Court Opinion

ID: 9638980
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:00:32.862449+00
Date Added: 2024-06-11T18:10:11.155762
License: Public Domain

*272MAGRUDER, Chief Judge.
I concur in the result. But I would, stress certain additional facts which apparently have not been regarded as significant either by the district court or by my brethren.
The taxpayer Friedman had an old and valued client, Wax, in whose integrity and ability he had complete confidence. Wax lost everything during the depression. Early in 1937 the Malden Trust Company, which held a chattel mortgage on Wax’s hardware store, foreclosed the mortgage and bought in the stock of merchandise. Wax entered into negotiations with Gofman and Kaufman, who owned the controlling interests in Gofkauf’s Stores, Inc., operator of a chain of hardware stores. The business proposition under contemplation was that Gofkauf’s Stores, Inc., would acquire the stock of merchandise from the Malden Trust Company and install Wax in his old hardware store as manager for Goflcauf. Wax was also' to be buying agent for the Gofkauf chain. In connection with this negotiation, Gofman and Kaufman insisted “that Wax should be in a position where he wouldn’t be bothered by creditors, so that he would have to make some settlement with his creditors in order to be able effectively to take up the details of his new position.”
Accordingly, on March 12, 1937, Wax addressed a letter to his creditors offering them ten cents on the dollar in full settlement. On the same day Gofman and Kaufman sent a letter to Wax’s creditors explaining their plan for employing Wax as manager of his old hardware store, which they intended to develop “into a larger and more successful proposition”, and urging the creditors to accept Wax’s offer as a fair on’e and the best that could be done under the circumstances. Shortly thereafter five of Wax’s smaller creditors filed an involuntary petition in bankruptcy against him. On April 28, 1937, Friedman’s firm as attorneys for Wax sent a letter to Wax’s creditors stating that so many creditors had already accepted the offer of settlement, “that it has led Mr. Wax to continue in his desire to put through this settlement, and he has authorized us to say that he would make such an offer in composition proceedings under the present bankruptcy petition.”
Gofman and Kaufman agreed to put up $2000 toward the proposed composition settlement. The balance of $5000 was to be raised on an insurance policy on the life of Wax, payable to his wife. Wax and his wife both told Friedman that they would agree to the use of the policy for this purpose. The policy was delivered into Friedman’s hands. Being completely confident that the money would be forthcoming, Friedman did his best to persuade the creditors to accept the composition offer. In the course of this effort he assured attorneys for various of the creditors that funds would be available to fulfill the terms of the offer, if accepted by the creditors. He made a similar assurance to the referee in bankruptcy. According to his testimony, “I made the statement in open court that if this composition was accepted and confirmed, I could assure the court that the money was there to put it through. I never made a statement to the court that I personally would pay the money. I never said that to the court. But I said I was in a position to give the court the assurance that if that composition was accepted and confirmed, that the money was available for carrying it through.” /
However unfortunate the giving of this assurance may appear in retrospect, under the circumstances at the time it seems to me a natural, certainly not an extraordinary, thing for Friedman to have done in the service of his client. And having given the assurance, I further think it was not unreasonable for Friedman to regard it as a matter of professional honor, in the maintenance of his good will and standing at the bar, to make good on that assurance.
The referee insisted that a deposit be made to cover the proposed composition.' Gofman and Kaufman handed over to Friedman the $2000 they had agreed to contribute. When Friedman went to Wax to get'him to raise $5000 on the life insurance policy, as he had previously indicated his willingness to do, Wax said that in justice to his wife and children he could not do that, for it was the only resource he had left wherewith to feed and support them. At *273this time,- apparently, his negotiations with Gofman and Kaufman had stalled, and the prospect of an early employment by Gofkauf’s Stores, Inc., was not so bright. Friedman therefore, on February 17, 1938, took $5000 of his own money, and adding it to the $2000 put up by Gofman and Kaufman, made the deposit with the clerk of the district court for the purpose aforesaid. At the time of making the deposit, Friedman filed a caveat reciting that no part of the said fund bad been paid or contributed by the alleged bankrupt, and further that none of it was a part of the estate of the alleged bankrupt.
If these were all the relevant facts, I should hate to have to- hold that the payment of $5000 by Friedman under the circumstances stated was not an “ordinary and necessary” expense paid in carrying on his professional business. The statutory language is pretty flexible. Cf. Welch v. Helvering, 1933, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212: “One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle.” I do not think that the fact that the making of the deposit was “voluntary”, in the sense that it was not in pursuance of an enforceable legal obligation, is conclusive against deductibility. Dunn & McCarthy, Inc., v. Commissioner, 2 Cir., 1943, 139 F.2d 242. See A. Harris & Co. v. Lucas, 5 Cir., 1931, 48 F.2d 187. “Whether an expenditure is directly related to a business and whether it is ordinary and necessary are doubtless pure questions of fact in most instances.” Commissioner v. Heininger, 1943, 320 U.S. 467, 475, 64 S.Ct. 249, 254, 88 L.Ed. 171. Hence the finding of the district court in the present case that the payment was not an ordinary and necessary expense incident to Friedman’s practice of law would have to be accepted by the appellate courts unless “clearly erroneous.” In view of the further facts to which I shall now advert, I think that on the record as a whole it would have been improper to find that the $5000 item was an ordinary and necessary business expense.
