DocketNumber: Docket No. 3954-68
Citation Numbers: 1970 U.S. Tax Ct. LEXIS 199, 54 T.C. 374
Judges: Sterrett,Tannenwald,Forrester,Fay,Dawson,Simpson,Tannenwald,Featherston,Fay,Irwin,Tietjens,Drennen,Withey,Atkins,Hoyt
Filed Date: 3/2/1970
Status: Precedential
Modified Date: 11/14/2024
*199
*374 Respondent determined a deficiency of $ 754.10 in the petitioners' Federal income tax for the taxable year 1966. The only issue for decision is whether respondent was correct in its determination that $ 3,016.43 expended by petitioners to secure new employment is not deductible under
Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
Petitioners David J. and Carol J. Primuth (Carol is involved herein solely by reason of filing a joint return and therefore the designation "petitioner", will refer only to David) resided at Glenview, Ill., at the time their petition was filed herein. They filed their joint Federal income tax return for 1966 with the district director of internal revenue at Milwaukee, Wis.
In May of 1961 petitioner was employed by Foundry Allied Industries, Inc., of Racine, Wis. (hereinafter referred to as Foundry), as controller. Subsequently he became secretary-treasurer at a base salary of approximately $ 22,000 per annum. His total compensation with bonus was approximately $ 30,000 per annum for the 2 years prior to his leaving Foundry.
As secretary-treasurer petitioner had fiduciary responsibility for the financial well-being of the corporation, as well as overall management responsibility for accounting, cost accounting, purchasing, and international finance.
As of May 1966 petitioner had become dissatisfied with his prospects*202 at Foundry. He felt the corporation, itself, had a limited future and that there was organizational instability.
After seeing an advertisement in the Wall Street Journal petitioner contacted Frederick Chusid & Co. (hereinafter Chusid) at its office in *375 Milwaukee, Wis., with the sole purpose of securing new employment. Chusid, though not licensed in its home State of Illinois as an employment agency, held itself out as "World's Largest Consultants in Executive Search and Career Advancement."
Subsequent to his response to the newspaper advertisement petitioner was contacted by a Chusid representative, Mr. Fisher. On October 11, 1966, petitioner signed a contract by which he agreed to pay $ 2,775, or $ 2,636.25 if fee paid in full within 3 weeks, plus certain out-of-pocket expenses in return for Chusid's services.
According to the terms of the contract Chusid agreed to provide "consulting services and direct assistance" for a period of 8 months, beginning with the date of the contract. Under this contract petitioner agreed to pay Chusid's fee without condition. On October 11, 1966, petitioner made a payment of $ 775 and on November 5, 1966, he paid the remainder, $ 1,861.25.
*203 Although petitioner was aware of the fact that Chusid's fee was payable irrespective of whether new employment was obtained, this aspect was minimized by Fisher at their initial meeting. Petitioner was assured that, in cases of clients with qualifications such as those he possessed, employment was invariably secured. In addition Chusid furnished a guarantee that petitioner could utilize any unused portion of the 8-month contract period, for 3 years, if he was dissatisfied with the position Chusid secured for him. If the 8-month period had been expended he would be entitled to another 30 days of Chusid's services free of charge.
The aforementioned contract of October 11, 1966, set forth the various services that Chusid had agreed to perform for petitioner. These were as follows: (1) Assignment of the client's case to various staff members, such as a "supervising psychologist," a "counseling psychologist," promotional specialists, writers, financial advisers, and researchers; (2) research into the client's background, abilities, and personality; (3) evaluation of the client by the psychological staff; (4) counseling; (5) career assessment; (6) evaluation of opportunities; (7) career*204 planning; (8) establishment of a plan of action aimed toward realization of goals; (9) development of a "marketing image"; and (10) staff assistance in the preparation of marketing materials.
After execution of this contract petitioner's case was turned over to Charles Darwent (hereinafter Darwent) of Chusid's Chicago office. Darwent was to act as petitioner's consultant. Petitioner was interviewed by Darwent and spoke to him on a daily basis by telephone.
At Chusid's request in order to analyze the petitioner's potentialities he submitted to a series of tests which lasted 60 to 90 minutes and had at least one interview with a psychologist. Petitioner was indifferent *376 to the results of these procedures; his purpose in consulting Chusid was to secure employment.
In furtherance of this purpose an extensive resume of petitioner's background and qualifications was prepared and mailed, along with a transmittal letter, to various potential employers by Chusid. Petitioner desired and was aware of this activity on his behalf by Chusid.
