*2028 The respondent's disallowance of claimed deduction from petitioner's gross income for 1925 as ordinary and necessary business expenses of accountants' and attorneys' fees paid by petitioner in that year in contesting the assessment of Wisconsin State income taxes for the years 1918 and 1920 approved in the absence of evidence that the transactions giving rise to such assessments were incidents of petitioner's business.
*975 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1925 in the amount of $442.11.
*976 It is alleged that the respondent erred in disallowing as a deduction the amount of $3,585.79 paid by petitioner for legal and accounting fees incurred in contesting the assessment of Wisconsin State income tax and surtax.
FINDINGS OF FACT.
The petitioner is an individual with residence at 631 Hampshire Avenue, Milwaukee, Wis. From 1919 to 1925, he was president of the American Candy Company, an officer and director of the First Acceptance*2029 Corporation, and a director of the National Bank of Commerce.
In 1919 the American Candy Company was a Wisconsin corporation. Its entire stock was owned by the petitioner and W. F. Stark. However, on July 19, 1919, it was reorganized as an Illinois corporation and 120,000 shares of stock of the new corporation were issued. Stark and the petitioner retained 45,000 of these shares between them and the remainder of the shares were sold to an underwriter. From the sale of shares to the underwriter petitioner received in cash $795,680. This amount was received by the petitioner as the result of the sale of 45,240 shares of common stock and 7,232 shares of preferred stock.
Sometime subsequent to July 19, 1919, petitioner invested this money in stocks and bonds. Thereafter, and during 1925, petitioner owned 68 different bond items aggregating $372,204.85, and 12 stock items aggregating $423,758, making a total of $795,962.85. The petitioner purchased these stocks and bonds personally and devoted approximately 50 per cent of his time to them. These stock and bond holdings represent the investment of cash received by the petitioner from his various business transactions.
From*2030 1919 to 1921, inclusive, the petitioner's salary as president of the American Candy Corporation was $25,000 per year. It was found, however, in 1920 that due to the large amount of preferred stock dividends to be paid, the earnings of the new corporation were not sufficient to carry the burden. Therefore, in 1922, petitioner, in order to protect the value of the 26,827 shares of common stock of the corporation which he held, allowed his salary to be reduced to $10,000. From 1922 to 1925, inclusive, his salary remainded at $10,000 per year.
Petitioner did not carry on a banking business. He had an office in connection with the First Acceptance Corporation, which was owned 100 per cent by him.
Under date of July 17, 1925, the petitioner received a notice from the Assessor of Incomes for Milwaukee County in the State of Wisconsin to the effect that it was proposed to make an additional assessment *977 of income tax, surtax, and interest based on an item of income received in the year 1919 or 1920 and not previously taxed, amounting to $236,601. Under date of September 17, 1925, petitioner received a notice of assessment of State income taxes for the year 1920, which, *2031 together with interest, amounted to $26,895.98. Petitioner then employed Arthur Young & Company to represent him in this matter. On October 6, 1925, the assessor withdrew his notice of assessment of September 17, 1925, and issued a revised assessment for the year 1920 in the amount of $11,123.37. At the same time an assessment in the amount of $29,053.09 was made for the year 1918, making a total of $40,176.46.
Thereafter, on October 29, 1925, the 1920 assessment was canceled and the 1919 assessment was submitted to the County Board of Review for hearing on November 5, 1925. To further protect his interest, petitioner obtained the services of Henry B. Nelson, Inc., tax consultants, and Lines, Spooner & Quarles, attorneys at law. Thereafter, the assessment for 1918 was reduced by stipulation with the assessor to $3,484.46. The following amounts were paid by the petitioner to the accountants and attorneys for services in that tax controversy:
| Arthur Young & Company, accountants | $2,320.39 |
| Lines, Spooner & Quarles | 602.70 |
| Henry B. Nelson, Inc | 602.70 |
| Total | 3,525.79 |
In addition to the foregoing, a $60 fee was paid by petitioner to Cherry, Cheyne & Company, *2032 accountants, for services prior to the engagement of Arthur Young & Company.
