Court Opinion

ID: 4608507
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:52.384077+00
Date Added: 2024-06-11T07:53:43.248311
License: Public Domain

JAMES D. ROBINSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Robinson v. CommissionerDocket No. 104734.United States Board of Tax Appeals45 B.T.A. 39; 1941 BTA LEXIS 1186; September 5, 1941, Promulgated *1186  In 1937 petitioner was vice president of a bank in Atlanta, Georgia, at a salary of $19,000 per annum and received notice that he was to be elected president of the bank in 1938 at an increased salary.  Another officer and valued employee of the bank received an offer in 1937 from a New York bank, which carried a considerable increase in salary, to come to New York.  Petitioner, as one of the chief executive officers of the bank, knowing that he was to become president of the bank the following year and that this officer of the bank who had received the offer of increased salary was of great value to the bank and would be very helpful to petitioner when he became president of the bank, paid certain sums out of his own personal funds to retain the services of the employee to the bank.  In 1938 the bank increased this employee's salary and petitioner made no such further payments.  Held, that the amounts which petitioner thus paid in 1937 were in the nature of personal expenditures and were not ordinary and necessary expenses paid by petitioner in carrying on his business of being one of the chief executive officers of the bank.  Sidney J. Hayles, C.P.A., for the petitioner. *1187 J. Marvin Kelley, Esq., for the respondent.  BLACK *39  The Commissioner has determined a deficiency of $3,025.23 in petitioner's income tax for the year 1937.  The deficiency results from the disallowance by the Commissioner of a deduction of $4,853.10 which petitioner claimed in his income tax return as "expenses deductible from salary and other compensation." *40  Petitioner by an appropriate assignment of error contests the correctness of this adjustment made by the Commissioner.  FINDINGS OF FACT.  Petitioner is a resident of Atlanta, Georgia, and filed his income tax return with the collector of internal revenue for the district of Georgia for the year 1937, showing thereon total income of $174,315.28.  He derived his income from trading in stocks, and from dividends, salaries, and trustee fees.  During the year 1937 petitioner was a vice president of the First National Bank of Atlanta, Georgia, and for his services as such he received a salary of $19,000.  During that year petitioner was asked by the then president of the First National Bank of Atlanta if he would accept the presidency, beginning in 1938.  At that time petitioner was*1188  a director of the bank, as well as a vice president, and was engaged in various other activities such as trading in stocks and bonds, acting as trustee of a large estate, and liquidating the A. M. Robinson Co., with which he had formerly been actively connected.  Another officer and employee of the First National Bank of Atlanta was R. Clyde Williams, who had been with the bank for several years and formerly had been a national bank examiner and with the War Finance Corporation and had large experience in the matter of granting lines of credit and making loans.  In 1937 Williams, who was then one of the vice presidents of the bank, received an offer of $25,000 per year from the Central Hanover Bank of New York.  Williams was then receiving $16,000 annual salary from the Atlanta bank.  Petitioner was very anxious that Williams should not accept the offer to go to New York because he felt that he was a valuable man to the bank and would be especially valuable to petitioner if and when he became the president of the bank in 1938.  Petitioner tried to induce the board of directors of the bank to increase Williams' salary in 1937 so as to prevent him from accepting the New York offer. *1189 The board of directors declined to comply with petitioner's request in this respect.  Thereupon petitioner and Williams entered into an agreement that, if Williams would remain with the First National Bank and render certain services to the bank and to petitioner as an officer of the bank, the petitioner, who was to be made president the following year, would pay Williams $1,000 in cash in 1937 and "would endeavor to make him the difference in the stock market." The petitioner purchased 200 shares of Republic Steel in the name of Williams.  Williams was to receive all profits and petitioner was to bear all losses.  There were losses in the stock transaction of $3,853.10 which the petitioner paid to Fenner & Beane for account of Williams during the month of December 1937.  He also paid Williams $1,000 in cash on December 22, 1937, as had been agreed upon.  *41  The nature of the services which Williams was to render petitioner for the consideration above named was described in substance by petitioner as being that he wanted Williams there in the bank, if and when petitioner was elected president of the bank in 1938, to help him pass upon applications for large loans and the*1190  granting of large lines of credit and to help make his administration as president of the bank a success.  In speaking of the nature of his services rendered and to be rendered to petitioner Williams testified: I thought that it was necessary for him to have someone in that capacity, due to the many changes that had occurred in the banking laws in recent years, and the further fact, as executive officer of the institution, it was up to him, really, to make the final determination in regard to large loans and credits, or large loans that might be offered.  He, therefore, felt I would be extremely helpful to him in seeing that our operations conformed to the legal requirements then necessary, and also in the preparation and continued following up of the large loans and lines granted by the bank.  Respondent's counsel asked the following question of Williams and received the following answer in the course of his cross-examination: Q.  All the services you rendered in this capacity were banking services, were they not, Mr. Williams?  A.  They were banking services, although they were probably unusual by reason of Mr. Robinson's request to me for assistance, and as an ordinary thing, *1191  he would have done those things and I would have done other things, maybe.  Petitioner did not pay any special compensation to Williams after the year 1937.  Beginning with January 1938 Williams was granted an increase of salary by the bank and still remains an officer of the bank.  