1936 BTA LEXIS 611">*611 In 1931 petitioner expended a certain sum of money in payment of attorney fees incurred in resisting a claim of the Government for additional income tax alleged to be due on the sale by petitioner in 1925 of certain stock and stock warrants owned by him in a corporation of which he was president and the directing head. Held, the amount is not deductible as ordinary and necessary expenses incurred in any trade or business carried on by the taxpayer.
34 B.T.A. 1028">*1028 The Commissioner has determined a deficiency of $2,112.04 in petitioner's income tax for the year 1931, which results from the disallowance of $10,000 claimed as a business expense in that year. This was the amount paid by petitioner as fees to a firm of lawyers in that year in contesting a deficiency asserted by the Commissioner in petitioner's income tax for 1925.
FINDINGS OF FACT.
In the year 1925 the petitioner was president and the principal stockholder of the Peoples Drug Stores, Inc., and was chiefly responsible for the directing of the business of the corporation. At the same time he1936 BTA LEXIS 611">*612 was sole owner of and was chiefly responsible for the directing of the businesses of the Stockwood Investment Co., E. Z. Chemical Co., and Casmith Remedy Co., all of which were actively engaged in business.
In the year 1925 the petitioner owned the following securities:
| Shares | Value | |
| Gillette Safety Razor Co | 29 | $2,853.00 |
| American Security & Trust Co | 120 | 24,500.00 |
| American Tobacco Co., common | 98 | 6,800.00 |
| Marland Oil Co | 100 | 5,612.50 |
| Butte & Superior | 50 | 1,300.00 |
| Inspiration Copper | 50 | $1,950.00 |
| Kennecott Copper | 50 | 1,406.25 |
| Johnstone Laboratories | 37 1/2 | 1,000.00 |
| Packard Motors | 200 | 17,974.20 |
| A.D.S | 2,000 | 18,017.00 |
| First trust notes | 350,000.00 |
These securities also required some of the petitioner's attention for selling at opportune times, and for reinvesting the proceeds of such sales in other securities.
During the year 1925 purchases and sales of securities were made by him as follows:
| Purchases | Sales | |
| 2,000 shares A.D.S | $18,017.00 | |
| 500 shares Peoples Drug Stores, Inc | $15,000.00 | |
| 50 shares Kennecott Copper | 1,406.25 | |
| 200 shares Packard Motors | 17,974.20 | |
| 37 1/2 shares Johnstone Laboratories | 1,000.00 | |
| First trust notes | 350,000.00 | |
| Total | 367,406.25 | 35,991.20 |
1936 BTA LEXIS 611">*613 34 B.T.A. 1028">*1029 These transactions were in addition to the sale of Peoples Drug Stores stock, mentioned in the deficiency notice.
For the years 1926 to 1931, inclusive, purchases and sales of securities were made by the petitioner as follows:
| Year | Number of purchases | Number of sales | Amount of purchases | Amount of sales |
| 1926 | 44 | 5 | $251,386.12 | $71,185.00 |
| 1927 | 42 | 35 | 509,788.12 | 166,785.27 |
| 1928 | 41 | 25 | 304,386.66 | 222,958.44 |
| 1929 | 30 | 41 | 186,020.38 | 247,439.98 |
| 1930 | 15 | 19 | 64,227.75 | 26,170.62 |
| 1931 | 19 | 1 | 175,321.25 | 1,521.46 |
| Total | 191 | 126 | 1,491,130.28 | 736,060.77 |
The directing of the Peoples Drug Stores, Inc., consumed the major portion of the petitioner's time devoted to business activity.
In the latter part of the year 1925 it was decided to expand the business of the Peoples Drug Stores, Inc. In order to do this it was necessary to provide more capital. Accordingly, the bylaws of the corporation were amended in December 1925 to make certain necessary changes.
In accordance with this plan of expansion the petitioner entered into a contract with the Peoples Drug Stores, Inc., Shields & Co., and Merrill, Lynch & Co. for the purpose1936 BTA LEXIS 611">*614 of listing the Peoples Drug Co. stock on the New York Curb for its sale. Minutes of the Peoples Drug Stores Inc., dated December 7, 1925, authorizing its officers to enter into this contract, state as the purpose of the contracts with Shields & Co. and with Merrill, Lynch & Co.: "* * * in order to procure their assistance in creating a market for the stock of the corporation, and to obtain the benefit of their advice in financial matters * * *."
