in accordance with the vouchers issued within two or three days after the date of the voucher.
    At the several times when the .above-mentioned sums were respectively subscribed and paid by the plaintiff corporations generally in Baltimore made substantial payments for the same or similar purposes; all the corporations of any size in Baltimore, including plaintiff, were urged to contribute, and most of them did.
    These subscriptions and payments by the plaintiff and other corporations were given wide publicity in Baltimore at the time they were made, and the plaintiff’s subscription to the first Red Cross war fund was given publicity in New York.
    Y. For (1) the fiscal year ended June 30, 1917, (2) the fiscal year ended June 30,1918, and (3) the half year ended December 31, 1918, the plaintiff made its returns showing-net income after deductions, among others, .of the payments above stated, as ordinary and necessary business expenses on which income and profits taxes were paid aggregating for the fiscal year ended June 30, 1917, $85,329.36; for the fiscal year ended'June 30, 1918, $106,013.80; and for the half year ended December 31, 1918, $126,415.81. Subsequently, on June 14, 1920, after an examination of the original returns of the plaintiff and its affiliated corporations, the Commissioner of Internal Revenue ruled that the amounts of the contributions were not deductible as ordinary and necessary business expenses, and the plaintiff made amended returns, in which, under protest at the requirement of the commissioner, the above-mentioned contributions were eliminated as deductions from gross income.
    The ultimate additional tax paid as a result of the non-allowance of the deductions as aforesaid was paid under protest on November 26, 1926, for the following taxable periods and in the following amounts:
    Year ended June 30, 1917_ $374. 00
    
    Tear ended June 30, 1918_ 27,777. 66
    Year ended December 31, 1918_ 3, 500.00
    31, 651. 66
    
      VI. On December 12, 1921, the plaintiff filed with the collector of internal -revenue a claim for refund of $38,832.36, the amount' of income and profits taxes exacted from and paid by the plaintiff for the fiscal years ended June 30, 1917, and June 30, 1918, and the half year ended December 31, 1918, as the result of not deducting the payments aforesaid, aggregating $144,666.67 (and other payments not now insisted upon as a deduction). Said claim for refund was by the Commissioner of Internal Revenue disallowed and rejected on September 7, 1922, for the reason that the contributions were not deductible as ordinary and necessary business expenses.
    The court decided that plaintiff was not entitled to recover.
   Campbell, Chief Justice,

delivered the opinion- of the court:

The question for decision is whether subscriptions made by a Maryland corporation to war funds of the Red Cross, the Y. M. C. A., and similar agencies, and paid during the year 1917, after the beginning of the war, and also paid in 1918, constitute “ ordinary and necessary expenses paid within the year in the maintenance and operation of its business” (act of 1916), or “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business ” (act of 1918), within the intent and meaning of the quoted words in the revenue act of 1916 (39 Stat. 759, 767), and the revenue act of 1918 (40 Stat. 330). In other words, are payments so made proper deductions from the corporation’s gross income in ascertaining its taxable net income ? The claim. asserted is that the corporation having been a large contributor to the Red Cross and other such organizations should have been allowed to deduct the amounts of these contributions from its gross income. The Commissioner of Internal Revenue having refused to allow the deduction, the plaintiff paid its taxes and sues to recover the amounts alleged to have been overpaid.

Finding the words we are called upon to construe in a taxing act, we must recognize that the “ literal meaning ” of the words employed is most important because such statutes are not to be extended by implication beyond the clear import of the language used. Doubts are to be resolved in favor of the taxpayer. See Gould v. Gould, 245 U. S. 151, 153; United States v. Merriam, 263 U. S. 179, 188. In the latter case is cited with approval the rule stated by Lord Cairns in Partington v. Attorney General, L. R. 4 H. L. 100, 122, in the course of which it is said:

“In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.”

It is quite clear that the words of the act of 1916, “ ordinary and necessary expenses,” could not have been intended when the act was first enacted to be given the wide meaning-now urged. As then used, they related to expenses paid in the maintenance and operation of the business, and were in the main the ordinary expenses incident to the particular trade or business. The extraordinary situation that developed later was not in mind when this taxing act was passed. When the act of 1916 was amended, 40 Stat. 330, a deduction was allowed in favor of individual taxpayers to the extent of 15 per cent of the taxpayer’s taxable net income for contributions actually made to corporations or associations organized exclusively for religious and other designated purposes. But these deductions, in case of individuals, were allowable only if verified under rules and regulations to be prescribed by the commissioner with the approval of the Secretary of the Treasury. The act is silent as to such deductions by corporations. This provision for individuals on account of contributions is carried forward into the revenue act of 1918, but no such provision is made for corporations, though the allowable deductions in case of corporations are stated at length. (40 Stat. 1077.) But the deductions of “ ordinary and necessary expenses ” are applicable to both individuals and corporations, and if the deduction now urged is allowable it is singular that a deduction of charitable gifts is allowable to individuals and is not even mentioned in case of corporations. In an opinion of the Attorney General given to the Secretary of the Treasury upon the question before us, that official held the deduction here sought was not to be allowed, giving, among others, the reason that an amendment, offered when the bill was under consideration, which would have made applicable to corporations the deduction for contributions to religious and other purposes, was defeated. While the act mentions ordinary and necessary expenses, it may perhaps be said that the expenses contemplated need not be both ordinary and necessary, but the expense must be an ordinary or a necessary one, and in any event the words should be given their usual meaning. It is argued for plaintiff that payments to the Red Gross or other war agencies are deductible “ not as charitable contributions but as business expenses for the protection of its property.” But it was not an ordinary expense, nor was it a necessary one. The amount was what the corporation thought proper to subscribe, and ivhether to be subscribed at all was a voluntary act.

The argument based upon the idea that the corporation was expected to help in the emergency gives no new meaning to the words of the statute. What should be deductible expenses, in arriving at the net income, is primarily a legislative question. Whether Congress would feel free to sanction contributions by officers of a corporation or whether in any case action by the governing board or the stockholders would be necessary are not questions for our determination. It is sufficient for this case to say that Congress has authorized certain deductions, and the court can not extend the terms they have employed. In our opinion, the items claimed were not deductible. The petition should be dismissed. And it is so ordered.

Moss, Judge; Graham, Judge; and Booth, Judge, concur.  