*972 1. Early in the taxable year 1933 some of the directors succeeded in displacing petitioner as president and chairman of the executive committee of the Texas Corporation, and on May 5, 1933, he resigned his chairmanship of the board. Thereafter, during the remainder of the taxable year, petitioner paid from his personal funds $30,577.01 in expenses in the form of clerk hire, communication, stationery, supplies, postage, printing, publicity, and legal services, in notifying and making recommendations to the 90,000 stockholders of the corporation to bring about action which he thought should be taken. Held, that petitioner as an executive officer of a corporation was engaged in carrying on a "trade or business" as that term is used in section 23(a), Revenue Act, 1932; held, further, that such expenditures, not having been incurred and paid until after petitioner severed his connection as executive officer of the corporation, were not so proximately connected therewith as to make them ordinary and necessary expenses incurred and paid in carrying on his business as executive officer of the corporation.
2. Petitioner remained a stockholder and director in the corporation*973 after his resignation. Assuming, without deciding, that to be a director of a corporation where compensation or fees are paid for such services, constitutes the "carrying on of a business" within the meaning of that term as used in section 23(a), held, the expenditures in question were extraordinary in character for a director to pay out of his own personal funds and are not shown to be "ordinary and necessary" expenses in carrying on such business of being a director, if it be a business.
*866 Petitioner brought this proceeding to redetermine his income tax liability for the calendar year 1933, for which year the respondent determined a deficiency in the amount of $4,398.62. He assigned an error relating to bad debts, but waived it at the hearing. The sole remaining issue is whether the respondent erred in disallowing a deduction of $30,577.01 taken by petitioner on his return as ordinary and necessary business expenses.
FINDINGS OF FACT.
Petitioner, formerly of New York City, is an individual residing at Shinglehouse, Pennsylvania, and*974 filed his income tax return in the third district of New York. He entered the employ of the Texas Corporation, as vice president in charge of refining interests, when it was organized in 1902. In 1907 he became a director. In later years he became president of a subsidiary company engaged in development and refining in Mexico, and also became president of a subsidiary steamship company owning some twenty-six ships. In 1926 he became president and early in 1928 chairman of the executive committee of the Texas Corporation. He was also chairman of the board of directors, which was composed of 12 members, including petitioner. His salary ranged from $50,000 to $100,000 a year. After the depression it was reduced to $85,600. Petitioner owned stock in the corporation, the exact amount of which is not disclosed. He was not one of the larger stockholders. The corporation had about 90,000 stockholders.
During the period from 1926 to 1933 there was some disagreement as to policies between petitioner and three directors referred to as the "Lapham group." This disagreement came to a head in April 1933.
The annual meetings of the stockholders and the board of directors were scheduled*975 for April 25, 1933. About two months prior thereto J. H. Lapham came to petitioner and suggested that he would like to have his father, Lewis H. Lapham, put back on the board. Petitioner replied that he thought that would be unwise as the Laphams *867 then had three representatives on the board, and that he thought the larger stockholders should be represented. Nothing more was said in regard to this subject and the matter was dropped. On the afternoon of April 24, 1933, J. H. Lapham came to petitioner and said: "Mr. Holmes, we do not like your policies and we do not like what you are doing. We have arranged that I shall be chairman of the board and you president - we to share equally all duties and all responsibilities, including the handling of the organization; there is dissension in the ranks." Petitioner inquired, "Who are we?" Lapham replied, "All of us." Petitioner then learned that the phrase "All of us" meant the Lapham group consisting of J. H. and H. G. Lapham, and Albert Rockwell, five employee directors, and Eugene M. Stevens, a director. The next morning the stockholders reelected the entire board, including petitioner, without any changes. Immediately*976 thereafter the board met. At this meeting W. S. S. Rodgers was elected president; J. H. Lapham, chairman of the executive committee; and petitioner, chairman of the board. Later petitioner suggested to Rodgers and J. H. Lapham that they outline together, preferably in writing, what policies they thought were important and what the division of duties should be as between the three executive officers. They informed him that was a matter for the board of directors to decide. Petitioner then called for a special meeting of the board to be held May 2, 1933. At that meeting all the suggestions offered by petitioner were voted down, and at the close of the meeting petitioner had no knowledge of what his authority or responsibilities were. He then told the board that, if they did not outline the policies in connection with the offices of the president and chairman of the executive committee, he would undertake the duty of putting the whole matter before all the stockholders. There was more discussion, but