*1028 Where petitioner received an extortion letter threatening harm to his children unless a certain sum was paid, expenditures made to obtain evidence used in the trial and conviction of the writer thereof, held not deductible as an ordinary and necessary business expense or as a contribution for the use of the United States.
*465 This proceeding was brought for a redetermination of a deficiency in petitioner's income tax for the calendar year 1934 in the sum of $3,005.15.
The controversy arises on the failure of respondent to permit petitioner to deduct a sum expended in obtaining evidence to be used in the prosecution of a person who had attempted to extort money from petitioner under a threat of committing harm to petitioner's children. The question is whether such sum is deductible as a "business *466 expense" or deductible, in the proportion permitted by the statute, as a contribution for the use of the United States.
From the stipulation submitted by the parties and the evidence presented at the hearing we make the following findings*1029 of fact.
FINDINGS OF FACT.
Petitioner is married and, with his wife, two sons, Charles and Richard, and daughter, Mary Anna, resides at 1045 E. Mariposa Avenue, Altadena, California. They have lived at this address for approximately 15 years.
The petitioner filed his 1934 Federal income tax return with the collector at Los Angeles, California, on March 15, 1935.
Petitioner's business interests have always been in connection with some phase of the oil business and in 1934 he had a personal fortune of approximately $1,500,000, which he had accumulated largely through his own efforts. He was a partner in several oil ventures in Texas. Petitioner was active in the management of the oil business, although local men performed the actual field work.
Petitioner also served in an advisory capacity to his father's testamentary trust, to the extent that the trustees would take no action without petitioner's advice and consent. His father's trust had a net worth of approximately $1,500,000 throughout 1934, from which he had reported an income of $14,357.60 in that year. Petitioner, throughout 1934, had a substantial sum invested in securities which he handled himself. In his*1030 return for 1934 petitioner reported a net income of $38,880.90. His wife had a substantial income from community property and securities. Petitioner's return showed that he had an interest in three oil enterprises and had large holdings of stock in the CocaCola International Corporation and stocks of five other corporations.
Prior to, during, and subsequent to 1934 petitioner used one of the ground floor rooms in his house as his office. He employed a secretary and carried on his affairs relating to his investments, holdings, and operations from his office in his home. The expense of operating the office was deducted in the income tax return and allowed by respondent.
Petitioner was engaged in business in 1934 as an oil producer and a capitalist, employing and managing his capital in the above described manner. His capital produced income which was subject to Federal income tax.
On April 1, 1933, petitioner and his wife received through the mail an anonymous letter which demanded that petitioner, on April 14, 1933, at 5:15 p.m., place $22,000 in a package in a hedge near petitioner's home or run the danger of having an accident happen to one of his sons. It was also*1031 threatened that if petitioner took precautions and "forced" the writer of the letter to take a child or cause an accident *467 to one, the money demanded would be trebled to compensate for the added danger. Admonition was also given against informing any one, including the police, petitioner's banker or servants, of the contents of the letter.
Petitioner turned this letter over to the sheriff's office at Altadena and with his family left the next day for Texas where they stayed for some weeks.
At the time indicated in the letter the sheriff's office placed a package as directed and attached the package by a string to a gopher gun. At the time designated in the letter Frank E. Sutton, who was a nextdoor neighbor of petitioner (a vacant lot intervened between the two houses) appeared to be hoeing and irrigating his hedge and backed into the bushes and set off the gopher gun. Sutton hurried down his driveway where he was intercepted by deputy sheriffs who had hidden themselves about the premises. They interrogated Sutton but were not able to produce any evidence connecting him with the extortion letter, except that he caused the gopher gun to be set off. Sutton was taken*1032 to the sheriff's office and to petitioner's home for questioning. Sutton told Captain Allen of the sheriff's office that he would sue petitioner for causing him to be suspected of implication in the extortion letter and affair.
Subsequently, petitioner was informed by the sheriff's office by telephone that it was safe to return to his home with his family and they did so about the middle of May 1933.
