Comm'r of Internal Revenue

Tax Court of the United States.Feb 28, 1946
6 T.C. 285 (U.S.T.C. 1946)

Docket No. 5868.



George F. Thompson, Esq., and Warner F. Thompson, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent.

1. Deductions for travel to and meals and lodging in the place where petitioner conducted his only business, held not allowable, the expenditures not having been incurred in pursuit of his business. Commissioner v. Flowers, 326 U.S. 465.

2. Voluntary surrender to the debtor of a portion of the securities (bonds) held by petitioner, held not to result in a deductible loss, notwithstanding that the bonds were partially worthless. Sec. 23(k), I.R.C. George F. Thompson, Esq., and Warner F. Thompson, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent.

By this proceeding petitioner seeks a redetermination of a deficiency of $6,766.33 in his income tax for 1941.

The issues relate to the deductibility of expenses for travel, meals, and lodging; and the deductibility in the taxable year of a long term capital loss on account of certain bonds.

The parties filed a stipulation of facts; those facts hereinafter appearing which are not from the stipulation are from the evidence adduced at the hearing.


The stipulated facts are hereby found accordingly. Petitioner was born in Saratoga Springs, New York, and in his early teens moved to western New York, where he attended public schools. when he was 19 years of age he went into law offices as clerk at Middleport, New York. He was admitted to the bar in the State of New York in 1922, and thereupon entered into a partnership with the lawyer for whom he clerked. Two years later the partner turned over the business to petitioner, which he conducted in Middleport for some time. Thereafter petitioner entered a partnership with Judge Hickey and Judge Gold at Lockport, New York, at which time he kept his residence at Middleport, which is about 15 miles from Lockport. Lockport has a population of approximately 25,000; Middleport has approximately 1,500.

Petitioner is married. In about 1900 he purchased residence property in Middleport. The property was originally purchased in petitioner's name, but was later deeded jointly to him and his wife. They have continued to own it up to the present time. Petitioner's family has continue to live there. Petitioner resided there whenever he was in Middleport.

Petitioner, in about 1900, was elected village clerk, and later became a member of the board of education, a justice of peace, and police judge. In 1904 he became a member of the New York State Assembly, was reelected in 1905, and in 1912 was elected to the New York State Senate, where he served until 1921, representing the district in which Middleport is located.

About 1920 petitioner and three other men purchased the stock in a concern called ‘The Niagara Sprayer Company,‘ located in Middleport. Petitioner assumed active management of that company in 1921 and stayed with the company until 1928.

In 1925 petitioner entered into a law ‘partnership‘ with Frank Smith with offices in Lockport under the firm name of Thompson & Smith. That business was maintained until the fall of 1929. Petitioner did not participate in the business nor take any money from it. Smith performed all the work and received all the earnings. The use of petitioner's name in the partnership was merely to keep his name on a shingle. In the fall of 1929 the partnership name was changed to Thompson, Smith & Thompson to include petitioner's son who was admitted to the bar in that year. In June 1930 Smith died and shortly thereafter the name was changed to Thompson & Thompson. The office was moved to the Bewley Building in Lockport, where it is now located.

In 1930 petitioner undertook to represent August Heckscher in the city of New York. Petitioner performed special trial work in a number of cases. Heckscher's office was at 52 Vanderbilt Avenue in New York City, and petitioner established a law office in the same building across the hall from Heckscher. Petitioner maintained that office until May 1, 1938, when he moved his office to the Lincoln Building at 60 East 42d Street, New York City. Petitioner has continued to maintain that office until the present time. He went to New York City from Middleport in connection with the Heckscher matter whenever necessary. He was not on a regular retainer by Heckscher, but was paid for the cases he handled. One of the cases affected the Grand Central Palace, involved a large sum of money, and petitioner spent approximately five years on it until it was finished in 1937.

Whenever petitioner went to New York City he would take a room at a hotel and stay there as long as necessary. He had no lease on any apartment in New York City. Sometimes his stays in New York would be for a few days and sometimes they might be for two or three weeks at a time. During each year petitioner made a number of trips back and forth between Middleport and New York City.

