Bullock v. Commissioner

H. E. BULLOCK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bullock v. Commissioner Docket No. 28612. United States Board of Tax Appeals 16 B.T.A. 451; 1929 BTA LEXIS 2590; May 9, 1929, Promulgated *2590 Attorney fees paid by a partnership composed of stockholders of a dissolved corporation who were transferees of the assets of the corporation, for services in securing the abatement of a proposed penalty assessment by the Commissioner of Internal Revenue against the corporation held deductible as ordinary and necessary expenses paid by the partnership in carrying on a trade or business. E. J. Wells, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. SIEFKIN *451 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1922 in the amount of $1,408.11. It is alleged that the respondent erred in failing to allow, as a deduction from gross income, the sum of $10,000 paid during the fiscal year ended May 31, 1922, by the Kentucky Block Coal Mining Co., a partnership, as attorney fees, thus increasing the petitioner's part of the profits from the partnership from $563.96 to $7,921.10. FINDINGS OF FACT. The petitioner is an individual having principal office at Lexington, Ky. The Kentucky Block Coal Co., a corporation, organized under the laws of the State of Kentucky, *2591 was dissolved on June 3, 1920, and was succeeded by the Kentucky Block Coal Mining Co., a partnership, composed of the same persons who were formerly stockholders of the Kentucky Block Coal Co., a corporation. The total par value of stock of the corporation was $35,000, of which the petitioner owned about 50 per cent. The other stockholders were C. S. Foley, John Hayslette and V. B. Renaker. The petitioner later owned a 206/280 interest in the partnership. At the time of the dissolution of the corporation the partnership took over all the assets of the corporation and assumed all the liabilities. Shortly thereafter the respondent assessed against the Kentucky Block Coal Co., the corporation, a 100 per cent penalty for filing a false and fraudulent excess-profits-tax return for the calendar year 1917, amounting to something over $68,000. *452 In January, 1921, the petitioner, acting for the partnership, employed Perry B. Miller and Cox and Wells, attorneys, of Louisville, Ky., to represent them in proceedings against the imposition of the penalty of $68,000. These attorneys were to receive 15 per cent of that portion of the penalty which they succeeded in having*2592 abated. They succeeded in having the entire amount of the penalty abated. During the fiscal year ended May 31, 1922, the partnership, Kentucky Block Coal Mining Co., paid the attorneys the sum of $10,000 fees for services rendered in connection with the proposed assessment of $68,000 penalty against the predecessor corporation. The partnership, in making this return for the fiscal year ended May 31, 1922, deducted the attorney fees of $10,000 as a business expense of the partnership. The respondent refused to allow the deduction. OPINION. SIEFKIN: During the fiscal year ended March 31, 1922, the partnership, composed of the stockholders of the dissolved corporation, Kentucky Block Coal Mining Co., paid $10,000 attorney fees for services rendered in connection with abating a proposed penalty of $68,000 against the corporation for filing a false and fraudulent excess-profits-tax return for the year 1917. The sole question involved in this proceeding is whether respondent erred in refusing to allow the attorney fees as a deduction from gross income of the partnership. The petitioner alleges and the respondent admits that the partnership took over all the assets of the*2593 corporation and assumed its liabilities. The liability of the partnership to pay the penalty asserted by the respondent against the corporation would necessarily arise from the fact that the partners were transferees of the corporation as well as the obligation assumed by contract. The assets taken over by the partnership were charged with a lien in favor of the United States and the petitioner, as a member of such partnership, was justified, as a proper business precaution, in employing lawyers to prevent such a lien becoming a judgment which would reduce the property of the partnership. We hold that the litigation arose out of a transaction directly connected with the business and the attorney fees paid are deductible as ordinary and necessary expenses paid or incurred in carrying on a trade or business. Reviewed by the Board. Judgment will be entered under Rule 50.