Munson v. Commissioner

CARLOS W. MUNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Munson v. Commissioner Docket No. 16562. United States Board of Tax Appeals 18 B.T.A. 232; 1929 BTA LEXIS 2093; November 18, 1929, Promulgated *2093 The petitioner operated a large farm and trucking business. Serious labor troubles occurred which made it necessary for him to engage private detectives to guard his property. Held, that the amount of $60,194.07 paid out for detective hire in 1921 is deductible as a business expense. William P. McCool, Esq., R. Kemp Slaughter, Esq., and Hugh C. Bickford, Esq., for the petitioner. Hartford Allen, Esq., and Hugh Brewster, Esq., for the respondent. SMITH *232 This proceeding is for the redetermination of a deficiency in income tax in the amount of $15,912.01. The only error alleged is with respect to the respondent's disallowance of the deduction of an amount paid out in the year 1921 to the Wm. J. Burns International Detective Agency, Inc., for services performed by detectives and guards during the taxable year. *233 FINDINGS OF FACT. The petitioner is a resident of the State of New York and is chairman of the board of directors of the Munson Steamship Line, of which he and his brother own the controlling interest. The petitioner served as president of the company from 1906 until the close of the year 1913. Due to*2094 failing health he discontinued active service with the steamship company at that time and retired to his estate at Roslyn, L. I., where he had always made his home, to recuperate. His brother succeeded him as president of the Munson Steamship Line. His success in the shipping business did not fulfill all of the petitioner's ambitions. Since early childhood he had wanted to be a farmer. He had spent much time in the study of agriculture and had accumulated a large library on the subject. From his study and observation he had evolved a theory. It had for its hypotheses (1) that farming as a business was being conducted in an old-fashioned way; (2) that instead of horses for farm work tractors should be used; (3) that instead of horse-drawn market wagons motor trucks should be used; and (4) that instead of the present indirect marketing system the produce should flow direct from the farm to the retail store and the consumer. About the year 1916 the petitioner, having sufficiently regained his health, resolved to put his theory to the test. As a nucleus for his farming operations he purchased several hundred acres of land near Roslyn, immediately adjoining his estate. He leased*2095 other farm lands in the vicinity on a rental basis. He organized the business into separate units, such as a truck and tractor unit, a garden and greenhouse unit, and a marketing unit. He engaged experienced men to manage the different departments. The head of the Nassau Farm Bureau, who was also head of the Farm School of Agriculture, was employed as a supervisor. In the matter of equipment he spared no expense. He built a large greenhouse sufficient for raising winter vegatables for the market and a completely equipped garage to serve the trucks and tractors. He built a wharf at Port Washington and markets at Mineola Market, N.Y., and Port Washington. He purchased 20 tractors, 10 trucks, and numerous plows, harrows, reapers, and other modern farm equipment. It was the petitioner's intention from the beginning to extend his new system beyond the limits of his own farm lands, which comprised about 300 acres. He contracted with other farmers in the vicinity to assist them in plowing and cultivating their lands at an agreed rate per acre. In 1919 he plowed and seeded by machine *234 power over 3,000 acres of land in Nassau County, N.Y. Later on he assisted the farmers*2096 in harvesting and marketing their crops. He sold his farm produce to the general trade through his markets and to hotels and other large consumers in and near New York City. He employed at one time as many as 200 men in the different departments of his farming business. During the year 1918 the petitioner came to suspect that something was wrong in the conduct of the farm business. Complaints were received from different sources of shortages in deliveries of produce and other irregularities of like nature. Upon investigation the petitioner learned that there was widespread graft throughout the business. Immediately the guilty employees were identified and dismissed. This was the beginning of serious labor trouble that finally forced the petitioner to give up his farming venture. After their dismissal some of the former employees became resentful and set about to destroy the petitioner's business. They intimidated and otherwise influenced other employees to aid them. Practically all of petitioner's property was endangered. Steel Filings were put in the lubricating oil of the motors of the trucks and tractors, causing serious damage. Varnish was put in the fuel causing*2097 the cylinders to stick. The fuel pipes were stopped up with corks causing the bearings to burn out. A whole greenhouse crop of tomatoes, valued at $3,000 or $4,000, was destroyed, the plants being killed by the use of too much fumigant. Another greenhouse crop was destroyed by the fire being permitted to die out on a cold night. Produce sent out from the farm was undelivered and left to spoil on the trucks. On one occasion in 1919 when the petitioner was walking on his farm a shot was fired at him by some unknown person. In great despair at the threatened ruin of his business the petitioner sought aid from the local police. He was told, however, that there were no men available for the purpose of guarding his property. He made an appeal for state troopers, which was likewise denied. He then consulted his attorney, who advised him to employ private detectives until the danger had passed. Acting upon his attorney's advice, the petitioner employed the Wm. J. Burns International Detective Agency, Inc. William J. Burns, president of the agency, visited the petitioner at his home and discussed the situation with him. The petitioner wanted his property protected and those responsible*2098 for its destruction apprehended. Burns suggested that the entire matter be left to his direction, to which the petitioner