To prevail in this case, the taxpayer of course had to show that the claimed “ordinary and necessary” business expense was paid or incurred in the taxable year 1941. His theory, therefore, must have been that though he made the $5000 deposit in 1938, it was not until 1941 that the money was irretrievably applied to the purpose for which the deposit had been made.
As already stated, Friedman made the deposit to make good on his assurance that funds would be available to satisfy a composition of ten cents on the dollar if Wax’s creditors should accept the offer of settlement. That was the only purpose of the deposit; and that was the full extent of the professional obligation of honor which Friedman scrupulously recognized. Friedman certainly had no obligation, moral or legal, to make a general and unrestricted contribution to the bankrupt estate out of his own pocket. The caveat filed at the time the deposit was made expressly stated that the deposit was not part of the estate of the bankrupt; and though the caveat did not specify the restricted purpose of the deposit, there is no doubt as to what that purpose was. This purpose was acknowledged by the trustee in a petition filed by him later in the proceedings.
Now it appears from the record that the proposed composition was never effectuated and that Friedman’s $5000 was never applied to the limited purpose for which the deposit had been made. Upon the failure of the composition proposal, Wax was adjudicated a bankrupt. Shortly thereafter, on October 31, 1939, Friedman petitioned the referee for the return to him of the money he had deposited “for the proposed composition which has been abandoned.” So far as I can see, Friedman was clearly entitled' to the return of the deposit upon the frustration of the purpose for which it had been made. But for some reason that does not appear, the referee delayed action on Friedman’s petition for the return of his deposit.
Meanwhile, the trustee in bankruptcy, in ■an endeavor to gather in some assets for the bankrupt estate, had commenced a suit in equity against the Malden Trust Company, and others, attacking the validity of *274the foreclosure proceedings. After some negotiations in which the trustee, the Malden Trust Company, Friedman, and others participated, a compromise agreement was worked out under which the trustee agreed to accept from the Malden Trust Company the sum of $4000 in full settlement of the equity suit; and as part of the compromise Friedman agreed not to press his petition for the return to him of the $5000 deposit and not to oppose the entry of an order by the referee extinguishing Friedman’s claim to the deposit and transferring it to the trustee in bankruptcy for the general purposes of the bankruptcy administration.
On October 23, 1941, the trustee filed with the referee a petition for approval of the aforesaid compromise. The petition contained the following recital: “Earlier in these proceedings in bankruptcy, to wit, before adjudication, the bankrupt made a composition offer to his creditors of ten per cent (10%) in cash. Pursuant to the then requirements of the Bankruptcy Act, a deposit of $7,000. was made to defray the requirements of said composition; but the composition was not confirmed and the bankrupt was adjudicated.” Further, the petition recited that, as part of the compromise settlement, Friedman had agreed to relinquish to the estate of the bankrupt his interest in the deposit. On November 10, 1941, Friedman filed with the court an agreement for entry of decree, referring to the trustee’s petition for ap~.. proval of the compromise, declaring that the $5000 on deposit was “my own money”, but declaring further that upon condition of the entry of an order by the referee approving the compromise set forth in the trustee’s petition, he did not further oppose the entry of an order directing that the said $5000 be transferred to the trustee in bankruptcy. Thereupon, the referee entered his order approving the petition of the trustee, and pursuant to Friedman’s agreement he disallowed Friedman’s petition for return of the deposit. Then and there Friedman lost his $5000.
The record is silent as to the reasons which led Friedman to agree in 1941 that the $5000 deposit (to the return of which he was clearly entitled upon the failure of its purpose) should be turned over to the trustee in bankruptcy to be dealt with without restriction as part of the bankrupt’s estate. This agreement does not appear to have been related in any way to the assurances which Friedman had given to the referee and to attorneys for Wax’s creditors back in 1937 as a result of which Friedman had felt morally bound to make the deposit so that funds would be available to satisfy the proposed agreement of composition then pending. As above stated, the composition was never consummated and Wax was adjudicated a bankrupt. Friedman’s relinquishment in 1941 of his claim for refund of the $5000 deposit can therefore not be deemed to have been an ordinary and necessary expense by way of fulfilling a professional commitment made in the course of his practice of the law— which is the main ground urged by Friedman in support of his claim that the $5000 item was properly deductible. Nor was the $5000 item deductible under I.R.C. §sg3(e)(l) as a “loss” incurred in trade or business. The record contains no basis for a finding that it was part of Friedman’s business as a practicing lawyer to contribute $5000 of his own money to the bankrupt estate of his client Wax in order to induce the trustee in bankruptcy to accept a compromise settlement of the claim of the estate against the Malden Trust Company.