*1893 Petitioners were shareholders in a "Massachusetts" realty trust, which disposed of practically all of its assets, distributed the proceeds thereof to its shareholders and ceased to do business in 1920. More than a year thereafter a deficiency assessment was proposed against it and the shareholders, realizing if it was sustained the tax would have to be paid by them, employed attorneys and real estate experts to resist and defeat the proposed assessment. In the circumstances of the instant cases, held, that the pro rata expense so incurred and paid in 1924 (the taxable year in issue) by petitioners was an ordinary and necessary expense and deductible as such in computing petitioner's net income.
*217 The Commissioner determined a deficiency in income tax for 1924 against Fred T. Ley in the sum of $1,678.78. He also determined deficiencies in income tax against Edward J. Murphy for 1924 and 1925 in the respective amounts of $2,169.76 and $2,483.54. The 1925 tax is not contested and only $1,072.83*1894 of the 1924 tax is controverted. In each case the deficiency in dispute arises on account of the failure of the Commissioner to allow certain claimed deductions in computing the petitioner's taxable income.
Fred T. Ley's claimed deduction is $7,345.39 and Edward J. Murphy's is $5,357.67, which amounts are alleged to have been paid by the petitioners as their respective shares of fees and other expenses incurred in resisting the collection of an income and profits tax sought to be levied upon the alleged income of a Massachusetts real estate trust, taxable as an association, and to be collected from petitioners and others as the owners of said trust, which was then in liquidation and without funds or property to pay such proposed tax.
The cases are consolidated for hearing and decision and are submitted on admissions in the answers, the deposition of one witness, stipulation and exhibits.
FINDINGS OF FACT.
The petitioners are individuals, Fred T. Ley residing in New York, N.Y., and Edward J. Murphy residing in Springfield, Mass.
Ley was in 1924 and for many years prior thereto interested as owner or otherwise in corporations and trusts and was largely interested with*1895 Edward J. Murphy in the ownership and sale of real estate in and about Springfield, Mass. In 1920 he was a trustee of the Springfield Realty Trust, which was a Massachusetts association or trust having transferable shares of capital stock. It was formed in 1902 and shortly thereafter acquired a large and valuable piece of land at the corner of Main and Worthington Streets, Springfield, Mass., with old business buildings thereon. Its business consisted wholly of operating and developing this parcel of real estate for the purpose of revenue.
Edward J. Murphy was engaged in 1924 and for more than thirty years prior thereto in the business of owning, buying and selling real estate in and about Springfield, Mass. In 1920 he was a trustee, treasurer and manager of the Springfield Realty Trust. He and Ley were original subscribers to said association or trust.
In February, 1920, the Springfield Realty Trust sold its aforesaid parcel of land and distributed to shareholders the proceeds of sale (except $3,031.42 in cash and a small amount of accounts receivable, on which there was afterwards collected $1,037.60, all retained to pay any claims against said trust and substantially*1896 all of both amounts being so applied) on February 19, 1920, and July 6, 1920. The record *218 does not disclose what Ley received, but Murphy received in February, 1920, $189,924 and in July, 1920, $1,874.25.
In 1920 Ley was the owner of 3,426-3/20 shares and Murphy of 2,499 shares of the stock of said trust, and in all there were outstanding 10,000 shares.
On November 3, 1921, the internal revenue agent in charge at Boston, Mass., mailed a letter to the Springfield Realty Trust proposing additional taxes against it for the years 1917 to 1920, inclusive.
The tax proposed for the year 1920 was due chiefly to an alleged profit on the sale then made by the Springfield Realty Trust of its real estate heretofore described. At the time of the distributions of the proceeds of sale, made in February and July, 1920, it was not believed by the officers that any substantial additional taxes from it were due to the United States.
The proposed additional taxes asserted in the internal revenue agent's letter of November 3, 1921, were as follows:
| 1917 | $2,058.50 |
| 1918 | 923.43 |
| 1919 | 1,223.12 |
| 1920 | 101,570.32 |
The alleged profit on the 1920 sale was $224,396.67*1897 and in the computation of the taxable income of the Springfield Realty Trust for the year ended July 31, 1920, said amount was included.