nothing was accomplished, and petitioner finally told the board that he felt under the necessity and obligation of reporting to the stockholders. J. H. Lapham then moved, seconded*977 by Rockwell, "that the chairman of the Board be requested to submit his resignation as such, and in the absence of such resignation forthwith, moved that the Chairman of the Board be removed from such office." Petitioner declined to put the motion, whereupon it was then put by the president and adopted. Three days later, at a special meeting of the directors, the action taken by the board on May 2 was rescinded, upon condition that petitioner submit his resignation as chairman of the board, which he did upon advice of counsel, who felt that he would make his position stronger with the stockholders if he should resign. When petitioner submitted his resignation as chairman of the board of directors under the circumstances above mentioned, he stated to the other members of the *868 board substantially as follows: "I told them that I would make this report to the stockholders. I said that I had been with the company since the beginning and that I felt it was my duty to the old stockholders and I also felt that it was an obligation to make it clear to all the stockholders what that situation was." Thereafter C. B. Ames was elected chairman of the board.
Petitioner thereupon*978 opened up an office in New York City, engaged assistants, and prepared "A Statement to the Stockholders of The Texas Corporation from R. C. Holmes a Director and former President", explaining in detail his side of the controversy. The statement consisted of 43 printed pages, was dated August 15, 1933, and on the front thereof recited:
This statement is made because of the sense of duty and obligation I feel, and have always felt, for all stockholders, be their interests large or small; because of the high regard I have for the generally loyal and efficient organization and because of my own interest as a stockholder.
The statement contained a recital of the policies pursued by the petitioner as their executive, a detailed review of the events leading up to his resignation; a summary of his reasons for thinking the Lapham group incompetent to manage the company, and his recommendation that the stockholders enlarge the board of directors to secure better representation for themselves.
The statement, together with a letter signed by eight stockholders, was mailed to the stockholders of the Texas Corporation on or about September 11, 1933. Among other things this letter stated:
*979 Because of the circumstances related, we urgently recommend that with the least possible delay the stockholders of the Corporation exercise their voting rights (1) to create twelve additional memberships on the Board of Directors, thereby insuring against any small minority control; (2) to elect to the additional directorships so created persons truly representative of the great body of stockholders and who possess the ability, integrity, and experience commensurate with these responsibilities.
* * *
The stockholders of the Corporation have the power to make the above recommendations effective by requesting at once that a special meeting of stockholders be called for these purposes. * * *
To this end we are enclosing a form of call for a special meeting of stockholders of The Texas Corporation, and proxy made out to a Proxy Committee, whose members have been shareholders in the Corporation for many years, and who will devote all the time and energy necessary to faithfully discharge the duties delegated to them.
On September 20, 1933, the officers and certain directors of the Texas Corporation issued an answering statement to the stockholders, the next to the last paragraph*980 of which was as follows:
We, therefore, respectfully request that you decline to execute the proxy and the petition for a special stockholders' meeting forwarded to you by Mr. Holmes' committee.
*869 On October 16, 1933, petitioner sent an individually signed letter to each of the stockholders enclosing a reprint of an article published in the October 4, 1933, issue of the Financial World, entitled "The Texas Corp. Squabble", in which letter he again set forth certain accusations and stated that he wanted to make it abundantly clear that "My own reinstatement as an official of The Texas Corporation is not an issue."
On October 31, 1933, the new chairman of the board took steps to have an impartial stockholders' committee of three make a thorough investigation and report of the entire controversy. The committee conducted hearings from November 22 to December 8, 1933, the record of which consisted of over 2,300 pages of testimony and over 139 documents and other papers. On January 25, 1934, the committee published its report of findings, conclusions and recommendations. Among other things the committee recommended that the 15 directors to be elected at the next annual*981 meeting of the stockholders to be held on April 24, 1934, shall be representative more adequately than heretofore of the ownership of the stockholders; that the first step to be taken by the new board to be so elected shall be to secure an executive of outstanding experience and proven ability who has an extensive acquaintance with the leaders of the oil industry, who will command its respect and who is believed able to work effectively with the organization; that no more than one of the Lapham family be elected as a director; and "That such antagonism has developed between Mr. Holmes and the operating executives that his reelection as a director is undesirable and unwise."
