Kissel v. Commissioner

CAROLINE T. KISSEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kissel v. Commissioner

Docket No. 21788.

United States Board of Tax Appeals

15 B.T.A. 1270; 1929 BTA LEXIS 2694;

April 5, 1929, Promulgated

---

1. Where a taxpayer owns a life interest in real property and erects a building thereon with her own funds, the life of which extends beyond the life expectancy of the life tenant, she is entitled to deduct in each year that portion of the cost which the taxable year bears to her total expectancy of life, as shown by life tables, but she is not entitled under the circumstances of this case to an additional deduction representing exhaustion of the building over its own life.

2. Real property taxes paid by the petitioner, pursuant to a covenant in the lease requiring her to pay the taxes "as part of the rent," are not deductible by her as lessee.

3. Counsel fees paid for the litigation of matters pending before the Bureau of Internal Revenue, under the evidence here, are deductible expenses incurred in the petitioner's trade or business.

Henry J. Richardson, Esq., and C. W. Dudley, Esq., for the petitioner.

Byron M. Coon, Esq., for the respondent.

---

MORRIS

This proceeding is for the redetermination of deficiencies in income taxes for the calendar years 1922, 1923, and 1924, amounting to $4,537.73, $5,165.30, and $6,586.68, respectively.

The petitioner alleges error on the part of the respondent in each of the following particulars:

1. Failure to allow as a deduction $10,303.33 representing exhaustion of property used by the petitioner in a trade or business during each of the years 1922, 1923, and 1924;

2. Failure to allow as a deduction $10,303.33 in each of said years as ordinary and necesary expenses representing the aliquot part of the cost of improvements to property used by the petitioner in a trade or business;

3. Failure to allow as a deduction $1,675.52, $1,669.43, and $1,705.92 for the years 1922, 1923, and 1924, respectively, representing taxes paid by the petitioner to the City of New York during those years; and

4. Failure to allow as a deduction for ordinary and necessary expenses $2,601.10 and $6,273.51 for the years 1923 and 1924, respectively, representing fees paid to attorneys for services during those years.

FINDINGS OF FACT.

Petitioner is an individual who resides in Morristown, N.J.

By the following provisions of the will of the late William K. Thorn, her father, petitioner acquired a life estate in certain lands situated in the City and State of New York, of which she was possessed during the taxable years here in controversy:

Fourth - I give and devise unto my daughter Caroline T. Kissel the four houses and lots of land fronting on Sixth Avenue at and near the Northeasterly corner of Six Avenue and Thirty-seventh Street in the City of New York conveyed to me by William B. Barton and Richard Barton and his wife; also the house and lot of land on the Northerly side of Fifty-third Street next Easterly the corner of Fifty-third Street and Eighth Avenue in said City of New York for and during her natural life, and at her death to her children then living and if any of her children shall have died leaving a child or children then such child or children shall take its or their respective parents share; but if she should die leaving no child or children her surviving, then the said property shall go, one-half thereof to her brother and his heirs if he then be dead, and the other half thereof to the children of my deceased daughter emma T. Parrish or their respective children per stirpes and not per capita.

In the year 1921 the buildings on the aforesaid land being old and unproductive of an amount of revenue satisfactory to the petitioner, she razed the same and constructed a four-story brick building thereon to be rented for business purposes, said building costing $113,727.51.

For the years immediately preceding and those subsequent to the year of the aforesaid construction, petitioner, as life tenant of the aforesaid property, received the following income:

1918	$7,999.80
1919	7,999.80
1920	7,934.85
1921 (year of building)
1922, after depreciation of $10,302.33	7,787.55
1923, after depreciation of $10,302.33	21,721.12
1924, after depreciation of $10,302.33	20,943.80
1925, after depreciation of $10,302.33	22,292.08

The building aforesaid was rented and put in use on November 1, 1921, and continued in such use during the years 1922, 1923, and 1924.

