*3190 In 1924 the petitioner paid a note, the payment of which had been assumed by the City of New Orleans as a part of the purchase price of land. The payment was made in order to obtain immunity from interference by city authorities with the conduct of the business of the petitioner. Held, that the amount paid was a legal deduction from gross income as a necessary expense.
*752 This proceeding is for the redetermination of deficiencies for the fiscal years ended March 31, 1921, and March 31, 1924, in the respective amounts of $4,898.12 and $962.59. The deficiencies result from the disallowance by the respondent of amounts which the petitioner claimed as deductions from gross income for the years involved.
FINDINGS OF FACT.
The petitioner is a corporation existing under the laws of Louisiana. Prior to 1925 its corporate name was Business Men's Racing Association, Inc. In 1925 the charter was amended and the name *753 changed to Louisiana Jockey Club, Inc. For many years it has operated a racing track in*3191 New Orleans.
In 1916 the petitioner purchased for a consideration of $401,000 a rival race track in the City of New Orleans, comprising an area of about 100 acres, known as the City Park Race Track property. It paid $75,000 of the purchase price in cash and gave promissory notes bearing interest at 6 per cent secured by vendor's liens for the remainder. Most of the notes were for $35,000 each and were payable yearly.
On February 21, 1917, it was ordered by the board of directors of the petitioner that the City Park property be dedicated to the City of New Orleans for use as a city park. At a meeting of the stockholders, called for the purpose of making formal dedication shortly thereafter, this recommendation was approved by a vote of 550 to 31.
On November 13, 1917, the Commission Council of the City of New Orleans adopted the following resolution:
Whereas, the Business Men's Racing Association, Inc., have dedicated to public use a certain tract of land known as the City Park Race Track, situated in the Second District of this city, which said tract of land was acquired by the Business Men's Racing Association, Inc., from Harry D. Brown on the 16th day of November, 1916, *3192 the title to which property originally stood in the name of the City Park Realty Company, and,
Whereas, by reason of said dedication, the City of New Orleans was and is permitted and did actually use for public purposes said tract of land, and, further, by reason of which said City of New Orleans was enabled to set apart a portion of said tract of land for the use and enjoyment of the soldiers of the United States government for military purposes; therefore,
Section 1. Be it ordained by the Commission Council of the City of New Orleans that in view of said dedication by the Business Men's Racing Association, Inc., of said tract of land to the City of New Orleans for public purposes, that the city taxes for the years 1916 and 1917, assessed against said property, be cancelled and annulled, and the inscription of said assessment be likewise cancelled and annulled.
Adopted by the Commission Council of the City of New Orleans, November 13, 1917.
Subsequently, one of the stockholders obtained a court injunction restraining the petitioner from donating the property to the city. It was found that there was no way for the property to be turned over to the city without the unanimous*3193 consent of the stockholders, except by an actual sale at a fair price.
On June 7, 1920, a resolution was adopted by the board of directors authorizing the president of the petitioner to sell the property in question to the New Orleans City Park Investment Association, a political subdivision of the City of New Orleans, hereinafter sometimes *754 referred to as the "park association." The resolution provided in part as follows:
RESOLVED: That the President of this Association B. C. McClellan, or, in his absence, Albert Tujague, Vice-President of this Association, be and he is hereby, authorized to sell with all legal warranties and with full subrogation and substitution against all preceding vendors, owners, possessors and other warrantors, unto the N. O. City Park Investment Association, for the use and benefit of the people of the City of New Orleans to be annexed to and made part of the City Park, the following described property to-wit:
* * *
RESOLVED FURTHER: That said sale be made for the price of Fifty five thousand ($55,000.00) Dollars, cash, subject also to the encumbrances now bearing upon said property, amounting in aggregate to the sum of One hundred and*3194 seventy nine thousand four hundred and fifteen and 91/100 ($179,415.91) Dollars and all taxes.
The sale was later consummated in the fiscal year ended March 31, 1921, in accordance with the above resolution. The park association, however, did not make any cash payment to the petitioner, but instead paid one of the petitioner's notes which became due on February 20, 1920, and interest thereon, and applied the balance of the agreed cash payment of $55,000 on other notes assumed by the city. At the time of its sale to the park association the petitioner had paid $181,250 on the purchase price of the property and had also paid interest on its notes amounting to $60,000.
