text:
    Samuel Lanski, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49347.
    Promulgated September 29, 1936.

      Arnold R. Baar, Esq., for the petitioner. '

      O. R. Marshall, Esq., for the respondent.
   OPINION.

Hill:

The first issue in this case is whether petitioner sustained a statutory net loss in 1924 which may be carried forward and deducted from gross income for 1925. The parties have stipulated that the petitioner sustained a deductible bad debt loss of $104,024.32 in 1924 on account of the worthlessness of his claim in that amount against the Fort Dearborn Furniture Co. for money loaned and advanced to the company, and that including such loss the excess of the deductions allowable to petitioner for 1924 over income amounted to $44,433.54. The parties further stipulated that if petitioner is entitled to deduct from his income for 1925 any net loss sustained in 1924 the amount is $44,433.54.

Under section 206 (a) and (b) of the Revenue Act of 1926, if a taxpayer has sustained a net loss attributable to the operations of a trade or business regularly carried on by him the amount is allowable as a deduction in computing net income for the succeeding taxable year. And subdivision (e) of the same section provides that if for the taxable year 1924 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1924, which are substantially the same as in the 1926 Act, the amount of such loss shall be allowed as a deduction in computing net income for 1925. Thus, the sole point in controversy here is whether or not the net loss admittedly sustained by petitioner in 1924 was “attributable to the operation of a trade or business regularly carried on” by him.

Respondent disallowed the claimed deduction as not within the terms of the statute, substantially taking the position that petitioner’s regular business was that of a corporate executive; that he was not regularly engaged in the business of lending money, and that the loans to the furniture company, which resulted in the loss in controversy, constituted a casual transaction made to protect his investment in the corporation’s stock.

The determinative questions are, first, Was petitioner engaged in promoting, managing, and financing corporate enterprises? and, second, If he was so engaged, was that a trade or business regularly carried on by him on his own behalf ?

It is not sufficient that the loss be sustained in a business transaction. It must be sustained in a trade or business regularly carried on by the taxpayer. This Board has, therefore, distinguished between a business regularly carried on and a single, isolated transaction. * * * -
The loss contemplated by the statute is an operating loss, and the party claiming it must be the operator of the trade or business in which the loss occurs. Therefore, a business regularly carried on by the taxpayer means a business regularly operated by the taxpayer on his own behalf. [Glenn M. Averill, 20 B. T. A. 1196.]

In E. M. Elliott, 15 B. T. A. 494, this Board said:

What constitutes a business has previously been considered in a number of cases. In Oscar K. Eysenbach, 10 B. T. A. 716, we approved definitions of “business” which we will repeat here:
Business is a very comprehensive term and embraces everything about which a person can be employed. Black’s Law Diet, citing People ex rel Hoyt v. Tax Comrs. 23 N. Y. 242, 244. That which occupies the time, attention and labor of men for the purpose of a livelihood or profit. 1 Bouvier’s Law Dict. p. 273. Approved in Flint v. Stone & Tracy, 220 U. S. 107; Von Baumbach v. Sargent Land Co. 242 U. S. 503.

Over a period of about 25 years up to and including the year 1924, the petitioner was connected with a number of corporations as a stockholder and officer. These corporations were I. Lanski & Son Scrap Iron Co., Great Eastern Manufacturing Co., Fort Dearborn Furniture Co., Republic Pipe & Supply Co., and the Red Point Manufacturing Co. The Illinois Pipe & Manufacturing Co. was not a corporation but a trade name established about 25 years ago and used by I. Lanski & Son Scrap Iron Co. for certain subsidiary trade purposes. Of these corporations the petitioner and two of his brothers organized the Fort Dearborn Furniture Co. in 1919, and the Republic Pipe <& Supply Co. in 1920 or 1921. The Red Point Manufacturing Co. was organized by the petitioner and two other persons in 1921 or 1922. Petitioner acquired stock in the Great Eastern Manufacturing Co. in 1917, but did not organize it. The I. Lanski & Son Scrap Iron Co. was organized about 40 years ago by petitioner’s father. The petitioner was a stockholder and officer in each of the corporations named, and was president and treasurer of I. Lanski & Son Scrap Iron Co., Republic Pipe & Supply Co., and the Fort Dearborn Furniture Co. He was president of the Great Eastern Manufacturing Co. and was manager of the four corporations last named. It was his duty as such officer and manager to arrange for the financing of the operations of these corporations. As an officer of the I. Lanski & Son Scrap Iron Co. petitioner received in 1924 a salary of $5,200, and in the same year he received a salary of $10,000 as an officer of the Republic Pipe & Supply Co. Neither of the other corporations was a going concern in 1924.

Petitioner initiated the idea and brought about the organization of the Fort Dearborn Furniture Co,-, the Republic Pipe & Supply Co., and the Red Point Manufacturing Co. He owned one-third of the stock in each of these three corporations. His two brothers owned the remainder of the stock in the Fort Dearborn Furniture Co. and the Republic Pipe & Supply Co. Frank Neal and one Larson owned the remainder of the stock in the Red Point Manufacturing Co. The petitioner owned practically all of the stock of the Great Eastern Manufacturing Co.

Pursuant to his duty as an officer petitioner arranged for bank credit to carry on the operations of all the corporations hereinabove named, except the Red Point Manufacturing Co., which continued in business for about one year only on the capital furnished therefor by petitioner at its organization. Such bank- credit was secured on the personal guaranty or endorsement of the petitioner.

During the depression before the World War, petitioner personally advanced moneys to the Lanski Co. and subsequently advanced moneys to the Furniture Co. for its operations. It is the loss sustained by reason of the advancements to the Furniture Co. which is herein claimed by the petitioner as a net loss deductible from his 1925 income.

The record discloses no advancement or loan by petitioner to any other corporation. In some instances petitioner was required to repay the loans from banks secured on his personal guaranty.

In addition to his activities in connection with corporate enterprises the petitioner, over a period of about 30 years, was engaged in buying vacant real property, erecting buildings thereon, and either renting or selling same for profit. His activities in this line were on his individual account and had no connection with the business of the corporations and had no relation to his corporate connections. The petitioner neither promoted, managed, nor financed any corporations other than those in which he was a substantial stockholder; he neither guaranteed nor made loans other than to such corporations. In all of the corporations with which the petitioner was connected, except Great Eastern Manufacturing Co., persons other than petitioner had substantial stockholdings. Petitioner’s two brothers, who were stockholders with him in the Fort Dearborn Furniture Co., joined him in making loans to that company.

The petitioner had two lines of business in which he was employed for profit or a livelihood. One was the management as a salaried executive officer, of certain corporations in which he was a stockholder; the other was his real estate operations. His activities in securing operating credit and in advancing money to the corporations in question were merely incidental to his obligations and duties as a corporation executive, and as such afforded him neither profit nor expectation of profit separate and apart from the business of the corporations. It is not claimed by petitioner, nor does it appear, that he received any compensation for financing corporations other than that which may have inured to him from his investments in the corporations. It does not appear that petitioner received any bonus, fee, commission or other compensation for promoting the organization of corporations.

It can not be said, therefore, that he was engaged in promoting or financing corporate enterprises for a livelihood or profit; hence, such activity of the petitioner did not constitute a trade or business. His means of livelihood or profit, as to his activities in connection with corporations, came from the salaries he received as an executive officer thereof, and his proportionate part of the earnings of such corporations, distributed as dividends, if any. His employment was that of a corporation official — that was the business regularly carried on by him.; that was the employment in connection with corporations which occupied his time, attention and labor for the purpose of a livelihood or profit. We conclude, therefore, that the loss which petitioner sustained in 1924 through advancements theretofore made to the furniture company was not sustained in a trade or business regularly carried on by him.

Respondent’s action on the first issue is approved. Dalton v. Bowers, 287 U. S. 404; Burnet v. Clark, 287 U. S. 410; Robert T. Cunningham, 20 B. T. A. 428; Eli Strouse, 24 B. T. A. 748; affd., 59 Fed. (2d) 600; Benjamin I. Powell, 26 B. T. A. 509; Winthrop Ames, 27 B. T. A. 729; affd., 68 Fed. (2d) 301; certiorari denied, 292 U. S. 635; John C. Shaffer, 28 B. T. A. 1294; Philip Rhinelander, 30 B. T. A. 121; Joseph Cavedon, 30 B. T. A. 364.

The second issue involves the action of the respondent in including-in petitioner’s income for 1926 the amount of $80,000 alleged to. have been received by petitioner in that year from one Isaac T._ Cook as commissions on the sale of Florida real estate. The evidence conclusively shows that the $80,000 of securities passed in the-transaction in question was received by Cook and not by or for the-petitioner; that petitioner received only a paper equity in 3,040-acres of land and a one-half interest in a like equity in another tract, of 10,100 acres. Cook held the remaining interest in the equity in,, the latter tract of land.