On November 1, 1921, the petitioner was 63 years of age and her reasonable life expectancy, according to American Life Insurance Tables of Mortality, was on that date, 11.039 years.

The respondent allowed as a deduction against the income from rental property 2 per cent of $113,727.51 in lieu of $10,302.33 claimed by the petitioner, based on an estimated life of 11.039 years.

During the taxable years 1922, 1923, and 1924, the petitioner owned and occupied, as a residence, a certain building located at No. 12 West 51st Street, New York, N.Y., on the premises leased from the Trustees of Columbia College. The said premises were occupied by the petitioner as assignee of the lessee under and by virtue of an indenture which provided for payment by her of all taxes "as part of the rent," and pursuant to that covenant the petitioner paid taxes of $3,080, $3,068.80, and $3,068.80 during the years 1922, 1923, and 1924, respectively, to the City of New York. Of those amounts the respondent has disallowed as a deduction $1,675.52, $1,669.43, and $1,705.92 for the taxable years 1922, 1923, and 1924, respectively, representing the taxes upon the land as distinguished from the taxes upon the improvements thereon.

The petitioner is a woman of very substantial means and invests rather heavily in stocks, bonds and other securities and in real estate in and about the City of New York and adjoining counties and States, and as a consequence her income-tax returns for the years 1917 to 1920, both inclusive, included income from interest, dividends, profits on the sale of securities and other property, and income from various sources.

In or about 1923 the Bureau of Internal Revenue proposed an assessment against the petitioner for the years 1917 to 1920, inclusive, of approximately $79,000, as a result of which attorneys were employed to prosecute her defenses to the said assessment, growing out of alleged inaccuracies or incorrect deductions in her income-tax returns. The issues raised by the attorneys so employed numbered five or six, the principal one of which being with respect to a loss of $178,000 deducted by the petitioner in her 1919 return on account of the sale of Hawkinsville & Florida Southern Railway Co. bonds costing $254,552.18. The minor issues involved were depreciation as affecting the profit or loss on the sale of properties, tax paid on taxfree covenant bonds, repairs, profit on the sale of real estate, loss of $38,000 deducted by the petitioner on the sale of certain Ridge Street properties and a deduction of certain inheritance taxes paid with reference to the estate in which she was legatee under the will of Gustav Kissel, deceased.

The petitioner's son is employed regularly to manage her business and maintains an office, and he employs two assistants for that purpose. In the prosecution of the foregoing proceeding the petitioner's attorneys did not confer directly with her for the ascertainment of facts upon which the case was presented but conferred with those three men.

During the year 1923 the petitioner paid her attorneys $2,500 for services rendered in connection with the litigation just discussed, plus hotel and traveling expenses of $101.10 incurred by said attorneys in the prosecution of their work, and in 1924 she paid them $6,150 for services rendered and $123.51 for hotel and traveling expenses.

OPINION.

MORRIS: Pursuant to stipulation entered into between the parties, the facts appeartaining to the first and second issues herein have been found from , in so far as applicable to the taxable years in controversy. The parties have also stipulated that those issues should be decided according to the final decision in that case, in which we held that the petitioner was entitled to deduct in each year that portion of the cost which the taxable year bears to her total life expectancy as shown by life tables, but that she was not entitled to any additional deduction representing exhaustion of the building over its own life.

The third allegation of error herein is with respect to the failure of the respondent to allow as deductions certain sums paid by the petitioner, as sublessee, to the City of New York, pursuant to a covenant in her lease providing for the payment by her of all taxes assessed against the premises "as part of the rent." The respondent has allowed that portion of the tax payments representing assessments against the improvements and has disallowed the sums assessed against the land.

