Forbes v. Commissioner

Bertie Charles Forbes, Petitioner, v. Commissioner of Internal Revenue, Respondent Forbes v. Commissioner Docket No. 29327 United States Tax Court 18 T.C. 321; 1952 U.S. Tax Ct. LEXIS 194; May 16, 1952, Promulgated *194 Decision will be entered for the respondent. Section 23 (a) (2) -- Nonbusiness Expense Deduction -- Proximate Relation. -- Held, a payment of $ 1,000 made by the petitioner to the Investors League, Inc., in 1946, is not a deductible nonbusiness expense under section 23 (a) (2), where there is no proximate relation of the expenditure to the production or collection of petitioner's income or the management, conservation, or maintenance of income producing property of the petitioner. George Schwartz, Esq., for the petitioner. Joseph F. Rogers, Esq., for the respondent. Harron, Judge. HARRON *321 The respondent*195 has determined a deficiency in income tax for 1946 in the amount of $ 532. Some adjustments increasing the petitioner's taxable income are not contested. *322 The only issue for decision is whether or not the amount of $ 1,000 paid to the Investors League, Inc., in 1946 is deductible under section 23 (a) (2) of the Code. The petitioner filed his return with the collector for the second district of New York. FINDINGS OF FACT. The facts which have been stipulated are found as facts and are incorporated herein by this reference. During the taxable year the petitioner was the publisher, editor, and writer of Forbes Magazine, and the author of a syndicated newspaper column. The petitioner's writings were in the field of business, finance, and economics. The issue in this proceeding does not relate to the foregoing business activities of the petitioner. In 1946, the petitioner owned corporate securities, having a total value of $ 147,730, as follows: Shares Corporation Value [100] Addressograph-Multigraph $ 4,200 [600] American Bantam 3,000 [150] American Home Products 5,300 [50] American Power & Lt., Pfd 5,800 [150] Bethehem Steel 17,250 [300] Canadian Pacific 8,400 [700] Claude Neon 6,300 [100] Columbia Broadcasting 4,700 [100] Commercial Credit 6,000 [200] Consolidated Edison 7,200 [100] General Fireproofing 3,100 [100] General Motors 8,000 [100] Harbison Walker 3,500 [100] Hudson Trust 2,500 [20] Kennecott Copper 1,200 [100] Mid. Cont. Pet 4,500 [100] Montgomery Ward 10,400 [50] National Bank Detroit 2,200 [600] Paramount Pictures 24,000 [200] Plomb Tool 2,500 [100] Radio [100] Republic Pictures 1,800 [200] Suburban Propane 2,000 [400] Superdraulic [400] 1,720 $ 135,150 *196 The petitioner also held bonds as follows: Par value Corporation Value $ 2,000 Southern Pacific $ 2,200 6,000 Southern Railway 7,380 2,000 Standard Gas & El 2,000 1,000 Standard Pr. & Lt 1,000 $ 11,000 $ 12,580 *323 During his lifetime the petitioner is the income beneficiary of a trust which held stocks as follows: Shares Corporation Value [200] Addressograph-Multigraph $ 8,400 [50] Anaconda Copper 2,600 [30] American Power & Lt., Pfd 4,100 [100] Consolidated Edison 3,600 [100] General Motors 8,000 [65] Paramount Pictures 3,600 [150] Radio Corp 1,450 [113] Standard Oil of N. J 8,000 [20] United Fruit 1,100 [828] $ 40,850 The trust also held a $ 1,000 par value bond of the Southern Railway Co. which had a market value of $ 1,250. During 1946, the petitioner sold stocks and bonds in the aggregate amount of $ 78,250 1 and purchased stocks and bonds in the total amount of $ 23,500. His transactions in securities came to a total of $ 101,750. *197 The petitioner received dividends in the amount of $ 4,677.18, interest in the amount of $ 1,668.33, and income from his trust fund in the amount of $ 1,844.56 in 1946. None of this income was directly or remotely attributable to information or services provided by Investors League, Inc., (described hereinafter) to the petitioner. In 1946, the petitioner realized capital gains aggregating $ 44,747.65 upon the sale of stocks and bonds. None of the purchases or sales were made nor were any of the gains realized because of information or services supplied by Investors League, Inc., to the petitioner. The only other income received by the petitioner during 1946 was salary from B. C. Forbes & Sons Publishing Co. in the amount of $ 22,689.96, royalties on books of $ 364.29, and directors' fees of $ 65. The petitioner made a payment of $ 1,000 to Investors League, Inc., (hereinafter referred to as the League) in 1946. We make the following additional findings of fact relating to the background and operations of the League, which are material to the issue in this proceeding: The League was organized as a corporation under the laws of New York on July 1, 1942. It was originally known *198 as the Investors Fairplay League, Inc. The petitioner was a founder of the League, as well as its first president. He was also a director. During 1946, the officers of the League were as follows: Bertie C. Forbes President Benjamin A. Javits Vice President Gertude Weiner Secretary *324 The petitioner was not compensated for the services which he rendered the League, and he gave up his position of president in 1948. The League is a nonprofit and nonpartisan organization which is supported by contributions from its membership. During 1946 it had between 10,000 and 12,000 members throughout the United States. Its certificate of incorporation recites that the objects and purposes for which it was organized are: (1) To build up a nationwide organization which shall vigorously conduct activities designed to bring about fair play for: Investors Life insurance policyholders Savings depositors Homeowners Small business men Other property owners (2) To advocate by every lawful means the preservation of the existing private enterprise system. (3) To conduct economic studies and research; and to inform the public and the members of the Association of the results thereof. *199 (4) To cooperate in establishing local bodies having similar purposes throughout the country. (5) To express publicly the attitude of the League on any legislation or proposed legislation, including tax laws, affecting the interests of its members as investors, life insurance policyholders, savings depositors, homeowners, small business men and other property owners. (6) To participate in an appropriate and lawful capacity, and without