*169 Decision will be entered under Rule 155.
Petitioner was an active member of St. James Armenian Church of Los Angeles. During the years 1968, 1969, 1970, and 1971 petitioner paid legal fees incurred in defense of several actions brought against him by St. James for breach of fiduciary duty. Petitioner cross-claimed in one of the actions for collection of principal and interest on a loan made by petitioner to St. James. Held, the portion of the legal fees attributable to the collection of interest on the loan by petitioner to St. James is deductible under sec. 212(1). Held, further, remainder of legal fees do not qualify as deductible expenses under sec. 162, 212, or 170 but are nondeductible personal expenditures under sec. 262.
*862 Respondent determined deficiencies in petitioners' Federal income taxes as follows:
| Year | Deficiency |
| 1968 | $ 5,822.53 |
| 1969 | 14,925.48 |
| 1970 | 9,610.20 |
| 1971 | 10,499.45 |
| Total | 40,857.66 |
*863 The sole issue is whether legal fees paid by petitioners during the years 1968, 1969, 1970, and 1971 are deductible under section 162, 1section 212, or section 170.
FINDINGS OF FACT
Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are found accordingly.
John Kurkjian (hereinafter referred to as petitioner) and Mary Kurkjian, husband and wife residing in Thousand Oaks, Calif., filed joint income tax returns for the years 1968, 1969, 1970, and 1971 with the District Director of Internal Revenue, Los Angeles, Calif.
Petitioner was born in Armenia in 1906 and came to the United *172 States in 1922, settling in Boston, Mass. Petitioner moved to California in 1947. During the years 1951 through 1966 petitioner carried on a business, individually and in several partnerships, of investing in and developing real property for commercial purposes and of making general investments. Petitioner's activities with respect to investing in and developing real property consisted of having commercial stores built for operation by himself or for rental purposes. Since 1963 petitioner's construction activities have been limited to the renovation of one or two older buildings. Petitioner has never been a licensed real estate broker.
Petitioner has always been a member of the Armenian Church. After living in California for a year he began attending St. James Armenian Church of Los Angeles (hereinafter St. James or the church). St. James is a nonprofit corporation organized and existing in accordance with the laws of the State of California and is a member of the western diocese of the Armenian Church of North America. During the years 1952 through 1966 petitioner was an active member of the St. James congregation. He held several positions in the church including chairman*173 of the parish council and chairman of the building committee. In addition he was appointed chairman of the Los Angeles campaign to raise funds for the restoration of the Holy Sepulchre in Jerusalem. Serving the church in these various capacities required approximately 35 percent of petitioner's time. *864 Petitioner has never received compensation for rendering services to the church.
Beginning sometime in 1963 petitioner became involved in the production of documentary films which were to be used by various churches in their fund-raising activities. Although petitioner never charged St. James for the use of these films, he did charge other churches for their use of the films. The amount charged for the rental of the films was designed to recover the cost of production only. Petitioner never intended to make a profit from the production and rental of these films.
The Los Angeles committee for the restoration of the Holy Sepulchre (the committee of which petitioner was chairman) was established by the parish council of St. James pursuant to the instructions of Archbishop Torkom Manoogian, primate of the western diocese of the Armenian Church. The committee collected a total*174 of $ 23,227 for the restoration of the Holy Sepulchre in Jerusalem. These funds were deposited by petitioner in the Great Western Savings & Loan Association in Los Angeles in the name of "St. James Armenian Church Jerusalem Funds" (hereafter the St. James account).
On August 11, 1967, St. James commenced legal proceedings against petitioner alleging that he committed wrongful and unlawful acts, resulting in financial loss to the church, while acting as chairman of the fund-raising committee. The Superior Court of the State of California for the County of Los Angeles held that petitioner had withdrawn from the St. James account the sum of $ 15,550.17 and that he had used this amount for his own personal use and enjoyment contrary to the rights of the church. This decision was affirmed by the Court of Appeals of the State of California, Second Appellate District. A petition to the Supreme Court of the State of California was denied on January 16, 1974. Petitioner claimed that at the beginning of the fund-raising campaign the patriarch of Jerusalem requested petitioner to loan the committee $ 15,000 in order to finance the campaign, which amount would be reimbursed to petitioner*175 after the campaign had been completed. Petitioner maintained that the amount withdrawn from the St. James account constituted reimbursement for the money advanced by him to cover the costs of the campaign.
On August 28, 1967, St. James filed a second complaint against petitioner for conspiracy and for money had and received. In this *865 complaint St. James alleged two separate causes of action grounded upon petitioner's alleged violation of his fiduciary duty to the church during 1965 and 1966 while serving as chairman of the parish council.
