Armour v. Commissioner

Philip D. Armour, Petitioner, v. Commissioner of Internal Revenue, Respondent

Armour v. Commissioner

Docket No. 4471

United States Tax Court

6 T.C. 359; 1946 U.S. Tax Ct. LEXIS 276;

March 7, 1946, Promulgated

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Decision will be entered under Rule 50.

1. Petitioner was liable as transferee for personal holding company surtax deficiencies and interest thereon of a liquidated and dissolved corporation. In 1940 petitioner paid the deficiencies and interest, all of which had accrued after the date of transfer. Held, the interest is deductible by petitioner under section 23 (b), Internal Revenue Code. Koppers Co., 3 T.C. 62">3 T. C. 62; affd., 151 Fed. (2d) 267, and Robert L. Smith, 6 T. C. 255, followed.

2. Petitioner paid $ 200 in miscellaneous legal fees in connection with the management, conservation, or maintenance of property held for the production of income, and he paid $ 1,650 in attorney fees in connection with litigation over personal holding company surtax deficiencies for which he was liable as transferee. Held, the expenses are deductible under section 23 (a) (2), Internal Revenue Code. Bingham Trust v. Commissioner, 325 U.S. 365">325 U.S. 365.

Harry D. Orr, Jr., Esq., for the petitioner.

Harold H. Hart, Esq., for the respondent.

Arundell, Judge.

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ARUNDELL

This proceeding involves a redetermination of petitioner's income tax liability for 1940. The Commissioner has determined that there is a deficiency of $ 9,421.22.

Two questions are raised: (1) Whether petitioner is entitled to a deduction for an interest payment made by him in the taxable year on a tax deficiency assessed against him as transferee, and (2) whether certain legal fees paid by him in connection with the contest of an asserted transferee liability against him, and other miscellaneous legal matters, are deductible under section 23 (a) (2), Internal Revenue Code.

Most of the facts have been stipulated by the parties and are found accordingly. Other facts are found from the evidence adduced at the hearing.

FINDINGS OF FACT.

Petitioner is an individual, residing at Chicago, Illinois. His income tax return for 1940 was computed on the cash receipts basis and was filed with the collector for the first district of Illinois at Chicago.

The Armforth Corporation was organized on July 8, 1931, under the laws of Delaware, by the petitioner, Philip D. Armour. He transferred certain securities to the corporation in exchange for its entire capital stock. On or about May 10, 1932, Armour created a revocable trust, to which he transferred all of the capital stock of the corporation. Bankers Trust Co. was trustee of the trust. Under the terms of the trust its entire income was currently distributable to petitioner. Thereafter, during its remaining corporate existence, the capital stock of the corporation was held by the trust.

On June 25, 1936, the Armforth Corporation was dissolved and on June 29, 1936, all the assets of the Armforth Corporation were distributed in liquidation to said Bankers Trust Co., as trustee of the aforesaid trust and, in such capacity, the registered owner of all the capital stock of the Armforth Corporation. Thereafter, including the calendar year 1940, the net income of said revocable trust was distributed to and received by the petitioner as sole beneficiary of the trust. The fair market value of the assets of the Armforth Corporation distributed in liquidation to Bankers Trust Co., New York, New York, as trustee was greatly in excess of the amount of $ 56,966.63 paid by the petitioner on November 28, 1940, as hereinafter set forth.

An income tax return and a return of personal holding company were filed for the Armforth Corporation for the fiscal year ended June 30, 1936. Thereafter, on November 29, 1938, the Commissioner of Internal Revenue duly mailed a notice of deficiency to the Armforth Corporation, notifying it of a deficiency of $ 48,975.44 in personal holding company surtax. A deficiency of $ 48,975.44 in tax, plus $ 7,286.61 in interest, was thereafter duly assessed on March 10, 1939, against the Armforth Corporation. Also, on November 29, 1938, the Commissioner duly mailed separate notices of transferee liability to petitioner and to Bankers Trust Co., trustee of the Philip D. Armour trust, notifying each of them of their alleged liability as transferee of the Armforth Corporation for the deficiency of $ 48,975.44 in personal holding company surtax, together with interest thereon as provided by law.

Petitioner and the Bankers Trust Co. each filed a petition with the United States Board of Tax Appeals, appealing said notices of liability, and the proceedings were given Docket Nos. 97207 and 97208, respectively. Answers and replies were duly filed and the proceedings were set for hearing. On or about November 14, 1940, petitioner executed a proposal for settlement of the cases covered by Docket Nos. 97207 and 97208.

On or about November 28, 1940, the petitioner, pursuant to the proposal for settlement, delivered to the collector of internal revenue at Chicago two checks drawn on his personal account, one in the amount of $ 56,235 and the other in the amount of $ 731.63. The collector on November 29, 1940, applied said payments as follows: $ 45,000 to tax; $ 6,695.14 to interest on $ 45,000 from the due date of the return, September 15, 1936, to March 10, 1939, and $ 5,271.49 to interest on $ 51,695.14 from March 17, 1939, to November 29, 1940.

Thereafter, stipulations signed by the respective parties pursuant to said proposal for settlement were filed with the Board in the two proceedings, Docket Nos. 97207 and 97208.