On brief respondent does not seriously contend that petitioner received the $80,000 as commissions, except possibly by constructive-receipt as payment for his equities in the above mentioned lands,, but respondent urges in the alternative that petitioner received taxable income in the same amount represented by the fair market value-of his interest in the lands for the cancellation and release of certain contracts referred to in our findings of fact. The correctness; of respondent’s contention depends upon whether the interest in the lands received by petitioner had a fair market value at the time of receipt. Concededly petitioner received taxable income only to the extent of the fair market value, if any, of the equities-acquired.

The evidence shows that the lands in question were encumbered by mortgages; that at the time of the transaction in 1926 the Florida, land “boom” had broken and that the paper interests received by-petitioner then had no fair market value in excess of the mortgages.. We have so found as a fact, and there is no persuasive evidence in the record to the contrary. Neither petitioner nor Cook considered, his interest in the lands of sufficient value to justify the payment, of taxes.

Respondent’s action on the second issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50..


source: Caselaw Access Project

license: Public Domain

text:
    Malcolm G. Gibbs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78229.
    Promulgated September 29, 1936.

      Lionel B. Farr, G. P. A., for the petitioner.

      E. G. Smith, Esq., for the respondent.
   OPINION.

Black.:

It is clear on tire facts that have been stated above that the proposed increase in petitioner’s income tax in 1925, against which he employed counsel to defend him and so paid the fees here in question, resulted proximately from his sale of stock of the Peoples Drug Stores, an incorporated business of which petitioner was president and majority stockholder and the direction of which consumed the major part of his time. The only question is whether the lawyers’ fees paid in 1931 were ordinary and necessary expenses incurred “in carrying on any trade or business” of the taxpayer within the requirement of section 23 (a) of the Revenue Act of 1928 so as to permit their deduction.

In Kornhauser v. United States, 276 U. S. 145, the Supreme Court held that attorney fees incurred by the taxpayer in defense of a suit against him for an accounting brought by a former copartner, the suit growing directly out of the conduct of the partnership business, were a deductible expense, saying, after reviewing certain holdings of this Board:

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), subd. 1, of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. ⅜ * *

On the other hand, it is well settled that attorney fees paid merely to preserve income, when that income is not derived from any business in which the taxpayer is engaged, are not expenses incurred in business, but personal expenses, and as such are not deductible. Van Wart v. Commissioner, 295 U. S. 112; Baruch Mahler Estate, 32 B. T. A. 644; Morse v. Commissioner, 85 Fed. (2d) 262.

So it seems to us that the question we have here to decide is whether the $10,000 in question was paid to the attorney for his services rendered in resisting a tax claim asserted by the Government arising out of some transaction connected with petitioner’s business, or whether the payment was made to the attorney for his services rendered in resisting a claim of the Government for additional tax on a transaction which was purely personal to petitioner and not connected with his trade or business. The distinction between the two classes of expenses is not always easy to draw and it is difficult to reconcile all the decided cases.

The law is clear, however, that expenses incurred in the taxpayer’s trade or business are deductible, and expenses incurred in a purely personal transaction are not deductible, even though the taxpayer is at the same time engaged in some trade or business.

It is true that the Peoples Drug Stores, Inc., was carrying on a business and petitioner was the president and directing head of it, Ibut that did not make it his business. Cf. Clark v. Burnet, 287 U. S. 410; Dalton v. Bowers, 287 U. S. 404.

Even if it be held that the large amounts of securities bought and :sold by petitioner in the years 1926 to 1931, inclusive, the figures of which are given in our findings of fact, were sufficient to constitute a business carried on by petitioner of buying and selling securities for his own account, it still remains that the sale of stock in the Peoples Drug Stores by petitioner in 1925 was not a part of such business.

As pointed out by the court in Hutchings v. Burnet, 58 Fed. (2d) 514, the phrase “carrying on a trade or business” as used in the revenue statutes bears a more restricted meaning than the general definition of what constitutes “business transactions.” We think it is undoubtedly true that petitioner’s sale of part of his stock in the Peoples Drug Stores in 1925 was a “business transaction” as that term is commonly used, but can it be said that the sale took place as a part of any business which petitioner was “carrying on”? We do not think so. The court in its opinion in Hutchings v. Burnet, supra, among other things said:

In Lewellyn, Collector, v. Pittsburgh, B. & L. E. R. Co. (C. C. A.) 222 F. 177, 185, a case relating to the excise tax imposed by Act of Aug. 5, 1909, sec. 38 (36 Stat. 112) it is said: “ ‘Carrying on business’ does not mean the performance of a single disconnected business act. It means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto, and likewise the expression ‘doing business,’ when employed as descriptive of an occupation, conveys the idea of business being alone, not from time to time, but all the time.” See, also, Mente v. Eisner (C. C. A.) 266 F. 161, 11 A. L. R. 496.

In Isaac P. Keeler, 23 B. T. A. 467, we said: “The respondent also ¡disallowed as a deduction from gross income of the petitioner for •the year 1926, an amount of $2,000 paid by the petitioner to O. W. McGuire for services in connection with the income tax upon petitioner’s income from Tilton and Keeler. This expenditure was not .an ordinary and necessary business expense and the respondent’s .action must be approved” (citing Charles Henry Mattlage, 3 B. T. A. 342, and Frank C. Hermann, 20 B. T. A. 899).

In the Keeler case we also held that where petitioner, as the .■result of investments made in his individual capacity but in order to benefit the partnership of which he was a member, expended ¡amounts in defense of a law suit, such expenditures were deductible from his individual gross income as ordinary and necessary expenses of his business. Petitioner contends that our holding in the -above respect is authority in his favor in the instant case. We do mot think so.

The deficiency which respondent determined against petitioner in the instant case for the year 1925 did not grow out of the listing: of the stock of the Peoples Drug Stores on the Curb Exchange in that year. The asserted deficiency against petitioner grew out of the sale by him of some of his individually owned stock and stock warrants in the Peoples Drug Stores, and, while the sale may have been made in connection with the listing of the stock of the company on the Curb Exchange, we do not think that changes the character of the sale. It still remained a sale of petitioner’s individually-owned stock. The income therefrom was his individual income and we do not see where it can be held that it was income from any business which petitioner was “carrying on” within the meaning of the applicable statute. Petitioner cites in support of his contention H. M. Howard, 22 B. T. A. 315; Samuel D. Leidesdorf, 26 B. T. A. 881; and Commissioner v. People's Pittsburgh Trust Co., 60 Fed. (2d) 187. We think these cases are distinguishable on their facts.

We, therefore, sustain respondent in his disallowance of the claimed deduction.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Van Fossan:

text:
    H. S. and W. K. Vanderbilt, Executors of the Estate of Alva E. Belmont, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80650.
    Promulgated October 1, 1936.

      Hugh C. Bickford, Esq., for the petitioners.

      John W. Smith, Esq., for the respondent.

         Sec. 303. For the purpose of the tax the value of the net estate shall be determined— (a) In the case of a resident, by deducting from the value of the gross estate—
      *******
      (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; * * *

   OPINION.

Van Fossan:

This proceeding was brought to redetermine a deficiency in the estate tax of the estate of Alva E. Belmont in the sum of $31,425.13. The petitioner asserts that the respondent erred:

(1) In disallowing a deduction of $100,000 representing a legacy bequeathed to the National Woman’s Party by the decedent, Alva E. Belmont.
(2) In disallowing a deduction as a debt against the decedent’s estate of tlie sum of $522.19, tlie expenses of a prize essay contest which Alva E. Belmont agreed to pay.

The following facts are found from the stipulation filed by the parties:

The petitioners are the duly appointed and acting executors of the estate of Alva E. Belmont, deceased. The notice of deficiency determined a deficiency of $31,425.13 in Federal estate tax liability against •the estate of the deceased, of which $10,855.64 may be eliminated by credit for state, estate, inheritance, legacy or succession taxes pursuant to the provisions of section 301 (b) of the Revenue Act of 1926, as amended by section 802 of the Revenue Act of 1932.

The decedent died January 26, 1933, leaving a will which, among dther bequests, bequeathed $100,000 to the National Woman’s Party in the following terms:

Thud): I give and bequeath to National Woman’s Party, a corporation ■organized and existing under and by virtue of the laws of the District of Columbia, United States of America, the sum of One Hundred Thousand ($100,000.00) Dollars.

The decedent was internationally known as a leader in the movement for the establishment of women’s rights and the elimination of legal, social, and economic restrictions which placed women in an inferior position. Her zeal to right these wrongs and to overcome the prejudice against a moral, economic, and social equality between the sexes, led her to encourage and to support many movements for the improvement of the state of woman. She was a leader in the movement which resulted in the adoption of the Nineteenth Amendment to the Constitution of the United States on August 18, 1920. With others who had worked with her upon a national scale for the adoption of such constitutional amendment, she became convinced that the franchise alone would not remove existing legal and economic handicaps since the average woman was ignorant of their existence and effect. A great campaign to instruct women in such matters became the ideal of this group and the National Woman’s Party, hereinafter called the Party, was formed to conduct this campaign on a national scale. One of the leaders in such formation was the decedent, who became chairman of the Party and served as such until the time of her death.