In 1940 and 1941 petitioner was engaged in New York City in connection with a suit against the Willys estate which was quite complicated and involved some 22 motions before the court. The case finally went to trial on June 1, 1941, and on June 9, 1941, during the trial, was settled. On April 26, 1941, Heckscher died, and on July 10, 1941, his wife, who had inherited the bulk of her husband's estate, died, leaving a will in which petitioner was named executor. The two estates amounted in all to approximately $4,000,000. Petitioner's activities in connection with the estates were handled from the New York City office, with help from the Lockport office. The New York City office of petitioner was necessary for the conduct of the affairs of these estates. The matters concerning them could not have been taken up in the courts in northern New York.

Petitioner's wife resided in the house in Middleport in 1940 and 1941. Petitioner's sister also lived there. Sometimes petitioner's wife would accompany him when he went to New York City— usually at Easter time, when she would bring one of the grandchildren and stay a couple of weeks with petitioner at his hotel.

The matter involving the Willys estate, which was conducted from the New York City office, began June 10, 1940, and ended June 9, 1941, and required 121 days. The suit was tried in White Plains, New York, where petitioner spent 44 days, usually returning at night to his hotel in New York City. In addition thereto, in connection with that case he spent 73 days in the office in New York City, and 4 days in the Bronx, Jamaica, and Brooklyn. During the taxable year petitioner, in connection with the Heckscher estate, spent 92 days in New York City, 14 days in Florida, 4 days in Texas, 2 days in Great Neck, Long Island, and 1 day in Greenwich, Connecticut. Also during this period petitioner spent 9 days on a matter involving the Cotton States Fertilizer Co., of which 3 days were spent in New York City and 6 in Washington, D.C.; 8 days on a McDonald case in and around New York City; 1 day on a Joseph case; and 3 days in connection with a Lockport client, 2 of which were spent in Albany and 1 in New York City. The total of all the foregoing working days is 255.

Petitioner maintained a bank account in New York City and also in Lockport. During 1940 and 1941 or 1942, petitioner represented the Lockport Credit Association. During this period he was executor of the Dickson estate and of another estate in Lockport. Petitioner also was interested in the Niagara Herald Co., a printing plant located in Middleport, and was a director of the Niagara Sprayer Co. In 1940 petitioner assisted in the trial of the Charlie Papworth case in Lockport. Petitioner would generally stay 2 or 3 weeks in Middleport and vicinity in the summer when he would take a trip. The stationery for petitioner's office bore the heading ‘George F. Thompson, Attorney, 60 East 42nd Street, New York,‘ and at the left thereof ‘James T. Ronaghan, Warner F. Thompson, Associates.‘ There was also stationery for the Lockport office.

Petitioner filed his Federal income tax returns with the collector of internal revenue at Buffalo. On each of his returns for the years 1938, 1939, and 1940 he gave his address on page 1 as Middleport, New York.

On his income tax return for the year 1938 petitioner reported a gross income of $6,800 from his profession and claimed as deductions therefrom salaries of $3,900 and other expenses of $6,292, consisting of rent of $2,500, telephone, light, supplies, traveling, and other expenses of $3,792. The item of rent of $2,500 was for the New York City office.

On his 1939 return petitioner reported $25,217.55 as gross income from his profession. This income was derived from services rendered at the New York City office in connection with the Heckscher estate. On the return, in answer to the direction ‘State business, name and address if different from name and address on page 1,‘ petitioner stated ‘60 East 42nd Street, N.Y.C.‘ The principal deductions claimed from the gross income figure consisted of salaries of $3,575, rent for the New York City office, $2,175; traveling expenses, $2,047.17; telephone and telegraph, $1,422.07, and library expense, $256.28.

On his 1940 return petitioner reported $1,878.91 as gross income from his profession, and principal deductions of salaries, $2,623; rent for the New York City office, $1,778.20; telephone and telegraph, $630.44; and travel expenses, $1,788.53.

During the taxable year 1941 petitioner went to Middleport 18 times. He spent not more than 78 days in Lockport and Middleport, of which 15 or more were Sundays.

The Lockport office rent was paid by petitioner's son out of the Lockport business. Petitioner had a stenographer-secretary in the New York City office who had been with him since he had been in the New York State Senate. Ronaghan, an attorney, was also employed in petitioner's New York City office, and petitioner's son also performed services in the New York City office whenever he was not busy in the Lockport office. Petitioner had a library in his New York City office.

