Kaufman v. Commissioner

Morgan S. Kaufman, Petitioner, v. Commissioner of Internal Revenue, Respondent

Kaufman v. Commissioner

Docket No. 17098

United States Tax Court

12 T.C. 1114; 1949 U.S. Tax Ct. LEXIS 153;

June 22, 1949, Promulgated

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Decision will be entered under Rule 50.

Deduction -- Ordinary and Necessary Expense -- Defense Against Indictment -- Section 23 (a) (1). -- A lawyer, indicted for conspiracy to obstruct justice, paid attorneys' fees and other expenses in connection with two trials. In each case the jury disagreed and finally a nolle-pros was entered. Held, the expenses of the proceedings were deductible as ordinary and necessary expenses under section 23 (a) (1), I. R. C.

Fred L. Rosenbloom, Esq., for the petitioner.

William D. Harris, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined a deficiency of $ 5,363.65 in income tax for 1943. The only issue is whether $ 4,614.14 expended in 1942 and $ 37,955.52 expended in 1941 are deductible for those years in computing net loss carry-overs to offset 1943 income.

FINDINGS OF FACT.

The petitioner filed his individual return for 1943 with the collector of internal revenue for the twelfth district of Pennsylvania. He resided at that time in Scranton, Pennsylvania.

The petitioner was admitted to the bar in Pennsylvania in 1905 and engaged continuously in the active practice of law until 1941. He was a member of the bar of several courts, including that of the United States Court of Appeals for the Third Circuit. His practice was extensive and profitable.

William Fox and members of his family held substantial interests in two corporations which were represented by the petitioner in patent infringement suits before the United States Court of Appeals for the Third Circuit during the period 1932 to 1934, inclusive. J. Warren Davis was a judge of that court from June 1920 to April 15, 1939. The petitioner had been acquainted with Davis for a number of years prior to 1932.

The petitioner, Davis, and Fox were indicted on March 28, 1941, by a Federal grand jury. The indictment was captioned "United States of America v. J. Warren Davis, William Fox and Morgan S. Kaufman, No. 8969. March Sessions, 1941, Conspiracy to obstruct justice and to defraud the United States." The indictment charged, in effect, that money had passed from Fox through the petitioner to or for Davis, for which Davis was to influence improperly the action of the United States Court of Appeals for the Third Circuit in matters pending in which Fox and the petitioner were interested. The period covered was from 1935 until 1941.

Davis and the petitioner were twice tried on the indictment during 1941. The jury disagreed each time and a nolle-pros was entered as to Davis and the petitioner on November 24, 1941, upon motion of the United States Attorney.

The petitioner appeared as counsel of record in several cases litigated, during the period of the alleged conspiracy, in the United States Court of Appeals for the Third Circuit. Davis wrote the opinions of the court in two and sat as a member of the court in all of the cases.

The petitioner was questioned extensively during the second conspiracy trial regarding his connection with the above cases and with another in which Davis had rendered an opinion favorable to the petitioner's client.

The Attorney General of the United States, through the United States Attorney for the Eastern District of Pennsylvania, instituted disciplinary proceedings against the petitioner in the United States District Court for the Eastern District of Pennsylvania on December 5, 1941. The petition in the matter recited the history of the criminal proceedings and in paragraphs 8 to 11 thereof, alleged as the basis for disciplinary action, the following:

8. That during the trials of the above mentioned case the defendant, William Fox, testified that the respondent, Morgan S. Kaufman, met him, William Fox, at Atlantic City, New Jersey, "and informed me (William Fox) that Judge Davis was about to give a wedding for his daughter and that he hadn't enough funds to do it with, and would I (William Fox) be good enough to loan him $ 15,000." (n. t. July 31, 1941, p. 552). That he, William Fox, was in bankruptcy at that time, having filed a voluntary petition in bankruptcy with the United States District Court for the District of New Jersey. The defendant, William Fox, further testified that "I (William Fox) met him (Morgan S. Kaufman) at Philadelphia at the Bellevue-Stratford Hotel a few days after the middle of July (1936). I gave him the money and told him that I was making the loan that he requested." (n. t. July 31, 1941, p. 557).

