Continental Screen Co. v. Commissioner

*1095 This is a proceeding for the redetermination of deficiencies in income tax for 1925, and for the fiscal period January 1 to July 31, 1926, of $5,199.99 and $2,025, respectively. The petitioner alleges that the respondent erred in disallowing as deductions from gross income in its return for the calendar year 1925, and in its return for the fiscal period January 1 to July 31, 1926, of $40,000 and $15,000, *2255 respectively, paid for attorneys' fees in presenting its case before the Federal Trade Commission.

FINDINGS OF FACT.

The petitioner is a Michigan corporation with its principal office at Detroit. It was organized in 1905, for the purpose of manufacturing screen doors and kindred products by four or five large woodworking concerns located in different parts of the United States. The purpose of the organization was the desire of these separate companies to have a common distribution point for their products so that they would have agencies and distribution facilities and factories in all parts of the country. In 1920 the Federal Trade Commission *1096 began investigating its practices, charges having been made against it that it was operating in violation of the Sherman Anti-Trust Law. The petitioner was able to convince the Commission in 1922 that the charges that had been made against it were unfounded. Investigators of the Federal Trade Commission continued, however, to investigate the practices of the petitioner and several different examiners came to its offices in 1922 and 1923 for the purpose of obtaining data. On December 29, 1924, the petitioner was served*2256 with a notice of complaint by the Federal Trade Commission that it was operating in violation of the Sherman Anti-Trust Act and a date was set for hearing before the Commission. The petitioner viewed the complaint with much concern as, in the opinion of the officers, it might mean the dissolution of the petitioner's business, which it had taken 20 years or more to develop. A meeting of the board of directors of the petitioner was immediately called and it was decided to employ three different firms of attorneys to represent it before the Federal Trade Commission. These attorneys obtained a continuance for the date of hearing and prepared voluminous data to submit to the Commission. The petitioner was accorded a hearing before the Board of Review of the Federal Trade Commission in May, 1925, at which counsel presented data and moved that the complaint be dismissed as not being proven. After careful consideration the Commission, on October 14, 1925, entered an order dismissing its complaint against the petitioner.

Within the year 1925 two firms of attorneys rendered bills against the petitioner for services performed in the amount of $40,000, which bills were paid by the petitioner*2257 in 1925. The third firm of attorneys submitted its bill for services rendered in January, 1926, which bill was immediatetly paid by the petitioner in the amount of $15,000. These fees were paid solely for services in representing the petitioner before the Federal Trade Commission.

In its income-tax returns for the calendar year 1925, and for the fiscal period January 1 to July 31, 1926, petitioner claimed as deductions from gross income $40,000 and $15,000, respectively, representing fees paid to its attorneys. These deductions were disallowed by the Commissioner in the determination of the deficiencies and the deficiencies result solely from such disallowances.

OPINION.

SMITH: The single question presented by this proceeding is whether attorneys' fees paid by the petitioner in the calendar year 1925, and in the fiscal period January 1 to July 31, 1926, for services performed by the attorneys in representing it before the Federal Trade Commission, are ordinary and necessary expenses deductible from gross *1097 income within the meaning of section 234(a)(1) of the Revenue Act of 1926, which permits a corporation to deduct from gross income, among other items, "All*2258 the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *." At the hearing of this proceeding counsel for the respondent stated that the disallowances by the respondent were based upon several decisions of the Board. He stated:

* * * In the first place, we are relying upon the F. Myer and Company case, reported in 4 B.T.A., at page 481, which involves expenses incurred in connection with defending a suit for an alleged patent infringement, and defending of an action for an accounting in receivership as set forth in the O'Day Investment Company, reported in 13 B.T.A., at 1230, and defending an action for partnership accounting, as set forth in the Kornhauser case, reported in 48 Supreme Court, 219, or where the act alleged to have been committed is illegal, such as perjury, for instance, in the Sarah Backer case, reported in 1 B.T.A., at page 214, or a conspiracy to defraud as set forth in the appeal of *2259 John Stephens,2 B.T.A. 724, or violation of the anti-trust laws of the State of Ohio as set forth in the appeal of the Columbus Bread Company,4 B.T.A. 1126, and in those cases, the Board has consistently refused to allow expenses incurred in defense of the act as an ordinary and necessary business expense.

We have carefully examined the cases cited and are of the opinion that the decisions of the Board which have disallowed the deduction of attorneys' fees as ordinary and necessary expenses are not in point. In the first place, it is to be noted that in the present proceeding no suit had been brought against the petitioner for an injunction to restrain it from continuing its practices or for the dissolution of the corporation. The Federal Trade Commission, upon imperfect information, raised a question as to whether the petitioner was not violating the Sherman Anti-Trust Law. It was perfectly proper for the petitioner to present its case before the Federal Trade Commission. The counsel fees were paid for services in connection with the presentation of the petitioner's case. After obtaining the full facts the Federal Trade Commission dismissed*2260 its complaint against the petitioner. This must be interpreted to mean that the petitioner was found to the satisfaction of the Commission not to be operating in violation of the Sherman Anti-Trust Law. It was permitted to continue its practices. The expense of employing the attorneys was incurred in the course of its business operations. In Kornhauser v. United States,276 U.S. 145, it was stated:

In the Appeal of F. Meyer & Brother Co.,4 B.T.A. 481, the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense.

The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated (Appeal of Backer,1 B.T.A. 214, 216), proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214(a), *1098 subd. 1, of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. * * *

Similarly, in this case we are of the opinion*2261 that the attorneys' fees paid proximately resulted from the conduct of petitioner's business. They were ordinary and necessary expenses of conducting the business and as such are legal deductions from gross income.

Judgment will be entered for the petitioner.