In connection with his activities petitioner, during the year 1941, expended the following sums for railroad fares, meals, and lodging:

+------------------------------------------------------------------------+ ¦Hotel Biltmore, New York ¦$389.81 ¦ +---------------------------------------------------------------+--------¦ ¦Hotel Royalton, New York ¦796.00 ¦ +---------------------------------------------------------------+--------¦ ¦70 Park Avenue Hotel, New York ¦242.54 ¦ +---------------------------------------------------------------+--------¦ ¦Total paid hotels ¦1,428.35¦ +---------------------------------------------------------------+--------¦ ¦Meals outside hotels ¦400.00 ¦ +---------------------------------------------------------------+--------¦ ¦Railroad Fares: ¦ ¦ +---------------------------------------------------------------+--------¦ ¦18 trips Middleport, New York, to New York City and return ¦594.00 ¦ +---------------------------------------------------------------+--------¦ ¦47 trips to White Plains and return to New York City ¦94.00 ¦ +---------------------------------------------------------------+--------¦ ¦3 trips to Washington, D.C., and return to New York City ¦60.00 ¦ +---------------------------------------------------------------+--------¦ ¦1 trip to Goshen, New York, and Albany, New York, and return to¦ ¦ +---------------------------------------------------------------+--------¦ ¦New York City ¦11.50 ¦ +---------------------------------------------------------------+--------¦ ¦ ¦759.50 ¦ +------------------------------------------------------------------------+

The total of all these expenditures is $2,587.85, of which the items of $94, $60, and $11.50 (a total of $165.50) have been allowed by respondent as deductions in the notice of deficiency.

During the year 1941 petitioner's only trade or business was the practice of law and his place of business was in New York City.

On or about November 1, 1924, petitioner purchased bonds of the Niagara Furniture Co., of the face amount of $16,000, paying therefor $16,000 in cash or the equivalent thereof. These bonds were a part of a total of $10,000 face amount of first mortgage 6 percent coupon bonds issued by the company and were secured by a first mortgage on its real property and equipment.

On or about November 1, 1928, petitioner purchased from Niagara Sprayer & Chemical Co., $66,600 face amount of these first mortgage coupon bonds, making his total holdings of these bonds the face amount of $82,600.

In consideration for the $66,600 face amount of the bonds petitioner executed and delivered to Niagara Sprayer & Chemical Co. his promissory note in the amount of $66,600, bearing interest at 6 percent per annum, and deposited the $66,600 face value of bonds with that company as collateral security for the note.

On or about November 1, 1928, petitioner also purchased from the Niagara Sprayer & Chemical Co. all the issued and outstanding capital stock of Niagara Herald Co., and in consideration therefor petitioner executed and delivered to the Niagara Sprayer & Chemical Co. certain promissory notes in the total sum of $27,000, bearing interest at 6 percent per annum, and as collateral security therefor Niagara Herald Co. issued to Niagara Sprayer & Chemical Co. its bond and mortgage in the sum of $27,000.

On or about November 1, 1931, petitioner paid to Nigara Sprayer & Chemical Co. the sum of $9,500 to apply on the principal of the note of $27,000, thereby reducing the note and bond and mortgage to the face amount of $17,500.

Petitioner paid no further sums on principal or interest on any of the above mentioned notes up to the time of the settlement agreement of October 11, 1939, hereinafter referred to.

On October 11, 1939, petitioner's indebtedness to the Niagara Sprayer & Chemical Co. consisted of one principal sum of $66,600, with unpaid interest thereon in the sum of $43,734, and an additional principal sum of $17,500, with unpaid interest thereon in the sum of $13,201.67.

Petitioner's financial condition had become bad and he was unable to pay off the indebtedness.

On October 11, 1939, a settlement agreement was entered into between petitioner and the Niagara Sprayer & Chemical Co. The agreement recited the above mentioned indebtedness of petitioner to the company and provided that the promissory notes in the aggregate sum of $84,100, together with accrued interest, were thereby compromised and settled at the sum of $35,000; the company agreed to accept in full payment of the $35,000 a transfer to it of 250 shares of stock the company agreed to transfer to petitioner all of its right, title, and interest to $66,600 in face amount of bonds of Niagara Furniture Co., and all of its rights, title, and interest in and to a certain bond and mortgage made by petitioner and Niagara Herald Co. to the Sprayer & Chemical Co. dated February 28, 1929, both transfers being without recourse to the Sprayer Co.; that upon the delivery of the 250 shares of stock the Sprayer Co. was to deliver to petitioner its release of petitioner from any further obligation or liability evidenced by the notes.

