*62 Decision will be entered for the respondent.
In 1942, petitioner Alfred Meurlin, M. D., purchased the medical practice of Richard J. Brown, M. D., deceased, from the executrix of his estate for $ 13,500, payable in annual installments of $ 1,350 for 10 years, without interest. The contract between Stella Brown, executrix, and petitioner Alfred Meurlin contains, among other things, the following provisions:
1. * * * the said practice to include the good will and benefits thereof from the date hereof together with the use of the records of said practice.
2. The seller further agrees to make available to the purchaser the names and addresses of all patients of the said Richard J. Brown, M. D., now in existence, and to cooperate with the purchaser in the announcement to said persons of the continuation of said practice by the purchaser herein.
The contract was carried out by the parties according to its terms. In 1946 and 1948, petitioner Alfred Meurlin made payments of $ 1,350 in each year and petitioners claimed deductions therefor in the joint returns which they filed. The Commissioner disallowed the deductions. Held, the Commissioner is sustained. The payments were *63 capital expenditures and are not deductible as ordinary and necessary business expenses.
*119 The Commissioner has determined deficiencies in petitioners' income tax of $ 679.48 for 1946 and $ 446.49 for 1948. Some minor adjustments are not contested. The only adjustment in issue is one labeled in the deficiency notice "Annual payment to Mrs. R. J. Brown -- purchase of practice $ 1,350.00." This adjustment is explained in the deficiency notice as follows:
(1) It has been determined that a payment of $ 1,350.00 made to Stella Brown, Executrix of the Estate of Richard J. Brown, Deceased, in each of the taxable years ended December 31, 1946 and December 31, 1948, is a capital expenditure, hence, not allowable as a business deduction in the computation of income in each of the said years.
The petitioners, by an appropriate assignment of error, contest this adjustment for both years.
FINDINGS OF FACT.
Petitioners are husband and wife and reside in South Orange, Essex County, New Jersey. They filed income tax returns for the years 1946 and 1948 with the collector of*64 internal revenue for the fifth district of New Jersey. Petitioner Alfred Meurlin, M. D., will sometimes hereinafter be referred to as petitioner.
For a good many years petitioner was a practicing physician in East Orange, New Jersey, and specialized in obstetrics and gynecology.
Practicing in the village of South Orange, New Jersey, was Richard J. Brown, M. D., sometimes hereinafter referred to as Richard. He had a large obstetrical and gynecological practice. On February 4, 1942, Richard died testate naming his widow, Stella Brown, as executrix of his estate. She will sometimes hereinafter be referred *120 to as Stella. Richard, prior to his death, had his medical office adjoining his home located in South Orange.
Not long after the death of Richard, Stella, in her capacity as executrix, arranged to have petitioner contacted in regard to the possibility of his purchasing both the residence and the practice of her late husband. Petitioner had been associated with Richard for some years prior to his death in a social as well as a professional capacity and at Richard's death he felt that it would be to his advantage to acquire, in an ethical way, as much of Richard's practice*65 as he could.
After discussion with each other, on February 20, 1942, Stella, as executrix of her husband's estate, and petitioner entered into a contract which reads, in part, as follows:
This Agreement, made the 20th day of February, 1942, between STELLA BROWN, Executrix of the Estate of RICHARD J. BROWN, deceased, late of the Village of South Orange, County of Essex and State of New Jersey, hereinafter referred to as the seller, and ALFRED MEURLIN, M. D. of the City of East Orange, County of Essex and State of New Jersey, hereinafter referred to as the purchaser.
WITNESSETH:
1. The seller for and in consideration of the sum hereinafter provided and specified as the purchase price to be paid and satisfied as hereinafter mentioned and also in consideration of One ($ 1.00) Dollar and other valuable consideration, receipt whereof is hereby acknowledged, agrees to and with the purchaser that the seller will fully and absolutely sell, assign, deliver and set over to the purchaser, the physician's practice heretofore engaged in and conducted by Richard J. Brown, M. D. of 105 North Ridgewood Road, in the Village of South Orange, New Jersey, said physician maintaining offices at the aforesaid*66 address and at 211 Roseville Avenue, in the City of Newark, New Jersey, the said practice to include the good will and benefits thereof from the date hereof together with the use of the records of said practice.
2. The seller further agrees to make available to the purchaser the names and addresses of all patients of the said Richard J. Brown, M. D., now in existence, and to cooperate with the purchaser in the announcement to said persons of the continuation of said practice by the purchaser herein.
3. That the purchaser promises and agrees to and with the seller that he will pay and satisfy or cause to be paid and satisfied unto the seller the sum of Thirteen Thousand, Five Hundred ($ 13,500.00) Dollars as and for the purchase price of the foregoing described practice and the good will thereof, which said sum shall be paid in the following manner, that is to say:
In quarterly installments beginning March 1, 1942 and quarterly thereafter on the first day of each and every third month thereafter for a period not to exceed ten years from the date of this agreement and none of which said quarterly installments shall be less than Three Hundred ($ 300.00) Dollars and which said sums may*67 exceed the said sum at the option of the purchaser, provided, however, that the total payments for any one year shall not aggregate less than the sum of Thirteen Hundred Fifty ($ 1,350.00) Dollars.
4. The purchaser shall have the right to the immediate use of the office and equipment of Richard J. Brown, M. D. at 105 North Ridgewood Road, South Orange, New Jersey, from and after the date hereof and shall have the right to the *121 proceeds of all the cases not completed by Dr. Brown on the date of his death, to wit, February 4, 1942.
5. It is understood and agreed that the purchaser has also agreed by separate contract to purchase the home and office formerly occupied by Richard J. Brown, and until such date as the purchaser acquires title to said property under said contract, "the seller will cooperate in the maintenance of the physician's office located on said property by attending to telephone calls, reception of patients and in other incidental ways."
