Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Apr 2, 1947
8 T.C. 770 (U.S.T.C. 1947)

Docket No. 5954.



George A. Dickinson, Esq., for the petitioner. Sheldon Ekman, Esq., for the respondent.

DEDUCTION— BUSINESS EXPENSE.— Petitioner, a practicing lawyer, entered into a written contract in September 1941 with his 22-year-old son to pay the cost of tuition, books, and living expenses of the son and the latter's wife in return for the son's promise to attend and complete law school, do research work, be admitted to the New York Bar, and thereafter work in petitioner's law office for at least 12 months at stated compensation. Held, the expenses paid by petitioner during 1941 for the son's attendance at law school are not deductible as ‘ordinary and necessary‘ expenses of petitioner's business of practicing law. George A. Dickinson, Esq., for the petitioner. Sheldon Ekman, Esq., for the respondent.

The respondent determined a deficiency in petitioner's income tax in the amount of $766.65 for the calendar year 1941.

Petitioner assigns error in the respondent's disallowance of a deduction of $1,419.65 claimed as an ordinary and necessary business expense and alleged by petitioner to represent compensation paid to petitioner's son during 1941 for services rendered pursuant to a written contract.


Petitioner is an individual, whose business office, as member of a law firm, is located at 15 Broad Street, New York, New York, and since 1907 he has been actively engaged in the practice of law. His income tax return for 1941 was filed with the collector of internal revenue for the second district of New York.

Over a period of years prior to 1941 the petitioner had discussed in his family circle the matter of his sons going to a law school. Petitioner's eldest son, Robert, did not study law and in 1941, at the age of 27, he was engaged in a manufacturing business. In the summer of 1941 the petitioner's only other son, George, Jr., aged 22, graduated from Princeton University and soon thereafter was married. George, Jr., had little or no independent income and could not support himself and his wife while devoting his entire time to studying law, and so he had decided that he would not go to law school unless some arrangement was made to finance it.

Petitioner was so anxious to have George, Jr., take a law course, particularly at the University of Virginia, Charlottesville, Virginia, that he was willing to pay the full cost of taking such course, regardless of amount, to obtain what he wanted and ‘hoped to get.‘ In order to induce George, Jr., to study law, petitioner offered to pay the cost of the law course and also to provide for the support of George, Jr., and his wife while living at Charlottesville, in return for George's promise to do certain things, including, primarily, to satisfactorily complete the law course, to perform such research work as petitioner directed, to gain admission to the New York Bar, and, further, to work in petitioner's law office for twelve months after completing law school. Discussions between petitioner and George, Jr., about such a course of action continued during the period from the 1st of June, prior to George's marriage, until the latter part of August 1941. During the summer of 1941 George, Jr., went to Charlottesville to determine rental conditions and the cost of living for himself and wife, and the petitioner also went to Charlottesville to see the house that George, Jr., proposed to rent and to investigate the same living costs. Thereupon, petitioner fixed the figure of $250 per month, based solely on the cost of living of George, Jr., and his wife as the amount he would pay George, Jr., for the support of himself and his wife while living and attending law school at Charlottesville. Such amount was agreed to by George, Jr., as satisfactory for his and his wife's support and he would have accepted smaller monthly payments if they would have been sufficient for him and his wife to maintain a moderate scale of living. In the latter part of August or the early part of September 1941 the petitioner and George, Jr., arrived at the definite terms of their agreement and George, Jr., left for Charlottesville, Virginia. Thereafter, such agreement was reduced to writing as follows:

AGREEMENT made this 15th day of September, 1941 between GEORGE F. LEWIS, residing in Essex Fells, New Jersey (hereinafter referred to as the ‘employer ‘) and GEORGE F. LEWIS, JR., residing in Charlottesville, Virginia (hereinafter referred to as the ‘employee‘).

WHEREAS, the Employer is and has been engaged in the practice of law in the City of New York for over thirty years and requires and desires to acquire the services of a young lawyer as his associate; and

WHEREAS, the Employee is a graduate of Princeton University, is over twenty-one years of age and desires to become a member of the legal profession,

NOW, THEREFORE, in consideration of the mutual terms herein contained, it is agreed between the parties as follows:

1. The Employee agrees that he will

(a) attend the Law School of the University of Virginia for such period of time, not exceeding three years, as may be necessary for him to complete his legal education as prescribed by said University;

(b) pursue the study of such courses in such Law School as may be prescribed by the Employer, provided same are those for which credit is received for a degree;

(c) devote his best efforts to satisfactorily complete such courses;

(d) do such research work in such Law School or elsewhere as the Employer may request and furnish the Employer with written reports and memoranda of such research work;

(e) perform such services and do such work during all vacation periods either for the Employer or the nominee of the Employer as the Employer may elect;

(f) continue to work for the Employer or the nominee of the Employer for twelve months after the satisfactory completion of his course at the Law School, and perform such services as the Employer or his nominee may from time to time assign him.

2. The Employee further agrees that after the completion of such course he will devote his best energy and ability to fulfilling the requirements that are necessary in order to become admitted to the practice of law in the State of New York. This obligation is binding on the Employee for the duration of his contract and for twelve months thereafter.