The $1,000 which petitioner paid Williams in 1937 and the $3,853.10 which he paid to Fenner & Beane to cover a loss incurred in a stock trading account carried in Williams' name were not ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business in which petitioner was engaged.  OPINION.  BLACK: The applicable statutes and regulations are printed in the margin. 1*1192 *42  There is no question but that petitioner was out of pocket the $4,853.10 which he claimed as a deduction from his gross income on his 1937 income tax return.  One thousand dollars of this amount he paid in cash to R. Clyde Williams and the other $3,853.10 he paid to Fenner & Beane to make good a loss in a stock trading account carried in the name of R. Clyde Williams which had been guaranteed by petitioner and was operated and conducted for Williams' benefit by petitioner.  But, while there is no doubt that petitioner paid out the funds which he claims as a deduction, were these expenditures "ordinary and necessary expenses paid or incurred * * * in carrying on any trade or business" within the meaning of section 23(a), printed in the margin?  We think that question must be answered in the negative and that the Commissioner must be sustained in his disallowance of the claimed deduction.  We think that what happened, as disclosed by the evidence, was approximately this: Williams was a valuable officer and employee of the First National Bank of Atlanta and petitioner knew it.  Williams had received a favorable offer from a New York bank which he was about to accept and*1193  petitioner, as an officer and director of the bank, did not want the bank to lose his services.  Therefore he proposed to the directors of the bank that the bank pay Williams an increase in salary so as to hold him.  This the directors declined to do in 1937.  Petitioner, knowing that Williams was a valued employee of the bank and would be of great assistance to petitioner when he became president of the bank in 1938, a fact which seemed to have already then been agreed upon, rather than lose Williams' services, decided that he would pay out of his own pocket an amount which would hold Williams.  This he did, as detailed in our findings of fact.  In making such an expenditure we think that petitioner was incurring something in the nature of a personal expense rather than an ordinary and necessary business expense.  Throughout the year 1937 Williams was an officer and employee of the First National Bank of Atlanta and not of petitioner.  The bank did not of course have the right to deduct as a business expense the amounts which petitioner paid to Williams, for the simple reason that the bank did not pay these amounts.  *1194  We fail to see, however, where the relationship of employer and employee ever existed between petitioner and Williams.  It is true that petitioner, as vice president of the bank at a salary of $19,000 in 1937, was engaged in business.  . In that case we said: * * * It may well be that deductible "ordinary and necessary expenses in carrying on a trade or business" would be few and for between for a taxpayer *43  engaged in carrying on a business as executive officer of a corporation.  The most of such deductions that we can think of would be those allowable only to the corporation.  However, there are some which would be allowable as deductions to the individual, if he pays them out of his own personal funds, such for example as those involved and allowed in the Peoples-Pittsburgh Trust Co. case and the Hurt case.  * * * We may pause long enough here to remark that the expenditures made by petitioner in the instant case are not of the nature of those involved in , and *1195 . In the Ralph C. Holmes case, supra, we denied the taxpayer the deductions which he sought as ordinary and necessary business expenses on the ground, first, that they were made after Holmes ceased to be the chief executive officer of the Texas Co. and, second, that, even assuming that his remaining as a director of the corporation of which he had formerly been president constituted the carrying on of a business, the expenditures in question could not be allowed as deductions, because they were extraordinary in character for a director to pay out of his own personal funds and were not shown to be "ordinary and necessary" business expenses.  From our decision the taxpayer filed petition for review to the Second Circuit, but later dismissed his appeal on March 15, 1939.  Thus our decision in that case stands.  While the expenditures involved in the Holmes case were different from those involved in the instant case, yet we think the rationale of our opinion in the Holmes case should govern here.  Just as the expenditures involved in the Holmes case were not ordinary in the conduct of the business*1196  of being director of a corporation, but were extraordinary, so do we think that the payments made by petitioner to Williams in 1937 out of his own personal funds were not ordinary expenditures for him to make as an officer of the bank, but were extraordinary in character, and are not deductible by petitioner as ordinary and necessary expenses in carrying on his business of being one of the chief executive officers of the bank.  We may remark in this connection that petitioner made no more such payments to Williams after 1937.  In 1938 the bank increased Williams' salary and doubtless received full deductions for all amounts paid to him as ordinary and necessary business expenses of the bank.  Petitioner does not claim that the $3,853.10 which he paid to Fenner & Beane in 1937 pursuant to his guarantee of Williams' account is deductible as a loss under section 23(e)(1) or (2) of the Revenue Act of 1936.  It seems clear that the amount would not be so deductible even if petitioner had claimed it on that ground, because the loss was not incurred in trade or business as provided by section 23(e)(1) and it was not incurred in a transaction entered into for profit as provided by section*1197  23(e)(2).  Any profits which might *44  be obtained in the operation of the account were to go to Williams and not to petitioner.  For the reasons above stated, we sustain the Commissioner.  Decision will be entered for the respondent.Footnotes1. Revenue Act of 1936 - SEC. 23.  DEDUCTIONS FROM GROSS INCOME.  In computing net income there shall be allowed as deductions: (a) EXPENSES. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * * SEC. 24.  ITEMS NOT DEDUCTIBLE.  (a) GENERAL RULE. - In computing net income to deduction shall in any case be allowed in respect of - (1) Personal, living, or family expenses; * * * ART. 23(a)-1.  [Regulations 94.] Business expenses.↩ - Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, * * *