Tallman v. Commissioner

STEPHEN H. TALLMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tallman v. Commissioner Docket No. 86550. United States Board of Tax Appeals 37 B.T.A. 1060; 1938 BTA LEXIS 947; June 15, 1938, Promulgated *947 Petitioner acted under a power of attorney to manage the finances of an invalid relative of his wife, from 1925 to 1932. In 1932, upon legal determination that the wife's relative was insane, a guardian was appointed, who thereafter threatened to sue petitioner for mismanagement of funds and alleged the power of attorney was invalid. Petitioner paid $15,000 in compromise of the claim and deducted this in his income tax return for 1934, claiming a loss under section 23(e) of the Revenue Act of 1934. Petitioner acted under the power of attorney apart from his employment as a vice president of a bank. Held, upon the facts the claimed loss is not deductible because it was not incurred in a business or in a transaction entered into for profit. The loss was a personal loss. William Cogger, Esq., for the petitioner. D. D. Smith, Esq., for the respondent. HARRON *1061 The respondent determined a deficiency in income tax for the year 1934 in the amount of $708.98. The petitioner alleges that the respondent erred in disallowing a deduction of $15,100.05 for a claimed loss. Petitioner claims the deduction under section 23(e) of the Revenue*948 Act of 1934. FINDINGS OF FACT. Petitioner resides in South Orange, New Jersey, and is a vice president of the Central Hanover Bank & Trust Co., New York City. In 1925 petitioner was an assistant vice president of the Central Union Trust Co., which later became the Central Hanover Bank & Trust Co. In August 1925 petitioner was given a power of attorney to manage the financial affairs of his wife's aunt, Laura A. Brown, who was an invalid in a sanitorium near Cleveland. At that time she was not expected to live for long. The petitioner acted under the power of attorney given to him over a period from 1925 until late in 1932. Some time in 1932 a guardian was appointed for Laura A. Brown, who had been declared mentally incompetent by a court. In 1925 Laura Brown suffered a severe injury and was not expected to live over a year. A sister, Mrs. Worcester, in Cleveland, had taken care of the invalid. Mrs. Worcester's husband died. Another sister, Mrs. Maytham, in Buffalo, had been giving assistance. Mrs. Maytham's husband became ill and had to give up his business. These two women relatives, who had been looking after Laura Brown, found that the duty required some of*949 their own funds and caused them considerable worry. They pressed petitioner to come in and take over the affairs of Laura Brown. Petitioner had no conversation with Laura Brown about fees for the services either before or after the power of attorney was given him. The only time petitioner ever received any fees for any fiduciary services outside his regular salary from the bank was in 1935, when he was appointed a coexecutor and trustee under a will by the Surrogate's Court in New York. For these services petitioner received a *1062 fee. The estate was that of a client of the bank. In a few other instances petitioner acted under a power of attorney for clients of the bank, but received no fees. When the petitioner was given the power of attorney to manage Laura Brown's financial affairs she had $18,000 of securities held by a Buffalo bank. In 1929 she received an inheritance consisting of securities, which were delivered to petitioner as attorney for Laura Brown by a Cleveland bank. Petitioner found that about $3,000 per year was required to maintain Laura Brown. Under the powers granted petitioner, he borrowed, in 1925, $20,000 from the Central Union or Central*950 Hanover Bank for investment in income producing securities, giving Laura Brown's securities as collateral for the loan. The account was set up in the loan department of the bank which acted as custodian of the securities. Dividends were credited to the account. Petitioner paid the bills for Laura Brown's expenses after approval by her sisters named above. Petitioner managed and changed the investments so as to obtain $3,000 a year income. Petitioner incurred no personal liability for the loan because liability was that of the "customer", Laura Brown, if collateral was not sufficient. For the loan, she was the bank's client. Petitioner rendered a written statement of account, setting forth receipts and disbursements, to Laura Brown's sisters about every six months from 1925 to 1932. Petitioner did not render bills for his services under the power of attorney and did not receive any fees. In 1932 petitioner received a letter from a firm of attorneys in Cleveland, Ohio, stating that a guardian had been appointed for Laura A. Brown and that they represented the guardian. This was petitioner's first information that Laura A. Brown had been declared legally incompetent and*951 a guardian appointed for her. This letter informed petitioner that he would be held personally responsible for the shrinkage in her estate on the ground that Laura A. Brown had been declared mentally incompetent when she gave the power of attorney. The attorneys for the guardian threatened to sue petitioner for approximately $40,000. Petitioner wanted to fight the claim, but finally agreed, upon the advise of his attorney, to settle it. A compromise was entered into which was approved by the probate court of Cuyahoga County, Ohio, under which petitioner paid in compromise of the claim $15,100.05 and the Central National Bank of Cleveland, which had delivered the inheritance in securities to petitioner in 1929, paid $4,000. In his income tax return for 1934 petitioner deducted the $15,100.05 which he paid in compromise of the claim arising out of his handling the finances of Laura A. Brown. The respondent denied the deduction and determined the deficiency here in question. *1063 OPINION. HARRON: It is not disputed that petitioner sustained a loss of $15,100.05 in compromise of a threatened suit for $40,000. The only question presented for our decision is whether*952 the claimed loss is an allowable deduction under the Revenue Act of 1934. 