*199 Decision will be entered for the petitioner.
Held, fee expended in order to secure employment is deductible as an ordinary and necessary business expense within the meaning of sec. 162, I.R.C. 1954.
*374 Respondent determined a deficiency of $ 754.10 in the petitioners' Federal income tax for the taxable year 1966. The only issue for decision is whether respondent was correct in its determination that $ 3,016.43 expended by petitioners to secure new employment is not deductible under section 162 or 212, I.R.C. 1954. 1
*201 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
Petitioners David J. and Carol J. Primuth (Carol is involved herein solely by reason of filing a joint return and therefore the designation "petitioner", will refer only to David) resided at Glenview, Ill., at the time their petition was filed herein. They filed their joint Federal income tax return for 1966 with the district director of internal revenue at Milwaukee, Wis.
In May of 1961 petitioner was employed by Foundry Allied Industries, Inc., of Racine, Wis. (hereinafter referred to as Foundry), as controller. Subsequently he became secretary-treasurer at a base salary of approximately $ 22,000 per annum. His total compensation with bonus was approximately $ 30,000 per annum for the 2 years prior to his leaving Foundry.
As secretary-treasurer petitioner had fiduciary responsibility for the financial well-being of the corporation, as well as overall management responsibility for accounting, cost accounting, purchasing, and international finance.
As of May 1966 petitioner had become dissatisfied with his prospects*202 at Foundry. He felt the corporation, itself, had a limited future and that there was organizational instability.
After seeing an advertisement in the Wall Street Journal petitioner contacted Frederick Chusid & Co. (hereinafter Chusid) at its office in *375 Milwaukee, Wis., with the sole purpose of securing new employment. Chusid, though not licensed in its home State of Illinois as an employment agency, held itself out as "World's Largest Consultants in Executive Search and Career Advancement."
Subsequent to his response to the newspaper advertisement petitioner was contacted by a Chusid representative, Mr. Fisher. On October 11, 1966, petitioner signed a contract by which he agreed to pay $ 2,775, or $ 2,636.25 if fee paid in full within 3 weeks, plus certain out-of-pocket expenses in return for Chusid's services.
According to the terms of the contract Chusid agreed to provide "consulting services and direct assistance" for a period of 8 months, beginning with the date of the contract. Under this contract petitioner agreed to pay Chusid's fee without condition. On October 11, 1966, petitioner made a payment of $ 775 and on November 5, 1966, he paid the remainder, $ 1,861.25.
*203 Although petitioner was aware of the fact that Chusid's fee was payable irrespective of whether new employment was obtained, this aspect was minimized by Fisher at their initial meeting. Petitioner was assured that, in cases of clients with qualifications such as those he possessed, employment was invariably secured. In addition Chusid furnished a guarantee that petitioner could utilize any unused portion of the 8-month contract period, for 3 years, if he was dissatisfied with the position Chusid secured for him. If the 8-month period had been expended he would be entitled to another 30 days of Chusid's services free of charge.
The aforementioned contract of October 11, 1966, set forth the various services that Chusid had agreed to perform for petitioner. These were as follows: (1) Assignment of the client's case to various staff members, such as a "supervising psychologist," a "counseling psychologist," promotional specialists, writers, financial advisers, and researchers; (2) research into the client's background, abilities, and personality; (3) evaluation of the client by the psychological staff; (4) counseling; (5) career assessment; (6) evaluation of opportunities; (7) career*204 planning; (8) establishment of a plan of action aimed toward realization of goals; (9) development of a "marketing image"; and (10) staff assistance in the preparation of marketing materials.
After execution of this contract petitioner's case was turned over to Charles Darwent (hereinafter Darwent) of Chusid's Chicago office. Darwent was to act as petitioner's consultant. Petitioner was interviewed by Darwent and spoke to him on a daily basis by telephone.
At Chusid's request in order to analyze the petitioner's potentialities he submitted to a series of tests which lasted 60 to 90 minutes and had at least one interview with a psychologist. Petitioner was indifferent *376 to the results of these procedures; his purpose in consulting Chusid was to secure employment.