As a result of the settlement agreement petitioner transferred to the Niagara Sprayer & Chemical Co. 250 shares of its common stock, which at that time had a value of $160 per share, a total of $40,000, and the company delivered to the petitioner all the coupon bonds of the Niagara Furniture Co. in the face amount of $66,600, with all interest coupons attached, and an assignment of the mortgage of Niagara Herald Co., upon which there was then due the sum of $17,500 principal, with interest, less certain credits due to Niagara Herald Co. in the approximate amount of $6,000.

For a short time after the indebtedness arose, the Niagara Sprayer & Chemical Co. had entered the accrued interest on its books as income but thereafter made no entry recording the accrued interest.

On its books the Niagara Sprayer & Chemical Co. entered the 250 shares of its stock (which it had acquired by the settlement) at $35,000 and the balance of the principal indebtedness, plus the amount of accrued interest which had been entered on its books, was charged off as a bad debt and deducted in its income tax return for 1939. This deduction was allowed by respondent except for $5,000 of the amount claimed.

Except as otherwise recited herein, no interest on petitioner's indebtedness to Niagara Sprayer & Chemical Co. nor any part of the principal of the indebtedness was paid by petitioner up to the time of the settlement agreement referred to above. Petitioner filed his income tax returns on a cash basis and claimed no deductions thereon for interest on such indebtedness.

On December 15, 1939, the Niagara Furniture Co. was dissolved by the State of New York for failure to pay franchise tax.

In the taxable year 1941 petitioner still held $82,600 face value of the first mortgage coupon bonds in question. Petitioner had become actively interested in the management of the Niagara Furniture Co. in 1928, and continued to manage and perfect the business until 1930, when because of the depression the company ceased manufacturing furniture in quantities. The company at that time had considerable material and partly finished goods on hand, which during 1930 to 1933 were processed to a finished state. The company ceased manufacturing in 1933, and a watchman was employed. During the ensuing years the factory was kept up and the machinery greased so that operations could be started, if feasible, on a few days' notice.

By 1939 there was no further hope for the stockholders of the company. In that year the bondholders took possession of the property as mortgagees in possession. In 1941 the village of Middleport was pressing for the collection of unpaid taxes against the property which constituted the security for the mortgage bonds. These taxes had accumulated for several years. The property was sold in the spring of 1942 for approximately $23,000 and, after the cost of the sale of some $2,000 and local taxes were deducted, net proceeds of approximately $15,000 were distributed pro rata to the holders of the mortgage bonds.

On December 29, 1941, an agreement was entered into between petitioner and the other two holders of the mortgage bonds of Niagara Furniture Co. which recited that of the $100,000 face amount of bonds outstanding petitioner was the present owner of $82,600, Grace H. Hetley, as executrix of the estate of Charles Hickey, deceased, was the owner of $10,600, and William A. Gold was the owner of $6,800; that efforts had been made during 1941 to realize upon the bonds; that ‘it has been determined and ascertained that the mortgage security for the aforesaid bonds does not exceed in value the sum of Fifty Thousand Dollars‘; that no assets were available except the mortgage security; that ‘it has been determined by the parties hereto that the total amount of the bonds and mortgage hereinabove referred to is excessive of the true value and that a portion of said bonds be surrendered, cancelled and discharged, and that the mortgage be reduced accordingly.‘

It was agreed:

1. That the parties hereto do hereby surrender, cancel and discharge the following bonds, and do unconditionally, absolutely and finally release the Niagara Furniture Company, Inc. from any and all liability and responsibility for the payment thereof:

George F. Thompson— Bonds bearing the following numbers: M 1-8 inclusive; M 26-50 inclusive; C 1, having a total face value of $33,100.00.

Grace H. Hetley, as Executrix of the Estate of Charles Hickey, Deceased—Bonds bearing the following numbers: M 14-17 inclusive; C 2 and 3, having a total face value of $4,200.00

William A. Gold— Bonds bearing the following numbers: D 5-9 inclusive and C-8 and 9 having a total face value of $2,700.00.

