Comm'r of Internal Revenue

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Tax Court of the United States.May 5, 1952
18 T.C. 182 (U.S.T.C. 1952)

Docket Nos. 26049 26048.



George T. Altman, Esq., for the petitioners. Wm. P. Flynn, Jr., Esq., for the respondent.

DEDUCTION— BUSINESS EXPENSE— ATTORNEYS' FEES.— Petitioner, a movie script writer, was summoned to appear as a witness before a Committee of Congress to give testimony in a hearing wherein his business and that of the motion picture industry was under investigation relating to the charge of communistic infiltration in the industry, etc. The fact that he was summoned as a witness and the hearing by the Committee threatened to prevent or impair his future employment in the industry. He paid attorneys to represent him and advise him of his legal rights in connection with the hearing and to also aid in preventing his being blacklisted from further employment. Held, such payments to his attorneys were ordinary and necessary business expenses and deductible under section 23(a), I.R.C. George T. Altman, Esq., for the petitioners. Wm. P. Flynn, Jr., Esq., for the respondent.

The Commissioner determined deficiencies in petitioners' income tax for the calendar year 1947 as follows:

+-------------------------------+ ¦Docket¦Petitioner ¦Deficiency¦ +------+-------------+----------¦ ¦No. ¦ ¦ ¦ +------+-------------+----------¦ ¦26048 ¦Mary D. Salt ¦$79.04 ¦ +------+-------------+----------¦ ¦26049 ¦Waldo Salt ¦70.72 ¦ +-------------------------------+

Overpayments in the amount of $439.61 were claimed by each petitioner for the year 1947.

These cases were consolidated for hearing. Waldo Salt will hereinafter be referred to as petitioner.

The only question for decision is whether respondent erred in disallowing attorney's fees and other expenses, including traveling expenses, incurred by petitioner pursuant to and as result of a subpoena of the House Committee on Un-American Activities requiring petitioner's personal appearance in Washington, D.C., to testify before said Committee, which expenses petitioners claimed as a deduction for business expenses under section 23(a) of the Internal Revenue Code.

At the hearing petitioners waived their assignment of error based on Commissioner's disallowance of their claimed deduction for contributions to certain organizations.


Petitioners Waldo Salt and Mary D. Salt are husband and wife, residing in Los Angeles, California, and filed their income tax returns for the year 1947 with the collector of internal revenue for the sixth district of California.

Petitioner is and has been since 1935 employed as a writer in the motion picture industry, writing the script for plays produced therein, and in the year 1947 he received for his work as such writer a total of $31,655, of which $31,500 was paid to him by RKO Pictures Corporation.

In October 1947, petitioner, in obedience to a subpoena served upon him, went to Washington, D.C., to testify before the Committee on Un-American Activities of the House of Representatives, hereinafter called the ‘Committee.‘ Eighteen other individuals, also employed in the motion picture industry in Hollywood, were subpoenaed to appear at the same time, and did so appear. Those 19 individuals, of whom petitioner was one, will be termed ‘the group.‘ Of the group 14 were writers, 3 were directors, 1 was an actor, and 1 was an assistant producer. The hearings before the Committee of this group continued for 2 weeks, and petitioner and the others, together with their attorneys, remained in Washington. Eleven of them testified, ten of whom, after testifying, were cited for contempt by the Committee. Petitioner was not called upon to testify and was not cited for contempt, and he and 8 others of the group returned to their jobs after the hearing.

The group collectively employed four different firms of lawyers to represent them, three from California and one from Washington, D.C., of whom Robert W. Kenny of California was chief counsel. The group contributed, each in proportion to his earnings, an aggregate sum of $40,000 in payment of attorneys' fees and expenses incurred by their attorneys. All payments to this fund were made to Robert W. Kenny, Trustee, who properly distributed same to the attorneys employed. Petitioner paid to this fund $2,000 in October 1947 and $667 in November 1947, all of which was expended in 1947 in payment of petitioner's pro rata part of the attorneys' fees and attorneys' expenses, which amounts, together with an additional sum of $384.77 alleged to have been spent by petitioner for travel and hotel expenses in attending the hearings, were claimed as deductions by petitioners in their income tax return for 1947, and all of which sums were disallowed by the Commissioner in his notice of deficiency.

The attorneys were employed by the group to represent and advise them with reference to their rights and duties as witnesses before the Committee, and also to aid in preventing a threatened blacklisting, whereby petitioner would be denied further employment in the industry.

The attorneys accompanied the group to Washington, and during the hearings by the Committee had daily conferences with the group, including petitioner, and gave them advice regarding the powers of the Committee, the scope of its investigative powers, and the rights and duties of individual witnesses regarding particular questions which might be asked them at the hearings. Robert W. Kenny, chief counsel, both before and after the Committee hearings, conferred with the employer of petitioner and employers of others of the group, and also with Eric Johnston, who was then president of the Motion Picture Association of America, and with Paul McNutt, who was then acting as general counsel for the Association, and as result of these conferences obtained promises of the continued employment of the petitioner and others in the motion picture industry. So far as petitioner was concerned these promises were carried out. He was not blacklisted and his employment continued.

The purpose of the committee hearings was to investigate whether there existed communistic infiltration in the motion picture industry, whether any of its employees were communists, and whether the scope of the plays produced were subversive and designed to promote communism. Petitioner and the group were generally recognized as belonging to the ‘left wing‘ of the industry and were under suspicion by the Committee, and under the circumstances, the fact of their being summoned as witnesses, together with the scheduled hearings and the result thereof, all was calculated to and did threaten the present and future employment of petitioner and the group in the industry, and this prompted them to employ counsel.

The attorneys' fee of $2,667 paid by petitioner was ordinary and necessary expenses incurred by him in carrying on his trade or business.