No progress was made in the matter by the sheriff's office during the next nine months. The sheriff's office had a limited budget and it was unable to finance a further investigation. In the meantime petitioner was apprehensive that the writer of the extortion letter would carry out his threat unless he complied with the request contained in the extortion letter, and that Sutton would sue him for false arrest unless he was either cleared of all connection with the matter or indicted therefor.
Petitioner also wanted to warn other people away from attacking either his family or his capital.
About the beginning of 1934 Sutton had sold his house and was about to move and petitioner thought that if he did not ascertain the identity of the writer of the extortion letter before*1033 the trail got too cold Sutton would bring suit against him with reasonable chances of a successful outcome. Petitioner employed a private detective named Helpling to procure evidence as to the identity of the writer of the extortion letter and to assist in procuring his indictment and conviction. Helpling began active work on the case about January 3, 1934, and with the assistance of two associates spent most of that year on the case, their combined total working time amounting to about 900 days.
*468 Helpling immediately took possession of the concrete blocks located in the hedge where the package had been placed and the gopher gun had exploded. He retained these blocks until they were turned over to the Federal authorities for use at the trial. Helpling also discovered the identity and location of the typewriter which had been used in writing the extortion letter and retained it until it also was turned over to the Federal authorities for use at the trial. He ascertained the edentity of all persons who had had access to the typewriter about the time the extortion letter was written, procured samples of their typing, obtained knowledge of Sutton's financial condition*1034 at the time the extortion letter was written and other evidence tending to connect him with the case. The idiosyncrasies or habits of Sutton in operating a typewriter were similar to those of the writer of the extortion letter. The extortion letter had mentioned bank failures and Helpling ascertained that Sutton had been involved in a bank failure in Michigan.
After Helpling had procured sufficient evidence to indicate that Sutton was probably the writer of the extortion letter he took the matter up with the Los Angeles office of the Federal Bureau of Investigation, but that office advised that it could not go into the case except under directions from Washington inasmuch as the matter was pending in the local sheriff's office. The agent in charge of the Los Angeles office of the Bureau of Investigation wrote to the Director in Washington introducing Helpling and suggesting that the Federal Bureau of Investigation check over Helpling's findings. Helpling went to Washington, where he laid the matter before the officials of the Federal Bureau of Investigation and checked over with them in the technical laboratory the evidence which he had unearthed. The Federal Bureau of Investigation*1035 in Washington instructed the agent in charge of the Los Angeles office that he was to make the matter the subject of an official investigation. The case was docketed, given a number and a file made therefor. It was assigned to an agent, who reviewed Helpling's evidence. The entire matter was submitted to the United States Attorney's Office and an indictment for violation of section 338(a) of title 18 of the United States Code was returned against Sutton on May 23, 1934. He was arrested, arraigned, and pleaded not guilty.
Between the date of the indictment and the date of the trial which was held from December 4, to December 9, 1934, before a jury in the Federal court in Los Angeles, Helpling and his associates, at the instance and expense of the petitioner, spent most of their time working with the United States Attorney on the preparation of the case and the rechecking of evidence and searching for additional evidence. Helpling's work was duplicated by agents of the Federal Bureau of Investigation only to a very small extent. At the trial, Helpling *469 and one of his assistants testified as witnesses for the Government without being subpoenaed. Sutton was convicted*1036 as charged in the indictment on December 9, 1934, and sentenced to five years confinement in a United States penitentiary. On appeal, his conviction was affirmed on November 8, 1936.
Petitioner did not pay over to Sutton any money or thing of value on account of any threats made by Sutton to petitioner. Sutton did not sue petitioner.
