Barnes v. Commissioner

*690 This proceeding is for the redetermination of a deficiency in income tax of $2,633.08 for the calendar year 1925. The petitioner alleges that respondent erred in that he has disallowed as a business expense the amount of $14,160.67 representing attorney's or agent's fees paid during the taxable year 1925. The proceeding was submitted on the pleadings and an agreed statement of facts.

FINDINGS OF FACT.

1. The petitioner founded the business conducted by the A. C. Barnes Company, 24 Fortieth Street, Philadelphia; after the business had been conducted by the petitioner for a number of years, said business was incorporated prior to the year 1917 and has since been conducted by the A. C. Barnes Company, a corporation, the business of said corporation being that of manufacturing chemists; the corporation's capital stock*1809 consisted of 1,000 shares.

2. The petitioner, during the year 1925, was president of the A. C. Barnes Company and actively engaged in the management of its affairs.

3. The petitioner was not engaged in any other business during the year 1925.

4. The petitioner owned practically all of the stock of the A. C. Barnes Company during the years 1917 and 1918, but he had disposed of practically all of his stock prior to the year 1925 and owned only 100 shares of the said stock during the year 1925.

5. The petitioner's income for the year 1925 was salary of $30,000.00 from the A. C. Barnes Company, a dividend of $200.00 from said corporation, interest on bonds $7,595.00, rents $1,265.42, and interest on refund of 1917 and 1918 tax, $22,884.52.

6. The petitioner employed J. S. Wilson, Jr. & Company, Baltimore, Maryland, during the year 1924 to determine if he overpaid his taxes for 1917 and 1918 and to file claims for refund for said years, agreeing to pay J. S. Wilson, Jr. & Company fifteen per cent (15%) of any amount recovered as remuneration for their services.

*691 7. Claims for refund were prepared for the petitioner by J. S. Wilson, Jr. & Company and filed*1810 with the Treasury Department and refunds were made to the petitioner as follows:

8. Interest on said refunds paid the petitioner amounted to $22,884.52.

9. The petitioner received from the Treasury Department of the United States the full amount of said refunds and interest during the taxable year 1925.

10. The petitioner paid J. S. Wilson, Jr. & Company, during the taxable year 1925, as remeuneration for services performed, the sum of $14,160.67.

11. The petitioner, in making his income tax return for the taxable year 1925, returned as taxable the full amount of the interest received from the Treasury Department of the United States upon the refunds allowed for the years 1917 and 1918, and took as a deduction from his gross income for said year the amount paid J. S. Wilson, Jr. & Company for services rendered as aforesaid.

12. The Commissioner of Internal Revenue, upon verifying the petitioner's income tax return for the year 1925, disallowed the amount paid to J. S. Wilson, Jr. & Company, as remuneration for said services as a deduction from the petitioner's gross income, which disallowance results*1811 in the deficiency asserted by him.

OPINION.

MORRIS: Section 214(a)(1) of the Revenue Act of 1926 provides for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The petitioner contends that the $14,160.67 paid counsel for securing the refund is deductible under the above provision, or that the transaction was one entered into for profit. The latter contention is not argued to its conclusion, but is apparently based on section 214(a)(5) of the Revenue Act of 1926, which allows the deduction of losses sustained in a transaction entered into for profit. The expenditure is obviously not a loss. . The respondent disallowed the deduction upon the ground that it was a personal expense and not one incurred in carrying on a trade or business.

The Supreme Court in , after citing certain Departmental and Board rulings in which legal expenses were allowed as deductions, said: "The basis of these holdings seems to be that where a suit or action against a taxpayer is directly *692 *1812 connected with, or, as otherwise stated (, proximately resulted from his business, the expense incurred is a business expense within the meaning of § 214(a), Subd. (1) of the act. These rulings seem to us to be sound * * *." Examining the facts in the instant proceeding in the light of the foregoing, we are of the opinion that the legal expenses were not paid in carrying on any trade or business. It was stipulated that during the year 1925 the petitioner was president of the A. C. Barnes Co. and actively engaged in the management of its affairs, and that he was not engaged in any other business during said year. The record further shows that he owned practically all of the stock of said company during 1917 and 1918, the years for which the refund was granted, and presumably he was managing head during those years. The expenditure was neither directly connected with the petitioner's business as manager of the corporation nor proximately resulted therefrom.

Reviewed by the Board.

Decision will be entered for the respondent.

LANSDON and TRUSSELL dissent.