The contract states in part:
The party of the second part (M. G. Gibbs) is about to sell to the purchasers (Shields & Co. and Merrill, Lynch & Co.) and the purchasers are about to purchase from the party of the second part, ten thousand (10,000) shares of preferred stock, together with warrants calling on their face for twenty thousand (20,000) shares of common stock, and seventy thousand (70,000) shares of common stock.
34 B.T.A. 1028">*1030 The Purchasers are about to sell a part of such stock and warrants to the public, thus creating a market for the securities of the Corporation, which is recognized by all parties hereto as being of advantage to the Corporation (Peoples Drug Stores, Inc.) and to all its stockholders.
One of the incidental1936 BTA LEXIS 611">*615 results of this activity was a realization of a certain profit to the petitioner on the stock sold by him in carrying. out his part of the above contract. This profit as computed by the petitioner was included in his income tax return for 1925.
On review of the tax return, the Commissioner increased the amount of computed profit and determined a deficiency in tax which the petitioner considered excessive. The sole controversy in connection with the tax for the year 1925 was over the basis used by the Bureau of Internal Revenue for the determination of the profit realized from the sale of a portion of the stock acquired by the petitioner in exchange for the business previously conducted as an individual proprietorship. The increase in tax computed and the resulting deficiency concerning which objection was made resulted entirely from the above sale of Peoples Drug Co. stock. This necessitated the employment of counsel to prevent the collection of an excessive tax and a resulting payment in attorney fees of $10,000 for legal services rendered the petitioner in the case.
Employment of counsel and payment of the fee was for the purpose of resisting the imposition of the proposed1936 BTA LEXIS 611">*616 deficiency in income tax for the year 1925. The Commissioner in disallowing the claimed deduction gave the following explanation in the statement which accompanied the deficiency notice:
In the year 1925 you were president of Peoples Drug Stores, Incorporated, and were the principal stockholder of the corporation. Prior to 1919 the drug business was conducted as an individual. In 1919 the assets were transferred to the Peoples Drug Stores, Incorporated, for which you received the entire capital stock. This transaction was held to be a reorganization and no profit or loss was reported. When the stock was sold in 1925 it was claimed that under the revenue act then in force that the transaction was closed and, therefore, to arrive at the cost of the stock, good will should be considered. The case was finally closed by considering good will in arriving at the cost of the stock. The $10,000.00 was expended as attorney fees in contesting the deficiency in income tax for 1925 on the profit derived from this transaction.
In addition to the sale of the Peoples Drug Stores, Incorporated, stock in 1925, 2000 shares of A.D.S. and 200 shares of Packard Motors were sold during that year.
1936 BTA LEXIS 611">*617 To be allowable as a deduction it must be shown that you were engaged in the business of buying and selling securities and that such expense was directly in connection with your trade or business as provided by section 23(a) of the Revenue Act of 1928.
After considering all of the evidence of file it is held that the transactions in stock in 1925 did not constitute a trade or business and that the attorney fees expended was a personal expense and not an expense directly connected with a trade or business as contemplated by section 23(a) of the Revenue Act of 1928. Therefore, the amount in question has been disallowed as a deduction.
34 B.T.A. 1028">*1031 OPINION.
BLACK: It is clear on the facts that have been stated above that the proposed increase in petitioner's income tax in 1925, against which he employed counsel to defend him and so paid the fees here in question, resulted proximately from his sale of stock of the Peoples Drug Stores, an incorporated business of which petitioner was president and majority stockholder and the direction of which consumed the major part of his time. The only question is whether the lawyers' fees paid in 1931 were ordinary and necessary expenses1936 BTA LEXIS 611">*618 incurred "in carrying on any trade or business" of the taxpayer within the requirement of section 23(a) of the Revenue Act of 1928 so as to permit their deduction.