In furtherance of this purpose an extensive resume of petitioner's background and qualifications was prepared and mailed, along with a transmittal letter, to various potential employers by Chusid. Petitioner desired and was aware of this activity on his behalf by Chusid.
Petitioner also received copies of followup letters to potential employers from Chusid that Darwent indicated had been sent on petitioner's behalf. *205 Many of these letters emphasized petitioner's qualifications and contained Chusid's endorsement of petitioner's abilities. The letters also indicated that many prospective employers had evinced interest in the petitioner due to prior contacts initiated by Chusid. This, also, was the kind of activity for which petitioner employed the services of Chusid.
By check, dated November 28, 1966, petitioner made payment of $ 380.18 to Executive Advertising Services, Inc. This was pursuant to his agreement with Chusid to pay certain out-of-pocket expenses. The expenditure represented payment for the printing and mailing of 1,000 "Motivating Letters," 300 "Brochures" (apparently the aforementioned resumes), 100 "Want Ads," 100 "Master Leads," and 100 referral letters.
Each week Chusid mailed petitioner a list of positions available, together with a brief description of each of them. Upon receiving one of these lists petitioner would indicate interest in certain of the positions listed and Chusid, where appropriate, would arrange an interview.
The foregoing efforts on the part of Chusid resulted in at least seven interviews with representatives of various companies. Chusid gave petitioner*206 descriptions of his expected duties, potential responsibilities, and compensation with prospective employers but did not directly influence his negotiations with these firms. The interviews resulted in four specific offers of employment. One of these was with the Symons Manufacturing Co. of Des Plaines, Ill. (hereinafter Symons).
On March 23, 1967, petitioner accepted employment with Symons. He began his duties as secretary-controller 2 on May 15, 1967. He had terminated his employment with Foundry on May 12, 1967.
In October of 1968 petitioner was elected by the board of directors to his present post of vice president of Symons.
Petitioner considers his new employment to be more desirable than his position with Foundry due to his increased responsibilities, the greater remunerative potential, *207 and the national scope of the company.
*377 In order to keep the aforementioned 3-year guarantee in force petitioner was required to have a final interview with a Chusid representative. At this interview, which transpired approximately 20 days after he joined Symons, petitioner answered questions about how he was succeeding at his new employment.
Petitioner deducted $ 3,016.43 as "Employment Agency Fee" on his Federal income tax return for the taxable year ended December 31, 1966. This amount represented Chusid's fee of $ 2,636.25 plus the amount of $ 380.18 which petitioner had paid to Executive Advertising Services, Inc.
By notice of deficiency, dated June 11, 1968, respondent disallowed the deduction, stating:
The fee of $ 3,016.43 paid to Frederick Chusid & Company 3 is determined to be an expenditure for the purpose of seeking employment which is not deductible under Section 162 or Section 212 of the Internal Revenue Code, but constitutes a nondeductible personal expense under Section 262.
*208 OPINION
The petitioner seeks to deduct a fee of $ 3,016.43 which he paid in 1966 to Frederick Chusid & Co. for its services in securing new employment for him. We have found as a fact that Chusid at the outset virtually guaranteed him a new position and that their efforts did, in fact, result in his accepting a new position.
Section 162 (a) of the Code reads in part as follows:
SEC. 162. TRADE OR BUSINESS EXPENSES
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
We hold initially that the above-noted expenditure of $ 3,016.43 was incurred by the petitioner in carrying on his trade or business of being a corporate executive.
Over the years we have held on more than one occasion that a taxpayer may be in the trade or business of being an employee, such as a corporate executive or manager, Harold A. Chistensen, 17 T.C. 1456">17 T.C. 1456 (1952), Benjamin Abraham, 9 T.C. 222 (1947), Ralph C. Holmes, 37 B.T.A. 865 (1938), and Peoples-Pittsburgh Trust Co., 21 B.T.A. 588">21 B.T.A. 588 (1930),*209 affd. 60 F. 2d 187 (C.A. 3, 1932). To the same effect are Hochschild v. Commissioner, 161 F. 2d 817 (C.A. 2, 1947), reversing on other grounds 7 T.C. 81">7 T.C. 81 (1946), Schmidlapp v. Commissioner, 96 F. 2d 680 (C.A. 2, 1938), modifying a Memorandum Opinion of this *378 Court, and Daily Journal Co. v. Commissioner, 135 F. 2d 689 (C.A. 9, 1943), reversing a Memorandum Opinion of this Court.
