according to said income tax return. The Revenue Agent made
certain adjustments to said return upon audit thereof, reflecting
disallowance of $4,623 with respect to salary bonus payments
disallowed by reason of the action of the National Enforcement
Commission. The Commissioner of Internal Revenue, through his
Revenue Agent, disallowed said salary bonus payments made by Oak
to its employees on the ground that such payments were made in
violation of General Salary Stabilization Regulation 2
promulgated under the Defense Production Act of 1950. These
disallowances resulted in additional taxes due for the calendar
year 1952 in the amount of $4,280.26.
11. Within the time prescribed by law, Oak filed its claim for
refund with respect to income taxes asserted to have been
erroneously assessed and collected on account of the disallowance
of the referred to salary bonus payments made by Oak as described
in paragraphs 2 and 4 above, as follows:
(i) For the fiscal year ended May 31, 1951, $13,313.23.
(ii) For the short taxable period June 1, 1951 to December 30,
(iii) For the calendar year 1952, $4,280.26.
12. No statutory notice of disallowance of said claims for
refund has been mailed to Oak pursuant to the provisions of
Section 6532(a)(1) of the 1954 Internal Revenue Code,
26 U.S.C.A. § 6532(a)(1), and more than six months have expired
since the filing of said claims.
13. On or about April 7, 1953, there was served upon Oak by the
Office of Salary Stabilization, through its chief counsel, a
complaint before the National Enforcement Commission. Oak Mfg.
Co. filed an answer and supplemental answer to this complaint.
14. Following the issuance of said complaint, hearings were had
on April 30, 1953, May 15, 1953 and June 11, 1953 before an
Enforcement Commissioner designated by the National Enforcement
Commission. At the conclusion of said hearings both the Office of
Salary Stabilization and Oak filed proposed Findings of Fact and
Conclusions of Law. In support of its proposed Findings of Fact
and Conclusions of Law, the Office of Salary Stabilization filed
a memorandum. On July 8, 1953 the said Enforcement Commissioner
made certain findings and determinations against Oak. On July 24,
1953, Oak filed with the National Enforcement Commission a notice
of appeal pursuant to the provisions of GPR No. 1, Revised, as
revised, of the National Enforcement Commission dated August 23,
1952, 17 F.R. 7737.
On April 15, 1954, the National Enforcement Commission acting
within the Office of Defense Mobilization issued its final order
and decision upon the aforementioned appeal.
15. On July 11, 1955, the National Enforcement Commission sent
to the Commissioner of Internal Revenue a "Certificate of
Disallowance." Adjustments referred to in paragraphs 8, 9 and 10
of these Findings were made as a result of the issuance of this
16. Thereafter, Oak filed its complaint in the United States
District Court for the District of Columbia as Civil Action No.
1740-54 against the National Enforcement Commission, seeking to
enjoin the enforcement of said final determination.
17. After a hearing by a three-judge district court, the court
dissolved itself and referred the matter to the District Court
for disposition. After argument, the District Court held that Oak
had an adequate remedy at law and dismissed the complaint. Notice
of appeal from this ruling was filed but the appeal was not
perfected. Thereafter Oak paid the applicable income taxes
resulting from the disallowance of salary payments and in due
course filed its claims for refund of said additional taxes.
18. The plaintiff's "base bonus year" for the purpose of the
administrative regulations applicable to this case was the
calendar year 1950.
Conclusions of Law
1. This Court has jurisdiction over the parties to and the
subject matter of this suit.
2. This Court has jurisdiction to review the determinations of
the National Enforcement Commission in a proceeding instituted by
a taxpayer for the refund of internal revenue taxes.
