Hinkle v. Commissioner , 47 B.T.A. 670 ( 1942 )

EUGENE E. HINKLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hinkle v. Commissioner

Docket No. 103224.

United States Board of Tax Appeals

47 B.T.A. 670; 1942 BTA LEXIS 662;

September 11, 1942, Promulgated

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1. Legal expenses, court costs, etc., incident to securing petitioner's release from a mental institution and restoration of control over his property, held personal expenditures and consequently nondeductible.

2. Value of property may not be proved by the mere submission of computations based upon formulas.

Davis Haskin, Esq., for the respondent.

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ARUNDELL

A deficiency in income tax for the calendar year 1937 has been determined in the amount of $7,623.26. Two issues are presented: :1) The deductibility of $163,000 representing the legal expenses, court costs, doctor bills, etc., incident to the release of petitioner from a neuropsychiatric institution and the restoration to him of the management and control over his property, and :2) the March 1, 1913, value of certain shares of stock in the Hinkle Iron Co. The facts were stipulated and will be recited only in so far as is necessary for a decision of the points in controversy.

FINDINGS OF FACT.

Petitioner, a resident of Westport, Connecticut, filed his income tax return for 1937 with the collector for the district of Connecticut.

On December 19, 1934, petitioner was declared incompetent by the Probate Court for the District of Westport, a conservator was appointed over his estate, and he was ordered confined to a neuro-psychiatric institution. for a number of years prior to that date he had been engaged in the management of securities owned by him to the extent of receiving reports, dividends, and interest and making occasional sales and purchases. He had also been a partner with a twothirds interest in a firm which owned a business building in New York City. The building was actively managed by Spear & Co. of New York City, although petitioner retained final control over certain phases of the management. In addition petitioner was president of the Hinkle Iron Co. which had discontinued the iron and steel business in 1926 and since 1929 had invested all its assets in stocks and bonds.

On March 1, 1937, the Superior Court of Connecticut, on appeal from the above order of the Probate Court, declared petitioner to be competent and entitled to the management of his property. The decree ordered the removal of the conservator and restored petitioner to full rights over his property. Petitioner's purposes in taking the appeal from the Probate Court were to obtain his freedom and gain control over his property, and these purposes were fulfilled by the decree of the Superior Court. In securing his release, the removal of the conservator, and the restoration of his property, petitioner expended the sum of $163,000 for counsel fees, court costs, alienists, medical testimony, and other expenses. This sum was claimed as a business expense deduction on his return for 1937 and was disallowed by the Commissioner.

The Hinkle Iron Co. liquidated in 1937 and petitioner, as the owner of 1,292 shares of its stock, received cash of $3,678.83 and securities of the agreed value of $337,450.94. A gain of $69,099.17 was reported by him, computed on a basis of $210.55 per share as the March 1, 1913, value of his stock in the Hinkle Iron Co. Respondent determined that a gain of $78,039.81 was realized, based upon a March 1, 1913, value of $203.63 per share. The only evidence submitted on this question was the computations by which each party arrived at his determination of basis. These disclose that the parties agreed upon the March 1, 1913, value of the tangible assets of the company, as well as its average net profit for the five preceding years. The point of difference is the figure to be used for good will. Each computation is based upon the formula that the average net profit represented a return of 8 percent on the average tangible assets and the balance represented a return on intangibles which, capitalized at 15 percent, represented the figure to be used for good will. The different results were occasioned by petitioner's use of the average net tangible assets as disclosed by the books, whereas respondent increased that figure ratably over the preceding five years to account for the excess of the March 1, 1913, value of land over the figure it was carried on the books on that date.

OPINION.

ARUNDELL: Respondent's denial of the sought deduction of $163000 in our opinion was correct. The money was expended to secure petitioner's release from a mental institution to which he had been committed by appropriate court action. The fact that the decree which restored his freedom also gave him control of his property and served to discharge the conservator theretofore in control is unimportant. Such a restoration of control over his property naturally would follow from the court's determination that he was competent to handle his own affairs. Expenses of this character are personal, the deduction of which is expressly denied by statute. Sec. 24(a)(1) of the Revenue Act of 1936; . The argument, similar to petitioner's here, that expenses though personal in nature may be deducted because they incidentally advance his property interests or inure to the benefit of the business in which the taxpayer is engaged, has been uniformly rejected in analogous situations. ; ;; ; affd., 62 Fed.:2) 991. If some portion of the expenses could conceivaly be regarded as allocable to the restoration of his property, an assumption which we do not think is permissible, there is in the record no basis on which such an allocation could be made.

Moreover, it is clear that the expenditure of $163,000 could in no event be regarded as an ordinary and necessary expense of carrying on a trade or business. In , we held that expenses incurred in an incompetency proceeding were not deductible because the incompetent was not engaged in a trade or business. It is not believed that the activities of the present petitioner constituted the carrying on of a trade or business with the holding of . The collection of interest and dividends, keeping accounts, and making limited shifts of securities from time to time in the interest of safety and returns do not constitute the carrying on of a trade or business, regardless of the amounts involved. . Even where one is engaged in business it is necessary that the expense be both ordinary and necessary to make it allowable. . In no event do we think the expenditure in question could be regarded as ordinary.

Petitioner's further suggestion that, in any event, the outlay of $163,000 should be added to the cost of his property as a capital expenditure is, in our opinion, equally without merit. If such an assumption was indulged we would again be confronted with the fact that the record is barren of any means of allocating this cost to the various types of property owned by petitioner. Nor is there any statutory warrant for the assertion that the expenditure is deductible as a loss whether or not petitioner was engaged in a trade or business. The deduction of losses is confined by section 23:e) to those incurred in a trade or business, in transactions entered into for profit, or arising from fire, storm, shipwreck, or other casualty. The claimed deduction obviously does not fall within any of these categories.

With respect to the amount of taxable gain realized upon the liquidation of the Hinkle Iron Co. in 1937, the parties differ only as to the March 1, 1913, value of the shares of stock. Respondent has determined a value of $203.63 per share and the burden rests on petitioner to offer evidence to overcome the correctness of this determination. He reported in his tax returns and continues here to urge a value of $210.55 per share.

Value is sought to be established by first determining the March 1, 1913, value of the assets of the Hinkle Iron Co. and then dividing that value by the number of outstanding shares. It is the value of the good will on March 1, 1913, on which the parties differ. Each party has submitted a mathematical computation which he urges proves the value contended for by him. No other evidence is before us. In our opinion the value of shares of stock is not to be proven by the submission of such computations and formulae. "The value of property on March 1, 1913, is its actual value on that date, and that valuation can not be determined by any sort of theoretical computation * * *. ; . controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. . The important thing in computations of this sort is the selection of the factors to be used and they can only be determined after a careful weighing of all the surrounding facts and circumstances. In the absence of such facts, we do not feel that we are called upon to hazard a guess as to the correctness of the two computations. The determination of the Commissioner is presumably correct and we are not prepared to say that his method of arriving at his basis, as disclosed by the computation submitted by him, is incorrect. In the circumstances we sustain the value of the shares of the Hinkle Iron Co. as determined by the respondent.

Decision will be entered for the respondent.