Before HINCKS and WATERMAN, Circuit Judges, and RYAN, District Judge.
Juilliard & Co., appellant taxpayer, filed suit in the District Court seeking a refund of excess profits taxes assessed and paid by it for the calendar year 1943 (Sec. 3772, Title 26 U.S.C. and Sec. 1340, Title 28 U.S.C.). Judge Leibell after trial without a jury gave judgment dismissing the complaint upon the merits.
Judge Leibell, as has been his custom, filed carefully prepared full and complete findings of fact and conclusions of law; he also filed a separate opinion. He has by his industry and scholarly thoroughness lightened the burden of this court; familiarity with his decision is assumed.
The suit raised the right of the appellant to deduct in its 1943 excess profits return two items, $410,219.31 and $4,184.63 as ordinary and necessary business expenses (Sec. 23 (a) (1) (A), I.R.C. 1939, 26 U.S.C. § 23 (a) (1) (A)). Both sums represent the amounts paid to the Administrator of the Office of Price Administration by the appellant in compromise and settlement of civil treble damages alleged to have been incurred for overpricing on sales made by Juilliard in violation of Maximum Price Regulation 163, promulgated under Emergency Price Control Act of 1942 (56 Stat. 23, 50 U.S.C.A. Appendix, § 901 et seq.). The Commissioner of Internal Revenue refused to allow these payments or any part of them as ordinary and necessary business expense deductions. Judge Leibell denied any refund of taxes paid after computation based on such disallowance. We hold the result reached by the judge to be correct and affirm.
The OPA issued General Maximum Price Regulation, effective April 26, 1942, freezing all prices in the economy at the March, 1942 level. Thereafter, on June 16, 1942, the OPA issued effective June 22, 1942 MPR 163 which established ceiling prices on woolen and worsted civilian apparel fabrics for manufacturers.
Juilliard & Co. had long been a large manufacturer of women's woolen and worsted apparel fabrics. It also sold rayon, silk and cotton fabrics but fifty percent of its total sales of $52,091,804. in 1942 was of woolen and worsted goods. Its mercantile operations were subject to the provisions of the Act and the regulations promulgated.
MPR 163 set up and defined three classifications of fabrics - "continuous" fabrics, embracing fabrics previously manufactured; "comparable" fabrics being fabrics of the same weave and containing substantially the same number of ends and picks per finished inch, the same yarn sizes, the same weight per yard, width and finish, and belonging to the same classification as a fabric sold by the manufacturer during the applicable base period, but manufactured from different blends of raw material; and "new" fabrics consisting of those which could not be classified as "comparable" or "continuous."
Juilliard on July 17, 1942 filed with the OPA its first ceiling price reports as required by MPR 163, for the period from June 22 to September 8, 1942. The reports covered thirty-eight fabrics all priced as "comparable" fabrics. The Juilliard method of pricing was difficult to understand as the raw material content was not indicated and of this the OPA advised it by letter of September 12, 1942. Official report forms had not been devised and most of the reports received by the OPA were unsatisfactory to it. The OPA concluded that this situation was due to the fact that the MPR 163 test for "comparable" fabrics afforded the manufacturer too wide a latitude. Amendment 4 of MPR 163 was published on September 2, 1942 (effective September 8, 1942) and this specified maximum tolerances by which a "subject" fabric could vary from a "base period" fabric in elements of construction. The amendment also set up a fourth classification - "similar" fabrics to include those fabrics which were similar in use, serviceability and appearance to a base fabric and yet could not fit within the category of "comparable" fabrics. Amendment 4 of MPR 163 continued in effect the provisions for relief where ceiling prices were not fair or equitable, but Juilliard at no time petitioned for a price adjustment on the basis of hardship. The trial judge has found that Juilliard relied on its own interpretation of the regulation and amendment and sought to avoid using the pricing formula for a "new" fabric.