28 U.S.C. § 1346(a)(1); Internal Revenue Code of 1954, 26 U.S.C. § 7422(a,
3. The action of the Commissioner of Internal Revenue in
disallowing wage or salary payments as nontaxable deductions from
gross income and in assessing and collecting additional taxes, is
not insulated from review because the disallowance, assessment
and collection were predicated solely upon a "Certificate of
Disallowance" issued and submitted to him by the National
Enforcement Commission, and not upon an independent evaluation by
him of the propriety of such payments under the facts and the
4. The Court is not precluded by concepts of estoppel, res
judicata, or otherwise, from reviewing in this tax refund
proceeding the determinations of the National Enforcement
Commission on the basis of which the Commissioner of Internal
Revenue disallowed wage or salary deductions and assessed and
collected additional taxes. The taxpayer's failure to seek direct
review of the 1954 final order and decision of the National
Enforcement Commission does not prevent it from maintaining this
suit and does not prevent the Court from examining the
correctness of the determinations of the Commission to the extent
permitted under law.
5. The provision in Title VII (General Provisions) of the
Defense Production Act of 1950, as amended, 50 U.S.C.A.Appendix,
§ 2159, that
"The functions exercised under this Act shall be
excluded from the operation of the Administrative
Procedure Act (60 Stat. 237) except as to the
requirements of Section 3 thereof. * * *"
precludes application of the judicial review provisions of
Section 10 of the Administrative Procedure Act, 5 U.S.C.A. §
1009, to the proceedings and determinations of the National
Enforcement Commission, including those here involved.
6. This Court has the duty and the power to appraise the
constitutional implications of the proceedings and determinations
of the National Enforcement Commission. The said proceedings and
determinations are not insulated from such review in this tax
refund proceeding by reason of any limitation in the Defense
Production Act of 1950, as amended, or otherwise. Nothing in the
said Act purports to restrict this Court's said power of review.
7. The provision in the Defense Production Act of 1950, as
amended, 50 U.S.C.A.Appendix, § 2159, which precludes application
of the judicial review provisions of Section 10 of the
Administrative Procedure Act, 5 U.S.C.A. § 1009, in this matter,
is not unconstitutional when construed, as this Court has
construed it, as not purporting to restrict this Court's power to
appraise the constitutional implications of the proceedings and
determinations of the National Enforcement Commission.
8. The allegations and arguments of the plaintiff directly
place in issue the constitutionality of the determinations of the
National Enforcement Commission and of regulations and general
orders upon which the said determinations may have been
9. Assuming, without deciding, that the determinations of the
National Enforcement Commission here in issue were proper and not
subject to impeachment on constitutional grounds, the
disallowance of wage payments as nontaxable deductions from gross
income for income tax purposes is a permissible sanction and such
disallowance does not constitute an excessive fine or cruel and
unusual punishment within the meaning of the Eighth Amendment to
10. Congress has full power to withdraw the statutory privilege
granted taxpayers of subtracting expenses from gross income to
determine the amount of income which shall be taxed; such power
may be exercised by Congress to any extent compatible with the
constitutional guarantee that there shall be equal protection of
the laws; and Congress may establish an administrative procedure
to hear evidence and determine whether there exist facts upon the
basis of which Congress has authorized withdrawal of the
statutory privilege. The establishment and utilization of that
administrative machinery pursuant to the Defense Production Act
of 1950, as amended, does not violate plaintiff's right to jury
trial under the Seventh Amendment to the Constitution.
11. The Defense Production Act provisions requiring the
President to issue regulations stabilizing wages, salaries and
other compensation (Section 402, 50 U.S.C.A.Appendix, § 2102),
"prescribe the extent to which any wage, salary, or
compensation payment made in contravention of any
such regulation or order shall be disregarded by the
executive departments and other governmental agencies
in determining the costs or expenses of any employer
for the purposes of any other law or regulation"
(Section 405(b), 50 U.S.C.A.Appendix, § 2105(b))
do not delegate legislative power to the President without
sufficient standards or guides, and are not in conflict with
Article I, Section 1, of the Constitution.
12. Defendant has not heretofore responded to several of the
constitutional issues raised by plaintiff concerning whether or
not the administrative process was fairly applied in this case,
and whether or not plaintiff was accorded all procedural and
substantive rights to which it was entitled. Proper disposition
of these issues requires the response by defendant to the
allegations and arguments of the plaintiff which raise those
issues. Defendant will so respond within 30 days from the date of
these Findings and Conclusions; plaintiff will reply within 20
days thereafter; and hearing on such issues will be set for March
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