compensation or pecuniary profit to the Association or its officers, in matters involving questions of mismanagement, or inconsiderate treatment of investors, or labor relations where principles are involved which affect the interests of members as investors, life insurance policyholders, savings depositors, homeowners, small business men and other property owners. The attitude of the League may or may not be the same as that of any government agency which may participate in such matters. (7) To advocate and promote a far greater degree of genuine democracy in industry, as distinguished from merely theoretical democracy in industry. During 1946 the League published a monthly bulletin which it distributed to its members and other investors. The League*200 was not organized and operated exclusively for educational purposes. The respondent disallowed a deduction of the amount of $ 1,000 paid to the League with the explanation that the "$ 1,000 does not constitute an allowable deduction under the provisions of section 23 (a) (2) or any other provision of the Internal Revenue Code." The expenditure of $ 1,000 was not directly or remotely helpful or appropriate to the production of the petitioner's income or to the management of income producing property of the petitioner during 1946. The payment which the petitioner made in 1946 to the League did not have a proximate relation to the production or collection of *325 taxable income of the petitioner or to the management, conservation, or maintenance of the petitioner's property held for the production of income, and it did not constitute an ordinary and necessary expense for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. OPINION. This issue is whether or not a payment in the amount of $ 1,000 made by the petitioner to the Investors League, Inc., in 1946 is a nonbusiness expense deductible under*201 section 23 (a) (2) of the Code. The petitioner contends that the payment made to the League was an ordinary and necessary expense for the production of income or for the management and conservation of his stocks and bonds. The respondent argues that the payment did not have any relation to the production or collection of the petitioner's income which he received from his securities or which was a result of the management and conservation of his securities, and that it is not deductible under section 23 (a) (2). The question to be decided is whether the payment of $ 1,000 was proximately related to the production of the petitioner's income, or to the management, conservation, or maintenance of his income producing property. Regulations 111, section 29.23 (a)-15. . The test to be applied is whether the payment was made with the purpose and with the reasonable expectation that income would flow directly therefrom to the petitioner. See ; ;*202 ; ; . Upon a consideration of all the evidence we have found as a fact that the payment in question was not proximately connected with the production of income or the management of income producing property of the petitioner during 1946. Cf. ; . We do not have the question in this proceeding of whether the League is an organization of the kind which qualifies for exemption from tax under section 101. Nor does the petitioner argue that the League is a corporation organized and operated exclusively for educational purposes, contributions to which are deductible as donations under section 23 (o) (2). Since the League devoted much of its activities to influencing legislation, it is unlikely that such a contention would succeed if made. . Cf. ;*203 . With respect to the question in the instant case, there is no evidence that the contribution to the League was made with the understanding that there was to be a quid pro quo of any kind from the League to the petitioner. The facts do not show that any information relating to stocks and bonds which the petitioner received from the League caused him to purchase or sell securities, or to take any particular course of action with respect to his own investments in 1946. Neither are we able to find that any services were rendered by the League which had the direct effect of increasing the petitioner's income from his own securities and investments during the taxable year. Although we are certain that the petitioner did not experience direct benefits from the payment of $ 1,000, we cannot even make a finding from the evidence that the expenditure was remotely connected with the production of petitioner's income, or with the management of his stocks and bonds, or with the investments which he made. Much of the evidence adduced by the petitioner is not material because it has no evidentiary value in establishing the*204 necessary element of proximate relationship, if indeed such proximate relationship existed. We refer, in particular, to the evidence that the League sponsored a program designed to foster favorable public opinion about the corporate investor's problems; that it published and distributed bulletins, containing articles which were of interest to investors; that it undertook to promote or defeat certain legislation which affected the interests of investors in securities; and that it studied and analyzed the practices of corporate management. None of this evidence warrants a finding in the petitioner's favor. Distinguishable facts requiring a different conclusion were present in the cases upon which the petitioner relies. 2 The cases cited are distinguishable. *205 We have found that the element of proximate cause was lacking between the expenditure in question and any income the petitioner received, as well as benefits to the petitioner in his management of his securities and investments, and that, therefore, it was not an ordinary and necessary nonbusiness expense within the meaning of section 23 (a) (2). *327 Under our holding, an alternative contention of the petitioner falls. It is also unnecessary to consider an alternative contention advanced by the respondent. It is held that the payment of $ 1,000 to the League in 1946 is not a deductible nonbusiness expense. The respondent's determination is sustained. Decision will be entered for the respondent. Footnotes 1. A schedule attached to petitioner's return shows total sales of $ 77,412.34.↩ 2. ; ;; ; ; ; ; , affd. ; ; ; ; , affd. ; ; ; ; ; ;↩.