Citron-Byer Co. v. Commissioner

CITRON-BYER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Citron-Byer Co. v. Commissioner Docket No. 37853. United States Board of Tax Appeals 21 B.T.A. 308; 1930 BTA LEXIS 1877; November 12, 1930, Promulgated *1877 Where a corporation and two of its officers were indicted for an alleged offense which arose directly out of its business and where it was determined by the court that no such offense had been committed, held that fees paid by it to counsel to defend against such indictment are deductible as ordinary and necessary expenses of its business. Theodore B. Benson, Esq., for the petitioner. Frederick R. Shearer, Esq., for the respondent. PHILLIPS *308 Respondent has determined a deficiency in income tax for the fiscal year ended January 31, 1926, in the amount of $338.29. The only error alleged in the petition is that respondent had refused the deduction of certain legal expenses because they were paid in defense of a criminal action brought against the petitioner by the United States. The facts were stipulated. FINDINGS OF FACT. 1. The petitioner at all times hereinafter mentioned was and is a corporation organized under the laws of the State of New Jersey, with principal office at 64 Muirhead Street, Trenton, and engaged in business as a junk dealer. Its corporation income-tax return for the fiscal year ended January 31, 1926, was*1878 filed with the United States Collector of Internal Revenue for the First District of New Jersey. 2. The taxes in controversy are the corporation income taxes for the fiscal year ended January 31, 1926. The Commissioner determined a deficiency for said year in the amount of $338.29. It is agreed that in the event the Board decides in favor of the petitioner the amount of the deficiency or overpayment may be settled under Rule 50. 3. In its corporation income-tax return for the fiscal year ended January 31, 1926, the petitioner claimed a deduction for legal and professional fees in the amount of $3,460. This item was disallowed by the respondent in determining the deficiency. The only issue before the Board is whether the petitioner is entitled to the deduction in computing net income for the fiscal year ended January 31, 1926, of said item of $3,460, or any part thereof. 4. Prior to the beginning of the taxable year the petitioner and/or its officers, Israel Citron and Harry Byer purchased 89 coils of wire from the United States at a public auction of Government property at Camp Dix, N.J. When delivery was sought, 89 coils of *309 copper wire were delivered by*1879 representatives of the United States. The purchasers accepted said copper wire, took the same to Trenton, N.J., and sold it. The United States, on discovery that copper wire had been delivered, contended that ordinary wire rather than copper wire had been purchased, and called upon the purchaser and/or its said officers to pay the difference in value, which they did. On March 20, 1923, an indictment was found in the United States District Court for the District of New Jersey against the petitioner and its two officers above mentioned, charging them with conspiracy to defraud the United States by having taken from the Government warehouse at Camp Dix 89 coils of copper wire instead of 89 coils of wire. Various motions were addressed to the indictment, which were decided in favor of the Government. On defendants' motion the court set the case for trial in September, 1924. The case was not moved by the Government, several other dates were set, and finally on October 30, 1924, the last date set by the court for the trial of the case, the Government's counsel moved for a nolle-pros and declined to proceed with he trial. The District Court declined to nol-pros the case, but did dismiss*1880 said indictment for want of prosecution. 5. In the November, 1924, term of the United States District Court for the District of New Jersey a new indictment was found against the petitioner and its two officers aforesaid. The defendants then moved to quash. In considering the said motion the District Court inquired into the evidence adduced before the grand jury upon which said indictment was predicated and the Government witnesses were subpoenaed and their testimony taken in the presence of counsel. The District Court held that there was not a single iota of legal evidence to sustain the charge as laid in the second indictment, but that the grand jury had acted upon statements which could not have been received in a court and which did not sustain the charge as laid. Accordingly, the District Court quashed the second indictment. 6. In the above mentioned criminal proceedings the petitioner and its officers were represented by counsel. For the services of such counsel rendered in connection with the two indictments aforesaid, the petitioner paid during the fiscal year ended January 31, 1926, attorneys' fees in the amount of $3,460, which is the same amount as that referred*1881 to in paragraph 3 above. 7. The petitioner employed the accrual method of accounting in keeping its books and records and in making its Federal income-tax returns during all the times material hereto. *310 OPINION. PHILLIPS: The agreed stipulation of facts contains equivocal statements. The use of the "and/or" is highly objectionable. The facts should be stipulated as they occurred and not in the alternative; much less in both the conjunctive and alternative. We are met at the outset with the question of who purchased the wire. Was it purchased by petitioner through its officers Citron and Byer, or by it in conjunction with these two officers, or by these two officers in their individual capacity? The doubt raised in the first sentence of paragraph four of the stipulation must be resolved in favor of the first meaning, since Citron and Byer are not referred to in their individual capacity, but as officers, and since further on in the same paragraph petitioner is referred to as "the purchaser." Petitioner, which was engaged in the junk business, purchased from the Government coils of wire. The Government agents delivered what the Government contended and petitioner*1882 apparently admitted was another and more expensive kind. The Government demanded additional pay and received it. Thereafter petitioner and its two officers were indicted for conspiracy to defraud the Government in the transaction; this indictment was dismissed for want of prosecution. A second indictment was found. The defendants moved to quash this latter indictment, and the judge, after hearing the witnesses who had testified before the grand jury, held that there was not a single iota of legal evidence to sustain the charges made and then quashed the indictment. Here petitioner is not seeking to deduct anything in the nature of a fine or penalty incurred by a violation of the laws as in ; affd., . Not only did the presiding judge hold that there was not an iota of legal evidence to sustain the charge as laid, but it is stipulated that the erroneous delivery was the act of the representatives of the Government. No crime was committed and none was contemplated. Petitioner did not lay itself open to the charge of conspiracy to defraud. Petitioner*1883 was indicted for an alleged crime which it had not committed. The transaction out of which the indictment grew was a purchase made in the operation of its business. In defense of this prosecution petitioner paid counsel fees to attorneys to defend it. The question presented is whether the amount of $3,460 paid for counsel fees is deductible as an ordinary and necessary business expense within the meaning of section 234(a)(1) of the Revenue Act of 1926. We have no been favored by a brief in behalf of respondent, but we find that in his deficiency letter he stated that the deduction was disallowed because the fees were paid "for legal *311 services to defend a criminal action brought against it by the United States * * *." We anticipate that the contention would be that it would not be within the ordinary and necessary course of business of a corporation to violate a criminal and that therefore expenses paid in defense of a prosecution for such offense did not constitute ordinary and necessary business expenses and this irrespective of whether it was guilty or innocent. By the same token it is not a part of the ordinary business of a physician to be guilty of malpractice, *1884 nor of a corporation to infringe patents, nor of an expartner to wrongfully retain that which belonged to his former partner, but in all these cases deductions were allowed of fees paid in defense of actions to recover. , and cases there cited with approval. We can not perceive that it matters whether the fees were paid in defense of a civil or of a criminal action. Indeed, in the Great Northern case, supra, the larger part if not all the penalties were recoverable by civil actions which were not governed by considerations controlling prosecutions for criminal offenses. . If the fees were paid in defense of an action or proceeding directly connected with and proximately resulting from the ordinary and proper conduct of the taxpayer's business, they are ordinary and necessary expenses of the business and deductible as such. The situation is not the same as that presented where the taxpayer, engaged in a lawful business, violates regulations laid down for the conduct of that business and thereby incurs penalties, for then it must*1885 be assumed that such violations are not necessary. Since the acts which were the basis of the indictment in this case were connected with and grow out of the legitimate business transactions of petitioner, the amount of the fees constituted an ordinary and necessary business expense. . Decision will be entered under Rule 50.