At approximately the date of the sale the shareholders of the petitioner voluntarily caused to be circulated among themselves a petition wherein they agreed to donate to the park association any profits they might derive from the operation of the business over and above an annual dividend of 10 per cent.
At a meeting of the board of directors of the petitioner, held on February 22, 1923, there was submitted by the president of the corporation, and adopted, a brief history of the City Park Race Track property, *3195 from the date of its acquisition by the petitioner, which set forth the facts above stated and further provided as follows:
Since the above sale was consummated the Business Men's Racing Association, Inc. has been in extreme financial difficulties to make repairs and improvements to its Fair Grounds property, said improvements being imperative for the proper conduct of its business and in addition owing to the small amount the capitalization have been compelled to pay large amounts to the United States Government in the way of taxes and in addition is met by a large claim of the Government for back taxes for the years 1917, 1918 and 1919. The Association, therefore, has been unable to pay any dividend to its shareholders and as this is the only legal manner in which the City Park Improvement Association may be reimbursed for the purchase price of City Park the Association has been powerless to do anything in the premises.
It is the earnest hope of the shareholders of the Business Men's Racing Association, Inc. to soon be in a position to make payments yearly on the City *755 Park Race Track property until such a time as the City Park Improvement Association has been reimbursed*3196 for every penny expended for the purchase of this property in order that its original intention of donating this property to the people of New Orleans for the sole use has been carried out to the letter.
At a meeting of the board of directors, held on December 3, 1923, a resolution was adopted, reading in part as follows:
WHEREAS, the Commission Council of the City of New Orleans has demanded of this Association through our President that this association must pay on February 2d, 1924, the note of this association maturing that day and in principal and interest aggregating $37,819.90 which note of this association was issued by it November 16, 1916 at the time this association purchased the city park race track, and
WHEREAS, Commissioner Richard M. Murphy at the session of the City Council on Tuesday November 27, 1923, did introduce in the City Council an ordinance to repeal the permit heretofore granted by the City Council to this Association to conduct racing meets at the Fair Grounds in the City of New Orleans; and
WHEREAS, a majority of the Commission Council of New Orleans, assert that they will vote for the passage of said ordinance and revoke the racing permit now held*3197 by this association unless this association shall pay on February 2, 1924, the note for $37,819.90 aforesaid; and
WHEREAS, all arrangements have been made for a most successful race meet to be held at the Fair Grounds beginning January first, 1924, there being assembled here now from all over the United States about two thousand of the highest class race horses ever gathered together and the effort of the City Council to revoke our racing permit and the litigation necessarily consequent to prevent the same would certainly badly affect and seriously injure the prospects and results of the racing meet now practically upon us, regardless of the ultimate outcome of said litigation; and
WHEREAS, the City of New Orleans will not provide in its budget for the year 1924 the funds to pay the aforesaid note of this association maturing February 2, 1924, because all of the city's available funds will be needed for the city's paving program,
THEREFORE, on motion of Victor H. Demoruelle, seconded by Wilson Williams
IT WAS RESOLVED BY THE BOARD OF DIRECTORS OF THE BUSINESS MEN'S RACING ASSOCIATION, INC., that Mr. John Dymond, Jr., President, for and on behalf of this association be and he*3198 is hereby authorized and directed to pay at its maturity on February 2, 1924, out of the funds of this association, the aforesaid note in principal and interest aggregating the sum of $37,819.90, and to advise the Commission Council of that fact.
At a meeting of the board of directors, held April 21, 1925, the following resolution was adopted:
IT WAS RESOLVED BY THE BOARD OF DIRECTORS OF THE BUSINESS MENS RACING ASSOCIATION, INC., That the Business Mens Racing Association, without recognizing or assuming any legal obligation, as to the City Park Race Track Notes assumed and paid by the City of New Orleans, aggregating approximately One Hundred Five Thousand ($105,000.00) Dollars, nevertheless recognizes the correctness of the contention of the City Administration that a moral obligation exists to complete, as soon as possible, its donation of the City Park Race Track to the City of New Orleans, from the profits of the conduct of horse *756 races as a winter attraction in New Orleans, and therefore, to that end will, as circumstances permit, reimburse the City of New Orleans, from its profits of operation of horse races at the Fair Grounds, the amount expended by the City, *3199 in its payment of these notes, which were paid to prevent the loss to the City of New Orleans by foreclosure of the City Park Race Track property, now forming part of City Park in New Orleans. It is understood that in the event horse racing is discontinued at the Fair Grounds, then in such an event the provisions of this resolution shall be null and void and of no effect.
