Case Name: Hyman Y. Josephs, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1947-03-25
Citations: 8 T.C. 583
Docket Number: Docket No. 8294
Parties: Hyman Y. Josephs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Kern, </., dissents.
Reporter: Reports of the Tax Court of the United States
Volume: 8
Pages: 583–593

Head Matter:
Hyman Y. Josephs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 8294.
Promulgated March 25, 1947.
H. A. Dancer, Esq., for the petitioner.
Edward O. Adams, Esq., for the respondent.

Opinion:
OPINION.
Arundell, Judge:
We need not decide whether the petitioner, acting as administrator, was engaged in carrying on a trade or business so as to make the payment of $10,000 in settlement of the suit and the $1,500 attorneys' fees deductible under section 23 (a) (1) (A), because we have reached the conclusion that the expenses are deductible under section 23 (a) (2) of the Internal Revenue Code.
Prior to the adoption of section 23 (a) (2) the statute made provision for deduction of expenses only if the taxpayer was engaged in carrying on a trade or business. In. earlier years, under a broad and liberal interpretation of the term "trade or business," expense deduc tions were allowed both administratively and judicially to taxpayers who incurred the expenses in connection with the production of taxable income or in connection with income-producing property. Later, conflict developed in the matter; and in 1941 the Supreme Court resolved the conflict in its decision in Higgins v. Commissioner, 312 U. S. 212, strictly limiting the scope of the term "trade or business." The enactment by Congress in 1942 of section 23 (a) (2) followed shortly upon the heels of the Higgins case and provided for deduction of nontrade or nonbusiness expenses.
While it is true that the new statute was interpreted rather strictly in tho first two or three years following its enactment (see, for example, Estate of Edward W. Clark, III, 2 T. C. 676, and Stoddard v. Commissioner, 141 Fed. (2d) 76), in 1945 the Supreme Court decided Bingham's Trust v. Commissioner, 325 U. S. 365, pointing out that section 23 (a) (2) is comparable and in pari materia with section 23 (a) (1); that section 23 (a) (2) provides for a class of nonbusiness deductions coextensive with the business deductions allowed by section 23 (a) (1), except that the taxpayer need not be engaged in trade or business; and that the principle of Kornhauser v. United States, 276 U. S. 145, applicable to section 23 (a) (1) — i. e., that the expense be directly connected with or proximately result from the conduct of the business — is likewise applicable to those activities which fall within section 23 (a) (2). Following the Bingham case, this and other courts have taken a noticeably broader view of section 23 (a) (2). See, for example, Howard E. Cammack, 5 T. C. 467; Philip D. Armour, 6. T. C. 359; Julius A. Heide, 8 T. C. 314; Stoddard v. Commissioner, 152 Fed. (2d) 445.
Thus, under the principles of the Bingham case, we are to determine here whether the expenses in question are directly connected with or proximately result from an income-producing activity or from an activity consisting of the management of income-producing property so as to make them deductible under section 23 (a) (2). And, we see no reason why the term "production or collection of income" should be construed any more narrowly or strictly than the term "management, conservation, or maintenance of property held for the production of income." That is to say, there is no reason why the connection between the expense and the activity need be any more direct or proximate in the one case than in the other. Any expense which would be deductible under section 23 (a) (1) if the taxpayer's activities amounted to the carrying on of a trade or business is deductible under section 23 (a) (2) where the activities do not quite measure up to a trade or business but nevertheless were embarked upon by the taxpayer with the expectation of realizing income or profit. The corollary, of course,.is that any expense, such as strictly personal, living or family expenses, which would not be deductible under section 23 (a) (1) is likewise not deductible under section 23 (a) (2).
In the instant case it can not be gainsaid that the expenses in question would be deductible under section 23 (a) (1) if the taxpayer's activities as administrator amounted to the carrying on of a trade or business. John Abbott, 38 B. T. A. 1290. The evidence establishes positively that petitioner entered upon his duties as administrator with the expectation of being paid for his services. We have found as a fact that he would not have accepted the office if he had not expected to receive compensation. Indeed, no reason appears on this record why he should otherwise have accepted the office or why the heirs should have expected him to serve without compensation. He was not a relative of the decedent, and he had no interest in the decedent's business.
This being so, we think it immaterial that several years later, i. e., after the controversy with some of the heirs arose in 1939 or 1940 and petitioner was threatened with suit, he agreed to forego the compensation and fees to which he was entitled in order to promote a settlement. Cf. Julius A. Heide, supra. Certain it is that petitioner entered upon his office as administrator with the expectation of realizing income and that the expense payments in question were a direct result of his activity as administrator. We therefore hold that the expenses are deductible under section 23 (a) (2).
Reviewed by the Court.
Decision will be entered under Rule 50.
Kern, </., dissents.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions :
(a) Expenses.-—
(2) Non-tbade ob non-business expenses. — In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, ifr for the management, conservation, or maintenance of property held for the production of Income.