MEMORANDUM FINDINGS OF FACT AND OPINION
TANNENWALD, Chief Judge: Respondent determined a deficiency of $12,295.40 in petitioners' 1978 Federal income tax. We must determine whether petitioners are entitled to a deduction for legal fees, travel costs, and miscellaneous expenditures pursuant to
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioners, Peter and Nina Klein, resided in New York, New York, at the time they filed their petition in this case. Petitioners, in 1978, used the cash-basis method of accounting.
Blue Shore Development Company (Blue Shore or the corporation) is an Israeli corporation organized in 1962 or 1963. The corporation holds undeveloped land in Herzliya, Israel, on which it originally had planned to build a convention center and hotels. Due to differences of opinion between the*24 municipality of Herzliya and the Israeli government concerning the planning and development of the land, no construction has taken place.
Blue Shore's 51-percent shareholder is a Netherland's trust, Beleggingsmaatschappij Mabemij N.V. (the trust). At all times relevant hereto, the largest interest in the trust was held by Aaron Gutwirth (Gutwirth). Gutwirth acted as sole trustee for approximately 10 years. Since August 19, 1963, the trust has held Blue Shore Stock, 50,088 shares, and certificates of indebtedness representing 268,329 Israel pounds in trust for Nina. Nina has never received any interest or dividends from Blue Shore.
From 1970 until 1976, Peter attended informal annual or biannual shareholder meetings of Blue Shore in New York. In 1976, Peter heard rumors of a possible foreclosure against the corporation for its nonpayment of real estate taxes.
Upon the advice of his accountant, Philip Trestyn (Trestyn), Peter hired Leon Charney (Charney), a lawyer. In 1977, Charney billed petitioners $1,202 for "disbursements re Israel trip." Petitioners' check to Charney in payment of this amount was dated December 30, 1977.
In 1978, Peter, accompanied by Trestyn and*25 Charney, traveled to Israel. Peter hoped that his presence in Israel would "start the ball rolling" and supply the contacts and energy needed to breathe life into Blue Shore. In Israel, the three met with an architect, a former deputy prime minister, and the mayor of Herzliya to discuss whether Blue Shore could obtain the building rights required for construction. They met with the manager of and bookkeeper for Gutwirth's affairs in Israel to review Blue Shore's books and records and to discuss what concrete steps could be taken to obtain building rights and pay off the back taxes. Charney also conferred with Gutwirth's manager to discuss possible liquidation of a joint venture into which Blue Shore had entered which was thought detrimental to the corporation's interests. Finally, they spoke to Gabriel Cohen, a lawyer hired by Peter to research the question of a shareholder's liability for Israeli taxes in the event of Blue Shore's liquidation.
In connection with the trip to Israel, the parties have stipulated that petitioners paid the following amounts in 1978: 2
*26
Retainer for Charney | $15,000.00 |
Airfare to Israel and cab fare | |
for Charney | 2,070.00 |
Hotel accomodations | |
for Charney | 773.20 |
Legal fee of Cohen | 224.00 |
Hotel accomodations for Trestyn | 425.83 |
Hotel accommodations for Peter | 531.21 |
$19,024.24 |
Nina's sister and mother also held interests in Blue Shore. 3 In connection with the expenditures listed above, petitioners were reimbursed $2,224.22 by by Nina's mother and brother-in-law, Paul Elkins.
By check dated March 16, 1978, petitioners paid $1,038 to Hewig & Marvic, Inc., a company of which Peter was president. The words "Blue Shore" appear in the upper left corner of the check and petitioners' check register bears the notation "Airline Tickets."
Neither Peter nor Nina were ever officers, directors, or employees of Blue Shore.
Petitioners own mineral interests in Alabama from which they receive royalty income from Getty Oil Company (Getty) and other oil companies. In 1978, Peter, and two lawyers, Sidney Gelfand and Wallace Musoff, traveled to Alabama to discuss with Getty its plan for unitization of*27 the oil field and to negotiate lower extraction charges in determining the amount of royalties.