In the first cause of action, the church alleged that petitioner, while serving the church as chairman of the parish council, entered into a conspiracy with others to cheat and defraud the church of $ 100,000. St. James contended that petitioner, by virtue of his position within the church, induced the church to sell property to other members of the conspiracy for $ 400,000 while deliberately concealing from the church that a buyer was willing to purchase the property for $ 500,000. The church alleged that after the other conspirators had acquired the property from the church, they then sold the property to the aforesaid buyer for $ *176 500,000. Thus, the church argued, the conspirators made a secret profit of $ 100,000 which was then divided among the conspirators.
The church's second cause of action was, as the first, based upon petitioner's alleged violation of his fiduciary duty owed to the church while serving the church as chairman of the parish council. This arose by virtue of certain personal loans made by petitioner to the church during 1965. The church alleged that petitioner surreptitiously and fraudulently placed a cloud on the church's title to certain improved real property in order to gain unfair advantage over the church.
Petitioner filed an answer to this complaint denying any violation of his fiduciary duty to the church with respect to either cause of action. Petitioner then filed a cross-complaint against the church for damages, alleging breach of contract. Petitioner alleged three separate causes of action in his cross-complaint, all based upon the church's alleged failure to make principal and interest payments on certain personal loans made by petitioner to the church. In 1972 this action was settled between the parties without trial. The total amount expended by petitioner for legal *177 fees with respect to this case was $ 5,000.
On September 13, 1967, a third complaint was filed by St. James against petitioner and on October 11, 1967, a fourth complaint was filed by St. James against petitioner. These actions were consolidated for purposes of trial and were tried before the Superior Court during 1972. These actions involved the activities of petitioner during the years 1963 and 1964 while *866 serving the church as chairman of the parish council and as chairman of the building committee. Specifically, these cases were concerned with the actions of petitioner, as the church's agent and fiduciary, in the purchase by the church of certain improved real property and in the sale by the church of certain unimproved real property.
The Superior Court found, in part, that petitioner violated his fiduciary duty to the church by fraudulently conspiring with A. B. Hallaian (hereinafter Hallaian), a licensed real estate broker, for the purpose of enabling and permitting Hallaian to make and receive a secret profit in the form of a real estate broker's commission with respect to both the purchase and sale of the separate properties by the church. The court further found*178 that petitioner received no part of the secret profit made by Hallaian.
The court found petitioner liable to the church in both actions and entered separate judgments against him. Petitioner has appealed both of these judgments to the Court of Appeals of the State of California, Second Appellate District. As of the date this case was submitted to this Court, those appeals were still pending.
It was petitioner's contention that all four of these disputes should have been settled by a tribunal of the Armenian Apostolic Church governed by the ecclesiastical laws and doctrines of the Armenian Apostolic Church. St. James, however, refused to abide by a request made by the cathologous, the head of the church, that these matters be settled within the church.
In defense of the actions brought against him by the church, petitioner employed legal counsel and in connection therewith expended the following amounts:
| Year | Amount |
| 1968 | $ 17,693.80 |
| 1969 | 25,868.55 |
| 1970 | 20,500.00 |
| 1971 | 20,593.90 |
| Total | 84,656.25 |
The legal fees were deducted by petitioner on joint returns filed with his wife for the years and in the amounts heretofore stated. Respondent disallowed all such deductions*179 in full.
Sometime during 1967 petitioner ceased attending St. James Armenian Church. Since that time he has attended various churches and has been active in assisting these churches in *867 various fund-raising activities. Petitioner's services in this regard have been without compensation.
OPINION
Petitioner maintains that he is entitled to a deduction for the attorney fees paid in the years 1968, 1969, 1970, and 1971 in defense of law suits commenced against him by the St. James Armenian Church. Petitioner has submitted four alternative grounds upon which he bases his claim for the deduction of these attorney fees.
Trade or Business Expenses: Section 162Petitioner first argues that he was in the trade or business of rendering services to his church and that the attorney fees were ordinary and necessary expenses incurred in that trade or business. Respondent argues that petitioner's church activities did not constitute a trade or business and that the attorney fees incurred by petitioner are nondeductible personal expenses under section 262. We agree with respondent.
It is well established that a genuine profit motive must exist before an activity constitutes a trade*180 or business within the meaning of section 162. Brydia v. Commissioner, 450 F.2d 954">450 F.2d 954 (3d Cir. 1971), affg. per curiam a Memorandum Opinion of this Court; Lamont v. Commissioner, 339 F. 2d 377 (2d Cir. 1964), affg. a Memorandum Opinion of this Court; Hirsch v. Commissioner, 315 F. 2d 731 (9th Cir. 1963), affg. a Memorandum Opinion of this Court. Petitioner voluntarily performed services for his church and never received or expected to receive compensation for his services.