The Party was incorporated September 19, 1918, under chapter XVIII, subchapter III of the Code of Laws of the District of Columbia, which provides:

Any three or more persons of full age, citizens of the United States-, a majority of whom shall be citizens of the District, who desire to associate themselves for benevolent, charitable, educational, literary, musical, religious, scientific or missionary purposes, including societies formed for mutual improvement or for tlie promotion of the arts, may make, sign and acknowledge * * * and file in the office of the Recorder of Deeds, to be recorded by him, a certificate in writing * ⅜ *.
Upon filing their certificate the persons who shall have signed and acknowledged the same shall be a body politic and corporate * * *.

The objects of the Party, as set forth in the certificate of incorporation, are as follows:

The term for which the society is organized is perpetual.
The particular business and objects of the society are educational and for mutual improvement and especially by the preparation and circulation of books, newspapers, the delivery of speeches, lectures and such other proper means as in the judgment of the society will promote that end, to educate public sentiment to a recognition of the equality of the sexes in all their rights, privileges and obligations.

The pertinent portions of the constitution and bylaws of the Party in effect in 1933 are as follows:

Article II: Object
The object of this organization shall be to secure for women complete equality with men under the law and in all human relationships.
Article III: Members
Section 1. Membership shall be open to all women who support the object of this organization and comply with provisions for membership of State organizations, or of the National organization.
Section 2. Any group of women wishing to further the objects of this organization may form a branch of the National Woman’s Party, by submitting a constitution to the National Council and receiving the approval of that Council. Upon such approval, the branch shall become a part of the organization of the National Woman’s Party of the State in which it is organized. There shall be no more than one state organization in each state.
* * * * ⅜ ⅜ ⅜
Article XI: Dues
Section 1. Each State organization shall pay to the Treasury of the National organization before June 1st of each year twenty-five cents for each member belonging to such organization.
Section 2. A member of the National Woman’s Party may become a National Life Member by payment of $1,000 to the National Treasury: a National Sus-tainer by the payment of $5,000, to the National Treasury; a National Endower by payment of $5,000 to the National Treasury. The dues for other members shall be $1.00 payable to the local, state branch or National Headquarters: $10.00 for active membership, $2.00 of which must be sent to National Headquarters.

The designation and duties of the officers, the establishment of the national council, standing committees, national conferences and conventions, state organizations, and other routine matters were also provided for in the document.

Following the adoption of the Nineteenth Amendment the Party reorganized on a permanent basis to work for the complete freedom of women in all lines. During 1921 the decedent donated a building opposite the National Capitol to the Party as permanent headquarters.

The Party from 1922 to 1934 has conducted a national campaign for the establishment of woman’s rights and the elimination of handicaps. In 1923 a^weekly paper, subsequently issued biweekly, was established and has since been published. The magazine collected and published all facts relating to the campaign. Members of the Party conducted exhaustive research and prepared bibliographies of all books and literature found relating to the subject of woman’s rights. The research developed the statutes of each of the forty-eight states which restricted or handicapped woman. In making this investigation constitutional provisions, statutes, and court decisions of the several states bearing upon women were examined. The results of this study were published in pamphlets and circulars for each state. When noteworthy statutes were passed, such as the Wisconsin Equal Rights Law, special pamphlets were issued, such as “What Women Won in Wisconsin.”

Special pamphlets, circulars, and notices were issued and widely circulated to make known the facts regarding various particular subjects relating to the status of women and the discrimination seemingly made against them. The Party also encouraged the publication of articles in various magazines and frequently when such articles appeared reprints thereof were made and distributed throughout the Nation.

The attention of the country was turned to the equal rights question by publicity and organizing compaigns conducted by the Party. As a part of these campaigns great pageants have been organized, such as one at Seneca Falls, New York, to commemorate the seventy-fifth anniversary of the first equal rights convention; one in the Garden of the Gods in Colorado as part of the conference of the western states; one at Meadowmount in the Adirondacks in memory of Inez Milholland; one in Detroit as a part of the mid-western conference of Woman’s Party leaders; and one at Washington to dedicate the national headquarters. Many thousands of people from all parts of the country attended these pageants, which dramatized the struggle for woman’s freedom and at which speeches were arranged to explain and advance the cause. Sectional and regional conferences were periodically held, as well as monthly and weekly, of state branches, to advance equal rights for woman, at which appropriate discussion was held and at which prominent men and women spoke on instructive subjects.

Tlie Party lias drafted many bills for tlie state legislatures designed to equalize control of children, of property, 0f earnings; to make contractual rights, citizenship rights and inheritance rights equal; to provide equal opportunities in the schools and universities, in professions and industries, and in government service; to provide equal pay for equal work; to assure equal right to individual identity after marriage; to equalize moral standards. Facts and information in support of these bills have been supplied by the party and ax>proximately 100 of such laws have been passed by the state legislatures. The Party has also supplied facts, speakers and support for the adoption of a joint resolution proposing an amendment to the Constitution of the United States, introduced in both Houses of Congress, of the Seventy-third Congress, first session, providing:

Men and women shall have equal rights throughout the United States and every place subject to its jurisdiction.

The funds of the Party have been derived from dues of its members and from contributions which, between March 15, 1922, and December 31, 1934, amounted to $1,165,231.40, of which $1,164,647.80 has been expended to defray the costs of the foregoing activities, leaving a balance on hand at December 31, 1934, of $583.60. The corporation is not organized for profit and no part of its earnings inured to the benefit of any private shareholder or individual.

On December 16, 1931, Alva E. Belmont sent a letter to the national chairman of the Students Councils of the Party, stating that she was renewing her offer of $500 to use as a prize to be given by the president of the Party to women college students of the country and increasing the prize to $500 as a first prize and $200 as a second prize. The prizes were to be given for essays dealing with the proposed equal rights amendment and the decedent agreed to pay all necessary expenses connected with the publicity, clerical costs, and traveling expenses of prize winners.

The essay contest was announced in the Party magazine “Equal Eights” on May 14,1932, and was open to undergraduate students in colleges and schools throughout the land. On July 8, 1933, the winners were announced and subsequently came to Washington for the formal awards. The expenses of the contest, aggregating $528.61 were not paid at the date of the decedent’s death. The executors of her estate paid $522.19 of such expenses and claimed the payment as a deduction. The respondent disallowed the deduction on the ground that the decedent’s liability was not incurred or contracted “for an adequate and full consideration in money or money’s worth” within the meaning of section 303 (a) (1) of the Revenue Act of 1926.

The primary issue before us is whether or not the Rational Woman’s Party is a corporation organized and operated exclusively for educational purposes as contemplated by the provisions of section 303 (a) (3) of the Revenue Act of 1926. If it is, the $100,000 bequeathed to it by Alva E. Belmont must be deducted from the gross value of her estate in order to determine its proper net value as a basis for assessing the estate tax. It is stipulated that no part of the net earnings inures to the benefit of any private stockholders or individuals.

To entitle petitioners to the deduction claimed on account of the bequest to the National Woman’s Party it must appear that the corporation in question was “organized and operated exclusively” for educational purposes. Respondent contends that it fails to satisfy the statute in either respect. Though the avowed purpose, as found in the certificate of incorporation, is stated to be educational, it is to 'be noted that the constitution of the organization sets forth that the object is “to secure for women complete equality with men under the law, and in all human relationships.” The accomplishment of this goal would require more than education — it would require the adoption of an amendment to the Federal, and many State, Constitutions and the passage of legislation both by the Congress and state legislatures. Thus it may seriously be doubted whether the stated object of the corporation comes within the scope of education.

When we pass to the activities of the corporation the real situation becomes clear. The corporation was not “operated exclusively” for educational purposes. In the stipulation of facts we find that the Party “conducted a campaign for the establishment of women’s rights and the elimination of handicaps”; it staged pageants and sponsored speeches “to explain and advance the cause”; it “drafted many bills for State legislatures” and supplied “facts and information in support of these bills”; it “supplied facts, speeches and support for the adoption of a Joint Resolution proposing amendment to the Constitution of the United States” granting equal rights. The above quotations evidence, not the education of women nor of the electorate, but the active advocacy of legislation necessary to the removal of barriers to equality of the sexes. In this activity the Party transgressed! the 'boundaries prescribed by the statute and forwent its advantages. In John H. Watson, Jr., 27 B. T. A. 463, after discussing certain, cases also pertinent here, we observed:

In the instant case the members of the League would perhaps paraphrase the purpose of the League as “the bringing about of better local government and the election of better fitted men to office.” But in the very statement they assume the soundness of their conclusions and the accuracy of their judgment of fitness. Furthermore, they impute that those not in agreement with the League are mistaken in their philosophy and unsound in their judgment. Any organization such as that under consideration is obviously partisan in the broad sense of that term. It has its own concept of what constitutes good government and its own criteria by which to judge candidates for office, and it suggests its conclusions to others. To this extent it is an advocate. And though advocacy may be but a natural expression of sincerity of belief, it also tends to indicate the point at which education ends and, in that this, political activity begins.
On the facts before us we are not convinced that the Citizens League of Cleveland was organized and operated exclusively for educational purposes. The classification of candidates and the publishing as paid advertisements of such classification went beyond the education of the public. The obvious purpose! of such advertisements was to promote the election of “preferred” candidates. This was a political activity, however laudable the aim in the opinion of the= members of the League. Similarly, the League presented its conclusions and, by proper inference, it recommended actions to the legislative authority. Here, again it assumed the role of an advocate in political matters.