Petitioners failed to make proof of the expenditure by them of any sum for travel or hotel bills, and accordingly the Commissioner's disallowance of the claimed deduction of $384.77 therefor is sustained.

The evidence, however, does establish that petitioners in 1947 did expend $2,667 for attorneys' fees or legal expenses, and under the facts and the record as a whole we are of the opinion that same constituted ‘ordinary and necessary‘ business expenses of petitioner within the meaning of section 23(a) of the Internal Revenue Code, and hence are deductible.

Sec. 23. 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, * * *

That such expenditure was unusual does not mean that it was not ‘ordinary‘ within the meaning of the section. As was said in Welch v. Helvering, 290 U.S. 111:

* * * Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. * * *

This expression was quoted by Mr. Justice Minton in Heininger v. Commissioner 133 F.2d 567, whose opinion was affirmed by the Supreme Court in Commissioner v. Heininger, 320 U.S. 467, wherein it was said that ‘whether an expenditure is directly related to a business and whether it is ordinary and necessary‘ are ordinarily questions of fact.

Attorney's fees and legal expenses incurred by a taxpayer in litigation directly connected with his business constitute a ‘business expense‘ and are deductible as such under section 23(a), such as in a suit against the taxpayer by a former partner for accounting Kornhauser v. United States, 276 U.S. 145, or a suit by the taxpayer to enjoin the enforcement of a mail fraud order, the result of which litigation permitted the taxpayer to remain in business for 2 years, Commissioner v. Heininger, supra, or by a taxpayer army officer in his defense against a court martial proceeding, wherein conviction would have resulted in his dismissal from the service, Lindsay C. Howard, 16 T.C. 157.

It is not essential to the deductibility of attorney's fees that there be litigation. Legal services are frequently required in forums other than courts, and also advice of attorneys as to legal rights and procedure is often necessary. The vital test as to deductibility is whether the services of an attorney are required by the taxpayer in a matter directly connected with his business. The facts in the instant case meet that test.

That petitioner's employment of attorneys was occasioned by and directly connected with his business is apparent. The investigation by the Committee before which he was summoned to give testimony related directly to the business in which he was engaged. The motion picture industry, of which he was a part, and also his individual connection and activities therein were the subject of the investigation, and it was about same that he was summoned to testify. The result of the investigation was calculated to affect the future of the motion picture industry as a whole and also petitioner's employment therein. A specific result was the threatened blacklisting which would have deprived petitioner of further employment in the industry and which his attorneys succeeded in averting.

Applying here the reasoning and an expression used in the Heininger case, supra, ‘upon being served‘ with a subpoena to appear before the Committee, petitioner ‘was confronted with a new business problem which involved‘ his present and future business welfare. Ordinary business prudence demanded that petitioner employ counsel to advise with and represent him in such an emergency.

That petitioner and others of the group believed the employment of counsel was required in the carrying on of their business and was related thereto is evidenced by the fact that the legal expenses paid by each were based upon a pro rata portion of his earnings in the motion picture industry.

Respondent does not question the reasonableness of the legal expenses paid by petitioner, which were less than 10 per cent of his annual earnings from his business as a script writer in the industry.

There is no merit in respondent's suggestion that the legal expenses are not deductible because of the inhibition in section 23(o)(2), I.R.C., or because of Regulations 111, section 29.23(o)-1. The deduction is not claimed under either of these provisions, and furthermore no part of same was used in propaganda ‘to influence legislation,‘ nor was the same ‘expended for lobbying purposes.‘

Respondent on brief says that the fund in question ‘was used not for the purpose of merely 'lobbying’ or 'influencing legislation' but for the purpose of directly opposing and resisting the actual investigative function of a Congressional committee.‘ The record does not so show. In support of this allegation respondent cites only the testimony of Robert W. Kenny, petitioner's chief counsel, and his answer to a single question on cross examination by respondent, wherein Kenny admitted that in conferring with the movie producers the desirability of securing an end to the hearings was mentioned, but in answer to respondent's next question, ‘Did you actually attempt to bring to a close these hearings?‘ the witness replied in the negative, saying that in view of the wide publicity given the hearings by the press and public sentiment created thereby ‘it would have been an idle act to have done anything to prevent the hearing taking place.‘ Petitioner's counsel was not employed to resist or to try to put an end to the hearings by the Committee, but to aid petitioner in his role as a witness before the Committee, and that was the character of service they rendered.

Finally, respondent's brief declares:

The general principle that the consequences of a tax deduction must not frustrate sharply defined National policies has been reiterated by the Court on several occasions. Commissioner v. Heininger, 320 U.S. 467; Textile Mills Securities Corp. v. Commissioner, 314 U.S. 326; Anthony Cornero Stralla, 9 T.C. 801.

Respondent cited no other cases in his entire brief.

Respondent does not apply this abstract statement of law to the facts of this case. Conceding its correctness, we fail to see wherein it is relevant or applicable.

None of the cases cited by respondent sustains his contention on the issue here involved. The Heininger case, supra, from which we have heretofore quoted, and which is also cited by petitioner, we think is excellent authority for petitioner. In the Textile Mills case, supra, the expenditures were not deductible because they were spent for ‘lobbying purposes.‘ In the Stralla case, supra, the taxpayer was engaged in an unlawful business, and the opinion therein, in distinguishing it from the Heininger case, said: ‘The Supreme Court in the Heininger case did specifically note that Heininger was conducting a lawful business but that certain practices in its conduct were illegal.‘

Here the business in which petitioner was engaged was lawful and no practices in its conduct were shown to be illegal.

Respondent's disallowance of the claimed deductions for attorneys' fees and legal expenses is reversed.

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