Court Opinion

ID: 4594046
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:12:05.962878+00
Date Added: 2024-06-11T07:51:11.135303
License: Public Domain

KERWIN H. FULTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fulton v. CommissionerDocket No. 91086.United States Board of Tax Appeals41 B.T.A. 1037; 1940 BTA LEXIS 1109; May 2, 1940, Promulgated 1940 BTA LEXIS 1109">*1109  Petitioner incurred, during the taxable year, legal and other expenses of $28,427.69 in connection with his suit to annul a settlement agreement previously made by him, for the purpose of relieving himself of the personal liability imposed by that agreement.  Held, that the $28,427.69 may not be deducted as an ordinary and necessary business expense.  Fred R. Angevine, Esq., for the petitioner.  George R. Sherriff, Esq., for the respondent.  TYSON 41 B.T.A. 1037">*1037  In this proceeding petitioner seeks redetermination of an income tax deficiency of $5,515.98, for the calendar year 1934, which arises from the disallowance by the Commissioner of a deduction of $66 for depreciation, as to which no question is raised, and of a deduction of $28,427.69 taken by petitioner as an ordinary and necessary business expense.  The sole issue presented is whether the latter amount was incurred and paid as an ordinary and necessary expense of the carrying on of a trade or business by petitioner.  FINDINGS OF FACT.  Petitioner is an individual, residing at One West 81st Street, New York City, and has his office and place of business at 60 East 42d Street, New York City. 1940 BTA LEXIS 1109">*1110  During the taxable year, and for a period previous thereto beginning in 1904, the petitioner was engaged in various capacities in the outdoor advertising business.  In 1917 petitioner organized and became president of the Brooklyn Poster Advertising Co. and, also in that year, became president of other advertising companies.  In 1919 petitioner and his associates acquired from Oscar J. Gude the controlling interest in the O. J. Gude Co., another and separate outdoor advertising company, at that time in financial difficulties.  Subsequently, in the year 1923, Oscar 41 B.T.A. 1037">*1038  J. Gude, who owned stock in several outdoor advertising companies, persuaded the petitioner to agree to be named in Gude's will as a coexecutor of Gude's estate and cotrustee of a testamentary trust.  During the year 1925 the General Outdoor Advertising Co. was formed from the merger of some twenty companies in the outdoor advertising field and petitioner became its president and general manager and so remained until June 15, 1931.  Oscar J. Gude held stock in some of the companies merged and, for the surrender of this stock, received 15,000 shares of common stock and 3,413 5/8 shares of preferred stock1940 BTA LEXIS 1109">*1111  in the General Outdoor Advertising Co.  In August of 1925 Oscar J. Gude died, having previously executed a will according to the provisions of which Walter E. Gude, a brother of Oscar J. Gude, and petitioner on October 14, 1925, became duly qualified and acting coexecutors and trustees.  Walter E. Gude was not financially responsible.  The coexecutors disposed of all of the General Outdoor Advertising Co. stock of the estate during the years 1926 and 1927, except 3,300 shares of preferred stock and 7,200 shares of common stock, which were received by petitioner and Walter E. Gude as cotrustees, at valuations of $77.50 per share for preferred and $39 per share for common.  Gude's will permitted the trustees to retain or sell for reinvestment the stock in the General Outdoor Advertising Co., but under a decree construing the will the surrogate of New York County warned the trustees that they assumed a grave responsibility in the exercise of their judgment as to whether or not the stock should be sold for reinvestment and as to how long the stock should be retained before such sale, if made.  Between October 1929 and the end of the year 1930 the General Outdoor Advertising Co. stock1940 BTA LEXIS 1109">*1112  held by the petitioner and his co-trustee had substantially declined in value, and in November 1930 one of the beneficiaries of the estate instituted a suit in the Surrogate's Court of the County of New York to remove the trustees and surcharge them with waste of the corpus and resultant loss of income because, inter alia, of their continued retention of the stock in the General Outdoor Advertising Co. during a period when its value was being greatly diminished.  This beneficiary was afterwards joined by other beneficiaries in the suit.  In September 1930 petitioner had undertaken to bring a large part of the outdoor advertising business together in the formation of a new sales company.  His efforts in numerous conferences with leaders in the outdoor advertising business had reached an advanced stage when, on Friday, February 27, 1931, the suit instituted by the beneficiaries, to which answer had been filed by the trustees, was set down for hearing on the following March 2.  Petitioner was approached during the period between February 27 and March 2, 41 B.T.A. 1037">*1039  1931, by counsel for the plaintiffs in that suit and was informed of their plan to present at the hearing evidence1940 BTA LEXIS 1109">*1113  that petitioner was generally inattentive to his duties both towards the General Outdoor Advertising Co. and as cotrustee; that he drank to excess; that his conduct was exceedingly improper; that he had quarreled with customers; that he had failed to keep business engagements; and further evidence of a nature derogatory to petitioner's conduct and character.  Petitioner was further informed that plaintiffs in the suit intended to give all this evidence wide publicity through the press.  Petitioner was then actively engaged in the formation of the new sales company.  He thought the resultant publicity from such evidence would be damaging to him personally and to the General Outdoor Advertising Co. and would delay and perhaps prevent the organization of the sales company.  