The recent decision in Mitchell v. United States, 435">408 F. 2d 435 (Ct. Cl. 1969), which supports our holding, deserves special mention because its facts are of particular interest. There the taxpayer had taken as an ordinary deduction large amounts of legal fees which he had incurred in defending himself against an action which grew out of his earlier role as chief executive officer and major stockholder of a corporation. At the time the action was commenced he was president of another corporation and was advised that if the action against him was sustained he would be forced to resign. His reputation as a *210 corporate officer was consequently at stake. With this background the court found that the taxpayer's "primary trade or business has always been that of being a corporate official," and that therefore the fees were deductible as a business expense.
The fact that the petitioner was employed at the time the fee was paid, which resulted in his securing new employment, is of no moment. We held in Harold Haft, 40 T.C. 2">40 T.C. 2, 6 (1963), that a costume jewelry salesman who had worked as an employee for some 25 years "did not cease to be in the costume jewelry business" simply because he was temporarily unemployed and had no merchandise to sell. Consequently, he was entitled to deduct certain business expenses even though he had no offsetting income during the entire year in question.
A comparable result was reached in Furner v. Commissioner, 393 F. 2d 292 (C.A. 7, 1968), reversing 47 T.C. 165">47 T.C. 165 (1966), where the Seventh Circuit held that a professional teacher, who took a year off to secure a master's degree, was still carrying on a trade or business with the result that the cost of her courses taken *211 during that year off was deductible. Cf. Ditmars v. Commissioner, 302 F. 2d 481 (C.A. 2, 1962), reversing a Memorandum Opinion of this Court.
The obvious principle to be evolved from the Furner and Haft cases is that it is possible for an employee to retain, at least temporarily, his status of carrying on his own trade or business independent of receiving any compensation from a particular employer. This being so, it certainly cannot be held against the petitioner that, while actively and gainfully carrying on his trade or business of being a corporate executive, he incurred an expense with a view to receiving his paychecks from a different employer than the one for whom he was working at the time of payment.
Admittedly all the foregoing cases involved an expense which was incurred with respect, and related to, the employee's current or former employment and do not involve the payment of an employment fee. However, this does not serve to distinguish the principle at issue in *379 those cases from the one before us. In 1966 petitioner was an executive of one company. He desired to change his employment and to become an executive of*212 another company. To accomplish this purpose he employed Chusid and paid them a fee in 1966. Chusid found him to be a qualified executive and sought other suitable employment for him. They were successful with the result that on Friday, May 12, 1967, petitioner ceased being an executive of one company and on Monday, May 15, 1967, became an executive of another company.
Once we have made our decision that the petitioner was carrying on a trade or business of being a corporate executive, the problem presented here virtually dissolves for it is difficult to think of a purer business expense than one incurred to permit such an individual to continue to carry on that very trade or business -- albeit with a different corporate employer. There can be no question that the fee paid in 1966 resulted directly in petitioner's securing new employment in 1967. There can be no doubt concerning its proximity.
Furthermore, the expense had no personal overtones, led to no position requiring greater or different qualifications than the one given up, and did not result in the acquisition of any asset as that term has been used in our income tax laws. It was expended for the narrowest and most limited*213 purpose. It was an expense which must be deemed ordinary and necessary from every realistic point of view in today's marketplace where corporate executives change employers with a noticeable degree of frequency. We have said before, and we say again, that the business expenses which an employee can incur in his own business are rare indeed. 4 Virtually all his expenses will be incurred on behalf of, and in furtherance of, his corporate employer's business. What we have here, however, is an exception to that rule.