The reasoning underlying our ruling that the contribution was not deductible in the Watson case is equally pertinent here. In Leubuscher v. Commissioner, 54 Fed. (2d) 998 (affirming 21 B. T. A. 1022), the court approved the disallowance of a contribution to a club organized “to advocate the Henry George doctrine” and promote social intercourse “among single tax people”, while approving the deduction of a legacy to a foundation where “the money was to be used for teaching, expounding and propagating” the ideas of Henry George but “not for seeking the passage of legislation.” See also Henrietta T. Noyes, 31 B. T. A. 121, where contributions to two leagues of women voters were disallowed. The case of Charles W. Dahlinger, 20 B. T. A. 176, relied on by petitioners was essentially different from the present case in its facts.

We find that the National Woman’s Party was not organized and operated exclusively for educational purposes and, therefore, the deduction of the bequest from the gross estate was properly denied.

The second issue involves the deductibility of $522.19, paid by the petitioners to the Party to reimburse it for the expenditures made in connection with the Belmont prize essay contest, pursuant to the promise made by Alva E. Belmont during her lifetime.

In Boston Safe Deposit & Trust Co. et al., Executors, 30 B. T. A. 679, we liad a similar situation before us. There we held that such payments were not made for adequate and full consideration in money or money’s worth within the purview of the statute. The decision in that case is applicable to the facts here. See Charles B. Bretzfelder et al., Executors, 32 B. T. A. 116; Robert A. Taft, Executor, 33 B. T. A. 671. The amount is not deductible.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Section 303 (a) (1) of tlie Revenue Act of 1926 is as follows :
      “(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in the case of a resident decedent, where such property is not situated in the United States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth * * *”


author: Hill:

text:
    Christine Smith Kendrick, Lilian B. Morgan, and Katharine S. Smith Hare, Executrices of the Estate of Katharine Atlee Smith, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78700.
    Promulgated October 1, 1936.

      Henry Gross, Esq., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Hill:

In this proceeding petitioners seek review of respondent’s action in determining a deficiency in Federal estate tax of $23,280.76. The sole issue is whether certain powers of appointment given to Katharine Atlee Smith, under the wills of her mother and father, were general powers of appointment. Katharine Atlee Smith, hereinafter called decedent, died testate on November 24, 1931, a resident of Haverford, Montgomery County, Pennsylvania.

The will of Catharine Smith, decedent’s mother, was executed February 25, 1898, and the fifth paragraph thereof provided as follows:

It is my desire tliat neither my son Walter E. Smith nor any descendants of his shall participate in any way, shape or manner in my estate. In any general words which I may use in my will providing for children or their descendants, I direct that those words shall operate as they would have operated had my son Walter E. Smith died before me, without any descendants living.

After making certain special bequests, Catharine Smith, by the seventh paragraph of her will, directed that the residue of her estate should be divided into as many parts or shares as there were children of hers living at the time of her decease (other than Walter E. Smith) and children then dead represented by living descendants (other than Walter E. Smith). These parts or shares she gave to her husband, Charles Smith, as trustee, with directions to pay over the net income of one share thereof to each of her sons and daughters during his or her lifetime. It was further provided that the corpus of the trust should be disposed of as follows:

Upon the decease of each of said sons or 'daughters, to pay over, assign and convey his or her share to such person or to such persons upon such uses and trusts as he or she by any last will shall direct * * *

The will of Charles Smith, decedent’s father, was executed May 31,1905, and the fourth paragraph thereof provided as follows:

By my will and possibly by codicils thereto I have directed and may direct,, distribution to be made amongst my descendants. Wherever any principal! or income of my estate is to be distributed under any provisions in favor of.' descendants I direct that it shall be taken as though my son Walter E. Smitto had never been born. Under no provision or direction and in no contingency" and under no circumstances shall any person take any portion of my estate as his descendant. All provisions in favor of my descendants shall be taken as though incorporated therein was a direction excluding any possibility of any descendants of my son Walter under any conceivable circumstances receiving any distribution or property.

By the thirteenth paragraph of his will, Charles Smith directed that the residue of his estate should be divided into as many parts or shares as at the time of his decease there should be children of his then living and children then dead represented by descendants then living, and further provided:

This provision is of course subject to what I have said with regard to the exclusion of any claim of any descendants, if such claim be made of descendants of my son Walter. Whilst I do not believe any such descendants exist, I wish to exclude under any and all circumstances the possibility of a claim on behalf of such descendants or alleged descendants being made.

By the same paragraph of his will, Charles Smith gave to his three sons, Edward, Charles, and Horace, their respective shares absolutely. To each of his three daughters was given absolutely $50,000 in cash out of her share, and the balance of each daughter’s share was given to a trustee with directions to pay the net income to the daughter for life, the corpus of each daughter’s share to be disposed of as follows:

In trust upon the decease of my said daughter to pay over the principal of her share to such persons and for such uses as she by her last will and testament or writing in the nature thereof shall direct.

The decedent, Katharine Atlee Smith, exercised by her will such powers of appointment as she had under the wills of said Charles Smith and Catharine Smith.

The pertinent provisions of the applicable statute are quoted in the margin.

The petitioners contend that the powers of appointment given to and exercised by decedent under the wills of her parents were special powers, because she could not exercise them in favor either of her brother Walter or his descendants, and assign as error the action of respondent in including in the gross estate the value of the property passing thereunder. Respondent contends that the powers in question were general powers of appointment, and that under the quoted statute the value of the property passing thereunder was properly included in the gross estate.

A power of appointment is general when it can be exercised in favor of any person the donee may select. It is special or limited when exercisable only in favor of persons or classes of persons designated in the instrument creating the power. Kate Allerton Johnstone, 29 B. T. A. 957, 963; aff'd., 76 Fed. (2d) 55; Fidelity-Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600; certiorari denied, 280 U. S. 602.

To the above definition of a general power we would add what was not pertinent in the cited cases and hence not adverted to but is material in the present case, namely, that the person selected by the donee must be a person in being capable of accepting a gift. The essential elements of a valid gift include (1) a donor competent to make it, and (2) a donee capable of taking it. 28 O. J. 626, ¶ 15. Since a donee must be a person in being capable of taking, it has been held that a gift can not be accepted by a parent for unborn children. 28 G. J. 627, ¶ 18. For these reasons no power of appointment, however general in terms, may lawfully be exercised in favor of the dead. 49 C. J. 1265. And see Whitlock-Rose v. McCaughn (C. C. A., 3d Cir.), 21 Fed. (2d) 164, wherein it is said that a general power of appointment by will enables the donee to devise the property to any person who may have the capacity to take, citing Underhill on the Law of Wills.

It would follow, therefore, in the instant case, that if Walter Smith died prior to the date of decedent’s death and left no descendants surviving him the powers in controversy were general powers of appointment, since the donee in such event could have exercised them in favor of any living person she might have selected, who had the capacity to take. The powers could be said to be special or limited only in case Walter Smith was living at the time of decedent’s death or left surviving him descendants then living. If Walter Smith were dead, obviously he would have been incapable of taking, and if he left no descendants, the restrictions upon the powers, otherwise general, given to decedent would have been inoperative and of no effect.

In Leser v. Burnet (C. C. A., 4th Cir.), 46 Fed. (2d) 756, a power of appointment, on its face general in terms, was held to be not a general but a special or limited power, because of the operation of state law. We perceive no sound reason why the converse should not be true, and a power limited in terms become a general power by removal or inoperation of the limitation prior to its exercise.

In support of their contention, petitioners cite and strongly rely upon the decision of the United States District Court for the Eastern District of Pennsylvania in Fidelity Trust Co. v. McCaughn, 1 Fed. (2d) 987, wherein the power of appointment could be exercised only during the time the donee remained unmarried. The donee remained unmarried and exercised the power. The court held that it was a special and not a general power for the reason that no husband or children of the donee could become beneficiaries thereunder. We can not agree with the conclusion there reached. A power, otherwise general, which prohibits the donee from exercising it in favor of non-existing persons only, notwithstanding such persons may but do not come into being prior to its exercise, is a general and not a special power. An event which does not happen can not serve to change a general into a special power. In Johnstone v. Commissioner, 76 Fed. (2d) 55, supra, the court said:

While it is true that the decedent could not have exercised the power if he had left issue surviving, this fact does not change a general power into a special power. * * * a contingency which would have prevented his exercise of the power did not happen, and decedent was entitled to exercise the general power of appointment given him in the several trust instruments.

