Court Opinion

ID: 4608086
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:01.410645+00
Date Added: 2024-06-11T07:53:38.858719
License: Public Domain

ESTATE OF JOSEPH H. SCOBELL, LEOLA K. SCOBELL, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. *Scobell v. CommissionerDocket No. 108476.United States Board of Tax Appeals47 B.T.A. 971; 1942 BTA LEXIS 619; November 5, 1942, Promulgated *619  1.  Held, on the facts, that amounts paid to lawyers for various services were not paid for political influence but were ordinary and necessary business expenses and deductible as such.  2.  Decedent, without legal obligation so to do, decided to pay bonuses in certain amounts to his employees, but died before any other action thereon was taken.  After his death his estate paid such bonuses.  Held, the amount of the bonuses was not deductible in decedent's income tax return as an expense accrued under section 43 of the Internal Revenue Code, since all events fixing liability had not occurred prior to decedent's death.  United States v. Anderson,269 U.S. 422">269 U.S. 422. Henry S. Gottfried, Esq., for the petitioner.  Lawrence R. Blumenthal, Esq., for the respondent.  HILL *971  This proceeding is for a redetermination of income tax deficiencies of $4,731.78 and $1,567.87 for the years 1938 and 1939, respectively.  The full amount of the determined deficiency for the year 1938 will be included in the recomputation, since petitioner waived all assignments of error relating to the year 1938.  No evidence was introduced as to that*620  year.  We are concerned only with the issues raised in regard to the deficiency for 1939.  In computing decedent's income for the period January 1 to the date of his death in 1939, petitioner deducted fees paid to a firm of lawyers and bonuses paid to decedent's employees.  The issues are whether or not these deductions are allowable.  FINDINGS OF FACT.  Petitioner is the executrix of the estate of Joseph H. Scobell, who died November 3, 1939.  The income tax return for decedent for the period from January 1, 1939, to the date of his death was filed with the collector of internal revenue for the eighteenth district of Ohio.  Prior to his death decedent was engaged in the sale and distribution of liquor in the State of Ohio.  In Ohio the state has a monopoly on the sale of all liquor.  All liquor is sold by the vendor to the state on the so-called bailment plan, which amounts to the vendor shipping the liquor into five principal warehouses located in Ohio.  These warehouses are under contract with the State of Ohio to handle all merchandise shipped either in the name of the vendor or in the name of the State of Ohio.  Merchandise is withdrawn from these five central warehouses*621  by the state and sent out to state owned *972  liquor stores or in the smaller localities to licensed agents.  When the liquor is withdrawn by the state, a purchase order is sent to the vendor and on the basis of that order the vendor invoices the state for the merchandise.  The Department of Liquor Control determines what items will be shipped to the warehouses.  The prices which the vendors place on their liquor have to be approved by that department.  A vendor can petition the department for price changes and also for the addition or subtraction of items previously listed.  The amount of liquor of any particular brand to be carried in each state store is determined upon an inventory system based upon a period determined by the department.  The vendors and distilleries keep employees in Ohio to contact the liquor stores and see that sufficient inventory of their items is being carried and also to do "missionary work" in order to increase sales.  The Department of Liquor Control was first established in 1933.  Decedent had been assistant director for a short time and later he was made director of the department during the period 1933 to 1935.  After decedent severed his*622  connection with the department he was employed by the American Distilling Co. to handle their sales in Ohio.  He also began to sell liquor, bottled by that distillery but sold under the name of Scobell, Inc.Prior to 1939 he had enjoyed a very good business upon a six-month whiskey which had no competitors.  The new Board of Liquor Control directed that no liquor of less than one year in age was to be sold.  Decedent's business thereafter decreased considerably.  Because of his poor health and that of his wife, who had suffered a broken hip, decedent desired to spend more time in Cleveland and less in Columbus.  In January 1939 decedent hired the firm of Dunifon & Topper to represent him before all state boards, but principally the Department of Liquor Control.  Decedent agreed to pay the firm an annual retainer of $6,000 and actually paid $5,150 prior to his death, $5,000 being paid on the retainer and $150 for services rendered in December 1938.  Topper was the member of the firm with whom decedent dealt.  Topper had been Assistant Attorney General of Ohio from 1931 to 1937.  One of his duties in such capacity was counsel to the Department of Liquor Control.  At the time that*623  department was established he devoted a great deal of time to it.  In this connection he came in contact with decedent.  In 1937 Topper left the state employment and entered into a partnership for the practice of law, specializing in administrative law, that is, dealing with state departments.  Decedent was Topper's first client after he entered the practice of law in January 1937.  *973  Prior to the time decedent hired Topper he had to make trips at least once a week to Columbus to handle his affairs with the Department of Liquor Control.  After being hired on the retainer, Topper acted as decedent's personal representative in Columbus.  As such he performed numerous services of a legal, administrative, and advisory nature.  The performance of such services relieved decedent to a great extent from the necessity of traveling to Columbus.  The services were all in connection with decedent's business and were ordinary and necessary expenses of that business.  The amount of $5,150 paid by decedent was for the services rendered prior to November 3, 1939.  The amount paid was reasonable and no part of it was paid for political influence.  Some time prior to his death decedent*624  discussed the matter of bonuses for his employees with his personal attorney and business adviser, who resided in Cleveland.  It was decided that a bonus of one month's salary would be given to each employee.  Bonuses had been given in previous years and the employees expected them for the taxable year, although they had no contract or understanding to that effect.  About two weeks prior to his death decedent called his bookkeeper and asked her to prepare a sheet for the salesmen's bonuses.  About a month following decedent's death bonuses in the amount of $1,190 were paid.  The checks by which the individual bonuses were paid were signed by Mrs. Scobell.  OPINION.  HILL: The issues presented to us for decision are whether or not deductions for $5,150 paid to attorneys and $1,190 paid to employees are allowable as ordinary and necessary expenses of decedent's business.  Respondent disallowed the attorneys' fees for the reason that he claimed they were paid for political influence.  This position is maintained in his brief.  However, we have found as a fact that this payment was an ordinary and necessary business expense.  We have also found that the amount was reasonable and*625  that no part was paid for political influence.  There is ample evidence to support the latter finding, whereas there is no evidence which would support the position of the respondent.  Therefore, petitioner is entitle to a deduction for this amount in decedent's return for the period January 1 to November 3, 1939.  Sec. 23(a), Internal Revenue Code.  Sections 42 and 43 of the Internal Revenue Code place the last return of a taxpayer who dies upon the accrual basis.  The income which had accrued but had not been paid to decedent was properly reported in his income tax return for that period.  The only question is whether or not petitioner is entitled to accrue as an expense the item of $1,190 paid as bonuese to the decedent's employees.  *974  We think not.  Decedent determined the amount of the bonuses, but he did not actually pay them before his death.  There was no legal obligation by contract, express or implied, or otherwise, upon decedent to make such bonus payments.  Hence, no accrual of such payments as an expense of decedent was proper.  In order for an item to be accruable as an expense all events fixing the liability must have occurred.  *626 United States v. Anderson,269 U.S. 422">269 U.S. 422. The disallowance by the respondent of this deduction is approved.  Decision will be entered under Rule 50.Footnotes*. Prior to October 22, 1942, this report was approved for promulgation. ↩