As a result of such thought the petitioner and his cotrustee thereafter, on March 18, 1931, agreed to purchase from the trust, by payment therefor over a period of three years, the General Outdoor Advertising Co. stock held by it, at the prices of $77.50 per share for the 3,300 shares of preferred and $39 per share for the 7,200 shares of common, or a total purchase price of $536,550, and the beneficiaries agreed to1940 BTA LEXIS 1109">*1114  withdraw their suit.  This agreement was approved by the surrogate on the same date.  Petitioner and his wife in March 1931 owned 54,000 shares of common stock in the General Outdoor Advertising Co. and there were then some 642,000 shares of common stock outstanding.  Outdoor Advertising, Inc., the sales company in the formation of which petitioner had been engaged since September 1930, was organized on June 15, 1931.  The petitioner thereupon became its president and has retained that position ever since, giving his entire time and attention to the performance of his duties as such president.  During the taxable year the only business in which petitioner was engaged was that of serving as president of Outdoor Advertising, Inc., for which he received a salary of $54,668.64, but during 1934 he also had general interests in the outdoor advertising field.  The performance of petitioner's duties as president of Outdoor Advertising, Inc., did not embrace the purchase of the stock involved and it was not necessary in connection with performing his functions as such president to make such purchase.  On June 15, 1931, when petitioner became president of Outdoor Advertising, Inc., he1940 BTA LEXIS 1109">*1115  ceased to be president of the General Outdoor Advertising Co.  On August 10, 1933, the petitioner instituted a proceeding to set aside the settlement agreement of March 18, 1931, alleging in his petition, which he swore to, inter alia, that he had entered into that agreement under coercion and duress, because of the threats of the 41 B.T.A. 1037">*1040  beneficiaries to present, in their suit to remove and surcharge the trustees, the generally derogatory evidence set out above, and alleging further that the presentation of such evidence would have greatly damaged petitioner, and the General Outdoor Advertising Co., and probably would have wrecked the plans in which petitioner was then engaged in organizing Outdoor Advertising, Inc.  This proceeding was dismissed by the surrogate and such action was affirmed by the Appellate Division of the Supreme Court of New York.  Petitioner thereafter filed application for leave to appeal to the Court of Appeals of New York.  The petitioner was, on his petition filed in February 1934, permitted by the surrogate, on March 8, 1934, to resign as cotrustee, subject to judicial review and confirmation of the final and supplemental accounts previously1940 BTA LEXIS 1109">*1116  filed by the trustees, and a referee was appointed to hear objections raised by the beneficiaries to those accounts.  The New York Trust Co. was appointed as successor trustee.  During the period 1927-1931 petitioner received $35,284.92 as trustee's commissions from the Gude trust, and these commissions were included in petitioner's individual returns in the years when received.  Petitioner's income tax return for the taxable year was made upon the basis of cash receipts and disbursements.  In the latter part of 1933 petitioner was in default on his obligations assumed under the agreement of March 18, 1931.  Judgment was entered on suit by the New York Trust Co., successor trustee, for the amount of the default, $556,350.11, and execution issued thereon.  On December 4, 1934, petitioner and his cotrustee entered into an agreement with the beneficiaries and the successor trustee in compromise and settlement of all controversies between them, including the final and supplemental accounts of the trustees.  This agreement supplanted the agreement of March 18, 1931, and under its terms the petitioner and his cotrustee were to pay $450,000 for the stock held by the trust and the1940 BTA LEXIS 1109">*1117  beneficiaries were to withdraw objections to the final and supplemental account filed by petitioner and his cotrustee and all proceedings against the trustees were to be abandoned.  This agreement of December 4, 1934, was confirmed and approved by the surrogate on the same date.  The terms of the agreement were subsequently complied with and petitioner became the owner of the 3,300 shares of preferred and the 7,200 shares of common stock of the General Outdoor Advertising Co.  The quoted prices of the stock on that date were $21 for preferred and $3.75 for common.  During the calendar year 1934, in the prosecution of his suit to set aside the settlement agreement of March 18, 1931, and in connection 41 B.T.A. 1037">*1041  with the litigation culminating in the agreement of December 4, 1934, petitioner expended $28,427.69 in legal fees, bond premiums, and miscellaneous items connected therewith.  The $28,427.69 expenditure in legal fees, etc., in question was not an ordinary and necessary expense incurred and paid in carrying on any trade or business of petitioner.  OPINION.  TYSON: The sole issue presented for decision is whether the $28,427.69 expended by the petitioner during the taxable1940 BTA LEXIS 1109">*1118  year for attorney fees and bond premiums in his suit to vacate and set aside the settlement agreement of March 18, 1931, constituted such ordinary and necessary business expenses of petitioner as are deductible under the provisions of section 23(a) of the Revenue Act of 1934.  The respondent contends that the disbursement in question constituted a capital expenditure and that, even if it was not a capital expenditure, the disbursement was not a deductible ordinary and necessary business expense.  