By check dated May 8, 1978, petitioners paid Hewig & Marvic, Inc., $660. The check bears the notation "RE-AIRLINE TICKETS" in the lower left corner.
In 1978, petitioners paid the following out-of-pocket expenses for taxis, postage, lunches, etc., in connection with Blue Shore and the Alabama mineral interests:
Blue Shore | $120.10 |
Mineral interests | 8.25 |
Blue Shore and mineral | |
interests | 73.76 |
$202.11 |
OPINION
We must determine whether petitioners are entitled to a deduction under
*28 Petitioners claim they are entitled to a
First, we will deal with the Blue Shore expenses. Petitioners argue that these expenditures are ordinary and necessary expenses paid for the production or collection of income or for the management, conservation, or maintenance of property held for the collection of income and, thus, are deductible under
"Ordinary and necessary" nonbusiness expenses are deductible under
*31 Courts have consistently held that a shareholder may not deduct currently expenditures which relate to the business of the corporation. See, e.g., Deputy v. du
Petitioners argue that they are entitled to a deduction because they were acting to benefit themselves, not the corporation, and because their status as minority shareholders distinguishes this case*33 from those where "a controlling shareholder and officer pays the expenses of a corporation so that tax benefits might be realized which the corporation, usually with substantial losses, could not obtain." 10 The Supreme Court has made it clear that no blending of the business of a corporation with the business of its shareholder is permitted; it matters not that no intimation of a tax-avoidance purpose is involved. Deputy v. du
*34 Additionally, petitioners have failed to establish that the expenditures incurred in traveling to Israel were reasonable in relation to Nina's investment and were proxmately related to the production of income or the management of income-producing property. See pp. 8-9, supra. Nina's interest in Blue Shore was held in trust. The trust certificate stated: "The undersigned Beleggingsmaatschappij Mabemij N.V. hereby declares to hold [50,088 shares in, and certificates of indebtedness in the amount of 268,329 Israeli pounds of, Blue Shore] in trust for [Nina] * * * under the terms and conditions as laid down in the trust agreement, dated May 1963, in respect of these securities." Neither the trust agreement itself, nor any testimony revealing its terms, was introduced. Petitioners imply on brief that the trust was organized solely as a voting trust to consolidate the votes of a majority of the shareholders of Blue Shore and that, under the terms of the agreement, Nina was entitled outright to any dividends or interest paid in connection with her interest in Blue Shore. However, the record is devoid of any evidence to support petitioners' position. Under these circumstances, *35 it is unclear that Nina possessed an interest "held for the production of income" as that term is used in
*36 The cases relied on by petitioners in which shareholders have been permitted to deduct costs incurred for proxy fights, e.g.,
We believe that the expenditures in the instant case are more akin to those incurred in respect of a stockholder's derivative suit. Because the derivative suit directly benefits the corporation, a shareholder's expenditures therefor must be added to the basis of his stock rather than deducted currently.
Petitioners paid Gabriel Cohen, a lawyer in Israel, $224 to do research on the liability of Blue Shore's shareholders for Israeli taxes in the event of a liquidation of the corporation. Petitioners are entitled to a deduction for Cohen's fee pursuant to
In light of our conclusion that*38 Cohen's fee is the only Blue-Shore-related expenditure that is currently deductible under
We next turn to the deductions claimed by petitioners in connection with their Alabama mineral interests. Petitioners assert that they expended $660 for airline tickets for Peter and two attorneys to travel to Alabama to meet with Getty. Respondent concedes that petitioners are entitled to a
*39 Petitioners have submitted as substantiation their check to Hewig & Marvic, Inc. (the corporation of which Peter was president) in the amount of $660. The check bears the notation in the lower left corner "RE-AIRLINE TICKETS." Peter testified that the check was to reimburse the corporation for airline tickets.
