Court Opinion

ID: 4603133
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:18.578418+00
Date Added: 2024-06-11T07:52:47.746077
License: Public Domain

E. L. POTTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Potter v. CommissionerDocket No. 25544.United States Board of Tax Appeals20 B.T.A. 252; 1930 BTA LEXIS 2167; July 18, 1930, Promulgated *2167  1.  ATTORNEY FEES. - Amounts paid individually by a large stockholder in a hotel corporation, who was also its president and manager, in resisting a law suit against the corporation are deductible where the object was to oust him from the control and management of the hotel.  2.  REPAIRS. - Expenses for repairs to residence used for rental purposes allowed as a deduction.  3.  Deductions for bad debts and traveling expenses disallowed for lack of evidence.  J. B. Grice, Esq., for the petitioner.  J. L. Backstrom, Esq., for the respondent.  BLACK *253  Petitioner seeks redetermination of a deficiency in income tax of $680.11 for the calendar year 1922 and alleges error in the disallowance of the following deductions: (b) bad debt of $300; (2) attorney's fees of $3,000; (3) loss on investment in two promissory notes of J. P. Mace $625; (4) traveling expenses of petitioner $269.56; and (5) repairs to a building $900.  FINDINGS OF FACT.  The petitioner is an individual and resides at Seabreeze, Daytona Beach, Fla.  For the past twenty-eight years he has been actively engaged in the hotel business as owner, manager, managing director and stockholder*2168  and bondholder.  Some of those in which he was financially interested, or served in a managing capacity, were the Clarendon and El Cortez at Daytona Beach, Ansley at Atlanta, U.S. Grant at San Diego, Van Nuys at Los Angeles, and Equinox House at Manchester, N.H.  In these enterprises he was not a mere investor, but made them the subject of his personal attention and effort.  He did not devote all of his time to any one of these enterprises, but divided his time among them.  This was his business and constituted the source of his income.  During the taxable year 1922 petitioner was the president and manager of the Clarendon Hotel at Daytona Beach, Fla.  He was also the owner of 1,500 shares of its common stock and 850 shares of its preferred stock of the par value of $100 each.  The corporation had a mortgage indebtedness in the form of two mortgages, and upon its default in payment of interest E. Virgil Neal, the holder of one of the mortgages, instituted an action in the Circuit Court of Volusia County, Florida, against the Clarendon Hotel Co. and the trustee under the other mortgage for the purpose of enforcing his mortgage lien, and in addition seeking an accounting, receivership, *2169  and removal of taxpayer from control.  Petitioner employed attorneys to resist this action and paid them $3,000 from his own funds and claims deduction therefor.  Said litigation was finally settled in 1923 by petitioner selling his stock at a loss and retiring from the business.  Petitioner was the owner of a small two-story residence at Daytona Beach, which he usually rented to employees of the Clarendon Hotel.  It became in need of repairs and during the taxable year the porch, roof and floors were patched, the house and roof were painted, and some plastering was done at a cost of $900.  The house faced the ocean and on account of the salt breezes, house thus situated needed painting annually.  *254  OPINION.  BLACK: Petitioner complained of the disallowance by the respondent of (1) bad debt against one Crow, $300, charged off as worthless in 1922; (3) loss on investment in two promissory notes of J. P. Mace, $625; (4) traveling expenses of petitioner, $269.56.  The burden of proof in showing that the respondent erred in refusing to allow these items as deductions from gross income was on petitioner and this burden he has failed to meet.  In the absence of sufficient*2170  evidence to overturn the action of the respondent, his disallowance of these three items as deductions from petitioner's gross income in 1922 is approved.  Relative to the claims for deductions for attorney fees and repairs, we think it clear that petitioner made the payments as claimed.  The repairs made to the house were merely to put it into a usable condition in order that it could be rented out and produce income.  There was no remodeling, and there were no alterations, replacements, or additions tending to materially increase the value of the property.  The evidence shows that the expenses for these repairs were not capital expenditures.  Under the circumstances, petitioner is entitled to the $900 deduction for repairs.  . The claim for deduction of $3,000 for attorney fees raises the question whether an individual who is not named as a party defendant in an action, but who will be substantially affected by its result, may employ attorneys to defend it and protect his interests and deduct the expenditure as ordinary and necessary business expense.  We held in *2171 , which was this same taxpayer, and we now hold, that he was engaged regularly in the business of financing and managing hotels as a regular vocation.  The action filed against the Clarendon Hotel not only asked enforcement of mortgages, but sought to take the management of the hotel away from petitioner and put it into the hands of a receiver, thus jeopardizing his investment in $150,000 of its common stock and $85,000 of its preferred stock.  The litigation was terminated in the following year by a settlement involving purchase of petitioner's stock at a loss to him.  In the case of , we held that, where a member of a partnership engaged in the stock brokerage business contributed from his personal funds to securing evidence to suppress bucket shops, this was an allowable business expense, because it was done to protect his interest in his firm's business.  We there said: "One has the right to expend his individual money to protect his business interests whether such interests be in a partnership *255  or a corporation and when the proper necessity is shown such expenditures are*2172  deductible as business expenses." We think that there was a necessity that petitioner protect his interests, as his interests would be vitally affected by the litigation, and that he had a right to employ counsel and deduct the expenditure as a business expense.  Fees expended in suits of this character are allowable as business expenses.  ; . The claim for deduction of $3,000 for attorney's fees is allowed.  Judgment will be entered under Rule 50.