Wm. T. Stover Co. v. Commissioner

Wm. T. Stover Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Wm. T. Stover Co. v. Commissioner

Docket No. 46766

United States Tax Court

27 T.C. 434; 1956 U.S. Tax Ct. LEXIS 25;

November 30, 1956, Filed

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">*25 Decision will be entered for the respondent.

1. Petitioner, whose business was that of selling surgical and hospital supplies and equipment, purchased a round-trip airplane ticket to England for a newspaperman who was to make a study of socialized medicine in England and upon his return to report to the Arkansas Medical Society on his findings and to write articles thereon for publication. The Society was, and always had been, opposed to the establishment of socialized medicine in this country, and its current interest was occasioned by agitation for the passage of legislation for the establishment of socialized medicine in some form. The newspaperman made the trip as planned and upon his return reported his conclusions to the Society and wrote articles thereon which were more unfavorable than favorable, the articles being submitted to the Society prior to their publication. In purchasing the ticket, petitioner knew the identity of the man making the trip and the purpose of his trip to England. Held, that the expenditure for the ticket was not an ordinary and necessary expense within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939. Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326">314 U.S. 326.

">*26 2. During the taxable years herein petitioner owned, maintained, and operated a pleasure boat on a lake near Hot Springs, Arkansas. The boat was used in part for entertainment in the promotion of petitioner's business and in part for the personal pleasures of its stockholders. On its returns, petitioner claimed deductions of the entire amounts expended by it in maintaining and operating the boat. Respondent disallowed half of the deductions so claimed. Held, that petitioner has failed to show that the respondent erred in his disallowance of one-half of the said deductions.

3. Petitioner, in the taxable years, made contributions to three hospitals, the deduction of which contributions was allowable to it under section 23 (q) (2) of the 1939 Code. Held, that the respondent did not err in determining that the contributions to the three hospitals were not deductible as ordinary and necessary expenses under section 23 (a) (1) (A) of the Code.

4. In 1950 petitioner employed Moody Moore, who at that time was employed full time by the State of Arkansas as Director of its Division of Hospitals. Petitioner employed Moore for the purpose of procuring his services and influence ">*27 to the end that it would have an advantage over other concerns in the making of sales to hospitals, in respect of which Moore, as said director, had supervisory duties, powers, and functions. Such employment of Moore by petitioner and the services rendered by Moore to petitioner were antagonistic to and in conflict with Moore's duties and responsibilities as a public official. Held, that the compensation paid Moore, in the circumstances, was not an ordinary and necessary expense to petitioner within the meaning of section 23 (a) (1) (A) of the 1939 Code.

E. Charles Eichenbaum, Esq., and W. S. Miller, Jr., Esq., for the petitioner.

C. H. Cobb, Esq., for the respondent.

Turner, Judge.

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TURNER

">*435 The respondent determined deficiencies in income tax of $ 1,202.59 and $ 1,445.30 against the petitioner for the years 1949 and 1950.

The questions for decision are whether the respondent erred (1) in disallowing a deduction of $ 784.91 expended in 1949 for the purchase of a round-trip airplane ticket to England for a newspaperman who was to procure material and write articles on socialized medicine, under the sponsorship of the Arkansas Medical Society; (2) in disallowing as a deduction in both 1949 and 1950 one-half of the amounts expended in those years for the maintenance and operation of a pleasure boat; (3) in treating contributions made to hospitals in the taxable years as being subject, for deduction purposes, to the limitations of section 23 (q) of the Internal Revenue Code of 1939, and not deductible under section 23 (a) (1) (A); and">*29 (4) in disallowing for 1950 the deduction of $ 2,000 representing payments made to the Director of the Division of Hospitals of the State of Arkansas and claimed by petitioner as an ordinary and necessary expense.

FINDINGS OF FACT.

The petitioner is an Arkansas corporation, with its principal office in Little Rock. Its business is that of selling surgical and hospital supplies and equipment. It filed its income tax returns for the years herein with the collector of internal revenue for the district of Arkansas.

In 1949, William T. Stover, petitioner's president and general manager, was approached by two past presidents of the Arkansas Medical Society, with a request that petitioner purchase a round-trip airplane ticket to England for an experienced newspaperman who had been employed or commissioned by the Society to make a study of socialized ">*436 medicine in England and upon his return to report to the Society on his findings and to write articles thereon for publication.

The interest of the Society in the matter was occasioned by agitation for the passage of legislation to establish some form of socialized medicine in this country. The Society has always opposed such legislation.