Recognizing that the courts have uniformly required that an activity be carried on for profit before characterizing it as a trade or business, petitioner would have us establish an exception in his case. The grounds for the exception proposed by petitioner are the amount of time he spent working for the church and the alleged business contacts he was able to make through his church activities. Although petitioner argues that his church activities enabled him to make business contacts, he has not pointed to a single instance wherein his business as an investor and real estate developer was enhanced by virtue of his church*181 activities. With regard to the amount of time petitioner devoted to the church, *868 the following excerpt from the Ninth Circuit's opinion in Hirsch v. Commissioner, supra at 736, is apposite:
From the very import of Section 23 [referring to sec. 23(a)(1)(A), the 1939 Code predecessor of sec. 162(a)], which presupposes that the taxpayer has received taxable income before deductions can be taken therefrom, it is clear that Congress intended that the profit or income motive must first be present in and dominate any taxpayer's "trade or business" before deductions may be taken. While the expectation of the taxpayer need not be reasonable, and immediate profit from the business is not necessary, nevertheless, the basic and dominant intent behind the taxpayer's activities, out of which the claimed expenses or debts were incurred, must be ultimately to make a profit or income from those very same activities. * * * Absent that basic and dominant motive, the taxpayer's activities, no matter how intensive, extensive or expensive, have not been construed by the Courts as carrying on a trade or business within the purview of Section 23. * * *
We are not*182 persuaded that an exception to the prerequisite of the existence of a genuine profit motive should be made in this case. The deduction provided by section 162 is justified on the ground that expenses incurred in a trade or business can be characterized as the cost of producing the income therefrom. Where an individual engages in activity not for profit, there is no justification for deducting the expenditures related to that activity.
Nor are the attorney fees deductible as expenses incurred in petitioner's trade or business as an investor and real estate developer. The test that determines the deductibility of these expenditures was established by the Supreme Court in United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 49 (1963):
the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was "business" or "personal" and hence whether it is deductible or not under section 23(a)(2)2 * * *
*183 The Supreme Court's reasoning in United States v. Gilmore, supra, is equally applicable in determining whether legal expenses are deductible under section 162 or section 212. Nadiak v. Commissioner, 356 F. 2d 911 (2d Cir. 1966), affg. a Memorandum Opinion of this Court The attorney fees paid by petitioner originated from his church association and not from his position as an investor and developer. Under the test established by the *869 Supreme Court in United States v. Gilmore, supra, these expenses are not deductible.
Unreimbursed Employee Expense: Section 162Petitioner argues that the attorney fees are deductible under section 162 as expenses incurred as a result of performing duties as an employee. Respondent answers that petitioner was never an employee of the St. James Church or any other church and that the attorney fees are nondeductible personal expenses. We agree with respondent.
It is clear that an individual may be in the trade or business of being an employee and that ordinary and necessary expenses incurred in that trade or business are deductible under section *184 162. David J. Primuth, 54 T.C. 374">54 T.C. 374 (1970); Harold A. Christensen, 1456">17 T.C. 1456 (1952); Benjamin Abraham, 9 T.C. 222">9 T.C. 222 (1947). Although petitioner performed many services for the church, he was not employed by the church, at least not in the sense contemplated by the income tax law. The California statutes and cases, cited by petitioner, are not relevant in determining whether petitioner's relationship to his church justifies allowing deductions from income for expenses arising out of that relationship. Nor is section 3121(d), cited by petitioner, relevant to this inquiry. That section defines an employee for purposes of the employment taxes but has no relevance to section 162.
Whether or not an individual is an employee is not the critical question for purposes of the deduction under section 162. The critical question is whether he is in the trade or business of being an employee. Under section 162 there must be a genuine profit motive in order for an activity to constitute a trade or business. Lamont v. Commissioner, supra;Hirsch v. Commissioner, supra.*185 Certainly no less stringent requirement should be established in order to characterize a taxpayer as being in the trade or business of being an employee. Petitioner admits that he never received nor expected to receive compensation or pecuniary benefit from his church association. Many churches and other charitable organizations depend to a large degree upon lay leaders to perform services for which business organizations would ordinarily have to pay. When these services are rendered gratuitously and are motivated by the personal and charitable impulses of the individual, such an individual is not in the trade *870 or business of being an employee of the organization. This is so regardless of whether the individual is classified as an employee for purposes of State law relating to agency or workmen's compensation.
Deduction Under Section 212Petitioner's third argument in support of the deductibility of the attorney fees is based on section 212. Although petitioner would have us characterize the attorney fees as deductible nonbusiness expenses, he does not indicate whether he considers the fees to have been paid for the production or collection of income or rather for*186 the management, conservation, or maintenance of property held for the production of income. Respondent characterizes these expenses as nondeductible personal expenses under section 262.