Murphy also received a letter from the Boston internal revenue agent, bearing date of November 3, 1921, notifying him of a proposed additional tax of $31,667.25, upon his individual income for 1920. In computing this tax, the agent included $51,102.02 as the taxable portion of the distributions or dividends in liquidation received by Murphy from the Springfield Realty Trust.
There was no dissolution of the Springfield Realty Trust after its sale of real estate, though it discontinued business.
Shortly after the receipt of the letters of November 3, 1921, Murphy, after conferring with Ley and other shareholders in said trust, with their consent and authority employed Malley & Malley, attorneys, for and on behalf of the Springfield Realty Trust and also employed others to aid in resisting the proposed tax assessment against the trust. Murphy himself and his employees likewise rendered services in connection with the efforts made by Malley & Malley to resist such tax assessment.
A letter dated August 1, 1923, addressed to the Springfield*1898 Realty Trust, was received from the Commissioner, in which it was stated that the additional tax recommended by the internal revenue agent in charge at Boston in his letter of November 3, 1921, had been approved, with an exception not material here.
*219 On or about July 5, 1923, Edward J. Murphy received a letter from the Commissioner advising him of a reaudit of his income-tax returns for 1917 to 1920, inclusive, and notifying him of additional income taxes proposed against him for several years, including a tax of $30,014.64 for the year 1920.
In May, 1924, the Committee on Appeals and Review found that the March 1, 1913, value of the real estate sold by the Springfield Realty Trust in February, 1920, was equal to the sale price of same, neither gain nor loss resulting from such sale.
The Commissioner on June 24, 1924, addressed a letter to the Springfield Realty Trust in which it was stated in part: "Your tax liability has been adjusted in accordance with the recommendation of the Committee on Appeals and Review." This resulted in reducing the proposed additional 1920 tax on the said trust to $384.32.
The Commissioner also withdrew the proposed additional taxes*1899 against Ley and Murphy, individually, for 1920, as were based upon the contention that the distributions or dividends in liquidation received by them were partly composed of taxable profits or income.
On July 26, 1924, Malley & Malley, attorneys, rendered a bill in the amount of $17,500, addressing same to Edward J. Murphy, for professional services performed and expenses incurred in the matter of resisting and reducing the proposed additional tax assessment against the Springfield Realty Trust. Their services were continuous from the date of their employment in 1921 to the date in 1924 when the Commissioner abandoned his contention that a profit had been realized from the sale of the real estate of the trust.
Following the receipt in 1924 of the communications from the Commissioner revising income-tax liability as heretofore indicated and the bill of Malley & Malley and others for services in the matter of such tax reduction, Edward J. Murphy notified each of the shareholders and sent each a bill of his pro rata share of the total bill of Malley & Malley and other expenses incurred in resisting the proposed tax assessment.
There was never any meeting of the trustees of the*1900 Springfield Realty Trust for the purpose of making any assessment in connection with the expense of litigating the proposed additional income tax against the trust for 1920. The records of the Springfield Realty Trust show that it received in the nature of assessments from stockholders in the period September 29, 1924, to December 2, 1924, the amount of $21,439.27. Of this amount, Edward J. Murphy paid $5,357.67 and Fred T. Ley paid $7,345.38, the amounts here in controversy. The check stubs of the Springfield Realty Trust for the period February 25, 1924, to June 29, 1925, show that it paid Edward J. Murphy $2,500 - $1,250 on October 10, 1924, and $1,250 on December 13, 1924. It paid Malley & Malley $17,500, $8,750 being paid *220 October 1, 1924, $4,375 on November 1, 1924, and $4,375 on December 1, 1924.
After the various shareholders of the Springfield Realty Trust paid to Edward J. Murphy or to the Springfield Realty Trust in 1924 their pro rata part of the expenses which they had authorized him to incur on behalf of the said trust in resisting the 1920 deficiency tax proposed against it, said Murphy, from such funds, made payment of the expenses incurred as aforesaid.
*1901 OPINION.
SEAWELL: The law applicable to the questions involved in these cases is found in the Revenue Act of 1924. Under that act the term "corporation" includes (see section 2(a)(2)) such associations as the Springfield Realty Trust, hereinafter referred to as the trust.