On December 31, 1940, petitioner paid $ 1,850 legal fees to his attorneys, Hopkins, Sutter, Halls & DeWolfe, Chicago, Illinois, pursuant to a bill for that amount dated December 21, 1940, which read as follows:

To legal services from September 1, 1939 to date in connection with miscellaneous individual matters; also, services from January 12, 1939 to date in connection with additional taxes proposed against Armforth Corporation and P. D. Armour, et al, Transferees of Armforth Corporation.

Of this bill for $ 1,850, $ 1,650 was for legal services rendered in connection with the contest of petitioner's alleged tax liability as transferee of the Armforth Corporation. The balance of the bill, $ 200, was for the "miscellaneous individual matters." The miscellaneous matters included counsel to petitioner with respect to the following matters: The method of computing the holding period of stock received by him by gift; the treatment in his 1939 income tax return of dividends received from the Kennecott Copper Co., some part of those dividends having been declared paid out of depreciation reserves; the treatment in his 1939 income tax return of certain annuities on annuity policies on his own life; advice with respect to the sale of certain Douglas Aircraft stock which petitioner owned; deductibility of a loss sustained on a mortgage on the home of an individual mortgagor; and advice with respect to a proposed settlement by petitioner of a note obligation of an individual to him for less than the amount due him thereon.

In computing his taxable net income for the calendar year 1940 petitioner deducted the aforementioned interest in the amount of $ 11,966.63 and deducted the aforementioned legal fees in the amount of $ 1,850. The Commissioner of Internal Revenue has disallowed the deduction for interest and the deduction for legal fees taken by petitioner on his income tax return for the calendar year 1940, giving rise to the deficiency here in question.

OPINION.

In the taxable year the petitioner paid $ 11,966.63 as interest on a deficiency asserted against him as a transferee. The entire amount so paid accrued after the corporate property had been distributed by the transferor, and the petitioner seeks a deduction therefor under section 23 (b), Internal Revenue Code. The respondent has disallowed the deduction for the reason that the petitioner did not make a payment of interest on his personal obligation when he paid the collector the statutory interest on a deficiency in Federal personal holding company surtax assessed against the Armforth Corporation.

We have recently had occasion to review our position in connection with the question here at issue. In Robert L. Smith, 6 T.C. 255">6 T. C. 255, we pointed out that the authorities are not in harmony with respect to the deductibility of interest payments of this character and we stated that we would adhere to our established view that such payments constitute qua interest deductible under section 23 (b), supra. The Smith case, supra, presents a somewhat different factual background, but involves the same legal principle that is here considered. Finding no basis for distinguishing the two cases, we can only conclude that our disposition here should be governed by that decision. Accordingly, upon authority of that case we find for the petitioner.

During the taxable year petitioner paid out $ 1,850 in attorney fees. Of that amount the sum of $ 1,650 was paid for services in connection with additional taxes proposed against the corporation, and petitioner and others as transferees thereof. In the settlement of the transferee cases petitioner's attorneys were successful in reducing the amount of the deficiency. The remaining $ 200 was paid for miscellaneous legal advice which appears to relate to petitioner's tax problems.

With respect to the $ 200, we think petitioner is entitled to the claimed deduction. We have held that fees paid to attorneys for services are deductible under section 23 (a) (2), Internal Revenue Code, or not, depending on whether they were paid, within the statutory language, "for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income," and that in the absence of a showing that the payments were so related there can be no deduction. Aldus C. Higgins, 2 T.C. 948">2 T. C. 948; affd., 143 Fed. (2d) 654. Here the petitioner has shown that the legal advice rendered to him was connected with the determination of the holding period on certain stock acquired by him as a gift, a partial loss deduction, tax treatment of dividends paid by a corporation out of its depreciation reserve, tax treatment of certain annuities, advice with respect to the sale of stock, and so forth. The expenditures appear to have been for legal advice related solely to an ascertainment of the proper tax liability and they have a bearing upon the management, conservation, or maintenance of his property held for the production of income. Such is the nature of expenditures for which the law makes provision for deduction from gross income. Doubt as to the propriety of the claimed deduction was dispelled by the Supreme Court's decision in Bingham Trust v. Commissioner, 325 U.S. 365">325 U.S. 365, affirming 2 T. C. 853, after its reversal by the Circuit Court of Appeals for the Second Circuit. In that case a portion of the total expenditures for legal fees and charges was for services rendered in respect of the tax and other problems resulting from the expiration of the trust and delivery of its assets to the legatees. The Court held that the expenses were deductible under the statute as expenses of management or conservation of the trust fund. The rationale of that decision is equally applicable here.

The payment connected with the transferee cases stands upon the same footing and comes within that class of expenditures for which a deduction is provided. The petitioner, as a transferee, was entitled to contest the Commissioner's determination of deficiency in the personal holding surtax liability of the Armforth Corporation. This the respondent concedes. Hence, it seems clear that the issue is governed by the decision in Bingham Trust v. Commissioner, supra, where the Supreme Court held that counsel fees and expenses paid in contesting unsuccessfully an income tax deficiency were expenses "for the management, conservation, or maintenance of property held for the production of income" within the meaning of the statute. See Howard E. Cammack, 5 T. C. 467; Greene Motor Co., 5 T. C. 314; Herbert Marshall, 5 T. C. 1032, and Williams v. McGowan, 152 Fed. (2d) 570.

We conclude that the entire sum of $ 1,850 paid by the petitioner is an allowable deduction under section 23 (a) (2), supra.

Decision will be entered under Rule 50.