Petitioner also received copies of followup letters to potential employers from Chusid that Darwent indicated had been sent on petitioner's behalf. *205 Many of these letters emphasized petitioner's qualifications and contained Chusid's endorsement of petitioner's abilities. The letters also indicated that many prospective employers had evinced interest in the petitioner due to prior contacts initiated by Chusid. This, also, was the kind of activity for which petitioner employed the services of Chusid.
By check, dated November 28, 1966, petitioner made payment of $ 380.18 to Executive Advertising Services, Inc. This was pursuant to his agreement with Chusid to pay certain out-of-pocket expenses. The expenditure represented payment for the printing and mailing of 1,000 "Motivating Letters," 300 "Brochures" (apparently the aforementioned resumes), 100 "Want Ads," 100 "Master Leads," and 100 referral letters.
Each week Chusid mailed petitioner a list of positions available, together with a brief description of each of them. Upon receiving one of these lists petitioner would indicate interest in certain of the positions listed and Chusid, where appropriate, would arrange an interview.
The foregoing efforts on the part of Chusid resulted in at least seven interviews with representatives of various companies. Chusid gave petitioner*206 descriptions of his expected duties, potential responsibilities, and compensation with prospective employers but did not directly influence his negotiations with these firms. The interviews resulted in four specific offers of employment. One of these was with the Symons Manufacturing Co. of Des Plaines, Ill. (hereinafter Symons).
On March 23, 1967, petitioner accepted employment with Symons. He began his duties as secretary-controller *207 and the national scope of the company.
*377 In order to keep the aforementioned 3-year guarantee in force petitioner was required to have a final interview with a Chusid representative. At this interview, which transpired approximately 20 days after he joined Symons, petitioner answered questions about how he was succeeding at his new employment.
Petitioner deducted $ 3,016.43 as "Employment Agency Fee" on his Federal income tax return for the taxable year ended December 31, 1966. This amount represented Chusid's fee of $ 2,636.25 plus the amount of $ 380.18 which petitioner had paid to Executive Advertising Services, Inc.
By notice of deficiency, dated June 11, 1968, respondent disallowed the deduction, stating:
The fee of $ 3,016.43 paid to Frederick Chusid & Company
*208 OPINION
The petitioner seeks to deduct a fee of $ 3,016.43 which he paid in 1966 to Frederick Chusid & Co. for its services in securing new employment for him. We have found as a fact that Chusid at the outset virtually guaranteed him a new position and that their efforts did, in fact, result in his accepting a new position.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
We hold initially that the above-noted expenditure of $ 3,016.43 was incurred by the petitioner in carrying on his trade or business of being a corporate executive.
Over the years we have held on more than one occasion that a taxpayer may be in the trade or business of being an employee, such as a corporate executive or manager,
The recent decision in
The fact that the petitioner was employed at the time the fee was paid, which resulted in his securing new employment, is of no moment. We held in
A comparable result was reached in
The obvious principle to be evolved from the
Admittedly all the foregoing cases involved an expense which was incurred with respect, and related to, the employee's current or former employment and do not involve the payment of an employment fee. However, this does not serve to distinguish the principle at issue in *379 those cases from the one before us. In 1966 petitioner was an executive of one company. He desired to change his employment and to become an executive of*212 another company. To accomplish this purpose he employed Chusid and paid them a fee in 1966. Chusid found him to be a qualified executive and sought other suitable employment for him. They were successful with the result that on Friday, May 12, 1967, petitioner ceased being an executive of one company and on Monday, May 15, 1967, became an executive of another company.
Once we have made our decision that the petitioner was carrying on a trade or business of being a corporate executive, the problem presented here virtually dissolves for it is difficult to think of a purer business expense than one incurred to permit such an individual to continue to carry on that very trade or business -- albeit with a different corporate employer. There can be no question that the fee paid in 1966 resulted directly in petitioner's securing new employment in 1967. There can be no doubt concerning its proximity.
Furthermore, the expense had no personal overtones, led to no position requiring greater or different qualifications than the one given up, and did not result in the acquisition of any asset as that term has been used in our income tax laws. It was expended for the narrowest and most limited*213 purpose. It was an expense which must be deemed ordinary and necessary from every realistic point of view in today's marketplace where corporate executives change employers with a noticeable degree of frequency. We have said before, and we say again, that the business expenses which an employee can incur in his own business are rare indeed. *214 by our comments in
However, we think this language was not intended to permit the deduction of a fee where the employment agency merely seeks to locate a position for the taxpayer, as here, but was intended to allow a deduction
*380 Interestingly enough one might have thought that our decision would be in keeping with the views of respondent. To amplify, on April 25, 1960, respondent published
The Internal Revenue Service will continue to allow deductions for fees paid to employment agencies for securing employment.