1 The respondent disallowed the deduction on his determination that the loss was not incurred in trade or business or in a transaction entered into for profit. From the evidence before us, we think petitioner did not sustain the loss in connection with a business or in a transaction entered into for profit. Petitioner was employed by a bank at a salary of $11,000 per year and only occasionally acted for clients of the bank, under a power of attorney, and did not receive fees for such purposes. On only one occasion, in the administration of an estate of a client of the bank, did petitioner receive a fee. It can hardly be said, under the facts before us, that petitioner regularly*953 engaged in the business of acting as a fiduciary for his own clients. It has been held that a person can be engaged in more than one business, but, where transactions are periodic or isolated, they do not suffice to constitute a business, regularly carried on by the taxpayer for the purpose of livelihood or profit within the meaning of the term used in section 23(e) of the Revenue Act of 1934. ; affd., , and authorities cited therein. The matter involved in the issue before us was an isolated one which extended over several years. The matter of Laura Brown was of concern to petitioner's wife and her sisters. The two women relatives of Laura Brown found their responsibility difficult to carry and they prevailed upon petitioner to take over Laura Brown's financial affairs. The problem continued for longer than was expected. It was necessary to invest and reinvest a fund. But, in spite of the work required of investing, writing checks, and keeping accounts, petitioner never asked for or received a fee. There were practical reasons for petitioner's undertaking such efforts for an invalid relative*954 of his wife under a power of attorney. Laura Brown's securities were held by banks in Buffalo and Cleveland. No doubt some formal step, such as the execution of a power of attorney by Laura Brown, was necessary to satisfy the first bank concerned in Buffalo when it turned over securities to petitioner. The fact that *1064 petitioner acted under a power of attorney does not contribute to characterize his activities in the matter as a business activity. Viewing the entire matter from a reasonable standpoint, petitioner's activities were commendable and charitable, but were such as a business man in a family would undertake for the less experienced women relatives. We recognize that petitioner's regular business as a banker made him competent to look after the management of his wife's relative's finances, but we must draw a line between endeavors carried on in his regular business and an isolated matter carried on to aid a relative, even though the same skill and knowledge is used in both endeavors. Laura Brown was a client of the bank because of the loan account. But petitioner accepted the power of attorney entirely apart from his employment and duties at the bank and*955 before Laura Brown became the bank's client. He accepted the power of attorney at the behest of Laura Brown's sisters, to assist them in a duty they found burdensome. The matter appears to have been chiefly a "family matter." Viewing the Brown matter apart from the interest the bank later had, it was not such a matter as we can hold to constitute the carrying on of a "business" by petitioner within the meaning of that phrase in the revenue act. Nor do we believe it can be concluded that petitioner looked after the Brown matter with the intention of making a profit or deriving gain. Petitioner states that he expected to receive compensation for services after Laura Brown's death. This was at most a hope. Over a period of ten years no arrangements were made for any compensation for the services at the end and apparently the matter was not discussed. Intention of receiving gain or profit is important, as was noted by the court in . We are unable to find from the facts here that petitioner had any earnest intention of realizing profit from his efforts in the Brown matter. Cf. *956 . We recognize that a payment to settle a controversy or claim may be held to be a deductible loss, if, however, the controversy arises out of matters related to the conduct of a business or a transaction entered into for profit. Cf. . But here we conclude that the payment petitioner made in 1934, in settlement of the claim against him, constituted a personal loss rather than a loss deductible under section 23(e), because the matter which gave rise to the controversy or claim was not related to a business regularly carried on by petitioner, in addition to his bank employment, and was not in itself a transaction entered into for profit. Decision will be entered for the respondent. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (e) LOSSES BY INDIVIDUALS. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise - (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *. ↩