Clarke v. Haberle Crystal Springs Brewing Co.

Background

A brewery paid income and profits taxes for its fiscal year ending May 31, 1919, then sued to get those taxes back. Company officers had prepared for partial or total liquidation when it became clear in 1918 that prohibition was likely. The firm argued that under the Revenue Act of 1918 it could deduct a 'reasonable allowance for the exhaustion, including obsolescence' of its goodwill because prohibition would destroy the business; the amount to be deducted was agreed if any deduction were allowed. Lower courts were split on this question, prompting review by the Court.

Reasoning

The central question was whether the tax phrase 'exhaustion' and 'obsolescence' covers a business loss caused by a law making the business unlawful. Justice Holmes wrote that those words do not fit a termination produced by legislation. He said owners whose business is extinguished as noxious under the Constitution cannot claim compensation by cutting their taxes, and it is unlikely Congress intended such a partial compensation in the 1919 Act. The opinion noted the timing of the constitutional amendment process and declined to extend the statutory words to cover this kind of legal destruction of a business.

Real world impact

Because the Court denied the deduction, breweries and similar businesses destroyed by prohibition-style laws cannot reduce their federal taxes by treating lost goodwill as exhaustion or obsolescence. The decision reverses the lower court that had allowed recovery and clarifies that ordinary tax wear-and-tear rules do not compensate for legal shutdowns. The opinion does not decide other types of losses or different statutory language.

Dissents or concurrances

Two Justices (McReynolds and Stone) joined the result without a separate opinion.