About September 20, 1942, the OPA had complaints from consumers about Juilliard's prices particularly on fabric style number A2391 which was the Juilliard lead fabric. It had been reported by appellant as "comparable" to the base period fabric W4512. By letter dated October 8, 1942 the OPA advised Juilliard that no refiling of the report of July 17, 1942 having been made on the standard forms supplied by the OPA after the September 8, 1942 Amendment 4, it had on analysis of the Juilliard reports as filed found that thirty-two of the thirty-eight fabrics reported on July 17, for the first period (June 22 to September 8, 1942) were not "comparable" and directed Juilliard to make refunds to its customers of excess charges. On October 19, 1942 Juilliard submitted reports on forty-seven fabrics under Amendment 4; thirty-five used "similar" and twelve "comparable" fabrics in computing the ceiling price. The trial judge found that of the thirty-five "similar" fabrics reported, twenty-nine exceeded the permissible tolerances and of the twelve "comparable" fabrics four exceeded the permissible tolerances. At a conference in Washington on October 22, 1942, the OPA advised Juilliard that no variations from the tolerances would be permitted and that the reports filed would have to be corrected and refiled. Following this, the OPA by letter dated November 6, 1942 notified Juilliard fabric by fabric that the ceiling prices of thirty-three fabrics (filed October 19, 1942) did not conform to the Regulation and that Juilliard would have to file new reports for both periods (under original MPR 163 and under Amendment 4), to which Juilliard replied by letter dated November 12, 1942 that the matter would be attended to by a Juilliard official on November 23, 1942 upon his return from a business trip. The OPA determined to institute a civil enforcement suit for injunctive relief and statutory damages.
A complaint was filed on November 19, 1942 in the United States District Court for the Southern District of New York. It alleged three separate counts: Counts I and III prayed for injunctive relief, Count II sought to recover a money judgment under Section 205 (e) of the Act for the violations alleged. The trial judge has found that under a strictly literal application of the Regulation Juilliard would have been liable for $391,249.29 in overcharges on the fabrics listed on a schedule annexed to the complaint. When trebled the overcharges would have amounted to $1,173,747.87.
With the filing of the complaint the OPA obtained from the District Court an order citing appellant to show cause why an injunction pendente lite should not issue and it temporarily restrained appellant from selling twenty-seven specified styles of woolen and worsted goods, until new reports on ceiling prices had been submitted to the OPA and approved. It also prevented Juilliard from receiving payment from its customers for merchandise previously delivered until new ceiling prices could be determined. This resulted in holding up collection of over $300,000. of Juilliard's outstanding accounts; Juilliard later was permitted to receive and deposit in a separate fund the amounts due from customers to whom it had made sales of these specified fabrics. The suit was settled and compromised by stipulation of January 29, 1943 under which appellant paid to the Treasurer of the United States $410,219.31 - three times the over-charges as calculated in compromise by the parties at the time of the settlement. It is important to note that this stipulation of settlement provided in haec verba "defendant agrees to pay to the Treasurer of the United States the sum of $410,219.31 in full settlement and compromise of any and all claims of the plaintiff arising out of the facts specified in Count II of the complaint." As part of the settlement a consent judgment was entered on February 1, 1943 granting only injunctive relief against appellant; the stipulated amount of treble damages having been previously paid no money judgment was entered - although this payment was mentioned and referred to in the preamble of the judgment.
The payment of $410,219.31 under the settlement is one of the two payments which Juilliard sought to deduct on its 1943 excess profits tax returns as an ordinary and necessary business expense.
At trial Julliard contended that it was so harassed, and its business so jeopardized by administratively inspired publicity and news releases that it was forced to settle and pay damages under duress. The trial court has held that in calculating the overcharges the OPA was considerate and that Juilliard had violated the Regulation in fixing the ceiling prices on most of its woolen and worsted fabrics for women's wear, especially on its best sellers and that whatever "duress" resulted from the OPA suit had its origin in appellant's violation of MPR 163 and was a direct consequence of the application of the legal sanctions provided by Section 205 (a) and (e) of the Emergency Price Control Act. He also concluded that appellant's many violations in 1942 of the regulation were the result of negligence and its failure to take practicable precautions against the occurrence of the violations, and that the payment made by appellant of $410,219.31 in settlement was its free and voluntary act, after negotiations in which it had been represented by able counsel. There is ample in the record to sustain the trial judge's findings supporting these conclusions.
The discussions were initiated by Juilliard counsel; the settlement was reached after negotiations which extended over two months. At that time the OPA had no policy of settling treble damage suits for less than three times the amount of overcharges. It was prior to the passage of the Chandler amendment of June 30, 1944 (58 Stat. 632-640), and the courts had no alternative but to impose treble damages; lack of wilfulness or inadvertence was no defense to a violation of the regulations. Bowles v. American Stores, 78 U.S.App.D.C. ...