* * * *
8. It is further agreed that the rights of the purchaser hereunder shall not be assigned or transferred by him either in whole or in part without the written consent of the seller, provided, however, that the purchaser*68 shall have the right, without such consent, to transfer or refer any individual patients to such other physicians at such times and under such arrangements as the purchaser shall in his sole discretion deem desirable.
A short time after the parties entered into the foregoing contract, Stella, as executrix of her husband's estate, sold and conveyed to petitioner the home and office of her deceased husband's for a consideration of $ 22,500. That transaction is not involved in this proceeding.
Pursuant to paragraph 5 of the aforesaid contract, Stella cooperated with petitioner in maintaining the Ridgewood Avenue office by attending to telephone calls, reception of patients, and other incidental duties during the 3-month period between the date the petitioner purchased Richard's practice and the date Stella moved to another residence.
Following petitioner's acquisition of Richard's medical practice many of Richard's former patients called the Brown residence. These former patients were told by Stella that petitioner had acquired Richard's practice and they were also told by her that she knew that Richard would approve of the petitioner as a doctor, that he was a trustworthy and competent*69 doctor.
The aforementioned contract was carried out by the parties according to its terms. Pursuant to the terms of the contract petitioner paid to Stella, as executrix, the sum of $ 13,500 over a 10-year period at the rate of $ 1,350 per annum. One of these payments of $ 1,350 was made by petitioner during 1946 and another was made in 1948.
On the joint income tax returns for the years 1946 and 1948, petitioner claimed the aforesaid annual payments of $ 1,350 as an expense of his medical profession under the respective designations of "Annual payment for Purchase Practice -- Dr. R. J. Brown" and "Annual Payment -- Purchase Practice, R. J. Brown."
OPINION.
Some more or less minor adjustments which the Commissioner made to the income as reported by petitioners on their joint returns have been conceded by petitioners and are no longer in issue.
*122 We have only one issue to decide and that issue may be stated thus: Were the payments by the petitioners pursuant to the contract set out in our Findings of Fact made in consideration of the acquisition of the medical practice of Richard J. Brown, M. D., deceased, including his office equipment, record cards of his patients, etc., *70 and therefore capital expenditures as the Commissioner has determined in his deficiency notice, or were these payments made to Stella for services rendered by her to petitioner and deductible by petitioner as ordinary and necessary business expenses as petitioners contend?
Petitioners contend that the contract lacks clarity and therefore resort can be had to other sources for its meaning. In support of their contention petitioners cite . In that case the United States Court of Appeals for the Seventh Circuit said:
But in tax matters we are not bound by the strict terms of the agreement; we must examine the circumstances to determine the actualities and may sustain or disregard the effect of a written provision or of an omission of a provision, if to do so best serves the purposes of the tax statute. , * * *
At the hearing of this proceeding we were mindful of the foregoing rule and petitioner testified fully in his own behalf as to the transaction. We also heard the testimony of Stella, executrix of the estate, as a witness*71 for respondent. We do not think that there was any material conflict in their testimony. We think their version of the contract was to the same effect, namely, that the contract represented the intention of the parties and that it has been carried out according to its terms. Paragraph 5 (a) of the petition reads as follows:
5. The facts upon which the petitioners rely as a basis for the proceeding are as follows:
* * * *
a. By an agreement dated February 26, 1942, Stella Brown, the executrix of the estate of Richard J. Brown, a deceased physician, agreed to sell to the petitioner Alfred Meurlin, a physician, the practice of her husband in the following manner:
By permitting the petitioner to use the records of the said practice by making available to the petitioner the names and addresses of all patients, and by assisting the petitioner in other ways necessary for an ordinary transition of the practice.
The testimony of both petitioner and Stella shows that petitioners in the foregoing statement in their petition correctly summarized the transaction. It is clear to us that at no time was Stella an employee of petitioner's. Such services as she rendered him were incidental to *72 the carrying out of the contract. She was not a nurse, she rendered him no assistance in his medical practice in the sense of helping him look after his patients. It is true that for a period of 3 months after petitioner purchased Richard's practice and moved into Richard's office and prior to the time that Stella moved out of the residence which had *123 been sold to petitioner, she answered the telephone calls which came in and directed former patients of her deceased husband's to petitioner and recommended petitioner to them as a competent physician. She continued to do this to some extent after she moved to another residence. These things were done by Stella in pursuance of paragraphs 2 and 5 of the contract. These were incidental things which Stella had agreed to do in pursuance of the sale of her late husband's practice to petitioner. As we view it, the doing of these things in no sense had the effect of making Stella, either directly or indirectly, an employee of petitioner's and would not be sufficient to make deductible as ordinary and necessary business expenses the $ 1,350 which petitioner paid to Stella, as executrix, in each of the taxable years in pursuance*73 of the terms of the contract.
Petitioners, in their returns for 1946 and 1948, listed the $ 1,350 in question with other items of deduction from the gross receipts of petitioner's practice. The $ 1,350 item was listed "Annual payment for Purchase Practice, Dr. R. J. Brown." It is true, of course, as petitioners contend, that if they wrongly characterized the deduction in their returns such fact would not in any sense estop them from showing that it was something else. In other words, if the $ 1,350 in question did not represent purchase price for a medical practice but, in fact, represented money which petitioner paid to Stella for services which she rendered him, it was permissible for petitioners to show that fact at the hearing. But we do not think they have made any such showing. From a careful consideration of all the evidence, we think it is clear that the $ 1,350 payment in each of the years was a capital expenditure and was not deductible. See ; cf. .
On the facts, we think decision must be for the respondent. We so hold.
Decision *74 will be entered for the respondent.