Boehm v. Commissioner

*1107 This proceeding involves a deficiency of $1,891.22 in income tax for the year 1931. The respondent added to the income reported by the petitioner the total of the following three items: (1) "Interest" added, $22,004.91, (2) "club dues" disallowed, $1,188.11, (3) depreciation disallowed, $400.

FINDINGS*798 OF FACT.

The petitioner is engaged in the practice of law in New York City.

In 1926 the petitioner loaned to the United Power Laundries, Inc., and its subsidiary corporations the sum of $250,000 to be repaid within three years with interest at 6 percent per annum, the terms and conditions of which were set forth in a written agreement. A collateral agreement was executed simultaneously by the same parties whereby the United Power Laundries, Inc., agreed to pay the petitioner, in addition to the interest of 6 percent specified in the agreement, additional interest or compensation for the making of the loan and the rendition of services as advisor to the board of directors of 10 percent per annum on the principal amount of the loan payable in full on April 27, 1929; but it was provided that in the event that a certain option to purchase stock of said United Power Laundries, Inc., referred to in said agreement should be exercised by Louis Boehm "then this agreement to pay said bonus of ten per cent shall be null and void."

The petitioner was not obligated by the above agreements to render legal services to the United Power Laundries, Inc. During the first year of the loan he*799 voluntarily advised the board of directors occasionally because of the possibility of his becoming a stockholder. After the first year he decided not to exercise his option to buy stock and ceased giving voluntary services. He did render subsequent legal services but was paid on a retainer in each instance and these services bore no relation to the loan agreement.

The entire loan at 6 percent was repaid petitioner within two years. The 10 percent bonus of $25,000 per year was paid for two years but the corporation defaulted on the third payment, due April 27, 1929, and the petitioner instituted suit for breach of contract through a dummy who had no beneficial interest in the cause *1108 of action. The bonus payments were not compensation for services but were in the nature of additional interest payments.

On June 20, 1929, the petitioner executed a written assignment without monetary consideration to his wife, Lillian Boehm, of all his right, title, and interest in the cause of action then pending against United Power Laundries, Inc., and its subsidiaries and any and all proceeds accruing out of that action. The assignment provided inter alia "And I do hereby*800 give the said LILLIAN BOEHM, her legal representatives and assigns, full power and authority for her or their own use and benefit, but at her or their own cost, to ask, demand, collect, receive, compound and give acquittance for the same or any part thereof." After this assignment petitioner exercised no control whatever over the lawsuit. The suit proceeded to judgment in favor of the plaintiff and the full amount of $25,000 was recovered. The net amount collected after deduction of expenses was $22,004.91. This amount was collected by Mrs. Boehm in 1931, placed in her personal bank account, used for her own purposes, and no part was ever paid over to the petitioner at any time. The amount was included by Mrs. Boehm in her income tax return for the year 1931.

In 1931 the petitioner paid the following dues, entertainment expenses, and contributions to various lodges and clubs:

OPINION.

