Wakelee v. Commissioner

Louis E. Wakelee and Lillie E. Wakelee, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Wakelee v. Commissioner Docket No. 28411 United States Tax Court 17 T.C. 745; 1951 U.S. Tax Ct. LEXIS 49; October 31, 1951, Promulgated *49 Decision will be entered under Rule 50. Payments made pursuant to agreements between petitioner and a client for trading in securities under which petitioner became entitled to all dividends and 25 per cent of profit from sales, in return for his obligation to pay client an annual return upon sums invested, held deductible as an expense for the production or collection of income under section 23 (a) (2), Internal Revenue Code. Leonhard A. Keyes, Esq., for the petitioners. Robert Margolis, Esq., for the respondent. Opper, Judge. OPPER *745 Respondent determined a deficiency in income tax for 1944 of $ 1,008.39. The amount in controversy is approximately $ 734. Certain adjustments are not contested, additional tax having been paid. The sole issue is whether payments made during the taxable year are deductible under section 23, Internal*50 Revenue Code. Some of the facts were stipulated. FINDINGS OF FACT. The stipulated facts are hereby found accordingly. Petitioners, husband and wife, residents of Maplewood, New Jersey, filed a joint return for 1944 on a cash basis with the collector of internal revenue for the second district of New York. From 1925 to June 6, 1944, Louis E. Wakelee, hereinafter called petitioner, conducted an investment securities business under the name of L. E. Wakelee & Co., with place of business at 141 Broadway, New York City. He was a licensed dealer in securities and the sole owner of the business. On June 6, 1944, he gave up that business and became a representative of Reynolds & Co., a brokerage firm with membership in the New York Stock Exchange and offices at 120 Broadway, New York City. *746 For some years Dorothy E. Taylor, hereinafter called Mrs. Taylor, has been petitioner's client. They are not related. On various dates in 1942, 1943, and 1944 she and petitioner entered into 27 separate agreements, evidenced by a series of letters from petitioner to Mrs. Taylor which she signed in approval. In each letter petitioner proposed and Mrs. Taylor agreed that upon Mrs. Taylor's*51 purchase of certain shares, he would pay her 12 per cent (in some cases 10 per cent) "on the capital amount over the year, payable quarterly, in return for dividends paid by the Company, and 25% of the net profit from sale." The parties understood that petitioner would not be liable for any loss. They understood that petitioner would decide the time for sale. All of the securities involved were first purchased by petitioner and then sold by him to Mrs. Taylor, usually at a profit. Between March 31, 1942, and July 28, 1944, pursuant to those agreements, petitioner sold securities, which he had purchased for prices aggregating $ 26,931.37, to Mrs. Taylor for sale prices aggregating $ 29,021.25, making profits totaling $ 2,089.88. At various times in 1942 and 1943, sales were made of some of the securities purchased pursuant to the above agreements, and petitioner received the benefit of 25 per cent of Mrs. Taylor's profits upon those sales by deducting his portion of the profits from the amounts which he owed her during those years under the agreements. Subsequent to June 6, 1944, as a registered representative of a firm with stock exchange membership, petitioner was barred from making*52 profit-sharing agreements with clients. During 1944 he received no portion of profits received by Mrs. Taylor upon sales during that year of securities purchased under the above agreements. As of December 31, 1944, Mrs. Taylor continued to hold some of the securities which had been purchased under the agreements. Petitioner's business relationship with Mrs. Taylor continued and he handled her account in the purchase and sale of securities. During the years 1944 through 1951 commissions aggregating approximately $ 14,000 became payable to Reynolds & Co. resulting from security transactions for her account, petitioner's share in the commissions varying between 33 1/3 and 40 per cent. During the year in controversy, pursuant to the above agreements, petitioner made payments to Mrs. Taylor aggregating $ 2,807.94. Petitioner's 1944 tax return reported adjusted gross income of $ 6,281.43, which included the sum of $ 1,925.12, stated to be the net gain from sale or exchange of capital assets, which had been computed by deducting the amount of $ 2,807.94 from net short term capital gain for the year of $ 4,733.06. Respondent's notice of deficiency made several adjustments and determined, *53 among other matters, that "The deduction of $ 2,807.94 *747 claimed as interest payments in 1944 is not allowable under the provisions of Section 23 of the Internal Revenue Code." Petitioner alleged, among other matters, that "The respondent erred in disallowing the deduction of $ 2,807.94 representing payments made in 1944 to Mrs. Dorothy E. Taylor and claimed by the petitioners as deductible under the provisions of Section 23 of the Internal Revenue Code." The payments made by petitioner to Mrs. Taylor were ordinary and necessary expenses of an arrangement entered into for the production or collection of income. OPINION. That petitioner's arrangement with Mrs. Taylor was entered into "for the production or collection of income" 1 cannot be doubted. See 58 th Street Plaza Theatre, Inc., (Leo Brecher), 16 T. C. 469, 477. He became entitled to all of the dividends and a quarter of the capital gains arising from the securities covered by the agreement, benefits which were clearly income to him and were so dealt with by him. That he was required under the agreement to pay Mrs. Taylor an annual percentage on the money put up by her may not have*54 been "ordinary" in the sense of "usual" or "frequent." But it is not so different from other situations as to be considered unlike recognized business transactions and thus outside the scope of the deduction section. See Carl Hess, 7 T. C. 333 (guarantee against loss); Norbert H. Wiesler, 6 T. C. 1148, affd. (C. A. 6) 161 F. 2d 997; Commissioner v. Wilson (C. A. 9), 163 F. 2d 680, certiorari denied 332 U.S. 842 (short sales); 58th Street Plaza Theatre, Inc., supra (joint trading account). The contract was somewhat unusual, but once entered into, the discharge of financial obligations created by it was both ordinary and necessary. Cf. Welch v. Helvering, 290 U.S. 111. *55 It may well be that these payments were not actually interest, and we do not hold that they were. But they are so analogous to interest that to view them as extraordinary or unnecessary would clearly be unwarranted. Commissioner v. Wilson, supra, 682; see Welch v. Helvering, supra. For the reasons stated, we view the amounts in controversy as deductible, and find the deficiency to have been erroneous to that extent. Decision will be entered under Rule 50. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. -- * * * * (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 production of income.↩