1931 BTA LEXIS 1896">*1896 Amounts paid by petitioner to his attorneys for services rendered and expenses incurred in connection with demands made on behalf of his divorced wife for an accounting of the administration of her financial affairs during marriage, which were handled through accounts with a partnership of which petitioner was a member, and over which petitioner exercised control only with her advice and cooperation, are held to have been related directly to petitioner's marital situation and to have involved his business and that of the partnership only remotely and incidentally, and their deduction under section 214(a)(1), Revenue Act of 1926, is disallowed.
23 B.T.A. 304">*304 Respondent determined a deficiency of $9,234.56 in income taxes for 1925, resulting from the disallowance of a deduction of lawyers' fees and expenses.
FINDINGS OF FACT.
Petitioner is an individual residing in New York City. From February 1, 1911, to December 31, 1918, he was a general partner in the firm of Charles D. Barney & Company, a member of the New York Stock Exchange, 1931 BTA LEXIS 1896">*1897 engaged in financing corporations, issuing securities, and doing a general exchange business. In June, 1919, he became a special partner, retaining his desk and devoting his attention to several corporations and securities in which he and his firm were interested. On January 1, 1921, he retired from the firm entirely.
Petitioner was married, January 1, 1914, to Elizabeth Fairchild Howard. At that time he was worth $500,000, and was making $200,000 a year. His wife then owned property worth approximately $1,100,000, including an undivided interest in New Orleans real estate which had belonged to her former husband and from which she received on liquidation, occurring soon after the marriage, $100,000 in cash.
Prior to petitioner's connection with Barney & Company, his wife had kept an account with the firm, which she continued to carry until 1921, when she transferred it to the Central Union Trust Company. It was at all times in her own name and under her exclusive control. She bought, sold and carried securities on margin, had money advanced her, and later paid bills through the account, which was always handled by Barney & Company in the usual manner and for the usual1931 BTA LEXIS 1896">*1898 fees charged favored customers.
23 B.T.A. 304">*305 Before and after their marriage she frequently consulted petitioner about her financial affairs, and through him was permitted to deposit with Barney & Company the $100,000 received from her New Orleans property at 6 per cent interest, subject to withdrawal at any time pending final investment. At that time Barney & Company had some $9,000,000 in capital, of which petitioner had contributed about $500,000.
In 1914 petitioner leased a dwelling situated near the Roosevelt Estate in Long Island. His wife desired to purchase land in that vicinity and build. In answer to petitioner's objection that he required the necessary money in his business, she said that she would use her own money, and in 1915 purchased 25 acres of land near Piping Rock Club, on which she began the erection of a residence, completing and furnishing it about 1918, at a cost of $1,220,000. The bills rendered during the course of construction were paid upon her approval by Barney & Company from her account, which she constantly replenished with securities taken from her vault. Statements of the account's condition were sent her monthly. To avoid the sale of all1931 BTA LEXIS 1896">*1899 her securities, petitioner advanced about $600,000 of his own money to assist in paying for the home.
After petitioner's retirement from the firm in 1921, he and his wife went abroad in the most amicable relations. In 1923, however, marital difficulties arose; on May 1 they separated, and on February 6, 1926, were divorced in Paris, where both resided for some time before and after the proceeding.
When the controversy started, petitioner had a fortune of $2,250,000; his wife had little more than at the time of their marriage. About the middle of 1924, petitioner received a letter from Battle, an attorney representing his wife, asking an accounting of petitioner's administration of her financial affairs. He immediately consulted counsel, and arranged for a discussion of the matter after his return from a trip to Europe. Upon return, however, it had assumed a more menacing aspect. During his absence Mrs. Sanderson had brought into the case one Jaeckel, an attorney who made larger demands and with whom dealings were more difficult. Petitioner thereupon retained additional counsel and engaged accountants who spent over a year examining the details of Mrs. Sanderson's transactions1931 BTA LEXIS 1896">*1900 on the books of Barney & Company and of the Central Union Trust Company. Jaeckel, on behalf of Mrs. Sanderson, likewise employed an accounting firm to examine the books.
Among Jaeckel's contentions was that by virtue of Mrs. Sanderson's deposit in 1914 of $100,000 with Barney & Company she was entitled to a half of petitioner's interest in the firm's profits. This claim was withdrawn, but about February, 1925, Jaeckel prepared 23 B.T.A. 304">*306 and presented to petitioner a bill in equity alleging that with full confidence in her husband Mrs. Sanderson had permitted him to assume control of her capital, that he had acted arbitrarily, commingling her funds with his own, using her securities as collateral for his loans, diverting income from her, transferring valuable securities of hers to his account, using her money for living expenses, retaining control over her account before and after its transfer to the Central Union Trust Company, and doing divers other improper acts, wherefore she prayed that petitioner be directed to render a just and full accounting and deliver to her in cash and securities whatever should appear due.
Prior to the controversy Mrs. Sanderson had never asked1931 BTA LEXIS 1896">*1901 either petitioner or Barney & Company for an accounting, and there was never any suggestion that Barney & Company had misused funds or done anything wrong. Petitioner had paid all living expenses from his own account, and had never assumed control over his wife's account or other properties except with her advice and cooperation. In making an apportionment of their respective interests in the residence, petitioner and his wife organized the Sanderson-Fairchild Realty Corporation, to which the house and some $60,000 in securities were turned over. Only in effecting this transfer of assets to the corporation did some of Mrs. Sanderson's securities get into petitioner's name. In adjustment of their respective contributions in securities and advances for construction, 60 per cent of the corporate shares of stock was issued to Mrs. Sanderson and 40 per cent to petitioner. Mrs. Sanderson continued to own her shares until after the divorce, when she sold them to petitioner.
While the findings of the accountants for the opposing parties showed no serious discrepancy, petitioner grew weary of litigation, and compromised the dispute by check, contrary to the wishes of his attorneys. 1931 BTA LEXIS 1896">*1902 The bill in equity was never filed, and Mrs. Sanderson later disclaimed to petitioner all knowledge of its contents, alleging it to have been the work of her attorney. "Approximately the gist of the whole matter was the trouble between petitioner and his wife which started in 1923 and consummated in 1925." The relations between petitioner and his wife since the divorce have been of the most agreeable character.
As fees and expenses in connection with the threatened suit, petitioner's attorneys rendered him bills aggregating $37,562.63, which he paid in 1925. In computing taxable income, the Commissioner disallowed the deduction of this amount from gross income.
OPINION.
STERNHAGEN: The respondent determined that the amount of $37,562.63 paid to petitioner's attorneys in 1925 was not deductible 23 B.T.A. 304">*307 because it was "a personal expense within the meaning of section 215 of the Revenue Act of 1926." The petitioner contends that the amount was deductible "as an ordinary and necessary business expense under the provisions of section 214(a)(1)," and cites principally 1931 BTA LEXIS 1896">*1903 . We are of opinion that the respondent has treated the item correctly. It was related directly to petitioner's marital situation and only remotely and incidentally involved his business or that of Barney & Company.
Judgment will be entered for the respondent.