During 1933 and after he had severed his connection with the corporation as one of the executive officers, petitioner expended from his own personal funds the amount of $30,577.01 in connection with the sending of information to the stockholders and carrying on this attempt to bring about, according to his viewpoint, better conditions in the affairs of the corporation. The principal items making up the total of $30,577.01 were: Salaries, $7,409; telephone and telegraph, $422.76; stationery and supplies, $328.63; *982 postage, $6,079.38; printing, $7,605.94; publicity, $4,402.90; and legal expense, $2,081.62. Petitioner was never reimbursed for any of these expenditures. Petitioner's principal reason for making these expenditures was due to his sense of responsibility to the stockholders as a present director and former president and executive head of the corporation and as one who had devoted over thirty years of his life in doing what he had always regarded as being for the best interests of the corporation and its stockholders.
For the period employed by the Texas Corporation in the year 1933 the petitioner received a salary in the amount of $35,666.65.
*870 On a Federal income tax return filed for the calendar year 1933, the petitioner reported for tax purposes only $5,089.64 of the salary received aforesaid as follows:
| 1. Salaries, wages, etc. | Amount Rec'd | Expenses Paid | |
| Texas Corporation | $35,666.65 | $30,577.01 | $5,089.64 |
In schedule E of the return the following explanation is set forth in respect of the deduction claimed in item 1:
Item 1 - After several years as Chief Executive of the Corporation, his salary (at rate of $85,600.00*983 per annum) was discontinued on May 31, 1933 as the result of a controversy with certain of its directors, and this expense was incurred in an effort to reestablish himself in his former position as such executive by presenting all of the facts to the stockholders.
The Commissioner disallowed the deduction, stating in the deficiency notice as follows:
The deduction of $30,577.01, expenses incurred by you in an effort to effect your reelection as president of the Texas Corporation, is held by this office to be personal expenses and not a proper deduction from income.
The $30,577.01 expenditures in question were not ordinary and necessary expenses incurred and paid in carrying on any trade or business of petitioner.
OPINION.
BLACK: The question in this proceeding is whether the expenditures totaling $30,577.01 were ordinary and necessary business expenses as petitioner contends, or personal expenses as respondent contends. The former are deductible; the latter are not. The pertinent sections of the Revenue Act of 1932 are as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) EXPENSES. - All the ordinary*984 and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
SEC. 24. ITEMS NOT DEDUCTIBLE.
(a) GENERAL RULE. - In computing net income no deduction shall in any case be allowed in respect of -
(1) Personal, living, or family expenses * * *.
Congress has provided three prerequisites, each one of which must be met before any item of expense is deductible from gross income under section 23(a) of the Revenue Act of 1932. The item in question must be an "ordinary and necessary expense"; it must be "paid or incurred during the taxable year"; and it must be so paid or incurred "in carrying on any trade or business" of the taxpayer. If any one of these prerequisites is absent, the item in question is not deductible.
*871 The respondent concedes that the expenditures totaling $30,577.01 meet the second prerequisite of the statute. He contends, however, that the first and third prerequisites are absent.
We shall consider first whether petitioner paid the expenses in question "in carrying on any trade or business * * *." Petitioner paid the expenses from his personal funds while he was a stockholder and director of the*985 Texas Corporation, but after he was no longer an executive officer of the corporation. Petitioner contends however that the expenditures were so closely related to his services as an executive officer of the corporation as to make them deductible from the salary which he received from it, even though they were incurred and paid after his resignation. Petitioner emphasizes the fact that he continued to be a stockholder and director in the corporation throughout the remainder of the year.