In J. Gilmore Fletcher, Executor, 29 B. T. A. 503, 510, we discussed and declined to follow tlie Fidelity Trust Co. case, saying, “This decision appears to' the Board to be out of line with the great weight of legal authority.” And we may add that we have been unable to find where the reasoning applied in that case has been subsequently followed by any court.

Petitioners on brief also cite Leser v. Burnet, supra, but this decision, we think, does not aid them here. In that case a power, general in terms, was held to be a limited power by operation of the controlling state law. In its opinion the court said:

In the light of these authorities, we would not be justified in holding otherwise than that, under the law of Maryland, language such as that used in Fulton’s conveyance, which would ordinarily create a general power with right in the donee to appoint for the benefit of his own creditors, does not have such effect in Maryland, but creates a naked power from which neither the estate of the donee nor his creditors can possibly benefit. * ⅜ ⅜ A general power could doubtless be created in Maryland by expressing in the language creating it what is held to be implied in most other jurisdictions, viz., that the donee may exercise same for his own benefit or for the benefit of his creditors; but unless this is expressed, the power under the Maryland decisions is not general, but limited; and being limited, it does not come within the meaning of a general power of appointment as that term is used in the language of the Revenue Act.

Tlie court further said:

It thus appears that the purpose of Congress was to tax property in relation to which the donee of a power stands in a position not unlike that of owner, property over which he exercises the same authority as he does over that which he owns. This could be said of property which he could subject to the payment of his debts. It could not be said of a naked power which he could not exercise for his own benefit or for the benefit of his estate.

Tlie rule is well settled that while we look to the Federal decisions, and in the absence of such decisions to the general law, in interpreting the acts of Congress, we look to the laws of the state as laid down by its courts to determine the effect of conveyances executed in such state and relating to property there situate. Leser v. Burnet, supra; Tyler v. United States, 281 U. S. 491, 501; Warburton v. White, 176 U. S. 484. In the case at bar, then, we are bound by the laws of Pennsylvania in determining the effect of the powers here in controversy, since all the documents involved were executed in that state and the appointed property was located there.

The rule adopted by the Maryland courts, above referred to, apparently does not prevail in Pennsylvania. In re Forney's Estate, 280 Pa. 459; 124 Atl. 424, dealt with a power which did not in terms authorize the donee to appoint in favor of creditors. There, as to a share of his estate, the donor created a testamentary trust with a life estate to his daughter, and directed that if the daughter died without issue surviving, then her share should be paid to such person or persons as the daughter should “by any last will and testament, or instrument in the nature thereof, direct, limit and appoint.” The daughter died without issue, and executed the power in favor of her sister. The court held that in so doing she made the property a part of her estate for all purposes, and that it was subject to the inheritance tax. And this power was specifically characterized as a “general power” in the later case of In re Twitchell’s Estate, 284 Pa. 135; 130 Atl. 324.

Likewise, in the case of Fidelity-Philadelphia Trust Co. v. McCaughn, supra, arising in Pennsylvania, the power involved did not in terms vest the right in the donee to exercise it in favor of creditors. This point was considered by the court, but it was nevertheless held to be a general power of appointment and the appointed property subject to the Federal estate tax. See also J. Gilmore Fletcher, Executor, supra.

We conclude, therefore, that the powers here in question can not be held to be special or limited powers of appointment merely because by their terms they did not authorize donee to appoint in favor of creditors. These powers in effect were general powers and could be exercised by the donee in favor of any person capable of taking, whom she might have selected, unless Walter E. Smith was living at the date of her death or left descendants surviving at that time. Thus, the solution of the issue here depends upon a question of fact, namely, whether decedent’s said brother predeceased her, without surviving issue.

Petitioners failed to stipulate or establish by proof the facts on this point, taking the position that the character of the powers as granted and not the facts as they existed at the time of exercise is controlling. In support of this view, petitioners call attention to the fact that in the Leser case, supra, the power was held to be limited because the donee could not appoint in favor of creditors, although it does not appear from the record that there were any creditors.

This argument, we think, is unsound. The premise does not support the conclusion for the reason that there is no analogy. In the Leser case, the power of appointment was limited whether or not there were creditors. If there were creditors, the donee under the power could not appoint to them, and so it was a restricted or special power. If there were no creditors, the power ivas still restricted, since the donee could not otherwise derive any personal benefit from the exercise of the power. The power by its terms could be exercised only by will, and so the donee could not appoint to himself. In any event, therefore, he could not exercise authority over the disposition of the appointed property as he could over that which he owned.

In the instant case, if Walter Smith died without issue prior to decedent’s death, she, as donee of the power, could then have exercised the same authority over the testamentary disposition of the appointed property as she could over her own. In such event, the power was general and the property passing thereunder was properly includable in decedent’s gross estate under section 302 (f), sitpra.

We do not know whether Walter Smith was living when decedent exercised the power, or whether there were descendants of Walter then living. Petitioners have failed to submit proof of the facts in respect to which the burden is upon them. Respondent’s determination is presumed to be correct until the contrary is established by competent evidence. For lack of proof to show error respondent’s determination must be, and is, approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

Leech and Mellott concur in the result.

Tyson dissents.

       Revenue Act of 1926—
      Sec. 302. The value of the gross estate of the decedent shall he determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *<******
      (f) To the extent of any property passing under a general power of appointment •exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after his death, except in -case of a bona fide sale for an adequate and full consideration in money or money’s ’worth; * * *


author: TURNER: Van Fossan,

text:
    Alice G. Kales, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56137, 70651.
    Promulgated October 1, 1936.

      Hal H. Smith, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

TURNER:

The petitioner, citing section23 (a) of the Revenue Act of 1928, contends that the fees paid in connection with her suits for refund of Federal income taxes “are deductible as ordinary and necessary business expenses * * *, she being engaged in business.” That the fees paid were ordinary and necessary expenses of the petitioner is not questioned. The language of the statute cited discloses, however, that it is not enough that a taxpayer be engaged in business. It is essential that the expenses be paid or incurred in the trade or business carried on; otherwise section 23 (a) is not applicable and the expenditures being personal their deduction is prohibited under the provisions of section 24 (a) (1) of the act.

The question as to whether or not attorney fees paid by an individual are deductible under section 23 (a), supra, or similar provisions of other revenue acts, or are nondeductible under the provisions of section 24 (a) (1), supra, has been considered in numerous cases. The case most often referred to is Kornhauser v. United States, 276 U. S. 145. There the fees sought to be deducted were paid by the taxpayer to an attorney for defending a suit brought by the taxpayer’s former partner for an accounting of alleged partnership earnings. It was held that since the subject matter of the suit was business earnings and the defense thereof was undertaken by the taxpayer for the purpose of preserving those earnings to himself, the suit was directly connected with or proximately resulted from the taxpayer’s business and the fees paid in connection therewith were, for that reason, deductible under section 214 (a) (1) of the Revenue Act of 1918, which is the same as section 23 (a), supra. Our case here is one step removed, as to facts, from Kornhauser v. United States, supra. There the suit was based on the allegation that the earnings were realized in the conduct of a trade or business, namely, the partnership, and the outcome of the suit determined the ownership of those earnings. In the instant case no one disputed the petitioner’s title or right to the proceeds from the sale of the Ford Motor Co. stock in 1919 or to the dividends which had been paid to her as a minority stockholder. The money was hers and the suit in respect of which the fees were paid did not question her ownership, but, contrary to the facts in the Kornhcmser case, recognized and rested upon that ownership. But for the income tax law, which imposes a tax on gains whether they are realized from the conduct of a trade or business or from investments, the petitioner had no problem and, so far as the record shows, indulged in no activity with reference to the dividends or the proceeds of the stock sale other than the reinvestment and enjoyment of the money so received. In the case of this petitioner the refund suits and the issues therein would have been exactly the same regardless of whether she was engaged in a trade or business or was admittedly a mere holder of investments.