2. That the bonds mentioned in the preceding paragraph shall have endorsed on the face thereof a suitable notation indicating that said bonds have been surrendered, released and discharged.

3. That this instrument shall be recorded in the Niagara County Clerk's Office, with the direction that the aforesaid mortgage, which is duly recorded in said Clerk's Office, in Book 450 of Mortgages, at page 130, shall be reduced in accordance with the surrender, discharge and release of the aforesaid bonds and that suitable notation be made upon the records of the said Niagara County Clerk.

The agreement was filed of record on December 31, 1941.

Petitioner claimed a long term capital loss deduction of $16,550, being 50 percent of the $33,100 face amount of bonds which were canceled under the above agreement. Respondent disallowed the claimed loss in its entirety.


OPPER, Judge:

The record makes it clear that for a considerable period extending over the year in issue and several others (cf. Coburn v. Commissioner (C.C.A.,2DCir), 138 Fed.(2d) 763) petitioner had a place of business in New York City. He resided in Middleport, at the other end of the state. As this case was presented, it was thought that the decision by the Supreme Court in the Flowers case would be controlling on the issue of what constitutes ‘home.‘ Although the Supreme Court's decision did not dispose of that point, it is, however, equally pertinent, for under it petitioner can not be allowed the contested deductions unless the payments were made ‘in pursuit of (his) business.‘

Commissioner v. Flowers, 326 U.S. 465.

Internal Revenue Code, sec. 23(a)(1)(A):‘(a) EXPENSES.—‘(1) TRADE OR BUSINESS EXPENSE.—‘(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; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.‘

A careful scrutiny of petitioner's testimony reveals no specific evidence of any professional activity in the Lockport-Middleport vicinity during the period in question. Testimony relating to the use of his name in connection with the law practice, and even the assumption that the office represented ‘Lockport clients,‘ is not inconsistent with the conclusion that all of petitioners business was conducted from his New York City headquarters. It is not aided by the absence of evidence that any of petitioner's 1941 income was from the Lockport practice. Petitioner gave detailed accounts of his professional activities away from Lockport, but did not cite a single instance of legal work performed by him there during the instant year.

A somewhat similar arrangement during an earlier period was said by petitioner to be no more than for the purpose of keeping his name on a shingle.

The inference is a least as readily drawn that petitioner returned to his family and place of residence in Middleport whenever his professional activity permitted as that he went to Middleport or Lockport for business reasons or engaged in business activities there. This leads only to the conclusion that his visits to Middleport were occasioned by his purely personal desires and hence that neither his traveling expenses there and back nor his living expenses at the site of his actual law office were deductible. Mort L. Bixler, 5 B.T.A. 1181. The burden of proof was on petitioner, and his failure to dispel unfavorable inferences must fall upon him. The traveling expenses and costs of board and lodging were properly disallowed.

On the second issue, before petitioner surrendered the bonds for which he now claims a deduction, they were not totally, but partially, worthless. The statute in its present form allows no claim on this ground for such securities as these bonds. Petitioner's surrender of the bonds to the debtor was purely voluntary. The gratuitous forgiveness of a debt furnishes no ground for a claim of worthlessness. See Uhl Estate Co., 40 B.T.A. 1223; affd. (C.C.A., 9th Cir.), 116 Fed.(2d) 530. Even if it be assumed that the purpose of the surrender was to enhance the value of petitioner's remaining bonds, what he did was to make a capital investment of which the law takes cognizance when the transaction is finally closed by the disposition of his remaining interest. Franklin Q. Brown, 9 B.T.A. 965; see Helvering v. American Dental Co., 318 U.S. 322. On no tenable theory may the loss in question be allowed for the present year.

Internal Revenue Code, section 23(k):‘(k) BAD DEBTS.—‘(1) * * * when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. This paragraph shall not apply in the case of a taxpayer * * * with respect to a debt evidenced by a security as defined in paragraph (3) of this subsection.‘(3) * * * the term 'securities' means bonds, debentures, notes, or certificates, or other evidences of indebtedness, issued by any corporation * * * with interest coupons or in registered form.‘

Reviewed by the Court.

Decision will be entered for the respondent.