">*30 Some members of the Society, the number or percentage thereof not being disclosed, were or had been customers of petitioners, and most, if not all, of them were in position to promote goodwill, if not business directly, for petitioner.

Petitioner purchased the ticket as requested at a cost to it of $ 784.91, and the newspaperman made the trip as planned. Upon his return, he reported his conclusions to the Society and wrote articles thereon, which articles "were more unfavorable than favorable" toward socialized medicine. Prior to their publication, the articles were submitted to the Society.

In purchasing the ticket, the petitioner knew the identity of the newspaperman and the purpose of his trip to England.

In its income tax return for 1949, petitioner claimed a deduction of the amount expended for the above ticket as an ordinary and necessary expense in the conduct of its business. It was disallowed by the respondent in his determination herein.

During the taxable years petitioner owned and maintained a 27-foot cabin cruiser on Lake Hamilton, near the city of Hot Springs, Arkansas. The boat was used at times in each of the said years for the purpose of entertaining doctors and">*31 their wives, representatives of hospitals and of supply houses with which petitioner did business, and petitioner's employees. It was also used by Stover in entertaining personal friends, and by the two sons of another stockholder. ^{27 T.C. 434">*437 of the off-season months were $ 15 in amount, the rate of boathouse rent per month, there is no breakdown of the payments to the Lake Hamilton Marine Service. Repairs constituted a very substantial portion of the amounts expended on the boat in 1949.}

">*32 In its income tax returns for both 1949 and 1950, petitioner deducted in full the amounts paid by it for the maintenance and operation of the boat. Respondent in his determination disallowed an amount indicated as one-half of such costs for each year. ^{1956 U.S. Tax Ct. LEXIS 25">*33 been substantial customers of petitioner prior to its making of the contributions, and they continued to be so thereafter.}

Each of the above hospitals was of such character that contributions made to them by a corporation would have been deductible by the corporation under section 23 (q) of the Internal Revenue Code of 1939.

In its income tax returns for 1949 and 1950, petitioner deducted the above contributions to the three hospitals as ordinary and necessary expenses in the conduct of its business. The respondent in his determination disallowed the expenses so claimed.

In its returns for the years herein and exclusive of the above contributions to the three hospitals, petitioner, pursuant to section 23 (q), deducted contributions in an amount equal to 5 per cent of its net income computed without the benefit of the section 23 (q) deductions. The respondent in his determination allowed the section 23 (q) deductions as claimed.

By a statute enacted in 1947 by the Arkansas Legislature, a Division of Hospitals, which was to function as a part of or under the State Board of Health, was created. It was to "be administered by a full time salaried Director under the supervision and direction">*34 of the State Health Officer." ^{27 T.C. 434">*438 of the Seventy-ninth Congress, approved August 13, 1946, entitled the "Hospital Survey and Construction Act"; to assist in carrying out the hospital construction program; the preparation and submission to the Surgeon General of the United States of a State plan for the construction of hospitals in the State of Arkansas; seeing that the hospitals which received Federal aid for construction complied with the minimum standard prescribed by the State Board of Health and the Federal rules and regulations; the setting forth in the State plan of the relative needs of the various projects under the regulations prescribed pursuant to the Federal statutes, and the providing for construction, maintenance, and operation "in the order of the relative need"; the approving of applications which complied with the State Act, and the recommending">*35 of approval by the Surgeon General; the inspecting of construction projects and certifying to the Surgeon General that the work had been performed and purchases made in accordance with approved plans and specifications, and that "payment of an installment of federal funds is due to the applicant"; the receiving of Federal funds in the behalf of applicants; the depositing thereof with the State treasurer "to be used solely for payments due applicants for work performed, or purchases made, in carrying out approved projects"; the supervising of the granting of licenses under the Act; the prescribing of regulations relating to the inspection of facilities, alterations, additions, or new construction, and the making of inspections thereunder; the suspending or revoking of licenses to institutions violating any provisions of the Act or the rules and regulations, or permitting, aiding, or abetting the commission of an unlawful act; and the promulgating and enforcing of "such rules, regulations and standards as may be necessary for the accomplishment of the purposes" of the Act. The statute also provided that information received "through inspection or otherwise," authorized under the Act, ">*36 should "not be disclosed publicly in such manner as to identify individuals or institutions except in a proceeding involving the question of licensure or revocation of license."}

Moody Moore, during the years herein, was Director of the Division of Hospitals under the above statute. In 1950, petitioner placed Moore on its payroll at a stipend of $ 500 per month, and in that year made total payments to him of $ 2,000.

