*1920 Certain amounts paid by the petitioners in litigation of claims for compensation for property condemned for public uses by the city of New York, held not deductible in the years when paid.
*109 These proceedings are for redetermination of deficiencies for the calendar years, 1921, 1922, 1924, 1925, and 1926, as follows:
| Year | Thomas | Henry K. S. |
| Williams | Williams | |
| 1921 | $2,314.45 | |
| 1922 | 8,993.38 | |
| 1924 | 6,335.30 | $10,238.07 |
| 1925 | 1,333.00 | 4,160.90 |
| 1926 | 75.89 |
The issues being identical for each of the years involved with respect to each petitioner - that is, whether certain expenses of litigation in connection with condemnation proceedings are deductible in the taxable years - the proceedings were consolidated for hearing and opinion.
The petitioners are brothers and are residents of the State of New
The petitioners are brothers and are residents of the State of New York. They maintain an office at 220 Fifth Avenue, New York City.
At the beginning of*1921 the year 1919 the petitioners were the owners of considerable real estate situated along the water front on Staten Island, N.Y. They had owned the property for many years and had used portions of it in carrying on various business enterprises. A part of the property was occupied under lease expiring in 1923 by the firm of Ichabod T. Williams & Sons, a copartnership, hereinafter referred to as the copartnership, of which Thomas Williams was a partner. The copartnership was engaged in the wholesale lumber business specializing in the importation of high-grade lumber. Another part of the property was under lease, expiring in 1928, to the Edgewater Saw Mills Corporation, hereinafter referred to as *110 the corporation, of which the petitioners were stockholders. Other portions of the property had been transferred by the petitioners to the Stapleton Dock & Warehouse Corporation, a holding corporation, hereinafter referred to as the holding company, the capital stock of which was all owned in equal shares by the petitioners.
On July 1, 1919, the Commissioners of the Sinking Fund of New York City instituted proceedings to condemn for public use all of the above described property, *1922 together with other adjacent property, in connection with the improvement of the water front and harbor facilities of New York City. Pursuant to authority granted by the court, the Commissioners of the Sinking Fund on September 25, 1919, adopted a resolution reading in part as follows:
Resolved, that, pursuant to law, the Commissioners of the Sinking Fund hereby direct that title to the property to be acquired for the improvement of the waterfront and harbor of The City of New York, between Simonson Avenue, Clifton, and Arrietta Street, Tompkinsville, Borough of Richmond, as more particularly hereinafter described, shall vest in The City of New York on Saturday, October 11, 1919, and all of te rights, title and interest of any and all of the owners or persons interested in the said wharf property, rights, terms, easements and privileges, lands under water or uplands, shall cease and determine and be extinguished at such time.
Title to the property was taken over by the city in accordance with the above resolution on October 11, 1919, and on October 28, 1919, notice was given for the owners and parties in interest to file with the court their claims for compensation. Thereafter, *1923 and during the year 1919, claims for compensation for the condemned property were filed by the petitioners individually, by the copartnership, the holding company, and the corporation.
Prior to 1919 both the copartnership and the corporation had made considerable improvements upon the condemned properties out of their own funds.
The petitioners engaged the law firm of O'Brien, Boardman, Parker, and Fox to represent them in the prosecution of their claims.
The adjudication of the claims by the courts extended over a period of several years. On March 13, 1925, the Supreme Court of Kings County rendered judgment awarding the petitioners compensation in the amount of $3,792,090.74. Appeal from this award was taken by the city of New York to the Appellate Division, which, during the year 1926, rendered its decision approving the amount of the award as fixed by the lower court. See . Appeal was then taken to the Court of Appeals of the State of New York, which, on July 20, 1927, rendered final decision affirming *111 the award as fixed by the trial court. See *1924 ; .
Counsel for the petitioners in the prosecution of their claims for compensation taken for the property under the condemnation proceedings desired that the copartnership, the corporation, and the holding company make no separate contentions with respect to damages to which they might be entitled as a result of improvements which they had placed upon the property which had been taken over by the city. Accordingly, the claims for compensation were limited to those pressed by the petitioners. The petitioners had entered into an understanding with the other parties in interest that such parties would be compensated for out of any amounts which might be paid to the petitioners for damages in respect of the property taken.
During the years 1921, 1922, 1924, 1925, and 1926, the petitioners made expenditures in connection with the prosecution of the above claims, representing attorneys' fees, appraisals, expert witness fees, etc., as follows:
| Year | Thomas | Henry K. S. |
| Williams | Williams | |
| 1921 | $8,585.39 | |
| 1922 | 8,822.00 | |
| 1924 | 18,111.85 | $18,111.84 |
| 1925 | 5,116.01 | 5,116.00 |
| 1926 | 303.42 |
For 1921, 1922, and 1926*1925 Henry K. S. Williams paid an equal amount in connection with the prosecution of the above claims, but deficiencies determined by the Commissioner against Henry K. S. Williams for that year, if any, are not involved in these proceedings.