Our holding with respect to the precise issue presented herein was foreshadowed*214 by our comments in Eugene A. Carter, 51 T.C. 932">51 T.C. 932, 935 (1969), wherein we said the following with respect to a particular ruling of the respondent to be noted in a moment:
However, we think this language was not intended to permit the deduction of a fee where the employment agency merely seeks to locate a position for the taxpayer, as here, but was intended to allow a deduction only where the agency actually obtains a position for the taxpayer. In the latter circumstances, it may be reasoned, the expense (frequently paid from the wages earned from the new employment) relates to and is incurred in connection with the taxpayer's business of carrying on the new employment. [Footnote omitted. Emphasis supplied.]
*380 Interestingly enough one might have thought that our decision would be in keeping with the views of respondent. To amplify, on April 25, 1960, respondent published Rev. Rul. 60-158, 1 C.B. 140">1960-1 C.B. 140, which reads in part: "Accordingly, it is held that expenditures incurred by an individual in seeking employment, including fees paid to an employment agency, are not allowable deductions*215 for Federal income tax purposes." A short time later, on June 6, 1960, respondent revoked this ruling in Rev. Rul. 60-223, 1 C.B. 57">1960-1 C.B. 57, which states in entirety:
Revenue Ruling 60-158, page 140, this Bulletin, which holds that expenses incurred in seeking employment, including fees paid to an employment agency, are not deductible for Federal income tax purposes, is revoked. This ruling would have been effective for taxable years beginning after December 31, 1959.
The Internal Revenue Service will continue to allow deductions for fees paid to employment agencies for securing employment.
It was this ruling to which we had reference in the Carter case.
Respondent seeks to avoid the effect of the plain language contained in the last sentence of his own Rev. Rul. 60-223 on two grounds. First, he contends that Chusid was not an employment agency noting in support thereof that it was not so registered under Illinois law. Whether Chusid can be classified within the technical definition, whatever that might be, of an employment agency is irrelevant. What is relevant is the fact that Chusid did *216 all any third party can do to secure employment for the petitioner, and its efforts proved successful.
Secondly, respondent contends that his revenue ruling is not applicable because it only covers the situation where the payment of the fee is contingent upon the securing of a position and not the situation where, as is true here, the fee is payable in all events. In the case where the payment of a fee does in fact result in the securing of a job this seems to us to be a distinction without a difference. In both cases the purpose of the payment, and the results thereof, are identical. Furthermore, we noted in our Findings of Fact that a representative of Chusid practically guaranteed the petitioner, on the occasion of their first interview, that they would secure a job for him.
Admittedly this decision was not reached without some conceptual difficulties. It might be argued that the payment of an employment fee is capital in nature and hence not currently deductible. Presumably, under this view the fee would be deductible when the related employment is terminated. However, the difficulty with this view is to conjure up a capital asset which had been purchased. Certainly, the*217 expense was not related to the purchase or sale of a capital asset. Further, we do not find the instant situation analogous to the capital expense incurred by an individual in the course of changing his field of endeavor.
A further objection can be made on the basis that the expenditure is *381 basically personal in nature, analogous perhaps to general educational expenses. However, here we have an expense which was paid for the limited purpose of securing employment at a particular time and whose direct relationship to the obtaining of said employment cannot be questioned. There was no element in incurring the expense of qualifying for a new trade or business or better preparing oneself to take advantage of any number of unknown opportunities or of making life more enjoyable generally. Nor is it analogous to commuting expenses which are dependent in extent upon one's own convenience in choosing a personal residence. An employment fee by its very nature bears no relationship to a personal expense but instead bears a direct relationship to the receipt of income. Personal expenses should be limited to those which are not acquisitive in character from an income-producing*218 point of view.
Our holding herein makes it unnecessary for us to consider the applicability of section 212 (1) which authorizes the deduction of expenses paid "for the production * * * of income." The literal language of the statute would surely seem to apply and the fee was certainly "expended in the pursuit of income," to use the language of H. Rept. No. 2333, 77th Cong., 2d Sess., p. 46, which accompanied the progenitor of section 212 (1). See also Caruso v. United States, 236 F. Supp. 88 (1964). However, we are concerned by the language of the Supreme Court in McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57 (1944), which seems to limit section 212 (1) to serving as an offset to nonbusiness income. We are further troubled by the statutory scheme for the computation of a net operating loss deduction under section 172 which seems to prohibit the offsetting in the first instance of a section 212 (1) deduction against salary. Income Tax Regs., sec. 1.172-3(a)(3).