As Director of the Division of Hospitals, it was part of Moore's official duties to check the plans and specifications for merchandise and equipment for the hospitals falling under the Division of Hospitals Act, to see that they met the requirements and specifications prescribed by the United States Public Health Service. It was also a part of his duties to see that the quality of the merchandise supplied met the specified requirements with respect thereto. To that end, either personally ">*439 or through inspectors under his">*37 supervision, he checked the equipment delivered. The specifications were not rigid to the extent that they were not competitive. Where the sales of equipment to the hospitals were made pursuant to submitted bids and were "big deals," Moore "sat in on the bids." The accounting division of the Division of Hospitals, functioning under Moore's supervision, checked the purchases against the money allocated and issued the vouchers which supplied the basis for payment. By Moore, or persons working under him, the equipment purchased, including that supplied by petitioner, was approved for payment.

Moore's employment by petitioner came about after petitioner "had lost two deals" which it had thought it "was sure of getting." Moore was to serve petitioner as its "hospital consultant," and as such, it expected him "to determine the type of equipment as to whether it would meet, or not meet, specifications or requirements of the United States Public Board of Health [sic]. Also to check when a job was completed, or after it was completed, to check and double check with the architects to see if we [petitioner] could follow through and get their equipment installed." After Moore was employed">*38 as petitioner's "consultant," petitioner got "the lion's share" of the business, or stated otherwise, more jobs than it lost.

In consideration for the payments received from petitioner, Moore represented it at bid openings. He would advise petitioner as to the equipment which would meet the requirements and specifications of the United States Public Health Service. Where the contracts for equipment were not let on the basis of bids, they were acquired by negotiations which would extend for days or weeks, and sometimes required an inventory, presumably of equipment on hand. Moore performed those services for petitioner. When Moore would go into a hospital to inspect merchandise supplied by petitioner, one of petitioner's other employees would accompany him. The hospital people at times would request that the equipment of one manufacturer be exchanged for that of another, which would present a problem to be determined by the Division of Hospitals. Petitioner's men would accompany Moore, in such instances, and endeavor to work the matter out. After Moore was employed, petitioner's regular salesmen did not "cover" the jobs "held by Moore." They "covered" other jobs in the territory, ">*39 but not those jobs. In employing Moore, petitioner felt that in view of his official position with the State Moore could perform a function in making collections on its sales, and Moore did in fact effect and expedite such collections. The services rendered by Moore for petitioner were generally during normal working hours.

Moore was employed by petitioner for the purpose of procuring his services and influence to the end that it would have an advantage over ">*440 other concerns in the making of sales to hospitals, in respect of which Moore, as Director of the Division of Hospitals, had supervisory duties, powers, and functions. Such employment of Moore by petitioner and the services rendered by Moore for petitioner were antagonistic to and in conflict with Moore's duties and responsibilities as a public official.

In its income tax return for 1950, petitioner, describing the payments as "Hospital Consultant Fees," deducted the $ 2,000 paid to Moore as an ordinary and necessary expense in carrying on its business. The respondent in his determination disallowed the deduction so claimed.

OPINION.

With respect to the $ 784.91 expended for the round-trip airplane ticket to England">*40 at the behest of the Arkansas Medical Society, we are unable to distinguish this case in principle from Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326">314 U.S. 326, and on the basis of the pronouncements of the Supreme Court of the United States in its opinion in that case, that issue is decided for the respondent.

With respect to the cabin cruiser owned by petitioner and maintained and operated on Lake Hamilton, the facts show that the boat was used in part for entertainment in the promotion of petitioner's business and in part for the personal pleasures of its stockholders. They further show that except for payments for gasoline when Stover was using the boat personally, petitioner paid all of the cost of operation and maintenance, and in its returns it deducted as ordinary and necessary expenses in carrying on its business the entire amounts of the expenditures incurred by it for such operation and maintenance. It is the claim of petitioner that respondent erred in allowing the deduction of only one-half of the expenditures so made and that the claimed deductions should have been allowed in full.