During the time that petitioner was the president and chief executive officer of the Texas Corporation, including part of the taxable year involved here, was he engaged in any trade or business? Respondent contends that he was not. We think he was. During the several years that petitioner served as president and chief executive officer of the Texas Corporation his salary ranged from $50,000 to $100,000 per annum. We think these earnings were from a business carried on by petitioner, to wit, the business of being chief executive of an oil corporation. This view is supported by our decision in *986 Peoples-Pittsburgh Trust Co. et al., Executors,21 B.T.A. 588">21 B.T.A. 588. In that case, Herbert Du Puy, during 1917 and 1918, was chairman of the board of directors of the Crucible Steel Co. of America and during those years he devoted his time and attention almost exclusively to the affairs of the corporation. On these facts we held that the business of Herbert Du Puy during 1917 and 1918 was that of being the executive head of the Crucible Steel Co. of America and its subsidiaries and that his expenses incurred in defending an action growing out of acts done while he was acting as chief executive of the steel company were deductible as ordinary and necessary business expenses. Our decision in that case was affirmed in Commissioner v. Peoples-Pittsburgh Trust Co., 60 Fed.(2d) 187. The court, in affirming the Board, said:
* * * The taxpayer's business consisted in the performance of the duties devolving upon him as the executive head of the Crucible Steel Company and its subsidiaries. Though he was acting for the steel company and was doing only that which he was required to do, as its official, in the preparation and signing of the tax returns, he was, *987 nevertheless, conducting his own business. When, therefore, he was faced with criminal charges, and was compelled to pay out large sums of money for attorney's fees and other expenses of the trial, he paid what was necessarily incurred by reason of carrying on his own business, viz., that of acting as chief executive officer of the steel company.
*872 Mrs. A. B. Hurt et al., Executors,30 B.T.A. 653">30 B.T.A. 653, was a similar case, in which we followed Peoples-Pittsburgh Trust Co., supra.
The effect of respondent's contention on this point is that the Peoples-Pittsburgh Trust Co. case is no longer authority because of the Supreme Court's decision in Burnet v. Clark,287 U.S. 410">287 U.S. 410, and Dalton v. Bowers,287 U.S. 404">287 U.S. 404. It is plain that the Board has not agreed with this contention because Mrs. A. B. Hurt et al., Executors, supra, was decided by the Board subsequent to the Supreme Court's decisions in the Dalton v. Bowers and Burnet v. Clark cases. In fact, in the Hurt case we cited the two above named Supreme Court cases in support of our decision on the second point therein, which*988 was that a loss sustained by the decedent in 1921 by reason of the worthlessness of shares of stock in a corporation of which he was the majority stockholder and director did not constitute a "net loss" under the statute, and could not be carried forward and used as a deduction from gross income in computing the taxpayer's net income for the following year. The language of the Supreme Court in Burnet v. Clark, upon which respondent evidently relies in support of his contention, is as follows:
The respondent was employed as an officer of the corporation; the business which he conducted for it was not his own. There were other stockholders. And in no sense can the corporation be regarded as his alter ego, or agent. He treated it as a separate entity for taxation; made his own personal return; and claimed losses through dealings with it. He was not regularly engaged in indorsing notes, or buying and selling corporate securities. The unfortunate indorsements were no part of his ordinary business, but occasional transactions intended to preserve the value of his investment in capital shares.