Petitioner hired legal counsel to assist in his defense against four suits brought against him by St. James for breach of fiduciary duty. In one of the four suits petitioner filed a cross-complaint based upon the church's failure to make principal and interest payments on certain personal loans made by petitioner to the church. This suit was settled by the parties prior to trial and we will consider the deductibility of the attorney fees associated with this suit separately from the other suits.
The other three cases (two of which were consolidated for trial) were tried in the California courts and St. James prevailed in each. We agree with respondent that the attorney fees associated with these three cases are fully nondeductible personal expenses.
These legal fees were not incurred for the production or collection of income, nor did they arise in connection with any profit-seeking or income-producing activity. These expenditures represent nothing more than the cost of the petitioner's defense*187 against the church's allegations of fraud, deceit, and misrepresentation. No income could have been or was expected to be realized by the petitioner as a result of these expenditures. There is no basis for allowing a deduction for these expenses under section 212(1).
Neither do the facts support an argument under section 212(2) that these legal fees were incurred for the management, conservation, or maintenance of property held for the production of income. None of petitioner's property was in issue except to the *871 extent that his property may have been used to satisfy the judgments rendered in these cases. Legal fees are not deductible merely because they are for services which may relieve a taxpayer of liability. Lykes v. United States, 343 U.S. 118">343 U.S. 118 (1952). As the Supreme Court said in United States v. Gilmore, supra, with respect to the deductibility of legal fees under the predecessor of section 212, it is the origin and character of the claim with respect to which an expense is incurred, rather than its potential consequences upon the fortunes of the taxpayer that controls whether the expense is business*188 or personal. The origin of petitioner's legal fees associated with these three actions was personal. The expenditures, therefore, represent nondeductible personal expenditures under section 262.
The case which was settled by the parties prior to trial presents a different problem. In that case petitioner filed a cross-complaint for the collection of principal and interest on two personal loans he had made to St. James. As a part of the settlement petitioner agreed to cancel the indebtedness. With respect to this case, the total amount expended by petitioner for legal fees was $ 5,000.
Legal fees incurred in connection with a suit to recover interest on a loan are deductible under section 212(1), but that portion of the legal expenses attributable to the collection of the principal of the loan are not deductible. Daniel S. W. Kelly, 23 T.C. 682">23 T.C. 682 (1955), affd. 228 F. 2d 512 (7th Cir. 1956). 3 Petitioner was unable to suggest any allocation of the $ 5,000 paid in attorney fees between the costs of defending the claims brought by the church, the costs attributable to the collection of principal owed petitioner, and the costs*189 attributable to the collection of interest owed to petitioner. Only the costs attributable to petitioner's claim for interest represent deductible expenses under section 212. Bearing heavily against petitioner, upon whom rests the burden of proof, we find that of the $ 5,000 paid in attorney fees, $ 250 is attributable to petitioner's claim for interest. Cohan v. Commissioner, 39 F. 2d 540 (2d Cir. 1930). This amount is deductible under section 212(1).
*872 Deductibility of Legal Expenses Under Section 170Petitioner's final argument in support of the deductibility of the attorney fees is under section 170. Respondent maintains that the attorney fees are nondeductible personal expenses and do not represent a charitable contribution deductible under section 170.
Petitioner relies on section 1.170-2(a)(2), Income Tax Regs., which provides in part: "No deduction is allowable for contribution of services. However, *190 unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution." Petitioner claims that because St. James refused to desist from its actions against petitioner and submit the disputes to an Armenian Church tribunal governed by the ecclesiastical laws of the Armenian Church, he was forced to pay legal expenses which would have otherwise been the responsibility of the Armenian Apostolic Church. Petitioner maintains that in defending himself against the actions brought by St. James he was performing services for the Armenian Apostolic Church and that the payment of legal fees constituted an out-of-pocket expense incident to the rendition of these services. We cannot agree.
Regardless of whether the disputes between St. James and petitioner could have been settled by a tribunal of higher church authorities, petitioner's defense in the four civil suits instituted by St. James was his own responsibility. He in no way relieved the Armenian Apostolic Church of any responsibility by providing for his own defense. That group was not a party to any of these actions.
Furthermore, expenses*191 are not allowed as a charitable contribution when the activity for which the expenses are incurred brings a substantial personal benefit to the taxpayer even though the charity also benefits. Arthur I. Saltzman, 54 T.C. 722">54 T.C. 722 (1970). The presence of a substantial and direct personal benefit to the taxpayer is fatal to the claim for a charitable contribution. Grey B. (Miller) Tate, 59 T.C. 543">59 T.C. 543 (1973). There can be no doubt that petitioner benefited from the expenses associated with his legal defense. Even if the Armenian Apostolic Church in some way also benefited from these expenses, *873 a charitable deduction is precluded by virtue of the benefit derived by petitioner.
Decision will be entered under Rule 155.