It was this ruling to which we had reference in the
Respondent seeks to avoid the effect of the plain language contained in the last sentence of his own
Secondly, respondent contends that his revenue ruling is not applicable because it only covers the situation where the payment of the fee is contingent upon the securing of a position and not the situation where, as is true here, the fee is payable in all events. In the case where the payment of a fee does in fact result in the securing of a job this seems to us to be a distinction without a difference. In both cases the purpose of the payment, and the results thereof, are identical. Furthermore, we noted in our Findings of Fact that a representative of Chusid practically guaranteed the petitioner, on the occasion of their first interview, that they would secure a job for him.
Admittedly this decision was not reached without some conceptual difficulties. It might be argued that the payment of an employment fee is capital in nature and hence not currently deductible. Presumably, under this view the fee would be deductible when the related employment is terminated. However, the difficulty with this view is to conjure up a capital asset which had been purchased. Certainly, the*217 expense was not related to the purchase or sale of a capital asset. Further, we do not find the instant situation analogous to the capital expense incurred by an individual in the course of changing his field of endeavor.
A further objection can be made on the basis that the expenditure is *381 basically personal in nature, analogous perhaps to general educational expenses. However, here we have an expense which was paid for the
Our holding herein makes it unnecessary for us to consider the applicability of
Tannenwald,
Certainly, in the ordinary affairs of life, common understanding would clearly encompass the fee paid to the employment agency herein as "ordinary and necessary expenses in carrying on any trade or business" (
In cases of the instant type, I would adopt the simple test of comparing the position which the taxpayer occupied before and after the change. Perhaps the categorization of corporate executive will not always be applicable, but, in this case, petitioner was at all times a
I am not concerned that such a test will open up a Pandora's box of unjustified deductions. The courts are not wanting in capability of separating the wheat from the chaff and, at the same time, exhibiting sufficient flexibility not to proliferate taxpayers' difficulties unnecessarily. Such a task is simply a normal attribute of judicial life.
Simpson,
In our society, it is common practice for an employee to move from one position to another in the same trade or business for a variety of reasons. If an individual wishes to change his position in his trade or business, it is surely appropriate for him to secure the assistance of an employment agency in finding a new position. Hence, any fee that he pays to the agency meets the test of being an ordinary and necessary expense of his trade or business.
The position of the respondent is not altogether clear. On the one hand, his regulations under
Whatever the respondent's intended position may be, there is, in my opinion, no sufficient legal basis for treating the expenses of securing employment differently from those of seeking employment. The *224 arguments sometimes given for denying a deduction for the expenses of seeking an employment include the contention that the employee is not engaged in the new trade or business at the time he incurred the expenses, the contention that such expenses are personal or capital in nature, and the contention that to allow such expenses as a deduction would lead to numerous administrative problems. Yet, these same arguments apply with equal force to the expenses of securing a new position. To allow deductions for securing employment and *384 deny deductions for seeking employment seems unreasonable and arbitrary.
Featherston,
Exercising the authority conferred by section 7805(a) to prescribe "all needful rules and regulations," the Commissioner issued
Tietjens,
(f) Among expenditures not allowable as deductions under
And see
1. All section references are to the Internal Revenue Code of 1954 unless otherwise specified.↩
2. Although the stipulation reads "secretary-controller" petitioner testified at trial that he began employment as controller and assistant to the vice president of finance and was not elected secretary until January of 1968.↩
3. The notice of deficiency erroneously states that $ 3,016.43 was paid to Chusid. It appears from the record that $ 380.18 was paid to Executive Advertising Services, Inc.↩
4. In
"It may well be that deductible 'ordinary and necessary expenses in carrying on a trade or business' would be few and far between for a taxpayer 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. * * *"↩
Hochschild v. Commissioner of Internal Revenue , 161 F.2d 817 ( 1947 )
Helvering v. Horst , 61 S. Ct. 144 ( 1940 )
Walter E. Ditmars and Jennie J. Ditmars v. Commissioner of ... , 302 F.2d 481 ( 1962 )
Consolidated Apparel Co. v. Commissioner of Internal Revenue , 207 F.2d 580 ( 1953 )
Commissioner of Int. Rev. v. People's-Pittsburgh Trust Co. , 60 F.2d 187 ( 1932 )
Old Colony Railroad v. Commissioner , 52 S. Ct. 211 ( 1932 )
Mary O. Furner v. Commissioner of Internal Revenue , 393 F.2d 292 ( 1968 )
Schmidlapp v. Commissioner of Internal Revenue , 96 F.2d 680 ( 1938 )
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