Pursuant to the resolution of December 3, 1923, the petitioner paid the note falling due February 2, 1924, in the amount of $35,000, together with $2,819.90 accrued interest thereon.
In its income and profit-tax returns for the taxable years ended March 31, 1921, and March 31, 1924, the petitioner deducted the respective amounts of $55,000 and $35,000, which it claimed as expense deductions. The respondent has disallowed both of these deductions. The petitioner employed the cash receipts and disbursements method in keeping its books and accounts.
OPINION.
SMITH: In this proceeding the petitioner alleges as error on the part of the respondent that he disallowed the deductions from gross income of $55,000 in its return of income for the fiscal year ended March 31, 1921, and of $35,000 from the gross income*3200 in its income-tax return for the fiscal year ended March 31, 1924. The petition itself does not assert whether these amounts are claimed as deductions as ordinary and necessary expenses or otherwise. At the hearing of the proceeding council for the petitioner claimed that the amounts constituted ordinary and necessary business expenses; that they were made under threats and coercion from the City of New Orleans; and that it was necessary that the payments be made in order that the petitioner continue in business.
Considering first the deduction of the $55,000 for the fiscal year ended March 31, 1921, it is to be noted that in that year the petitioner sold to the New Orleans City Park & Investment Association, a political subdivision of the City of New Orleans, a tract of land which it had acquired from a rival racing association in 1916 at a price of $401,000. It was the intention of a majority of the stockholders in 1916 to acquire the property and donate it to the City of New Orleans. Some of the stockholders objected, however, to the making of the donation and the court held that the donation could not be made. The petitioner was in bad financial circumstances at the time*3201 and found that it could sell the property to the park association at a price of approximately $234,000, $220,000 of which represented the encumbrances upon the property, and $14,000 accrued interest. The agreement provided that the park association should *757 pay the petitioner $55,000 cash. Instead, however, of paying the cash over to the petitioner the park association paid it out in liquidation of certain encumbrances upon the property. The petitioner clearly sustained a loss in excess of $55,000 upon the sale and the petitioner was entitled to deduct the loss sustained from gross income in its income-tax return. The amount of $55,000 deducted from gross income was a deductible item under section 234(a)(4) of the Revenue Act of 1921.
The second question for our determination is whether the petitioner is entitled to deduct from gross income in its income-tax return for the fiscal year ended March 31, 1924, the amount of the note of $35,000 payable on February 2, 1924, together with interest thereon of $2,819.90, total $37,819.90. The respondent has allowed the deduction of $2,819.90 as interest paid. The question before the Board is whether the petitioner is entitled*3202 to deduct from gross income the $35,000 representing the face of the note paid during the fiscal year.
We can not doubt from the evidence that the petitioner paid the money under a threat that it would not be permitted to operate its race track unless the payment was made. It was essential that it make it in order to continue in business. The taxing act permits a corporation to deduct from gross income all "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Section 234(a)(1) of the Revenue Act of 1921. In , the Supreme Court had before it the deductibility from gross income in the tax return of an individual of fees paid to an attorney for defending an action for accounting instituted by a former partner. The lower court, had held that the amount was not deductible. The Supreme Court referring to departmental rulings and to rulings of the Board of Tax Appeals, held:
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 (*3203 Appeal of Backer, Dec. 88, , proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214(a), subdivision (1), of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. * * * In the application of the act we are unable to perceive any real distinction between an expenditure for attorney's fees made to secure payment of the earnings of the business and a like expenditure to retain such earnings after their receipt. One is as directly connected with the business as the other.
Applying this same principle to the case at bar, we are of the opinion that it must be held that the entire amount of the $37,819.90 paid by the petitioner during the taxable year ended March 31, 1924, is a legal deduction from gross income.
It does not appear from the record that the entire amounts of the deficiencies determined by the Commissioner for the fiscal years *758 ended March 31, 1921, and March 31, 1924, are due to the disallowance of the deductions of $55,000 for the earlier year and $35,000 for the later year.
Reviewed by the Board.
*3204 Judgment will be entered under Rule 50.
GREEN, ARUNDELL, VAN FOSSAN, and MURDOCK dissent.