Pierce v. Commissioner

EDWARD A. PIERCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pierce v. Commissioner Docket No. 19017. United States Board of Tax Appeals 18 B.T.A. 447; 1929 BTA LEXIS 2045; December 6, 1929, Promulgated *2045 Amounts paid by a member of a brokerage firm for the purpose of securing evidence with which to suppress bucket shops are deductible as an ordinary and necessary business expense. Thomas Davis Day, Jr., Esq., and Robert Hardison, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. PHILLIPS *447 This proceeding involves the redetermination of a deficiency in income tax for the year 1922 in the amount of $3,448.34. The only error alleged is that respondent refused to allow a certain deduction representing an alleged business expense. FINDINGS OF FACT. Petitioner resides at Short Hills, Essex County, N.J., has offices at 15 Wall Street in the City of New York, and is a member of the New York Cotton Exchange, New Orleans Cotton Exchange, Chicago Board of Trade, and Winnipeg Grain Exchange. He is a member of the firm of A. A. Housman-Gwathmey & Co., a firm composed of eight members. This firm, which has its principal office at 15 Wall Street, New York City, is a member of the New York Stock Exchange, New York Cotton Exchange, New Orleans Cotton Exchange, Liverpool Cotton Association, New York Coffee and Sugar Exchange, New*2046 York Produce Exchange, Chicago Board of Trade, Winnipeg Grain Exchange, San Francisco Stock and Bond Exchange, Toronto Stock Exchange, Los Angeles Stock Exchange, and other exchanges and boards of trade, and has business connections with every stock and cotton exchange and commodity market in the United States. The firm, in order to carry on its business as brokers engaged in the buying *448 and selling of stocks, cotton and other commodities, has branch offices in San Francisco, Los Angeles, Seattle, Portland (Oregon), Philadelphia, Washington, Houston, New Orleans and other principal cities of the United States, and leases and operates private wires to those cities at great expense. During the year 1922 petitioner owned in his own right a seat in the New York Cotton Exchange and a seat in the New Orleans Cotton Exchange, and about the same time bought as an investment a second seat in the New York Cotton Exchange. In order for a partuership to receive the advantages of the membership commissions in the New York and New Orleans Cotton Exchanges, one of its members must be a member of the exchange. The value of a seat on an exchange very largely depended on the activity*2047 of trade on the exchange. Prior to August 14, 1922, there was in New York City an exchange operating under the name American Cotton and Grain Exchange. Many bucket-shop operators in New York, Philadelphia, Pittsburgh and throughout the country generally were members of the American Cotton and Grain Exchange and used that exchange as a cloak for their operations. These bucket shops, in addition to handling cotton business ostensibly, also handled similar deals in securities. For about two years a campaign was conducted against the American Cotton and Grain Exchange and the bucket shops by the New York Stock Exchange, certain members of the New York Cotton Exchange, including petitioner as hereafter set forth, and the District Attorney's Office in New York City. This was not a combined effort, but the various agencies cooperated to the extent of exchanging information. These efforts resulted in the American Cotton and Grain Exchange and practically all the bucket shops being put out of business. During this time petitioner and Louis Brooks, one of the Board of Managers of the New York Cotton Exchange, cooperated in an effort to secure evidence against the bucket shops and*2048 the American Cotton and Grain Exchange. They employed detectives, investigators and, in one case, an employee of one of the bucket shops. During the year 1922 petitioner in his personal and not partnership capacity expended for these purposes the sum of $10,448.70. On August 14, 1922, Brooks reimbursed petitioner to the extent of $3,000. None of the partners of petitioner was requested to or did contribute and no other person, firm or corporation contributed to this particular undertaking. In his income-tax return for 1922 petitioner returned gross income in the total amount of $91,604.66. Of this amount the sum of $85,795.03 *449 represented his share of the profits of the firm of A. A. Housman-Gwathmey & Co., and the remaining items of income were interest on bank deposits, notes and bonds, dividends from demestic corporations, and the surrender value of an insurance policy, and a deduction of $193.53 was taken as a loss from the sale of property. Petitioner took a deduction in the amount of $7,448.70 as a business expense. This deduction respondent disallowed. OPINION. PHILLIPS: Prior to the year 1922 petitioner was and still is a member of a firm of brokers*2049 doing a large business all over the United States, and in New York City in particular, in the sale and purchase of securities and commodities including cotton. There was in New York a concern known as the American Cotton and Grain Exchange, purporting to do business as a cotton and security exchange. The evidence discloses that it was in fact the harbor and refuge of a large number of bucket shops located in New York and other cities. Such establishments are illegitimate and tend to bring the honest trade into disrepute. This particular exchange caused the legitimate houses to lose a large amount of business. It and many of its satellites were suppressed through efforts made by the New York Stock Exchange and others, including petitioner, and this suppression was of benefit to the reputable houses. If, under these circumstances, petitioner's firm had joined with other brokerage firms in the form of a trade association and had made a contribution to such association, it seems clear that the contribution would be deductible as an ordinary and necessary expense paid in carrying on its business. See *2050 ; . The expense under consideration was not incurred or paid by petitioner's firm and was not a partnership expense. It was incurred and paid by him as an individual. On the other hand, petitioner was not proceeding pro bono publico, but, so far as the record discloses, for the selfish purpose of protecting his own business, and in doing so was cooperating with the New York Stock Exchange, other private individuals, and the District Attorney. We can not see that the manner in which the money was paid, that is, whether petitioner proceeded alone or cooperated with others, changes the payment from a business into a purely personal expense. Cf. . The fact remains that the bucket shops and their central agency were suppressed and, with them, their attendant injurious effects on the petitioner's business and investments in seats on the various exchanges. Neither do we think that because, in thus *450 protecting his business interests, petitioner did not request his partners to contribute but proceeded on his own account*2051 is, under the facts of this proceeding, material. If in his judgment independent action on his part was proper, we can not say that he was bound to refrain from action unless the partnership assumed the obligation. One has the right to expend his individual money to protect his business interests whether such interests be in a partnership or a corporation and when the proper necessity is shown such expenditures are deductible as business expenses. Cf. , and . The test is whether the expense in directly connected with or proximately resulted from petitioner's business. . Tried by this test we are of opinion that petitioner should be permitted to deduct the net sum of $7,448.70 expended by him in the protection of his business. Decision will be entered under Rule 50.