Decision will be entered for the petitioner.
Tannenwald, J., concurring: I am in full agreement with the result reached*219 by my colleagues in the majority and with much of the reasoning in Judge Sterrett's careful and lucid analysis and his apparent rejection of the subtle distinctions which seem to be developing in this area. To me, the drawing of distinctions based upon the difference between "seeking" and "securing" employment, upon whether the fee of the employment agency is contingent or payable in any event, or upon whether the agency's efforts are successful or unsuccessful simply adds unnecessary confusion and complexity to a tax law which already defies understanding even by sophisticated taxpayers. I would similarly reject any attempt to import a capitalization of expenditure concept into a situation such as is involved herein. That concept has *382 generally been confined to cases of acquisition of tangible assets or intangible assets, such as a license or goodwill of a going business, or preparation for engaging in a new field of endeavor. Compare Morton Frank, 20 T.C. 511">20 T.C. 511 (1953) (prospective acquisition of newspaper businesses); Manhattan Co. of Virginia, Inc., 50 T.C. 78 (1968) (goodwill); Arthur E. Ryman, Jr., 51 T.C. 799 (1969)*220 (admission to the bar of a second State); Nathanial A. Denman, 48 T.C. 439">48 T.C. 439 (1967) (preparation for a new field of endeavor). By way of contrast, current deductibility has normally been permitted for advertising expenditures and for educational expenditures to improve one's skills utilized in existing employment, even though there were indications that some general benefit would in all probability last beyond the year of expenditure. E.g., Consolidated Apparel Co., 17 T.C. 1570">17 T.C. 1570, 1582 (1952), affirmed in part and reversed in part on other issues 207 F. 2d 580 (C.A. 7, 1953) (advertising expenses); Cosimo A. Carlucci, 37 T.C. 695">37 T.C. 695, 701 (1962) (educational expenses). Compare Harold Haft, 40 T.C. 2">40 T.C. 2 (1963).
Certainly, in the ordinary affairs of life, common understanding would clearly encompass the fee paid to the employment agency herein as "ordinary and necessary expenses in carrying on any trade or business" (sec. 162) within the "usual, ordinary and everyday meaning of the term." See Old Colony R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 561 (1932).*221 I think that the judicial interpretation of the term should be the same. "Common understanding and experience are the touchstones of the revenue laws." See Helvering v. Horst, 311 U.S. 112">311 U.S. 112, 117-118 (1940).
In cases of the instant type, I would adopt the simple test of comparing the position which the taxpayer occupied before and after the change. Perhaps the categorization of corporate executive will not always be applicable, but, in this case, petitioner was at all times a financial corporate executive. By any reasonable standard of application, he ought to prevail.
I am not concerned that such a test will open up a Pandora's box of unjustified deductions. The courts are not wanting in capability of separating the wheat from the chaff and, at the same time, exhibiting sufficient flexibility not to proliferate taxpayers' difficulties unnecessarily. Such a task is simply a normal attribute of judicial life.
Simpson, J., concurring: Although I agree with the conclusion of the majority in this case, I do not wish to be understood as approving our decision in Eugene A. Carter, 51 T.C. 932 (1969), or approving*222 *383 Rev. Rul. 60-223, 1 C.B. 57">1960-1 C.B. 57, if the intent of such ruling is to deny a deduction for the expenses of seeking employment. In my opinion, there is no legal basis for denying a deduction for the expenses of seeking a new position in the same trade or business.
In our society, it is common practice for an employee to move from one position to another in the same trade or business for a variety of reasons. If an individual wishes to change his position in his trade or business, it is surely appropriate for him to secure the assistance of an employment agency in finding a new position. Hence, any fee that he pays to the agency meets the test of being an ordinary and necessary expense of his trade or business. Cosimo A. Carlucci, 37 T.C. 695">37 T.C. 695 (1962). Business expenses need not lead to profit to be deductible. Sec. 1.162-1, Income Tax Regs. Therefore, it would be a novel rule to disallow a deduction merely because the expense does not lead to a new position. The ordinary test is merely whether there is a bona fide expectation that the expense will lead to profit. L. W. Brooks, Jr., 50 T.C. 927">50 T.C. 927, 932-933 (1968).*223 Under this test, many expenditures in unsuccessful causes have nonetheless been allowed as deductions. Doggett v. Burnet, 65 F. 2d 191 (C.A.D.C. 1933). I see no reason to exclude from the application of this rule expenses incurred in seeking employment. Accordingly, I disagree with our decision in Carter.