3. The Employer agrees that he will pay to the University of Virginia all tuition and other regular curriculum expenses in connection with the Employee's responsibility at such University and will reimburse the Employee for any and all amounts expended by the Employee for books required to be purchased by him in the pursuit of his legal education, or out-of-pocket expenses incurred in the research work above referred to. The Employer will likewise pay to the Employee on the signing of this contract the sum of $150.00, receipt of which is hereby acknowledged by the Employee, and will further pay to him the sum of $250.00 on the first of each and every months during the period of time covered by this contract.

IN WITNESS WHEREOF, the parties hereto have executed this agreement the day and year first above written.

(Signed) George F. Lewis George F. Lewis, Jr.

Pursuant to the contract, George, Jr., entered the University of Virginia Law School in the fall of 1941 and devoted his best efforts to satisfactorily completing various law courses and certain research work in connection therewith until he entered the Naval Service in about April 1943, but during that period of time he performed no research services nor vacation period work for petitioner, because the war caused a stepped-up schedule of study, by reason of which the vacation periods were abolished or greatly curtailed. During that period of time petitioner made the payments as provided by the contract, which amounted to $1,419.67 for 1941, $3,330.95 for 1942, and $1,263.32 for 1943. The agreement was terminated when George, Jr., entered the Naval Service in April 1943. In 1946, after returning to civilian life, George, Jr., was employed as a law clerk in the New York office of the petitioner, or his firm, at $250 per month and he also continued his law studies at Fordham Law School.

The payments made by petitioner during 1941 pursuant to the agreement consisted of the following items:

+---------------------------------------------------------+ ¦Sept. 9, down payment on signing contract ¦$150.00 ¦ +------------------------------------------------+--------¦ ¦Sept. 9, first monthly payment due Oct. 1 ¦250.00 ¦ +------------------------------------------------+--------¦ ¦Sept. 29, tuition paid University of Virginia ¦109.00 ¦ +------------------------------------------------+--------¦ ¦Oct. 12, book store ¦38.12 ¦ +------------------------------------------------+--------¦ ¦Oct. 30, second monthly payment due Nov. 1 ¦250.00 ¦ +------------------------------------------------+--------¦ ¦Nov. 21, book store ¦8.55 ¦ +------------------------------------------------+--------¦ ¦Dec. 1, third monthly payment due ¦250.00 ¦ +------------------------------------------------+--------¦ ¦Dec. 31, tuition paid University of Virginia ¦114.00 ¦ +------------------------------------------------+--------¦ ¦Dec. 31, fourth monthly payment due Jan. 1, 1942¦250.00 ¦ +------------------------------------------------+--------¦ ¦ ¦______ ¦ +------------------------------------------------+--------¦ ¦Total ¦1,419.67¦ +---------------------------------------------------------+

The amounts so received by George, Jr., during 1941 were not considered by him to be income and he filed no tax return for that year, but he did file a return for 1942, reporting thereon income of $3,000 which represented $250 per month payments for 12 months of that year.

The petitioner regarded his agreement of September 15, 1941, with George, Jr., as a ‘unique‘ contract of employment without parallel, so far as he knew, in his kind of business. The petitioner claimed a deduction of $1,419.65 on his 1941 tax return under the heading ‘other deductions authorized by law,‘ on account of the payments made under the agreement of September 15, 1941, and respondent disallowed such claimed deduction. On his 1941 return petitioner reported gross income from two sources, namely, a little over one-third thereof from salaries from corporations and commissions from certain trusts, and a little under two-thirds thereof from the law firm of Tibbetts, Lewis, Lazo & Welch, 15 Broad Street, New York City.

The petitioner's expenditures, totaling $1,419.67 during 1941, pursuant to his September 15, 1941, agreement with his son, George, Jr., were personal expenses incurred in furthering his son's education in pursuance of the personal desires of both father and son, and of such total expenditures the sum of $1,150 was based solely on the cost of the standard of living maintained by George, Jr., and his wife at Charlottesville, Virginia, rather than on the value of any personal services rendered by George, Jr., during 1941, or to be rendered by him in the future to the petitioner's law business. During the year 1941 George, Jr., fulfilled his promise to attend law school in return for the petitioner's payments totaling $1,419.67 for tuition, books, and living expenses; but George, Jr., rendered no services to the actual operation of petitioner's business and he did not contribute to the production of income by petitioner during that year. Such amount of $1,419.67 was a personal expense of petitioner and not an ordinary and necessary expense paid or incurred in 1941 in carrying on petitioner's law business.


TYSON, Judge:

Petitioner contends that the agreement of September 15, 1941, was an arm's length contract, legally binding on both the parties thereto, and that without such an agreement to finance his legal education George, Jr., would not have gone to law school. The respondent does not contend otherwise, and we may assume, arguendo, that such contention is correct.