Thomas Williams carried on no business during the years 1921 to 1926, inclusive, except in connection with the firm of Ichabod T. Williams & Sons, of which he was a member. Henry K. S. Williams had retired from business prior to 1924, and during the years 1925 and 1926 was living abroad.
In his income-tax returns for 1921, 1922, 1924, 1925, and 1926, Thomas Williams claimed as deductions from gross income the amounts paid by him in connection with the prosecution of his claims against the city of New York, set out above, and in his individual income-tax returns for 1924, and 1925, Henry K. S. Williams claimed as deductions from gross income in connection with the prosecution of these claims $47,448.07 for 1924, and $5,116 for 1925, although the amounts actually paid by Henry K. S. Williams in those years were, as above set forth, only $18,111.84 for 1924, and *112 $5,116 for 1925. The reason for claiming a larger deduction for 1924 than*1926 the amount paid was that Henry K. S. Williams had claimed no deductions for the years prior to 1924, and claimed the right to deduct in that year the entire amount paid by him in 1924 and prior years. The petitioners kept their records on the cash receipts and disbursements basis and filed their tax returns upon the same basis. In the determination of the deficiencies involved herein the Commissioner disallowed the deductions of the amounts paid in connection with the prosecution of the claims referred to above.
OPINION.
SMITH: The petitioners contend that all of the disputed amounts expended by them during the taxable years involved in connection with the adjudication of the claims for compensation for the property taken over by the city of New York are deductible from gross income as business expenses of those years. Henry K. S. Williams contends before the Board, however, that the only amount he is entitled to deduct from gross income of 1924 is the actual amount expended by him in that year, namely, $18,111.84, and not $47,448.07 as claimed on his return. The respondent opposes the deductions on the grounds -
(1) That the expenditures were not ordinary and necessary*1927 expenses incurred in carrying on a trade or business;
(2) That they were made in advance of or in proof of title and are therefore capital expenditures (see article 293, Regulations 62; article 292, Regulations 65);
(3) That even if considered as business expenses, none of the amounts are deductible in the petitioners' individual returns, since they were expended in part on behalf of other parties in interest and no proper basis for segregation of the amounts paid out in behalf of the petitioners' individual interests is provided.
The applicable statute is section 214 of the Revenue Acts of 1921 and 1924, which provides in part:
(a) That 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; * * *
In , the question before the court was whether a practicing attorney who had been in partnership was entitled to deduct from gross income legal expenses paid by him in defending a*1928 suit brought by a former partner who contended *113 that certain fees received by Kornhauser were in connection with business which had been done by the partnership while the former partner was a member of the firm. The alleged fees in fact consisted of stock in a corporation acquired subsequent to the dissolution of the partnership and not for services performed during its existence. The defense to the suit was successful and the Supreme Court held that the amount paid was a necessary expense incurred in connection with petitioner's business within the meaning of section 214(a)(1) of the Revenue Act of 1918. The court stated:
In the , the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense.
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 (*1929 , 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. If the expense had been incurred in an action to recover a fee from a client who refused to pay it, the character of the expenditure as a business expense would not be doubted. * * *
In the proceedings at bar we are unable to perceive any close relationship between he amounts paid by the petitioners in the prosecution of their claims against the city of New York and any business carried on by the petitioners during the taxable years. We can not find that Henry K. S. Williams was engaged in any business during the years 1924 and 1925. He had retired from business and was living abroad. He only business that Thomas Williams was engaged in appears to have been in connection with the partnership of Ichabod T. Williams & Sons. The amounts paid by Thomas Williams in connection with the prosecution of the petitioners' claims were not charged upon the books of the partnership and, so far as*1930 the record shows, were not intimately connected with the business of the partnership. The respondent's contention is that the amounts paid by the petitioners in the prosecution of their claims against the city of New York were in the nature of capital expenditures and that as such they at most are deductible from the amount of the compensation paid by the city of New York to the petitioners upon the adjudication of their claims in 1927. Whether this be the correct theory for disallowing the deductions in the years under review, it is unnecessary for us to decide.
As pointed out by the Circuit Court of Appeals for the Second Circuit in , expenses of the sort before the court in that case can be allowed as a *114 deduction only if the expense is clearly within "some statutory deduction." It further stated:
* * * We are to assume that the added security to Field, his power of immediate disposition and enjoyment over what in any case was eventually his, was a new asset, from whose value the fee must be deducted. Such refinements are too speculative to be workable in application; expenses of this sort must*1931 fall within those general costs of protecting one's property for which the statute makes no allowance.
We are of the opinion that the amounts claimed as deductions in the proceedings at bar are not "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." There is no other provision of the statute under which the deductions may logically be claimed. The disallowance of them by the respondent is therefore sustained.
Judgments will be entered for the respondent.