The evidence falls short of establishing">*41 error on the part of the respondent. The records maintained and the proof submitted do not even closely indicate the portion of the expenditures which should be attributed to petitioner's business and the portion which was personal to its stockholders. The signatures in the guest book supply the only basis, aside from the broad assertions of Stover, which assertions other proof shows were not accurate, for arriving at any reasonably accurate allocation of the use of the boat as between petitioner's business and the personal pleasures of the stockholders. We are satisfied, however, from Stover's own testimony, that the guest book does not supply the whole story. He admitted that all guests did not sign. Some of the signatures are out of order according to dates, and we do not know, on a comparative basis, the extent of the use of the boat by the ">*441 sons of another stockholder. Such being the state of the record, we are unable to say that the respondent erred in disallowing one-half of the deduction claimed for each year, and for failure to sustain its burden of proof, petitioner's claim is denied.

In 1949 and 1950, petitioner made contributions to building funds of three">*42 Arkansas hospitals, and claimed deduction therefor in its returns for the said years, as expenses of operation. In his determinations of deficiency, the respondent disallowed the deductions so claimed.

On the ground that the contributions were made in promotion of its business, and relying on the testimony of Stover, its president, to the effect that the making of the contributions was "cold blooded business" and that its business with the hospitals increased thereafter, petitioner in this proceeding contends that the contributions were ordinary and necessary expenses in the operation of its business, within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939, and are deductible thereunder as claimed.

It is the position of the respondent that the amounts in question are deductible under section 23 (q) of the Code only, and since the deductions under that section are limited to an amount which does not exceed 5 per cent of the taxpayer's net income, computed without benefit of section 23 (q)^{section 23 (q) for each of the years herein, his disallowance of the deductions in question must1956 U.S. Tax Ct. LEXIS 25">*43 be sustained.}

">*44 In our view, the position of the respondent is well taken. It is not disputed that each of the three hospitals was of such character that contributions by a corporation to them would be allowable deductions to the corporation under section 23 (q) (2), and in section 23 (a) (1)">*442 (B) ^{section 23 (a) (1) (A) "for any contribution or gift which would be allowable under subsection (q) were it not for the 5 per centum limitation therein contained."}

1956 U.S. Tax Ct. LEXIS 25">*45 Section 23 (q) was first enacted in the Revenue Act of 1935. Prior to that time, there was no specific provision granting deductions to corporations for contributions or donations made to organizations such as the three hospitals herein, and if deduction of such donations or contributions was to be had, it was necessary that they have such relation to the operation of the corporate business as to make them ordinary and necessary expenses in the operation thereof. With the enactment of section 23 (q), contributions and donations became deductible by corporations up to the limit prescribed, without regard to whether they were sufficiently closely related to the corporate business as to reasonably constitute them expenses thereof. Prior to 1938, however, the revenue laws contained no counterpart of section 23 (a) (1) (B) above. That provision first appeared as section 23 (a) (2) of the Revenue Act of 1938, and since that time contributions and donations deductible under section 23 (q) have not been deductible as ordinary and necessary expenses under section 23 (a) (1) (A). ^{1956 U.S. Tax Ct. LEXIS 25">*46 It is too well settled to require the citation of authorities that deductions from gross income are matters of legislative grace, and by section 23 (a) (1) (B), Congress has made it clear that the contributions in question are not deductible under section 23 (a) (1) (A), but must be lumped with other contributions in arriving at the amount deductible under section 23 (q). The respondent was not in error in his determination.}

In support of its claim that the contributions to the three hospitals are deductible under section 23 (a) (1) (A), the petitioner cites ">*443 Fairmount Creamery Corporation v. Helvering, 89 F.2d 810; B. Manischewitz Co., 10 T.C. 1139; Singer Sewing Machine Co., 5 T.C. 851, affd. 158 F.2d 982; and A. L. Killian Co., 44 B. T. A. 169, affd. 128 F.2d 433. The Fairmount Creamery, Singer Sewing Machine, and Killian cases all involved contributions made in years prior to the enactment of the Revenue Act of 1938, when there was no provision in the statute comparable to section">*47 23 (a) (1) (B) herein, and as a consequence, those cases are of no controlling importance in the instant case. The contributions under consideration in the Manischewitz case were made in the fiscal year ended July 31, 1943, and that case might on first impression appear to be in point. It is to be noted, however, that section 23 (q) applies to corporations, trusts, foundations, etc., created or organized in the United States or in any possession thereof, or under the law of the United States, or of any State or territory, or of the District of Columbia, or of any possession of the United States. In the Manischewitz case, we pointed out that the recipient of the contribution was the Hebrew Theological Seminary in Palestine, and that the deductibility of the contribution in question was not governed by section 23 (q), but by section 23 (a). The Manischewitz case likewise is not in point.