The petitioner's Federal income tax return for the year 1925 shows that his income from interest on bank deposits, bonds, etc., was $3,137.93, and that his income from dividends on stock of domestic corporations amounted to $21,915.70. In the return petitioner claimed a deduction from gross income for legal and accounting fees in the amount of $3,585.79, which were incurred in contesting the proposed assessment of Wisconsin State taxes.
The respondent in computing the deficiency in question herein disallowed the claimed deduction with the following statement:
The deduction of $3,585.70 claimed in line 16(b) and representing legal and accounting fees incurred in contesting an assessment of Wisconsin State Income Tax, has been disallowed for the reason that such additional tax arose out of the ownership of stock of a corporation and the reorganization of such corporation and not from the conduct of your trade or business. The deduction is, therefore, not allowable as it did not constitute an ordinary and necessary business expense.
*978 OPINION.
MCMAHON: The sole question presented is*2033 whether the respondent erred in disallowing as a deduction from petitioner's gross income for the year 1925 the amount of $3,585.79 expended by petitioner in that year as attorneys' and accountants' fees in contesting an assessment of Wisconsin State income taxes for the years 1918 and 1920 against the petitioner. Section 214 of the Revenue Act of 1924 provides in part as follows:
(a) In computing net income there shall be allowed as deductions:
(1) 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; * * *
Section 215 of the Revenue Act of 1924 provides in part as follows:
(a) In computing net income no deduction shall in any case be allowed in respect of -
(1) Personal, living, or family expenses.
Petitioner contends that his business was that of a capitalist and that these fees constituted ordinary and necessary expenses of that business. The respondent has held that the assessment of the additional Wisconsin State income taxes which gave rise to the expenditures in question was predicated upon*2034 the receipt of income by petitioner upon the reorganization of a corporation in which petitioner held stock. This holding of the respondent is not controverted by the petitioner and is presumed to be correct. The evidence shows that the additional State taxes for the year 1920 were based upon an item of income of $236,601 received in either the year 1919 or the year 1920 and not previously taxed. The evidence further shows that on July 19, 1919, the American Candy Company, in which petitioner held stock, was reorganized and that at that time or at some later time the petitioner received in cash $795,680 upon the sale of some of the stock of this reorganized corporation. From all the evidence we must conclude that it was the income from this transaction which gave rise to the additional State income taxes. The evidence also shows that the petitioner at sometime thereafter invested the amount of $795,680 which he received from the sale of that stock, in bonds and other stocks.
In support of his position that he was engaged in business as a capitalist, the petitioner introduced in evidence a list of his stock and bond holdings from sometime after July 19, 1919, until and including*2035 the year 1925, aggregating 80 items of a value of $795,962.85. To determine whether the expenditures in question were ordinary and necessary expenses of petitioner's business, we are concerned *979 only with the nature of petitioner's business at the time of the transaction which resulted in the expenditures. There is no evidence to show that the petitioner was engaged, at the time he received the income from the sale of his American Candy Company stock, in the business of a capitalist. On the contrary, the evidence shows that it was not until he received this money that he extensively dealt in stocks and bonds. At the time in question petitioner's business, so far as the record shows, was that of president of the American Candy Company, officer and director of the First Acceptance Corporation, and director of the National Bank of Commerce. Certainly the sale by petitioner of a part of his stock in American Candy Company was not an incident of his duties as president of that company. . It follows that the fees in question paid to contest the additional State income taxes for the year 1920 were not ordinary and necessary expenses*2036 of petitioner's business and are, therefore, not deductible.
We have no information as to the basis of the assessment of State income taxes for the year 1918 which the petitioner also contested and in which controversy the petitioner paid an undetermined portion of the fees in question. We are thus precluded by lack of evidence from determining whether that undetermined portion of the fees constituted ordinary and necessary business expenses. Even if the petitioner had proved that the expenditures relating to his State income tax liability for the year 1920 were ordinary and necessary business expenses, we would have to disallow the full amount of the claimed deductions, in view of the fact that petitioner has not shown what portion of the total fees were paid for service in the tax controversy for that year.
Judgment will be entered for the respondent.