One of the arguments advanced in support of the deductions claimed is that the expenditures were made with respect to transactions producing taxable income. As a basis for this argument it is pointed out that the petitioner, in 1928, received taxable income in the form of interest as a result of one of the refund suits. It is further pointed out that the dividends received in 1919 on the Ford stock and the gain from the sale of that stock in the same year were also items of taxable income and were the items of income involved in the refund suits. In this connection the petitioner cites a letter from the Bureau of Internal Revenue to the Committee of Banking Institutions on Taxation in New York City under date of January 4, 1984, to the effect that it is the recently adopted policy of the Bureau to allow as deductions all “ordinary and necessary expenses paid or incurred during the taxable year with respect to the management, protection and handling of properties producing taxable income.” The conclusion there stated is of no assistance here since it, also, depends on the applicability of section 23 (a), sufra. Any individual might receive dividends, or gain from the sale of stocks, and still not be entitled to the deduction of fees expended in income tax litigation involving that income because that individual was not engaged in carrying on a trade or business. Louis Kuhn, 22 B. T. A. 975. See also A. C. Barnes, 21 B. T. A. 690. Furthermore, the receipt of taxable income as the result of a suit or other proceeding does not, in itself, provide a sufficient basis for the deduction of attorney fees paid in connection with such suit or proceeding. Hall v. Helvering, 70 Fed. (2d) 284; Monell v. Helvering, 70 Fed. (2d) 631. In these cases taxpayers sued to recover estate taxes paid by estates of which they were beneficiaries and the fees sought to be deducted were paid to attorneys in prosecuting those suits. In the latter case the court, in considering the question as to whether or not the fees so paid constituted a business expense and were deductible, or constituted a personal expense, the deduction of which is prohibited, said:

Thus treated, the fee paid the attorney for securing the interest refunded was paid to enforce the personal rights of the petitioner and is not deductible. Commissioner v. Field, (C. C. A.) 42 Fed. (2d) 820; Lindley v. Commissioner, (C. C. A.) 63 Fed. (2d) 807. When she incurred this expense, she was carrying on no trade or business distinguishable from her purely personal affairs in which her expenses are expressly made nondeductible. The point where the one class of expenses merges into the other is often hard to determine. But, however blurred it may be, it is necessary to keep the distinction which Congress has made. If we were to agree with the argument of the petitioner’s counsel that the real test of deductibility is whether the expense was an ordinary and necessary one in obtaining income, we would take what might be supported as a fair one. If Congress had intended to allow deductions on that basis, however, it would have been too simple and easy to have said so to make it reasonable to believe that such was intended by the language which plainly limited expenses deductible to those incurred ordinarily and necessarily in carrying on a trade or business. If they come within the definition, expenses not incurred in obtaining' income are deductible. The petitioner is really seeking to obtain the result which would follow from reporting net income only instead of that which follows from, the present scheme of the law in getting the taxable net by taking allowable deductions from the statutory gross.

It matters not that the petitioner, as the result of the refund suit and in connection with which the fees sought to be deducted were paid, received interest which was reported in her income tax return for the taxable year. Neither does it matter that she received dividends on stock held for investment purposes or realized income from the sale of securities. She must have been engaged in a trade or business and the expenses must have been paid or incurred in carrying it on.

We have held that attorney fees paid in defense of an income tax claim are expenses paid in carrying on a trade or business and are deductible, where the claim for additional tax results from the disallowance of deductions for losses sustained and expenditures made in the conduct of such trade or business. Caroline T. Kissel, 15 B. T. A. 1270. On the other hand, we have held that attorney fees paid in defense of the proposed assessment of income tax against an individual or the prosecution of a suit to recover income taxes paid by an individual are not deductible where it is not shown that the taxpayer was engaged in a trade or business in the year in which the income involved in the litigation was realized. Louis Kuhn, sufra; Franle C. Hermann, 20 B. T. A. 899. See also A. C. Barnes, supra, where the deduction of fees Avas disallowed, there being a definite finding that the fees were in no way connected with any trade or business carried on by the taxpayer in the year they were paid and there was no showing as to the conduct of a trade or business in the years in respect of which the refund suits were brought.

In line with the theory of the Kissel case, the petitioner contends that the income tax, recovered and sought to be recovered in her refund suits, was imposed on the proceeds of a trade or business carried on by her and, for that reason, the fees paid in the prosecution of those suits were directly connected with the conduct of that trade or business and are deductible. The instant case is similar to the Kissel case in two respects. Here, as there, the taxpayer is a woman of substantial means and, as in that case, one of the questions involved is whether her activities in connection with the use of her property constituted the carrying on of a trade or business within the meaning of section 23 (a), supra. In the Kissel case, we were satisfied from the evidence and the testimony of record that the activities of the taxpayer were such as to constitute the conduct of a trade or business within the meaning of the statute. It is thus apparent that even under the theory of the Kissel case the deductibility of the fees in the instant case is dependent upon a determination that the activities of this petitioner in respect of the income involved in the refund suits constituted the conduct of a trade or business.

In petitioner’s brief it is stated that although it is not necessary to characterize her business by name, her activities can perhaps best be described as comprising the business of a capitalist, and it is pointed out that according to Webster’s Dictionary a capitalist is “a person of large property which is or may be employed in business.” It is interesting to note that that definition, on its face, indicates that a capitalist may or may not be engaged in business. The substance of the argument made, however, is that the petitioner is a woman of such means that her activities in looking after her investments constituted the carrying on of a trade or business.

In Foss v. Commissioner, 75 Fed. (2d) 326, the court was considering the deductibility of fees paid by Foss in a suit brought against him as a majority stockholder of a corporation, in the business affairs of which he was actively engaged. The court, citing Kornhauser v. United States, supra, held that his activities constituted the carrying on of a trade or business within the meaning of the act, and since the litigation was plainly an outgrowth of his business activities, the fees paid in connection therewith were deductible. In reaching this conclusion the court said:

A person ol property, who devotes liis time to the active management of it and also to active participation in the management of the companies in which his property is invested, and who maintains an office for that purpose where he spends a substantial part of his time, is carrying on business within the meaning of this statute. ⅜ ⅜ * The line comes between those who take the position of passive investors, doing only what is necessary from an investment point of view, and those who associate themselves actively in the enterprises in which they are financially interested and devote a substantial part of their time to that work as a matter of business.

In the instant case there is no showing that the petitioner associated herself actively in any of the enterprises in which she held securities or that she devoted any of her time to the work of those enterprises as a matter of business or in any way other than in the collection of whatever dividends or interest might be due or owing on the securities held. Her major holding was the block of 525 shares of stock in the Ford Motor Co. It does not appear that at any time during her ownership of the stock she devoted any time or effort to the business or the affairs of the Ford Motor Co. Her only activity shown by the record was the receipt of dividends paid. According to the record she was not even a party to the suit brought in 1916 to require the distribution of the dividend received by her in 1919 on her Ford stock. Neither is there anything connected with the sale of that stock which gives any indication of the carrying on of a trade or business. She was confronted with an investor’s problem such as confronted all of the minority stockholders of the Ford Motor Co., the question being as to whether or not, all circumstances considered, it was advisable to liquidate her holdings and place the proceeds in other securities. She accepted the Ford offer and invested the proceeds in bonds. She stated from the witness stand that she knew nothing about bonds, but gave her approval to the lists of securities submitted by her attorneys. The only other activity in this connection, so far as the record shows, was a request that in so far as possible the bonds be purchased through a firm with which her niece’s husband was connected.

Up to the end of 1919, which is the taxable year involved in the refund suits with respect to which the fees sought to be deducted herein were paid, the only other activity shown by the record in support of petitioner’s claim that she was carrying on a trade or business was the purchase during the period from 1916 to 1919 of $821,250 in bonds. This amount, so far as we know, approximated the excess of her income over personal expenditures during that period.

The bulk of the proof offered in petitioner’s behalf, however, was devoted to her transactions and activities subsequent to the year 1919, apparently on the theory that if she was engaged in a trade or business in the year in which the fees were paid, that fact would be a sufficient basis for the deduction of attorney fees even though they were expended in litigation involving income received in a taxable year nine years prior thereto and even though she may not have been engaged in business during the year that income was realized.

It is pointed out by th,e petitioner’s counsel that her activities were due to a large extent to a shifting of her holdings from stocks to bonds and that the magnitude of the transactions in making this shift supports her claim that she was engaged in a trade or business. Sather than supporting a claim that the transactions denoted a business purpose, we think they are more indicative of an investment purpose. It is well recognized that bonds are a logical haven for investors. They offer security, a definite income, and the avoidance of the hazards of conducting a trade or business. It is claimed that the petitioner sold stocks in the amount of several million dollars and purchased other stocks; that she also bought and sold bonds. The facts show that during the years 1920 to 1928, inclusive, she did receive $2,895,833.80 from the sale or liquidation of stocks, of which amount $470,168.46 went back into other stocks. It appears, however, that $2,187,875.69 of the above amount was received, not from the sale of stocks, but as a result of the liquidation of the Gray Estate Co., which, so far as we know, was a family holding company.

It is claimed that she was buying and selling bonds to such an extent and in such a manner as to constitute her activities in that direction a part of the conduct of a trade or business, and in support of that contention it is pointed out that she realized from the sale or maturity of bonds during the period from 1919 to 1928 approximately $3,000,000. The facts show that she did receive $2,890,031.33 in this manner, but of this amount $1,349,196.59 was received in 1927, the year in which she sold bonds, not for ordinary business purposes, but for the payment of notes given in 1925 for money borrowed to pay the income taxes in respect of which the refund suits were brought. Immediately upon the receipt of the refund in 1928, the bulk of the amount received was again placed in bonds. So far as we know the remainder of the $2,890,031.33 received was from bond maturities. Certainly there is no basis for contending that the receipt of money by a bondholder on maturity of a bond is anything to denote the conduct of a trade or business. The petitioner’s activities during the years 1929 and 1930 were comparable to those in the years 1919 to 1928. In 1929 she received $195,500 from the maturity of bonds and purchased other bonds having a par value of $322,000. In 1930 she received from the maturity of bonds $182,500 and purchased bonds having a par value of $494,000. In 1929 she sold stocks which had cost $187,055 at a profit of $120 and purchased other stock at a cost of $296,293.05, while in 1930 her stock purchases amounted to only $55 and her sales to $210.