HARRON: Issue (1). - The claim which the petitioner originally had against*801 the United Power Laundries, Inc., for $25,000 was for a "bonus" or additional interest relating to a loan to this corporation. It was not a claim for payment for personal services. The amount in question was due and payable April 29, 1929, and on that date the petitioner had a vested interest in the claim for payment which was not in any way dependent upon any performance of duties by him. When the corporation defaulted in the payment the petitioner had a cause of action against the corporation for breach of contract. We think it clear that the petitioner's right of action against the corporation is a property right in the State of New York. See McKinney's Consolidated Laws of New York, book 21, p. 51, § 39 and annotations; Gilbert v. Ackerman,159 N.Y. 118; 53 N.E. 753; *1109 American Law Institute Restatement of Property, ch. 1, p. 3. The petitioner's rights related to the payment of money and were assignable. His rights under a contract had completely accrued at the time they were assigned. In our opinion, the assignment of June 20, 1929, from the petitioner to his wife of all of his right, title, and interest in the cause of action*802 against United Power Laundries, Inc., and any and all proceeds accruing out of the action operated at that time to irrevocably divest the petitioner of entire ownership and control over and right to receive money that might subsequently be paid as a result of the action instituted against the corporation. The assignment gave Lillian Boehm an enforceable legal right to the money collectible under the suit for breach of contract. Therefore, the money paid to Lillian Boehm pursuant to judgment was not income of the petitioner and is not taxable to him. See Hall v. Burnet, 54 Fed.(2d) 443; Commissioner v. Ross, 83 Fed.(2d) 18; Matchette v. Commissioner, 81 Fed.(2d) 73; certiorari denied, 298 U.S. 677; Nelson v. Ferguson, 56 Fed.(2d) 121; certiorari denied, 286 U.S. 565; Commissioner v. Field, 42 Fed.(2d) 820; Blair v. Helvering,300 U.S. 5; Julius E. Lilienfeld,35 B.T.A. 391; *803 J. V. Leydig,15 B.T.A. 124; affd., 43 Fed.(2d) 494. Where the thing assigned is a property right productive of income and the assignment effectively divests the assignor of all control over the property so that he can not defeat subsequent payment of income to the assignee, the income thereafter arising from such property is income to the assignee by virtue of his ownership.

Issue (2). - The petitioner claims the right to deduct as ordinary and necessary business expenses a total of $1,188.11 paid as dues, contributions, and entertainment expenses to a golf country club, a city athletic club, various civic and political clubs, and two lodges. He claims that he maintained his memberships in all of these organizations for the purpose of furthering his law practice.

Section 23(a) of the Revenue Act of 1928 allows the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 24(a) prohibits deducting from net income personal, living, or family expenses. Whether or not a particular expenditure is a deductible business expense turns on the facts of each case and the burden*804 of proof is on the petitioner to show that such expenditures were primarily business rather than personal expenses. We do not think the burden of proof is met by the petitioner's argument that in general, membership in social, political, and fraternal organizations is helpful in obtaining clients through contacts made thereby or the citing of one instance of gaining a client through acquaintance made at a political club. No evidence has been introduced to show that any part or all *1110 of the expenditures in question were so closely related to the conduct of the petitioner's business as to have been appropriate, helpful, usual, or necessary. It is noted that in cases where expenditures of a social nature have been held to be deductible business expenses proof was presented to show that such expenditures had a direct relation to the conduct of a business or the business benefits expected. Such proof has not been presented here to show that the expenditures are deductible under section 23(a). Cf. E. E. Dickinson,8 B.T.A. 722; *805 Wade H. Ellis,15 B.T.A. 1075; affd., 50 Fed.(2d) 343; Robert C. Coffey,21 B.T.A. 1242; Victor J. McQuade,4 B.T.A. 837; Blackmer v. Commissioner, 70 Fed.(2d) 255. The respondent's determination with respect to these expenditures is sustained.

Issue (3). - The petitioner's claim for depreciation on the furniture and fixtures of his law office including his law library must fail for lack of proof. The statute provides that the basis for depreciation generally "shall be the cost of such property", with certain exceptions not shown to be applicable here. Secs. 113 and 114, Revenue Act of 1928. The purpose of the provision, as amplified in articles 201-204, Treasury Regulations 74, is to assure to the owner the return or replacement of the capital sum constituting his basis. Usually the capital sum to be replaced is charged off over the useful life of the property. The petitioner's only evidence is his estimate that in the taxable year his office equipment was worth $4,000 and that depreciation of 10 percent per year is, in his opinion, a fair annual charge-off for office equipment generally. *806 But it is evident that the equipment was not purchased in the taxable year. Lacking information as to the original costs, present age of the equipment, probable useful life, and what part if any has already fully depreciated, it is not possible to approve the petitioner's claim that a deduction of $400 for depreciation is proper in the taxable year and the disallowance of the entire deduction by the respondent is sustained.

Decision will be entered under Rule 50.