Petitioner urges that the expenditures were ordinary and necessary expenses of his business, in that they were incurred and paid in connection with the settlement agreement made on March 18, 1931, to protect petitioner from unfavorable publicity which at the time would have impaired the confidence of his associates, with some of whom he was negotiating for the organization of a sales company, and would probably have prevented such organization, as well as damaged the business of the General Outdoor Advertising Co., of which he was president at the time the agreement was executed.  Petitioner, on brief, asserts that he does not contend that the expenses involved were those of his carrying1940 BTA LEXIS 1109">*1119  on the business of cotrustee.  The settlement agreement was entered into by petitioner while he was engaged in the business of acting as president of the General Outdoor Advertising Co. and also in the business of organizing Outdoor Advertising, Inc.  Although the agreement was entered into by petitioner while he was so engaged, it was entered into by him for the two purposes of protecting those businesses and himself from the damaging effect of the publicity threatened by the beneficiaries of the trust through the introduction in their suit against him of evidence of the disparaging nature as heretofore set out.  We do not think that the purposes of the petitioner in executing the settlement agreement were the direct and proximate cause of the expenses here incurred and paid.  Regardless of these purposes, the fact remains that the effect of the settlement agreement was to fix a definite personal liability in a definite amount upon petitioner.  In our opinion, the direct and proximate cause of the expenses here involved was the effort of petitioner, through his suit to vacate and 41 B.T.A. 1037">*1042  set aside the settlement agreement, to avoid his personal liability fixed thereby.  1940 BTA LEXIS 1109">*1120 After a lapse of more than two years from the time of the execution of the settlement agreement of March 18, 1931, and while petitioner's sole occupation and business was that of acting as president of Outdoor Advertising, Inc., , he instituted the suit to set aside that agreement, which had imposed a personal liability on him.  Had he been successful in that suit in relieving himself of such liability he alone would have been benefited.  Neither Outdoor Advertising, Inc., of which he was then president, nor the General Outdoor Advertising Co., of which he was president when the settlement agreement was made, would have been in any way benefited.  Cf. , affirming . The expenses here involved were not incurred or paid in the business of either the General Outdoor Advertising Co. or Outdoor Advertising, Inc., or by reason thereof, but were incurred and paid in a suit the sole purpose of which was to relieve petitioner of a personal liability and such expenses therefore were his personal expenses and not expenses paid by him "in carrying on any trade or business"; 1940 BTA LEXIS 1109">*1121  and the amount thereof is not an allowable deduction, as claimed by petitioner.  If, however, it be conceded that the expenses claimed as a deduction arose directly from the settlement agreement of March 18, 1931, and that petitioner's purposes, as above stated, for entering into that agreement were also the direct and proximate causes of the expenses here involved, the decision here must nevertheless be against petitioner because it is controlled by the case of , in which it was said: * * * In practically every case where slanderous reports are circulated about an individual and damage his character or reputation, such reports affect indirectly, and, to a certain extent, the business in which he is engaged.  Any expense, however, incurred by him in defending his good name under such circumstances, cannot be said said to be ordinary and necessary expenses incurred in carrying on his business."Slander" has been defined to be "words falsely spoken, which are injurious to the reputation of another".  * * * This definition indicates that when the slanderous words spoken are about the reputation of an individual, such individual himself1940 BTA LEXIS 1109">*1122  is the one who suffers the injury.  Any damages recovered for such injury is recovered by the individual.  Applying this rule to the instant case, the injuries were suffered by the petitioner, and had he collected the amount of the judgment, such sum would have been his own private property and would have had no connection whatsoever with his business.  The E. E. Lloyd Paper Company neither profited nor lost by the suit.  There would be no important difference between the facts in the Lloyd case and those here even if the purposes of the petitioner in 41 B.T.A. 1037">*1043  entering into the settlement agreement of March 18, 1931, should be considered as the direct and proximate causes of the expenses here involved.  If so considered, the expenses were nevertheless incurred and paid in protecting the personal reputation of the petitioner and to prevent injury to the two businesses in which petitioner was then engaged, as was also true in the Lloyd case.  Under such circumstances, the expenses here are no more attributable solely to petitioner's businesses than the expenses incurred in the Lloyd case were solely attributable to Lloyd's business there.  In the Lloyd case the1940 BTA LEXIS 1109">*1123  expenses involved and disallowed as a deduction were incurred and paid in good measure for the protection of petitioner's personal reputation as well as his business, as is also true in the instant case; and for that reason the expenses here involved likewise would not be allowable as a deduction from petitioner's gross income even though it were conceded that the purposes of petitioner in entering into the settlement agreement of March 18, 1931, constituted the direct and proximate cause of such expenses.  The determination of the respondent is approved.  Decision will be entered for the respondent.