A great deal of time was devoted to showing the petitioner’s real estate holdings and the activities of the petitioner and her employees with reference to the management and operation of those holdings. It is shown that one of the employees of the law firm of Beaumont, Smith & Harris was assigned the duties of looking after all of her real estate properties except one building, the manager of which accounted directly to the petitioner, and that this employee spent his time collecting rents, making leases, seeing about repairs and doing any and all acts necessary for the maintenance, upkeep, and rental of the properties in question. The facts show that the real estate was not received by the petitioner until 1927, when her father’s real estate was divided among his heirs, and even though it be said that the activities connected with the renting, leasing and maintaining of these real estate properties were such as to constitute the carrying on of a trade or business within the meaning of section 23 (a), supra, there is nothing whatever which would give any basis for the holding that the sale of petitioner’s stock in the Ford Motor Co. in 1919 and the suit for the recovery of income taxes paid in respect of the gain thereon were activities which constituted a part of or were in any way connected with the management and operation of the petitioner’s real estate properties, which she did not receive until 1927.

The sums of money handled by the petitioner are impressive as to amount, and if the size of an individual’s fortune were the determining factor in the question as to whether or not a trade or business is carried on, this case might well be concluded in favor of the petitioner. It is not the size of a person’s fortune, however, which determines that activities in connection therewith constitute the carrying on of a trade or business, but it is the use of the fortune and the nature of the activities indulged in that are most enlightening. We know of no theory which holds that the amount involved in a transaction or in a number of transactions determines the question stated. As a matter of fact, a person of small capital most often finds it necessary to use that capital in the operation or conduct of a business in order to produce income sufficient for a livelihood, while a person of large means is much more likely to realize a sufficient income from investments which require no activities in connection with the business enterprise itself, but merely the doing of those things which are necessary from an investment point of view, that is, the collecting of the dividends or interest, and such supervision as may be necessary to shift from one investment to another when safety, security, and the yield of income suggest such a course. Such activities do not partake of the nature of the conduct of a trade or business in the ordinary sense and do not, in our ■opinion, fall within the meaning of section 23 (a), supra.

. We have pointed out that the fees paid in income tax litigations may be classified as expenses paid or incurred in carrying on a trade •or business only if the subject matter of the litigation, namely, the income or claimed deductions, is directly connected with or grows out of the conduct of a trade or business. Caroline T. Kissel, supra; Louis Kuhn, supra; Frank C. Hermann, supra; A. C. Barnes, supra. We accordingly hold that the fees paid by the petitioner in the refund suits described herein were not paid or incurred in carrying on a trade or business within either of the taxable years 1928 or 1980, first, 'because the activities of the petitioner in connection with her securities did not, in our opinion, constiute the conduct of a trade or business, and, second, because the subject matter of the refund suits was income realized in 1919 and had no connection whatever with any trade or business that may have been carried on by the petitioner in the years 1928 and 1980. We are of the further opinion that the fees in question were not paid in connection with and did not result from a trade or business carried on in 1919. The purchase of $321,250 in bonds from 1916 to 1919, the receipt or collection of dividends and interest on her securities up to and including the year 1919, the sale of 525 shares of stock in the Ford Motor Co. and the purchase of bonds with the proceeds, and the employment of Beaumont, Smith & Harris to advise her about her investments and to keep her personal accounts, including household accounts, do not, under the circumstances herein, show the conduct of a trade or business in 1919, and, under the authorities cited, there being no connection between the payment of the fees sought to be deducted and the conduct of a trade or business, the respondent is sustained.

The facts indicate that at least $250,840.52 of the $265,794.86 deducted by the petitioner under the designation of “Office Expenses” were fees of attorneys and witnesses expended in connection with the refund suits terminated in 1928. There is other evidence in the record which indicates that a portion of the balance of the amount so deducted obviously represented personal expenditures inasmuch as a part, at least, of that amount was paid to Beaumont, Smith & Harris for keeping the petitioner’s books and records, looking after her personal bank account, the drawing of personal checks in payment of her household expenses, and the performing of other personal services in her behalf. Counsel for the respondent was unable to explain at the time of the hearing how the sum of $248,650 disallowed was arrived at, and even though it was then apparent that if any amount was to be disallowed the amount disallowed should have been greater, no motion was made for an increased deficiency, and, for that reason, our action here is limited to the finding of deficiencies not in excess of those originally determined by the respondent.

Reviewed by the Board.

Decision will be entered for the respondent.

Van Fossan,

dissenting: I am unable to agree that petitioner was not engaged in a trade or business, both during the taxable years and previously since 1916. It is immaterial that she inherited a large part of her property. She at once assumed active management and supervision. She was in no sense merely a passive investor. In the most important matter that arose and which was the genesis of the deduction here claimed, she rejected advice and relied on her own judg-

ment. The situation is closely akin to that in Bula E. Croker, 27 B. T. A. 588, where we said: “The sale and care of this property and of her investments in Florida constituted her business. The fact that she employed an agent to act for her in these matters does not change the status of her business.” Consequent on this conclusion, we allowed the deduction of attorney fees. In Caroline T. Kissel, 15 B. T. A. 1270, Ave said:

The record shows that petitioner is a woman of substantial means and that she invests rather heavily in stocks, bonds, and other securities, and in real estate and that her son is employed regularly to manage her affairs and maintains an office and employs two assistants for that purpose. We are satisfied from the evidence, and the testimony of record, that substantially all of the alleged errors or inaccuracies, out of which the proposed additional assessment arose, which attorneys were employed to defend, were not mere isolated personal transactions, but were connected with the petitioner’s trade or business within the meaning of section 214 (a) (1), supra, and we, therefore, hold that the fees paid, plus reimbursed expenses, are deductible.

The deductions so alloAved were for attorney fees in connection with the prosecution and litigation of matters pending before the Bureau of Internal Revenue.

Being of the opinion that petitioner’s activity in the premises was such as to constitute a trade or business, I think the deduction should be allowed.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall he allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

       SEC. 24. ITEMS NOT DEDUCTIBLE.
      (a) General rule. — In computing net income no deduction shall in any case be allowed in respect of—
      (1) Personal, living, or family expenses.


author: Sternhagen :

text:
    Ernest DuPont, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58717, 58746, 58747, 58748, 58749, 58750, 58751.
    Promulgated October 7, 1936.

      A. Calder Maohay, Esq., for the petitioners.

      Hartford A lien, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Kathryn G. Peir; A. H. Peir; H. J. Barneston; Guy C. Earl, Jr.; Royal Miller; and Redondo Corporation.

   OPINION UPON RECONSIDERATION.

Sternhagen :

Upon the respondent’s motion for reconsideration of the opinion in 33 B. T. A. 643, the judgment of no transferee liability was vacated and the merits of the issues reconsidered. The findings of fact appearing in the earlier report require no modification, and stand as the foundation for the present opinion.

The earlier opinion was based entirely upon the proposition that because the Air Reduction Co. had, after notice from the Commissioner, paid, under protest, the $14,976.55 deficiency of the Western Oxygen Co,, ivith interest, and the Commissioner had not acted upon the claim for refund which had been simultaneously filed, the deficiency must be treated as having been paid and the liability of these petitioners thereby extinguished. After hearing both parties further upon this proposition, we think the earlier opinion was incorrect. The payment by the Air Reduction Co. was expressly made under protest and accompanied by a claim for refund on the ground that that corporation was not liable for the amount paid or any amount as transferee of the Oxygen Co.’s assets, since it was a purchaser for value. Clearly this was not a final discharge of the Oxygen Co.’s liability for the deficiency, and until it became so, either actually or presumptively, and the Reduction Co.’s right to recover determined, the Government’s right to a proper, collection of the deficiency was not foreclosed. The Commissioner’s collection of a transferor’s liability provisionally paid by a stranger or one who is otherwise not liable therefor does not discharge the liability or preclude its determination against the proper transferee. It is only a collection which discharges the obligation that can not be made twice. Until it appears from the evidence before the Board that there has been a complete discharge of the transferor’s deficiency, the liability of the other alleged transferees must, upon their petition to the Board, be determined.

In this view of the question, the actual allowing or disallowing by the Commissioner of the Air Reduction Co.’s claim for refund is not material; for the duty to determine the liability of the remaining transferees upon their petition remains until the final discharge of the liability appears. The Commissioner can not, by voluntarily refunding to the Air Reduction Co., release it and fix the liability upon the others; nor can he, by withholding refund to the Air Reduction Co., establish its final liability and discharge the others. It is for this reason that the Commissioner’s proffer, in his motion for rehearing, of evidence to prove that he has since the decision allowed the claim for refund, has been rejected.