Petitioner further contends that such agreement was not one for personal convenience, but a contract of business necessity in providing for the required legal training of a successor to petitioner for the continuance of the latter's law practice, particularly by one bearing the petitioner's name, and that, therefore, the expenses incurred and paid in the amount of $1,419.65 in connection therewith during 1941 constituted ordinary and necessary business expenses of petitioner, deductible under section 23(a) of the Internal Revenue Code. Respondent contends that such expenditures were neither ordinary nor necessary expenses of petitioner's business within the meaning of section 23(a) supra, but constituted purely personal expenses of a father furthering his son's education and thus specifically were not deductible, as provided by section 24 of the code. The applicable provisions of the code are set forth in the margin.

SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) EXPENSES.—(1) TRADE OR BUSINESS EXPENSES.—(A) IN GENERAL.— 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; * * *(2) NON-TRADE OR NON-BUSINESS EXPENSES.—In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management conservation, or maintenance of property held for the management conservation, or maintenance of property held for the production of income.SEC. 24. ITEMS NOT DEDUCTIBLE.(a) GENERAL RULE.— In computing net income no deduction shall in any case be allowed in respect of—(1) Personal, living, or family expenses; * * *

There is no question here but that the petitioner's active pursuit of the practice of the law in New York City during 1941 constituted ‘carrying on * * *business‘””’ within the meaning of section 23(a)(1)(A), supra, and there is also no question as to petitioner having ‘paid‘ in 1941 the amount of $1,419.65 to and on behalf of his son, George, Jr., in connection with the latter's attendance at law school during 1941, pursuant to the agreement of September 15, 1941. Accordingly, the sole issue presented is whether such amount constituted ‘ordinary and necessary expenses‘ of petitioner's business within the meaning of section 23(a)(1)(A) and thus were deductible from petitioner's gross income.

In Deputy v. Du Pont (1940), 308 U.S. 488, approving the rule laid down in Welch v. Helvering, 290 U.S. 111, that in order to be deductible the expense must be both ‘ordinary‘ and ‘necessary,‘ the facts differ from those in the instant case, but the basic principles there laid down as to whether an expense is deductible in computing net income are controlling here. To be ‘ordinary‘ the expense must proximately result from and be related to the taxpayer's own business; and must arise from a transaction of common or frequent occurrence in the type of business in which the expense was paid or incurred. Furthermore, the deductibility of an expense does not depend upon the fact that an obligation to pay has arisen, but rather upon the kind of transaction out of which the obligation arose and its normalcy and necessity in the particular business in which incurred. Also, the fact that a taxpayer might derive some benefit from the transaction does not bring it within the ambit of his business.

In the instant case the petitioner's agreement of September 15, 1941, with his son, George, Jr., and the 1941 payments thereunder, were in furtherance of the personal desires of both father and son that the latter should prepare himself for subsequently engaging in the father's business of practicing law. The fact that George, Jr., would not have gone to law school unless satisfactory financial arrangements were made and the further fact that petitioner might be benefited from the arrangement by subsequently obtaining the services of his son in carrying on his law practice, do not serve to change the personal character of petitioner's expense to one within the ambit of the expense deduction allowed by the statute. While the arrangement was a nice one, certainly as to the son, and perhaps also to the father, it has not only been shown to be either ‘ordinary‘ or ‘necessary‘ in its relation to the petitioner's business, but also, to the contrary, the petitioner himself testified that it was a unique arrangement, which, so far as he knew, was without parallel in his kind of business.

The primary facts relating to the issue presented as to the year 1941 are, that George Jr., was not an employee in the petitioner's place of business and rendered no services whatever at any other place in connection with the petitioner's business of practicing law; that the amount of the payments made by petitioner in 1941 was based primarily on the cost of the living expenses of his son and the latter's wife and not on the value of any services rendered to petitioner's business; and that the petitioner's payments, totaling $1,419.65, on behalf of his son in 1941 had no relation to the actual operation of petitioner's business of the production of his income during 1941. The expenses in question were purely the cost of George, Jr., in following a course of study so as to place himself in a position to practice law at a future time, and at such future time to render service to petitioner at a stipulated compensation for at least twelve months.

The authorities relied upon by petitioner are not apposite here, for in each of those cases the facts show that actual services were rendered by an employee in the operation of the taxpayer's business and that such services were related to the production of the income from which the claimed deduction was sought as compensation paid or incurred.

Cohen v. Commissioner, 31 Fed.(2d) 874; Grace Johnson Munroe, 32 B.T.A. 995; Anna E. Riley, 29 B.T.A. 160; petition for review dismissed, 70 Fed(2d) 1013; Oscar Mitchell, 27 B.T.A. 101; Samuel Rottenberg, 20 B.T.A. 589; Jascha Heifetz, 15 B.T.A. 410; Estate of K. Threefoot, 9 B.T.A. 499; McCoy-Brandt Machinery Co., 8 B.T.A. 909; Lillian M. Goldsmith, 7 B.T.A. 151; Alfred Le Blanc, 7 B.T.A. 256.

We conclude that the expense in question was not an ‘ordinary and necessary‘ expense of petitioner's business within the meaning of section 23(a), supra, but was a personal expense and, therefore, not deductible from petitioner's gross income as provided by section 24(a), supra. Cf. Robert S. Seese, 7 T.C. 925.

The respondent's determination is approved.

Decision will be entered for the respondent.