With respect to his disallowance of the $ 2,000 paid to Moody Moore, the respondent is also sustained.

Section 901, Title 40, of the Arkansas Statutes 1947, makes it unlawful for anyone to deliver any goods, money, or any other valuable thing "to any officer of the State, or person holding">*48 any place of profit or trust, under any law of the State." with intent to influence his decision on any question, matter, cause, or proceeding which may be pending or may be brought before him in his official capacity, or in his place of trust.

It is petitioner's contention that there is no Arkansas statute prohibiting an employee of the State from accepting outside employment, nor is there any declared policy prohibiting the outside employment; that in order that it might compete effectively with out-of-State firms which had hospital consultants, it employed Moore as its "hospital consultant"; that Moore's duties were to determine whether hospital equipment to be ordered would meet the requirements of the United States Public Health Service; to confer with architects about the equipment to be installed in newly constructed hospitals, and to assist petitioner in the collection of overdue accounts; that there is no evidence of violation of any State- or Federal-declared policy, or of any use of political influence; and that the claimed salary deduction should have been allowed.

In our opinion, the petitioner has not only failed in its analysis and evaluation of the facts shown of record, ">*49 but on those facts, it is likewise in error as to applicable law. Under the Division of Hospitals Act ">*444 Moore, as Director of the State's Division of Hospitals, was a "full time salaried" official and employee of the State of Arkansas, and the evidence is clear, and we have found as a fact, that his employment by petitioner, a private business concern, was for the purpose of procuring for it an improper advantage in business transactions, in respect of which Moore, as such official and employee, was obligated both to the State and the Federal Government. Patently the arrangement was a betrayal of the public interest and antagonistic and contrary to established policy, State and Federal.

And it is not necessary to the conclusion stated that by and under the arrangement between petitioner and Moore the public actually suffered a financial disadvantage. That a public office is a public trust, is fundamental, and requires no citation of authorities. It is equally well settled that it is against public policy for a public officer, by contract or agreement with outside or private interests, to place himself in a position inconsistent with his duties and responsibilities as such">*50 public officer, or in a situation where he may in reason be tempted to serve such outside or private interests to the prejudice of the public for whom the law authorized and required him to act. See, in that connection, Pan American Petroleum & Transport Co. v. United States, 273 U.S. 456">273 U.S. 456; Crocker v. United States, 240 U.S. 74">240 U.S. 74; United States v. Carter, 217 U.S. 286">217 U.S. 286, 217 U.S. 286">306; Providence Tool Co. v. Norris, 2 Wall. 45; McLain v. Miller County, 180 Ark. 828">180 Ark. 828, 23 S.W.2d 264, wherein it was held that a contract entered into by a public official in his individual capacity, the effect of which was to create a personal interest which might conflict with his public duty, was contrary to public policy; State v. Bunch, 119 Ark. 219">119 Ark. 219, 177 S.W. 932; Russell v. Tate, 52 Ark. 541">52 Ark. 541, 13 S.W. 130; Sellars v. Lamb, 303 Mich. 604">303 Mich. 604, 6 N.W.2d 911; Coco v. Odin, 143 La. 718">143 La. 718, 79 So. 287">79 So. 287,">*51 wherein a contract between a sheriff and a railway corporation to perform legal services in a suit where the company was a party, in exchange for a free pass, was held to be contrary to the morals and public policy of the State, and null and void; Cheney v. Unroe, 166 Ind. 550">166 Ind. 550, 77 N.E. 1041; Waymire v. Powell 105 Ind. 328, 4 N.E. 886; Tuscan v. Smith, 130 Me. 36">130 Me. 36, 153 A. 289; and Trainer v. Covington, 183 Ga. 759">183 Ga. 759, 189 S.E. 842, wherein it was held that the stated principle was applicable, even though there might be no statute or charter provision prohibiting the contracts involved.

The petitioner cites and relies on Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90; Alexandria Gravel Co. v. Commissioner, 95 F.2d 615, reversing 35 B. T. A. 323; and Aetna-Standard Engineering Co., 15 T.C. 284. Lilly v. Commissioner and Aetna-Standard Engineering Co. do not involve">*52 the employment, or attempted employment, of public officials, and plainly are not in point. And whatever may be said of Alexandria Gravel Co. v. Commissioner, the employment in that case was ">*445 not with relation to matters in respect of which the person employed had direct official duties and responsibilities, and the reasoning of the court in that case is likewise not in point.