agreed. The detective agency's employment continued from 1920 through the year 1923. Generally, there were from five to eight men on duty *235 regularly. One man acted as investigator and the others as guards. All of the petitioner's farm property was given protection. His residence also, which was occupied by himself and his wife only, was guarded continuously. One of the detectives acted as a bodyguard for the petitioner whenever he left his home. The petitioner made trips to New York City in company with one of the detectives about once every two weeks. It was at the suggestion of Burns, and against the petitioner's wishes, that the detective accompanied him as a bodyguard. The farming operations were practically suspended during the year 1921. The petitioner has since sold most of the farm equipment and a part of the land. The petitioner paid out to the detective agency for services rendered $25,137.99 in the year 1920, and $60,194.07 in the year 1921. He claimed the deduction of these amounts in his returns for those years as expenses*2099 of the farming business. The respondent allowed the deduction of the amount claimed in the 1920 return but disallowed the deduction of the entire amount claimed in the 1921 return. OPINION. SMITH: Did the amount of $60,194.07 paid out by the petitioner to the detective agency in the year 1921 under the circumstances above described constitute a deductible business expense of that year? Section 214(a)(1) of the Revenue Act of 1921 provides in part that in computing net income there shall be allowed as deductions: 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 * * * Section 215(a)(1) provides: (a) That in computing net income no deduction shall in any case be allowed in respect of - (1) Personal, living, or family expenses. It is not disputed that the farming operations carried on by the petitioner during the taxable year 1921 constituted a trade or business. The respondent takes the position that the expenditure represents, at least in part, a personal expense of the petitioner not connected*2100 with a trade or business within the meaning of the statute. He contends that one of the primary purposes for which the detective agency was engaged was to protect the persons of the petitioner and his wife and their personal property. He further contends that in any event the expenditure does not represent an "ordinary and necessary" expense within the meaning of the statute. *236 The purpose for which the detective agency was employed and the precise services rendered by the agency are questions of fact to be determined upon the evidence. There was no written contract pertaining to the employment of the detective agency. W. Sherman Burns, secretary and treasurer of the Wm. J. Burns International Detective Agency, Inc., who was summoned as a witness for the respondent, testified that the nature of the service contracted for was investigating and guarding; that the petitioner's farm property and personal property, as well as the persons of himself and his wife, were guarded; that the petitioner's wife was only guarded in her home, which she never left; and that he knew of no specific instances where attacks were made on the petitioner or his wife during the term of the*2101 agency's employment. The petitioner testified that he employed the detectives primarily to guard his property, particularly his farm property, which was being destroyed by the former employees whom he had discharged; that the bodyguard for himself was furnished against his wishes at the suggestion of William J. Burns; that he had no fear of personal violence; and that his chief concern was for his farm business, which he hoped to be able to resume after cessation of the labor trouble. There appears to be no serious conflict in this testimony. We think that as a whole the evidence establishes that the operation of the farm business gave rise to the situation which made it necessary for the petitioner to employ the private detectives; that the destruction of the farm property the the proximate cause of the detectives' employment; and that the services rendered by the detectives, other than those of protecting farm property, were directly related to and were incidental to those services. During this period the petitioner was engaged in no other business than farming. He was, himself, in a sense, an integral part of the farm. If he had been concerned solely with his own personal*2102 safety and that of his wife it would have been a much simpler course for him to abandon his residence on Long Island and seek safety in New York City or elsewhere. It is notable, too, that the petitioner did not employ the detectives until the year following the alleged attempt on his life. He did so then as a last resort and as the only apparent means of saving his business. The question of the deductibility of such an expenditure as that under consideration comes closely within the decision of the Supreme Court in , where it was held that attorney's fees paid out by a taxpayer in defense of a suit brought by a former law partner respecting the right to certain shares of stock received by the taxpayer for professional services performed, as allowed by the claimant, prior to the termination of *237 the partnership, were deductible from gross income as an ordinary and necessary expense under section 214(a)(1) of the Revenue Act of 1918. In its opinion the court said: In the *2103 , the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense. The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with or, as otherwise stated (, proximately resulted from, his business, the expense incurred is a business expense within the meaning of § 214(a), subd. (1), of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. * * * Where property connected with a business is imperiled through circumstances arising from the operation of the business, we can see little grounds for distinction between expenses paid out to protect such property from the unjust claims of other persons and expenses paid out to protect it from wanton destruction by other persons. We think that the deduction should be allowed as an expense of the petitioner's farming business. Judgment will be entered under Rule 50.