In order to meet the "adequate records" requirement of
*40 Since petitioners have failed to substantiate each element by "adequate records," the deduction is allowable under
Petitioners paid $8.25 postage in connection with their mineral interests. It appears that respondent concedes on brief that this expense is deductible. In any event, petitioners' mineral interests constitute property held for production of income and they are entitled to a deduction for this amount pursuant to
Petitioners made additional cash expenditures in 1978 of $73.76 in connection with both their mineral interests and Blue Shore. *41 Since we have held the expenditures in connection with Blue Shore are not currently deductible and those in respect of the mineral interests are, we hold that petitioners are entitled to a
In order to reflect the foregoing,
Decisin will be entered under Rule 155.
Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioners claim they made additional expenditures in 1978 to which respondent has not stipulated. See note 5, infra.↩
3. The record is unclear as to whether these interests were held directly or via the trust.↩
4.
Section 212 provides:In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.↩
5. Blue Shore:
↩Stipulated expenditures (pp. 4-5, supra) $19,024.24 Billed by Charney in 1977 1,202.00 Incidental expenses 120.10 Airfare to Israel for Trestyn and Peter 1,028.00 21,374.34 Less: Reimbursement 2,224.22 $19,150.12 Mineral interest: Airfare $ 660.00 Incidental expenses 8.25 668.25 Incidental expenses for both mineral interests and Blue Shore 73.76 $19,892.13 6. Petitioners' argument in respect of Cohen's fee is based on subsection (3) of
section 212 and is discussed on p. 15, infra.↩7. Respondent does not contend that the expenditures were nondeductible personal expenses. Compare
Kinney v. Commissioner,66 T.C. 122">66 T.C. 122↩ (1976).8. This case arose under the predecessor of
section 162 .Sections 162 and212 (and their predecessors) are to be read in pari materia,United States v. Gilmore,372 U.S. 39">372 U.S. 39 , 45 (1963). Accordingly, the reasoning undersection 162↩ and its predecessor is applicable to the issue herein.9. See
Stranahan v. Commissioner,T.C. Memo. 1982-151↩ .10. We note that not all the cases in which shareholder expenses have been held not currently deductible involve shareholders who own all or substantially all of the stock in their corporation. See, e.g., Deputy v. du
Pont,308 U.S. 488">308 U.S. 488 , 490 (1940) (taxpayer was beneficial owner of 16 percent of the stock);Low v. Nunan,154 F.2d 261">154 F.2d 261 , 262 (2d Cir. 1946), affg. a Memorandum Opinion of this Court (taxpayer and his wife owned 34 percent and held an additional 21 percent as joint trustee);O'Connor v. Commissioner,T.C. Memo. 1954-90↩ (taxpayer had a one-third interest in the corporation).11. Although Trestyn testified at trial that the repayment of the certificates was linked to the cost of living in Israel, we note that his report, introduced into evidence by petitioners, indicates that the certificates were "linked to the dollar exchange."↩
12. See note 4, supra.↩
13. See pp. 4-5 and note 5, supra.↩
14.
Section 274(d) provides:(d) Substantiation Required. -- No deduction shall be allowed --
(1) under
section 162 or212 for any traveling expense (including meals and lodging while away from home),unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift. * * *↩
15. We recognize that under
section 1.274-5(c)(2)(ii)(b), Income Tax Regs. , a written explanation of business purpose is not required in those cases where the business purpose of the expenditure is evident from the surrounding facts and circumstances. However, since the check only indicates that it was for "airline tickets," we are unable to deduce the business purpose from the surrounding facts and circumstances. SeeRutz v. Commissioner,66 T.C. 879">66 T.C. 879 , 883↩ n. 4 (1976).16. Trestyn testified only with respect to the trip to Israel.↩
17. We note that the parties have agreed that petitioners are entitled to income average in 1978 using the following figures:
↩Year Taxable Income 1974 $ 41,383 1975 107,252 1976 14,102 1977 43,406