We, therefore, hold, upon reconsideration, that the .payment made by the Air Reduction Co. under protest and accompanied by a claim for refund, does not serve to discharge any liability which these petitioners might have and does not justify the earlier holding that they are not liable as transferees of the Oxygen Co. It thus becomes necessary to consider their transferee liability, irrespective of the payment by the Air Reduction Co. Since the Air Reduction Co. is not a party before the Board, no determination may be definitively made in this proceeding asi to its liability.

The Oxygen Co. transferred its assets in one form to the Air Reduction Co1, in exchange for some (16,000) of the Air Reduction Co. shares, such shares thus becoming the assets of the Oxygen Co. in another form. We may assume, in the absence of evidence to the contrary, that the 16,000 Air Reduction shares received were less than all the Air Reduction shares outstanding, and represented properties of the Air Reduction Co. other than the assets acquired from the Oxygen Co. This differentiates such cases as Concrete Industries Co., 19 B. T. A. 655. In acquiring the assets, the Air Reduction Co. by its agreement appears to have assumed certain of the Oxygen Co.’s “obligations and liabilities”, among which the subsequently accrued and accumulated Federal income tax was not included. Thus it would appear that the Air Reduction Co. was a purchaser for value, with no liability either at law or in equity for the payment of such tax.

Upon the receipt by the Oxygen Co. of the Reduction Co.’s shares it proceeded to sell 1,811 of those shares for $184,922.61, and thus, irrespective of the use to be made of such cash, it realized!' gain of $140,204.22. This the Commissioner determined, and we think, correctly.

In connection with the transaction disposing of its assets to the Air Reduction Co. the Oxygen Co. paid commissions of $36,765 and attorney fees of $1,500, which it deducted upon its return. These deductions the Commissioner correctly disallowed, Odorono Co., 26 B. T. A. 1355; Georgia, Florida & Alabama Railroad Co., 31 B. T. A. 1. Thus his determination of the entire deficiency of $14,976.55 in the 1929 tax of the Oxygen Co. is sustained. The petitioners were all of the shareholders of the Oxygen Co. after the transaction with the Reduction Co., and each received in the liquidation of the Oxygen Co.’s assets an amount in excess of the ¡amount which respondent has determined as his transferee liability, leaving the Oxygen Co. without means to discharge its obligation for the deficiency. Under these circumstances the petitioners are clearly liable, jointly and severally, for the deficiency, and the determinations of the respondent must, therefore, be fully sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Aetjndell :

text:
    Frank W. Darling, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank W. Darling and Mrs. Frank W. Darling, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74372, 79254.
    Promulgated October 7, 1936.

      Ewgene Meaeham, Esq., for the petitioners.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Aetjndell :

The main issue here is whether the compensation received by the petitioner, Frank W. Darling, from the Westchester County Park Commission is exempt from Federal taxation. Since Mrs. Darling had no income in 1932 she is not liable for any tax in that year, although a joint return for husband and wife was filed. Cole v. Commissioner, 81 Fed. (2d) 485, reversing 29 B. T. A. 602.

We do not think that petitioner can be classed as an employee of the state, but was rather an independent contractor. Metcalf & Eddy v. Mitchell, 269 U. S. 514. His compensation, his term of service, and certain of his rights and duties were fixed by contract with the park commission. This is not common in the employer-employee relationship, and points definitely toward the contractor status. Cf. Burnet v. Jones, 50 Fed. (2d) 14; Roberts v. Commissioner, 44 Fed. (2d) 168; A. Ten Eyck Brown, 19 B. T. A. 568; aff'd., 55 Fed. (2d) 1076; H. A. Underwood, 20 B. T. A. 1117; aff'd., 56 Fed. (2d) 67. The fact that the petitioner was to receive a percentage share in the proceeds of successful operation also indicates that he must be considered an independent contractor. Apparently, one of the objects of the contract between the petitioner and the park commission was to attain the independent contractor status in order that the park employees would be free from blew York State civil service regulations. The very nature of petitioner’s work as resident manager of an amusement park, we think, would preclude the detailed supervision by the employer which is necessary to the employer and employee relation. Commissioner v. Modjeski, 75 Fed. (2d) 468; Kreipke v. Commissioner, 32 Fed. (2d) 594; Burnet v. McDonough, 46 Fed. (2d) 944; Childers v. Commissioner, 80 Fed. (2d) 27. We hold the petitioner to be an independent contractor.

Furthermore, the operation of an amusement park is not a usual, traditional, or essential function of government. Helvering v. Powers, 293 U. S. 214; United States v. California, 297 U. S. 175; Flint v. Stone-Tracy Co., 220 U. S. 107; Brush v. Commissioner, 85 Fed. (2d) 32. We take judicial notice that it is a function not commonly performed by governments either contemporaneously or historically. It is obvious that such á governmental enterprise is not necessary to the existence and continuance of the Government itself. It is not an undertaking which only a government can perform; the usual situation rather is private operation. The argument is advanced that Government creation of the amusement park Playland was necessary in the interest of public health, safety, and morals, to eliminate a notorious privately owned amusement park on the same site. It is not shown that this evil could not have been remedied by adequate regulations short of governmental operation, or that the nuisance could not have been abated in some other manner. The fact that governmental operation of a given enterprise may be preferable to private operation does not make such operation an essential or usual governmental function. Although it did have some free features we do not think that Playland falls within the classification of an ordinary, nonincome-producing park such as was dealt with in Everett B. Sherman, 27 B. T. A. 1169; aff'd., 69 Fed. (2d) 755. Nor do we think that the revenue-bearing features were merely incidental to the operation of an ordinary park. See Bolster v. City of Lawrence, 225 Mass. 387; 114 N. E. 722; Caughlan v. City of Omaha, 103 Neb. 726; 174 N. W. 220; and cf. Cornelisen v. City of Atlanta, 146 Ga. 416; 91 S. E. 415; Carta v. City of Norwalk, 108 Conn. 697; 145 A. 158. The principal characteristics of Playland were those of an amusement park, including various amusement devices and facilities furnished to the public at a charge; the free picnic facilities, etc., were only incidental. The very magnitude of the compensation which petitioner received is commensurate with the responsibilities involved in supervising a large business undertaking rather than with the superintendence of an ordinary nonincome-producing park. For the foregoing reasons the immunity must be denied.

Reviewed by the Board.

Decision will he entered v/nder Bule 50.


author: Steenhagen :

text:
    Girard Trust Company, Trustee under Agreement for Morris L. Clothier et al., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75740, 76841.
    Promulgated October 7, 1936.

      George B. Olothier, Esq., for the petitioner.

      R. N. McMillan, Esq., and E. M. Woolf, Esq., for the respondent.
   OPINION.

Steenhagen :

The Commissioner’s determination that petitioner is an association taxable as a corporation is defended entirely by reliance upon Swanson v. Commissioner, 296 U. S. 362; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Helvering v. Combs, 296 U. S. 365; and Morrissey v. Commissioner, 298 U. S. 344; “aijd the fact that from the testimony this trust was created for the purpose of engaging in a business for profit and was engaged in subdividing real estate, the purpose of which was to acquire larger profits.” But the evidence does not support such a finding and requires the «opposite finding which has been made. The ¡stipulation and the testimony all show that the trust was created only because it was the most convenient and practical method of disposing of the property. If the estate could have been liquidated promptly this would have been done; but it was too large for the market. Subdivision was the only effective way of disposition, and to have the deed to each lot executed by all the interested individuals would have been too cumbersome. The fact that in the process of liquidation they sought the best price — if possible a profit — and were financially able to resist immediate sale at less than fair value does not stamp the liquidation as a business enterprise. The question, whether the evidence shows liquidation or shows a business enterprise is always one of degree. Morrissey v. Commissioner, supra; Helvering v. Combs, supra; Helvering v. Coleman-Gilbert Associates, supra; Swanson v. Commissioner, supra; Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43; Dauphin Deposit Trust Co., Trustee, 21 B. T. A. 1214; Lloyd M. Willis et al., Trustees, 22 B. T. A. 564; 58 Fed. (2d) 121; Morriss Realty Co. Trust No. 1, 23 B. T. A. 1076; Commissioner v. Morriss Realty Co. Trust No. 2, 68 Fed. (2d) 648; Commissioner v. Atherton, 50 Fed. (2d) 740; Busch v. Commissioner, 50 Fed. (2d) 800; Zonne v. Minneapolis Syndicate, 220 U. S. 187; Central Republic Bank & Trust Co., Trustee, 34 B. T. A. 391 (on appeal, C. C. A., 7th Cir.); The Highlands, Trust No. 1546, 32 B. T. A. 760 (on appeal, C. C. A., 7th Cir.); National Bank of Commerce et al., Trustees, 34 B. T. A. 119. Here the businesslike method was an incident of the paramount process of liquidation. The determination is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.