In , the Supreme Court held that attorney fees incurred by the taxpayer in defense of a suit against him for an accounting brought by a former copartner, the suit growing directly out of the conduct of the partnership business, were a deductible expense, saying, after reviewing certain holdings of this Board:
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 (, 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. * * *
On the other hand, it is well settled that attorney fees paid merely to preserve income, when that income is not derived from any business in which the taxpayer is engaged, are not expenses incurred in business, 1936 BTA LEXIS 611">*619 but personal expenses, and as such are not deductible. ; ; .
So it seems to us that the question we have here to decide is whether the $10,000 in question was paid to the attorney for his services rendered in resisting a tax claim asserted by the Government arising out of some transaction connected with petitioner's business, or whether the payment was made to the attorney for his services rendered in resisting a claim of the Government for additional tax on a transaction which was purely personal to petitioner and not connected with his trade or business. The distinction between the two classes of expenses is not always easy to draw and it is difficult to reconcile all the decided cases.
The law is clear, however, that expenses incurred in the taxpayer's trade or business are deductible, and expenses incurred in a purely personal transaction are not deductible, even though the taxpayer is at the same time engaged in some trade or business.
34 B.T.A. 1028">*1032 It is true that the Peoples Drug Stores, Inc., was carrying1936 BTA LEXIS 611">*620 on a business and petitioner was the president and directing head of it, but that did not make it his business. Cf. ; .
Even if it be held that the large amounts of securities bought and sold by petitioner in the years 1926 to 1931, inclusive, the figures of which are given in our findings of fact, were sufficient to constitute a business carried on by petitioner by buying and selling securities for his own account, it still remains that the sale of stock in the Peoples Drug Stores by petitioner in 1925 was not a part of such business.
As pointed out by the court in , the phrase "carrying on a trade or business" as used in the revenue statutes bears a more restricted meaning than the general definition of what constitutes "business transactions." We think it is undoubtedly true that petitioner's sale of part of his stock in the Peoples Drug Stores in 1925 was a "business transaction" as that term is commonly used, but can it be said that the sale took place as a part of any business which petitioner was "carrying on"? We1936 BTA LEXIS 611">*621 do not think so. The court in its opinion in , among other things said:
In , a case relating to the excise tax imposed by Act of Aug. 5, 1909, sec. 38 (36 Stat. 112) it is said: "'Carrying on business' does not mean the performance of a single disconnected business act. It means conducting, prosecuting, and continuing business by performing progressively all the acts normally incident thereto, and likewise the expression 'doing business,' when employed as descriptive of an occupation, conveys the idea of business being done, not from time to time, but all the time." See, also, .
In , we said: "The respondent also disallowed as a deduction from gross income of the petitioner for the year 1926, an amount of $2,000 paid by the petitioner to C. W. McGuire for services in connection with the income tax upon petitioner's income from Tilton and Keeler. This expenditure was not an ordinary and necessary business expense and the1936 BTA LEXIS 611">*622 respondent's action must be approved" (citing charles , and ).
In the keeler case we also held that where petitioner, as the result of investments made in his individual capacity but in order to benefit the partnership of which he was a member, expended amounts in defense of a law suit, such expenditures were deductible from his individual gross income as ordinary and necessary expenses of his business. Petitioner contends that our holding in the above respect is authority in his favor in the instant case. We do not think so.
34 B.T.A. 1028">*1033 The deficiency which respondent determined against petitioner in the instant case for the year 1925 did not grow out of the listing of the stock of the Peoples Drug Stores on the Curb Exchange in that year. The asserted deficiency against petitioner grew out of the sale by him of some of his individually owned stock and stock warrants in the Peoples Drug Stores, and, while the sale may have been made in connection with the listing of the stock of the company on the Curb Exchange, we do not think that changes the character of the sale. It still1936 BTA LEXIS 611">*623 remained a sale of petitioner's individually owned stock. The income therefrom was his individual income and we do not see where it can be held that it was income from any business which petitioner was "carrying on" within the meaning of the applicable statute. Petitioner cites in support of his contention ; ; and . We think these cases are distinguishable on their facts.
We, therefore, sustain respondent in his disallowance of the claimed deduction.
Reviewed by the Board.
Decision will be entered for the respondent.