Textile Mills Securities Corp. v. Commissioner

Background

A Delaware corporation was hired to represent former enemy-alien German textile interests whose U.S. property had been seized under wartime law. The corporation ran a public campaign, hiring a publicist and two lawyers to influence Congress and helped bring about the Settlement of War Claims Act of 1928. The company tried to deduct those costs as ordinary business expenses. Separately, the Third Circuit—made up of five active circuit judges—heard this case with all five judges sitting together, raising a question about whether a circuit court of appeals may sit en banc when it has more than three active judges.

Reasoning

The Court addressed two questions. First, it examined the statutory language about a circuit court “consist[ing] of three judges” and the later provisions that provided for more circuit judges in some circuits. After reviewing the history and practical effects, the Court read the law in harmony with other provisions and concluded that the court may include all active circuit judges sitting together en banc. Second, on the tax issue the Court upheld Treasury Regulation Art. 262, which bars deductions for sums spent on lobbying, propaganda, or campaign contributions, and found the corporation’s payments fell within that prohibition. The Court therefore ruled those expenses were not deductible as “ordinary and necessary.”

Real world impact

The decision clarifies that multi-judge circuits can have full panels hear cases together, reducing conflicting panel rulings. It also confirms that corporations cannot deduct costs spent to influence legislation or run propaganda as ordinary business expenses. These rulings affect how appeals are handled and how corporations treat lobbying-related spending for tax purposes.