Following the reasoning of the Supreme Court quoted above, we agree entirely*989 that the business of the Texas Corporation in the instant case was not the business of petitioner; that the corporation was in no sense his alter ego; and that business expenses or losses of the corporation would in no sense be the business expenses or losses of the petitioner. Nevertheless to so hold we do not think means that we have to hold that petitioner himself was not, at least up until the time of his resignation in May 1933, engaged in carrying on a trade or business, to wit, that of being chief executive officer of an oil corporation, for which he received large amounts of compensation. We do not believe that the Supreme Court's decision in Burnet v. Clark and Dalton v. Bowers should be read as going so far as the Commissioner contends. Petitioner had been with the Texas Corporation for many years and had worked his way up to the position of its chief executive officer. So far as the record shows his duties and responsibilities in that position occupied his time, attention, and labor, and the purpose thereof was a livelihood or profit. Cf. *990 Flint v. Stone Tracy Co.,220 U.S. 107">220 U.S. 107. And to say that petitioner during *873 these years that he was acting as the chief executive officer of the Texas Corporation had "no trade or business" within the meaning of the applicable statute because the Supreme Court has said in the Dalton and Clark cases that the business of a corporation is not the business of its chief executive officer, is extending the meaning of the Supreme Court decisions too far. It may well be that deductible "ordinary and necessary expenses in carrying on a trade or business" would be few and far between for a taxpayer engaged in carrying on a business as executive officer of a corporation. The most of such deductions that we can think of would be those allowable only to the corporation. However, there are some which would be allowable as deductions to the individual, if he pays them out of his own personal funds, such for example as those involved and allowed in the Peoples-Pittsburgh Trust Co. case and the Hurt case. So, as we view it, petitioner, while an executive officer of the Texas Corporation, was engaged in "carrying on a trade or business" as that term*991 is used in section 23(a) of the Revenue Act of 1932. Having thus decided, we have still another inquiry which must be answered. Were the expenditures totaling $30,577.01, expended representing amounts paid by petitioner for postage, printing, clerk hire, office expense, et cetera, in acquainting stockholders of the Texas Corporation with the facts which brought about petitioner's severance from the corporation as its chief executive officer and seeking to arouse them to what petitioner conceived to be appropriate action, ordinary and necessary expenses incurred and paid in carrying on petitioner's trade or business as an executive officer of the corporation? We think this question must be answered in the negative.
Petitioner was not engaged in carrying on the business of executive officer of the corporation after he resigned. As pointed out by the court in Hutchings v. Burnet, 58 Fed.(2d) 514, 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. These expenditures made after May 1933 by petitioner were not for acts which were integrally*992 a part of and proximately resulting from his business as an executive of the corporation.
There was no action for accounting brought against petitioner, either by the corporation or its stockholders. Cf. Kornhauser v. United States,276 U.S. 145">276 U.S. 145. The petitioner was not being sued by the corporation or anyone and he was not required to defend himself against any action or indictment. As matter of fact, no complaint was ever brought or filed officially against him by the corporation or any of its stockholders. Cf. Mrs. A. B. Hurt et al., Executors, supra; Peoples-Pittsburgh Trust Co. et al., Executors, supra; Citron-Byer Co.,21 B.T.A. 308">21 B.T.A. 308.
*874 Petitioner's statement in his income tax return that "this expense was incurred in an effort to reestablish himself in his former position as such executive by presenting all of the facts to the stockholders" is not borne out by the evidence. Petitioner's own literature which he mailed out to the stockholders made it plain that the issue was not whether petitioner should be reinstated.
Therefore, for reasons stated above, we hold that the expenditures in question were*993 not incurred and paid in carrying on petitioner's business, engaged in for part of the year 1933, of being an executive officer of the Texas Corporation.
But, says the petitioner, even though it be held that the expenses in question were not incurred and paid while carrying on his business as an executive officer of the Texas Corporation, nevertheless the expenses were incurred while he was a director and stockholder of the corporation and are therefore deductible as ordinary and necessary business expenses on that ground. The fact that one is a mere stockholder in a corporation does not constitute the "carrying on of a trade or business" within the meaning of the statute. Cf. Dalton v. Bowers, supra;Burnet v. Clark, supra.What effect on the situation does the fact have that petitioner was a director of the corporation? We have no information as to what salary or compensation petitioner received for his services as director of the corporation, but, for present purposes, we shall assume that he did receive some compensation for such services. Assuming, without deciding, that to be a director in a corporation where compensation is received*994 for one's services constitutes carrying on a trade or business so as to make expenses which are properly attributable thereto deductible, such for example as traveling expenses of an out of town director, not reimbursed to him, we do not think such expenses as we have here in the instant case would be "ordinary and necessary expenses" of carrying on such trade or business.
The expenses, under the circumstances narrated in our findings, would be extraordinary we think for a director to pay out of his own personal funds. Cf. Welch v. Helvering,290 U.S. 111">290 U.S. 111. Therefore, assuming, without deciding, that to be a director in a corporation where compensation or fees are paid for such services is itself "carrying on a trade or business", we hold that the expenditures in question were extraordinary in their character for a director to pay and are not shown to be ordinary and necessary expenses incurred and paid in carrying on such business of being a director, if it be a business.
Reviewed by the Board.
Decision will be entered for respondent.