The position of the respondent is not altogether clear. On the one hand, his regulations under section 212 provide that expenses incurred in seeking employment are not deductible. Sec. 1.212-1(f), Income Tax Regs. On the other hand, he has long held by ruling that fees paid to secure employment are deductible. O.D. 579, 3 C.B. 130 (1920); Rev. Rul. 60-223, supra. Additional confusion results from Rev. Rul. 60-223, which may be reasonably interpreted as allowing the deduction of all expenses incurred in seeking employment.
Whatever the respondent's intended position may be, there is, in my opinion, no sufficient legal basis for treating the expenses of securing employment differently from those of seeking employment. The *224 arguments sometimes given for denying a deduction for the expenses of seeking an employment include the contention that the employee is not engaged in the new trade or business at the time he incurred the expenses, the contention that such expenses are personal or capital in nature, and the contention that to allow such expenses as a deduction would lead to numerous administrative problems. Yet, these same arguments apply with equal force to the expenses of securing a new position. To allow deductions for securing employment and *384 deny deductions for seeking employment seems unreasonable and arbitrary.
Featherston, J., concurring: I agree with the conclusion reached by the majority, but I would decide the case on a narrower ground.
Exercising the authority conferred by section 7805(a) to prescribe "all needful rules and regulations," the Commissioner issued Rev. Rul. 60-223, 1 C.B. 57">1960-1 C.B. 57, stating that "The Internal Revenue Service will continue to allow deductions for fees paid to employment agencies for securing employment." The Court has found that petitioner paid the fee to Chusid for securing employment for him. In these*225 circumstances, petitioner is entitled to the benefit of the ruling. I find nothing in the history of the Commissioner's administrative handling of this problem to show that Rev. Rul. 60-223 was intended to be limited to contingent fee situations.
Tietjens, J., dissenting: I respectfully dissent. Of course, as the majority points out, the taxpayer was in the business of being a salaried corporate employee. But I would confine that concept much more narrowly than does the majority. I would say the taxpayer was in the business of being an employee of Foundry when the claimed deductible expenses were incurred. The expenses, however, were not related to his employment by Foundry but were paid to obtain a new job with another employer. To me this is the same as incurring expenses in locating or finding a new business. Such expenses are not deductible as business expenses because they were not connected with taxpayer's existing employment. See the regulations under section 212 which provide in part as follows:
(f) Among expenditures not allowable as deductions under section 212 are the following: * * * expenses*226 such as those paid or incurred in seeking employment or in placing oneself in a position to begin rendering personal services for compensation, * * *
And see McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57, and the hoary case of Mort L. Bixler, 5 B.T.A. 1181">5 B.T.A. 1181, where the taxpayer was a salaried fair manager who, when his employment ended at one place or in the event of his resignation, sought a new salaried employment in some other State or municipality and where we denied deduction of his expenses in going from place to place in connection with seeking and changing jobs.
Footnotes
1. All section references are to the Internal Revenue Code of 1954 unless otherwise specified.↩
2. Although the stipulation reads "secretary-controller" petitioner testified at trial that he began employment as controller and assistant to the vice president of finance and was not elected secretary until January of 1968.↩
3. The notice of deficiency erroneously states that $ 3,016.43 was paid to Chusid. It appears from the record that $ 380.18 was paid to Executive Advertising Services, Inc.↩
4. In Ralph C. Holmes, 37 B.T.A. 865">37 B.T.A. 865, 873, the following statement is made:
"It may well be that deductible 'ordinary and necessary expenses in carrying on a trade or business' would be few and far between for a taxpayer engaged in carrying on a business as executive officer of a corporation. The most of such deductions that we can think of would be those allowable only to the corporation. * * *"↩