Court Opinion

ID: 4597032
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:18:20.013471+00
Date Added: 2024-06-11T07:51:43.529263
License: Public Domain

BULA E. CROKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Croker v. CommissionerDocket No. 32381.United States Board of Tax Appeals21 B.T.A. 240; 1930 BTA LEXIS 1890; November 7, 1930, Promulgated 1930 BTA LEXIS 1890">*1890  1.  Taxpayer and her husband were the owners of real estate, some of which he had conveyed to her and some of which was owned jointly, and they had been engaged in buying the selling lands and securities.  Taxpayer's stepson instituted a suit to have taxpayer's husband declared incompetent and the transfers to taxpayer set aside, during the pendency of which suit said property was tied up.  Held, attorney's fees paid by the taxpayer for defense of said suit are not deductible as ordinary and necessary expenses of carrying on a trade or business.  2.  In deciding that such an outlay is not deductible as an expense it is not necessary to decide that it is either a nondeductible "personal, living or family expense" or a capital expenditure.  E. L. Mooney, Esq., for the petitioner.  P. A. Bayer, Esq., for the respondent.  STERNHAGEN 21 B.T.A. 240">*240  This proceeding involves a deficiency of $2,129.79 in income taxes for 1922.  The only contested issue is the deductibility as a business expense of attorney's fees incurred in defending a suit affecting petitioner's right to certain properties.  FINDINGS OF FACT.  Petitioner is an individual residing at1930 BTA LEXIS 1890">*1891 West Palm Beach, Fla.  During 1922 she held certain tax-free bonds from which she received $18,500 in interest; a tax of 2 per cent on this income, amounting to $370, was paid at the source.  Petitioner was also the owner of certain real estate on which she paid $4,107.08 taxes in 1922.  In computing her income-tax liability for 1922, the Commissioner failed to credit petitioner with said tax of $370, and failed to allow as a deduction from gross income the said amount of $4,107.08.  On November 26, 1914, petitioner was married to Richard Welsted Croker, who was at the time owner of certain tracts of land near West Palm Beach known as "The Original Mile," "Ocean Vista," and the Otto Kahn property.  He also owned a half interest in the Royal Palm Bridge, which he had built about 1910.  At the time of her marriage petitioner had no capital, but with money which her 21 B.T.A. 240">*241  husband gave her and interests in land which he had deeded her she joined him in the business of buying and selling real estate at Palm Beach, West Palm Beach, and other places.  They also bought and sold through the New York market securities which they kept at West Palm Beach.  Between 1917 and 1919 they jointly1930 BTA LEXIS 1890">*1892  acquired numerous pieces of property forming a connected tract between the Atlantic Ocean and Lake Worth and also disconnected parcels.  With the exception of the lot on which their dwelling was situated, these holdings were unimproved and were known as jungle property.  They were disposing of parts of these tracts by sale until March, 1920, when a son of petitioner's husband, Howard Croker, as next friend of his father, instituted a suit against petitioner in his father's name, seeking to have his father declared incompetent and all transfers of property to petitioner set aside.  As a consequence of this litigation the real estate and all other property belonging to petitioner and her husband were tied up, and with the exception of some personal funds released in August, 1920, remained so until 1922, when the suit was finally decided in petitioner's favor and her right to the property transferred was recognized.  This occurred shortly after her husband's death in April, 1922.  Thereafter petitioner disposed of other tracts of land by sale.  In defending the aforesaid suit petitioner's husband paid as attorney's fees in 1920 large sums, and in 1922 petitioner so expended $6,500. 1930 BTA LEXIS 1890">*1893  In computing her income-tax liability for said year the Commissioner failed to allow this expenditure as a deduction from her gross income.  OPINION.  STERNHAGEN: Of the three issues originally raised by the petition, the first and second are conceded by respondent and need not be considered or decided.  In the redetermination they will be adjusted favorably to petitioner.  The third issue is whether petitioner is entitled to deduct the $6,500 paid in the tax year 1922 for attorney's services and the printing of a brief in the litigation against her and her husband brought by her husband's children to set aside conveyances to her and to her and her husband jointly and to have her husband declared incompetent and his affairs administered.  The deduction is claimed under Revenue Act of 1921, section 214(a)(1), as an "ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business." There is no necessity seriously to question whether petitioner was carrying on a trade or business, for even so, it is our opinion that the fees paid in defending this suit were not ordinary and necessary expenses paid or incurred in carrying it on.  Although1930 BTA LEXIS 1890">*1894  the 21 B.T.A. 240">*242  institution and pendency of the litigation probably impaired the business operations of petitioner and her husband, this alone does not give the defense the character of an incident of the business.  There is nothing to indicate that it grew out of the business, but it rather appears to have been the sort of litigation which would have been instituted and defended even if petitioner had merely been the grantee of properties from her husband, or had otherwise, as the children thought, benefited at their expense by taking advantage of their father's alleged incompetence.  The fact that there may have been a business which incidentally may have suffered does not bring the cost of defending the suit within the statute.  It is not, in our opinion, a proper deduction.  ; . We need not go so far as to call it a "personal, living or family expense" which is expressly nondeductible under section 215, nor need we say, with respondent, that this is a capital expenditure to be treated as part of the cost of the numerous properties involved in the suit.  If the expenditure does not meet1930 BTA LEXIS 1890">*1895  the statutory requirement, it can not be deducted, even though it may not properly be classified as a "capital expenditure." It is clear that there are expenditures which are not of a capital nature and yet do not meet the test of the statute. . Cf. ; . Nor do we hold it to be a cost of clearing title to the properties as in ; ; . The outlay is deductible only if brought within section 214; and failing that, it was properly disallowed.  Reviewed by the Board.  Judgment will be entered under Rule 50.SEAWELL SEAWELL, dissenting: I do not agree with the legal conclusion reached in this case.  When it is found as facts that the taxpayer and her husband were engaged in the real estate business, and that this business was "tied" up for two years, by suit brought by the stepson as next friend to his father and that the $6,500 attorney fee was paid to1930 BTA LEXIS 1890">*1896  defend the suit and by the defense the business was untied, then neither the Joyce case nor the Field case cited is, in my opinion, authority for the decision.  It is my opinion that the attorney fee paid under the circumstances detailed is a deductible ordinary and necessary business expense under section 214(a)(1) of the Revenue Act of 1921.  LANSDON, SMITH, TRUSSELL, and VAN FOSSAN agree with this dissent.