Rugel v. Commissioner, 127 F.2d 393; Harden Mortgage Loan Co. v. Commissioner, 137 F.2d 282; Raymond F. Flanagan, 47 B. T. A. 782; Charles H. McGlue, 45 B. T. A. 761; T. G. Nicholson, 38 B. T. A. 190; and Easton Tractor & Equipment Co., 35 B. T. A. 189, stand for the proposition that expenditures made to or by outside or private individuals for the purpose of influencing public officials and developing political influence, are contrary to public policy, and not deductible as ordinary and necessary expenses under section 23 (a) (1) (A). In the instant case, the payments in question were not to private">*53 or outside parties, but were directly to the public official himself. The payments here, if allowed as deductions, would be "to frustrate sharply defined * * * policies" of the State of Arkansas and the Federal Government, and such being the case, they are not ordinary and necessary expenses within the meaning of section 23 (a) (1) (A). See 343 U.S. 90">Lilly v. Commissioner, supra;Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 320 U.S. 467">473; Burroughs Building Material Co. v. Commissioner, 47 F.2d 178; Great Northern Railway Co. v. Commissioner, 40 F.2d 372; Sam Mesi, 25 T.C. 513; Julian Lentin, 23 T.C. 112, affd. 226 F.2d 695; Joseph Salzman, 21 T.C. 777; Henry Watterson Hotel Co., 15 T.C. 902, affd. 194 F.2d 539; and Anthony Cornero Stralla, 9 T.C. 801, 820, 821. The respondent did not err in his disallowance of the deduction claimed.

Decision will be entered">*54 for the respondent.

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Footnotes

• 1. A book, stamped on its cover "Admiral William T. Stover -- Guests," was kept on the boat, but not all guests signed the book. The entries were not all in sequence according to date. According to the book, the boat was used on seventeen occasions in 1949, the first date being April 23 and the last September 11. For 1950, only eight dates are shown, the first being April 9 and the last September 17. In 1950 two dates were shown for May, August, and September, and one each for April and June, with none for July. The sons of the other stockholder do not appear to have used the guest book when using the boat. No record was kept of the use of the boat by the said sons. Stover, in his testimony, was of the opinion that they did not use the boat more than four times a year.↩

• 2. Except for the reference to the amounts disallowed as being one-half of the boat costs, the record does not show the amounts of such costs. On the returns, the depreciation claimed with respect to the boat was lumped with that claimed on a truck and an automobile. There was no breakdown with respect to the three items covered.↩

• 3. Division of Hospitals Act, Ark. Stat. secs. 301-326, inclusive (1947).↩

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

  In computing net income there shall be allowed as deductions:

  * * * *

  (q) Charitable and Other Contributions by Corporations. -- In the case of a corporation, contributions or gifts payment of which is made within the taxable year to or for the use of:

  * * * *

  (2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States, or of any State or Territory, or of the District of Columbia, or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, veteran rehabilitation service, literary, or educational purposes or for the prevention of cruelty to children (but in the case of contributions or gifts to a trust, chest, fund, or foundation, payment of which is made within a taxable year beginning after December 31, 1948, only if such contributions or gifts are to be used within the United States or any of its possessions exclusively for such purposes), no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation; * * *

  * * * *

  to an amount which does not exceed 5 per centum of the taxpayer's net income as computed without the benefits of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.↩

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

  In computing net income there shall be allowed as deductions:

  (a) Expenses. --

  (1) Trade or business expenses. --

  * * * *

  (B) Corporate Charitable Contributions. -- No deduction shall be allowable under subparagraph (A) to a corporation for any contribution or gift which would be allowable as a deduction under subsection (q) were it not for the 5 per centum limitation therein contained and for the requirement therein that payment must be made within the taxable year.↩

• 6. The Committee on Ways and Means, in reporting the Revenue Bill of 1938 to the House, H. Rept. No. 1860, 75th Cong., 3d Sess., p. 17, explained the proposed change as follows:

  Under section 23 (q) of the Revenue Act of 1936 a corporation is allowed a deduction (limited to 5 percent of the net income), for contributions or gifts made to organizations described in such section (so-called charitable organizations). In some cases a contribution or gift to such an organization may also fall within the description of business expenses. Section 23 (a) allows a deduction for business expenses. Consequently, a corporation may claim it is entitled to obtain the benefit of deductions for such gifts and contributions, as business expenses, the effect of which would be that the amount of the deductions for contributions or gifts would exceed the 5 percent limitation contained in such section 23 (q)↩. This is no longer possible under the bill. * * *