Petitioner, in 1934, expended the following sums in connection with the Sutton case:
| Fees to Helpling and his associates | $7,829.25 |
| Mileage for automobiles used by the operatives and detectives | 2,164.84 |
| Reimbursement to Helpling for miscellaneous expenses | 1,144.42 |
| Telephone and telegraph, mostly paid through Helpling | 89.39 |
| Reimbursement for moneys paid by Helpling to informants | 575.40 |
| Cost of photographs, reimbursed to Helpling | 157.87 |
| 11,961.17 |
The Sutton case was one which the Government, in its general policy, would have prosecuted without the help of petitioner. The Government, because of expenditures made by petitioner, did not have to undergo certain expenditures, the exact amount of which is incapable of calculation, in the prosecution of the case.
Respondent, by his notice of deficiency, disallowed the*1037 deduction of the expenditure as a business expense, or any portion of it as contribution for the use of the United States.
OPINION.
VAN FOSSAN: Alternative contentions are urged by petitioner to sustain the deduction in controversy. The first position is that the $11,961.17 which he expended in the taxable year was expended in protecting his income-producing capital from various threats made by Sutton and was deductible as an ordinary and necessary business expense. The second position is that a portion of the $11,961.17, i.e., $4,581.61, is deductible as a contribution for the use of the United States. It is our opinion that petitioner can not prevail on either premise.
Respondent apparently concedes that petitioner, in managing his property and investments, was engaged in business. With this we agree. See Kales v. Commissioner, 101 Fed.(2d) 35 (C.C.A., 6th Cir.); Foss v. Commissioner, 75 Fed.(2d) 326 (C.C.A., 1st Cir.); and Cornelia W. Roebling,37 B.T.A. 82">37 B.T.A. 82. The statute, 1 however, requires that an expenditure to be diductible must be an ordinary and necessary business expense, and specifically provides 2*1038 *470 that no deduction shall be allowed in respect of personal or family expenses.
As we view it, the expenditure of the $11,961.17 was primarily if not purely a personal expense connected with the well being and protection of petitioner's family.
Counsel's argument that the extortion letter and the threat of suit were attacks on the capital of petitioner and that the expenses were entailed in defense thereof, we believe to be without substantial merit. Petitioner's testimony that "of course the danger to my family was part of it [his reason for employing Helpling] and I wanted to put myself on record by carrying this case to a conclusion to warn other people away from attacking either my family or my capital", is almost, if not quite, conclusive. To be deductible the expense must be "directly connected with" or "proximately resulting from the business." Kornhauser v. United States,276 U.S. 145">276 U.S. 145. See cases cited below. 3 In the case at bar the expenditure, made because of the extortion letter, was directly connected with and proximately resulted from personal or family considerations*1039 rather than any business in which petitioner was engaged.
Were we to hold, contrary to the above conclusion, that the expenditures were made primarily by reason of the fear of an impending suit by Sutton for damages for false arrest, the answer would be the same. Applying petitioner's reasoning, expenses incurred in prosecuting or defending*1040 almost any civil action would be deductible, however remote from taxpayer's business. Such is not the law.
An argument similar to that made here was presented in David G. Joyce,3 B.T.A. 393">3 B.T.A. 393. It was there said:
* * * It is argued on behalf of the taxpayer that he is engaged in the business of managing, investing, and preserving his estate, and that the attack, or threatened attack, by his wife on the postnuptial agreement was an attack upon or a claim against his property. It is not asserted that the expense of every litigation which might result in diminishing the taxpayer's estate would be a business expense. The contention is that the agreement related to his property, and, since the property was the "subject matter" of his business, the agreement had the effect of giving him greater freedom in managing his "business property"; therefore, the expense of defending and maintaining this agreement is a business expense. This reasoning is ingenious, but we do not think it is sound. We pass the question of whether this taxpayer was carrying on any trade or business, because its answer is unnecessary to a decision of the case. We think the expenditure, in any*1041 event, was not a business expense within the meaning of the statute.