9. That the respondent, Morgan S. Kaufman, at the request of J. Warren Davis, did lend to one Charles Lee Stokley, a cousin of the said J. Warren Davis, the sum of Ten thousand dollars ($ 10,000) on or about the 14th day of November, 1935, on the security of certain properties situate at Mount Dora, Florida; that no part of the principal of said loan had been paid as of August 19, 1941 and that approximately Three thousand dollars ($ 3,000) in interest was in arrears as of said date.

10. That at the times hereinbefore mentioned, J. Warren Davis was a Judge of the United States Circuit Court of Appeals for the Third Circuit.

11. That the respondent, Morgan S. Kaufman, was an active practitioner before the United States Circuit Court of Appeals for the Third Circuit and that he appeared as counsel of record in the following cases then pending before said Court during the time of the transactions above referred to:

Kelly-Springfield Tire Company vs. United States of America, No. 5491.

Henry C. Hill, Warden of the United States Northeastern Penitentiary vs. United States ex rel. Joseph Weiner, No. 5895.

Union Club of Pittsburgh vs. D. B. Heiner, Collector of Internal Revenue, No. 6263.

Paramount Pictures, Inc. v. United Motion Picture Theatre Owners of Eastern Pennsylvania Southern New Jersey and Delaware, Inc., Lewen Pizor, et al. No. 6565.

Walter M. Newman, Harry W. Kamin, Attorneys for Ambassador Apartment Building Bondholders Committee vs. Ambassador Apartment, Inc. Debtor, No. 6859.

and appeared as a party litigant in the following cases before said Court, likewise pending during said period:

Morgan S. Kaufman and Lambert J. Foulk, Receivers of S. W. Straus Investing Corporation vs. United States of America and Attorney General of the State of New York, No. 6872.

Morgan S. Kaufman and Lambert J. Foulk, Receivers of S. W. Straus & Co., Incorporated vs. United States of America, No. 6973.

The District Court of the United States for the Eastern District of Pennsylvania, acting on the report of the special masters who had found the petitioner guilty of unprofessional conduct, disbarred the petitioner on May 12, 1943.

The petitioner's expenditures for legal fees, costs, and other expenses in connection with his defense of the criminal prosecution totaled $ 37,955.52 in the year 1941 and $ 4,616.14 in the year 1942 and no part of such fees or expenses was paid in connection with the disbarment proceedings.

Deductions were claimed on the returns for 1941 and 1942 for the above expenditures, but the Commissioner disallowed them in determining the deficiency for 1943.

The petitioner first learned in 1939 of the investigation leading to the indictment. Shortly thereafter he ceased to practice law, i. e., he took on no new clients, turned some business over to associate counsel, and directed his other clients to obtain other counsel. He did not intend to practice until he could clear his name. He realized that the charges, if sustained, would destroy confidence in him and ruin his practice. He never resumed the practice of law.

The stipulation of facts is incorporated herein by this reference.

OPINION.

The amounts of the deductions and their effect upon net loss carry-overs for 1943 are not in dispute. The petitioner claims the deductions under section 23 (a) (1) of the Internal Revenue Code. The respondent does not rely upon the disbarment, but argues that it would be neither ordinary nor necessary for a lawyer in the course of his practice to have to defend himself against a criminal charge of conspiracy to obstruct justice and to defraud the United States. However, it is sufficient if the basis of the indictment was connected with and grew out of the legitimate business transactions of the petitioner. Kornhauser v. United States, 276 U.S. 145">276 U.S. 145; Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467; Citron-Byer Co., 21 B. T. A. 308. The indictment was directly connected with and proximately resulted from the petitioner's practice of law. It must be assumed that the petitioner's transactions out of which the charge grew were legitimate, since a defendant is presumed innocent until proven guilty, and the petitioner was never proven guilty. Hal Price Headley, 37 B. T. A. 738. Cf. Commissioner v. Heininger, supra;Greene Motor Co., 5 T.C. 314">5 T. C. 314. Thus, to allow the deduction would not violate public policy. The charge was more than a threat to the petitioner's law practice.

The respondent also contends that the expenses of the defense are not expenses of the law practice for 1941 and 1942, because the petitioner had ceased to carry on that business prior to 1941. This is contrary to Flood v. United States, 133 Fed. (2d) 173; Moir v. United States, 49 Fed. Supp. 331; and Waters F. Burrows, 38 B. T. A. 236. No sound reason for denying the deductions has been advanced or discovered. The Commissioner erred.

Decision will be entered under Rule 50.