The evidence shows that the said trust in February, 1920, sold its assets, consisting of a single large parcel of commercial real estate, and liquidated, retaining only a small amount of cash and uncollected amounts which were about equal to certain small unpaid debts. Shortly after such sale the proceeds thereof (with the exceptions stated) were distributed to the shareholders. There was no dissolution of the trust, though its business was discontinued and its assets disposed of as heretofore indicated.
At the time of the distribution of the proceeds of sale it was not known or believed by the officers of the trust that any substantial additional taxes were due from it to the United States. Not until November, 1921, was the trust advised, by a revenue agent, that an additional tax was proposed against it for 1920. The additional tax asserted for 1920 was based almost wholly upon an alleged profit*1902 upon the sale of its real estate. In August, 1923, the Commissioner indicated to the trust his approval of the agent's recommendation relative to the proposed assessment of additional income taxes, of which the principal amount was $101,570.32 for 1920.
After being first notified by the revenue agent of the proposed assessment of additional income tax against the trust for 1920, and recognizing the fact that the trust had not the money to pay the same, Edward J. Murphy, one of the trustees and also the treasurer and manager of the trust, conferred with other shareholders touching the subject. Realizing that if the tax should be sustained the shareholders would have to pay it personally - the trust then having practically no assets, Murphy was by such shareholders authorized and directed to employ attorneys and take steps deemed necessary to defeat the assessment and collection of such tax.
Attorneys and real estate experts were accordingly employed by Murphy for such purpose. The bill for such services amounted to *221 $21,439.50 and the same was presented for payment to Murphy in 1924, after the Commissioner admitted that no profit resulted from the sale of the real*1903 estate of the trust in 1920 and withdrew the demand for additional tax against the trust for said year, except $384.32.
The expense of $21,439.50 incurred in resisting the proposed assessment of additional income tax for 1920 against the trust was prorated among the shareholders by Murphy according to their stock holdings in the trust and was paid by them in 1924, petitioner Fred T. Ley paying $7,345.39 and petitioner Edward J. Murphy, $5,357.67, the amounts claimed by them as proper deductions in computing their taxable incomes for 1924.
The question for our determination is whether the amounts so paid, in the circumstances of the instant cases, are deductible as ordinary and necessary expenses in computing the taxable incomes of petitioners for 1924.
The facts here are so similar to those in some cases we have heretofore decided that we must apply the same principles and hold, on the authority of such cases, that the same are controlling here.
The applicable law is section 214(a)(1) of the Revenue Act of 1924, which provides:
In computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable*1904 year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *
The evidence clearly indicates that both Ley and Murphy had for many years been interested in real estate in various ways and that the ownership by them of interests in the Springfield Realty Trust was but one of many of their business ventures in real estate.
More than a year after the trust disposed of its real estate and distributed the proceeds of the same (with the exception of a small amount) to its shareholders, thus going into liquidation, the Commissioner proposed to assess a large additional tax in the name of the trust. If such proposed tax had been assessed, its payment would have fallen on the shareholders of the trust, it being in liquidation and no longer having assets or funds with which to pay such assessment.
It was both natural and wise that the shareholders in the trust should take action to resist what they believed to be an improper and unjust assessment. To protect themselves against the same, they authorized one of their number, Murphy, to employ lawyers and real estate experts to oppose the imposition*1905 of the proposed assessment. Murphy did so employ lawyers and such experts, for the purpose indicated, also rendering much service himself, and their efforts were *222 successful in defeating the proposed assessment. In doing so, however, an expense of $21,439.50 was incurred and paid by the shareholders, the petitioners paying their pro rata shares in 1924, the amounts being the same for which they are now claiming deductions in their respective petitions, Ley, $7,345.39 and Murphy, $5,357.67. The amounts so paid by them were in connection with the carrying on of their business ventures and we hold constituted ordinary and necessary expenses. We are, therefore, of the opinion that in the circumstances of these cases the petitioners are entitled to the benefit of the aforesaid claimed deductions.
See ; ; and .
Reviewed by the Board.
Judgment will be entered under Rule 50.