*471 The effect of the agreement may have been all that the taxpayer claims, but that does not determine that character of the agreement or of the claims for its modification. Also, his purpose in entering into the agreement, or in resisting the attacks upon it, is not determinative of the nature of the expense. any kind of liability to which he might have been subjected, however remote from the carrying on of his business, would have the same results to his estate. The taxpayer's argument ignores the genesis of the rights which he attempted to settle and limit by the postnuptial agreement. Whatever rights the wife had arose out of the marriage relationship, and her claims subsequent to the postnuptial agreement were certainly of the same origin. It is this fact which must determine the nature of the expense of opposing or adjusting those claims. To say that it was an ordinary and necessary expense incurred "in carrying on any trade or business" would be to broaden the scope of this language beyond any reasonable interpretation of it.
It is hardly necessary to allude to the fact that marriage is*1042 a personal relationship, except for the purpose of pointing out that the legal rights and obligations annexed to the relationship are also personal, and the expenses connected therewith would, we think, come within the classification of personal or family expenses. The Revenue Act expressly provides that personal and family expenses may not be deducted from gross income.
The parallelism between the arguments urged in that case and those urged in the present one is striking, and here, as there, our conclusion is that the sum involved is not deductible as an ordinary and necessary business expense. Incidentally, it may be observed that, assuming the expense was deductible in part as a business expense, in defense of his capital, there is absolutely no way on the record of determining such an amount.
We have already indicated that our opinion is that petitioner's alternative contention relative to the deductibility of the allowable portion of the sum expended as a contribution for the use of the United States is without merit.
With reference to this it should first be noted that the provision of the statute 4 allowing for the deduction of "charitable and other contributions" *1043 states that the contribution or gift must be "for exclusively public purposes." The present case does not meet this requirement. Petitioner was not motivated by a philanthropic impulse nor did he intend to make a contribution to the United States. He was seeking to bring to account a person he thought to be responsible for writing an extortion letter threatening harm to his children. In addition, petitioner was in a position where he felt he had to substantiate his accusations or be open to a suit by Sutton for false arrest. These considerations were peculiarly personal to taxpayer.
Although it may be said that the United States was benefited in some degree by the expenditure on the part of petitioner, this benefit is not such as to bring the payments within the contemplation of the statutory provision. The mere fact that an act or expenditure on the part of the taxpayer indirectly, and in some unascertainable *472 amount, may inure to the benefit of the Government does not entitle the taxpayer to a deduction therefor.
No useful purpose would be served to review here the few cases 5 pertaining to this type of a claim*1044 for deduction. It is sufficient to say that the case at bar presents an obviously different situation from the donation of a dam and park to a political subdivision of a state, or similar direct donations.
We, therefore, conclude that petitioner is not entitled to a deduction on account of the expenditures in question either as a business expense or as a contribution for the use of the United States.
Decision will be entered for the respondent.
Footnotes
1. Sec. 23(a), Revenue Act of 1934. ↩
2. Sec. 24(a), id.↩
3. Cases wherein the expense was held to be "directly connected with" or "proximately resulting from" the business: Kornhauser v. United States,276 U.S. 145">276 U.S. 145; Commissioner v. People's Pittsburgh Trust Co., 60 Fed.(2d) 187 (C.C.A., 3d Cir.), affirming 21 B.T.A. 588">21 B.T.A. 588; Commissioner v. Continental Screen Co., 58 Fed.(2d) 625, affirming 19 B.T.A. 1095">19 B.T.A. 1095; Hal Price Headley,37 B.T.A. 738">37 B.T.A. 738; Citron-Byer Co.,21 B.T.A. 308">21 B.T.A. 308.
Cases where action was purely personal and not directly connected with taxpayer's business or proximately resulting therefrom: Pantages Theatre Co. v. Welch, 71 Fed.(2d) 68 (C.C.A., 9th Cir.); Frank G. Robins,8 B.T.A. 523">8 B.T.A. 523; George L. Rickard,12 B.T.A. 836">12 B.T.A. 836↩.
4. Sec. 23(o)(1), Revenue Act of 1934. ↩
5. Wolfe v. McCaughn,5 Fed.Supp. 407; cf. Koehler v. Lewellyn, 44 Fed.(2d) 654 (D.C.); Johnson v. United States,8 Fed.Supp. 842↩.