Section 214(a) and subparagraph (3) of the Revenue Acts of 1921 and 1924 provide:

(a) That in computing net income there shall be allowed as deductions:

* * *

(3) Taxes paid or accrued within the taxable year except (a) income, warprofits, profits, and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States, as is allowed as a credit under section 222, (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (d) taxes imposed upon the taxpayer upon his interest as shareholder or member of a corporation, which are paid by the corporation without reimbursement from the taxpayer. For the purpose of this paragraph estate, inheritance, legacy, and succession taxes accrue on the due date thereof except as otherwise provided by the law of the jurisdiction imposing such taxes.

The petitioner contends that as long as the amount paid was a tax and was her obligation, it was deductible by her. That portion of the tax, the deduction of which was disallowed by the respondent, was upon the land which the petitioner occupied as lessee and was paid by her under the terms of the lease. Undoubtedly she was under obligation to make the payment in order to continue in possession of the premises, but her obligation was to be lessor, and not to the taxing authority. The liability for the payment of the tax rested upon the owner of the land, and he is the only one, in our opinion, who is entitled to the deduction for taxes paid or accrued within the taxable year. Any agreement between him and a third party for the paying of his liability does not entitle such third party to a deduction under section 214(a)(3) of the Revenue Acts of 1921 and 1924. See ; ; ; . Neither is the petitioner entitled to the deduction claimed, considering the payment as additional rental, as it was for residential property and therefore a personal expense. Section 215 of the Revenue Acts of 1921 and 1924.

The fourth issue urged by the petitioner is with respect to claimed deductions for attorneys' fees paid during 1923 and 1924 for the prosecution and litigation of matters pending before the Bureau of Internal Revenue. Section 214(a) and subparagraph (1) thereof of the Revenue Act of 1921 provide:

(a) That in computing net income there shall be allowed as deductions:

(1) 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; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity;

Section 215(a)(1) of that Act prohibits the deduction of "personal, living, or family expenses."

The respondent contends that these expenses were not paid in the petitioner's trade or business but were for services in connection with the adjustment of her personal income-tax liability before the Bureau of Internal Revenue and the preparation and filing of her returns for those years.

The respondent cites , and , in support of the position taken by him. In the former case the question was with respect to the deductibility of attorneys' fees paid for services incurred in breaking a will by which the taxpayer came into possession of his inheritance, and the latter involved the question of whether certain sums paid by the taxpayer to gain control of a corporation, resulting finally in practically the ownership thereof, were expenses or capital outlay. In our opinion those cases are not at all in point.

In , we held that an amount paid for the preparation of the petitioner's individual Federal income-tax return was not deductible, but, as we later said in , "It did not appear in that case, however, that the expenditure was in connection with the taxpayer's trade or business," and in the latter case we allowed such an expenditure to be deducted as an ordinary and necessary business expense. Therefore, the fact that attorneys' fees are paid in the litigation of matters arising out of the individual return of a taxpayer does not preclude the deduction if the expenditure in dispute grew out of the taxpayer's "trade or business."

As the court said in , "'Business' is a very comprehensive term and embraces everything about which a person can be employed. Black's Law Dict., 158 * * *." The word "business" as defined by Bouvier's Law Dictionary, vol. 1, p. 273, quoted with approval by the court in the foregoing case, means "That which occupies the time, attention and labor of men for the purpose of a livelihood or profit." ; . The term "business" has also been defined to mean "some profitable activity undertaken on its own account." .

We have held in innumerable cases that a taxpayer engaged in the occupation of farming for profit is engaged in a trade or business within the meaning of the acts. ; ; , and others.

The record shows that petitioner is a woman of substantial means and that she invests rather heavily in stocks, bonds, and other securities and in real estate, and that her son is employed regularly to manage her affairs and maintains an office and employs two assistants for that purpose. We are satisfied from the evidence, and the testimony of record, that substantially all of the alleged errors or inaccuracies, out of which the proposed additional assessment arose, which attorneys were employed to defend, were not mere isolated personal transactions, but were connected with the petitioner's trade or business within the meaning of section 214(a)(1), supra, and we, therefore, hold that the fees paid, plus reimbursed expenses, are veductible.

Judgment will be ordered under Rule 50.