Opinion
Docket No. 31163.
1953-09-17
SAMUEL G. SWAIM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Walter W. Flowers, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
A partnership of which petitioner was a member owned a compress and warehouse in West Memphis, Arkansas, and in 1946 listed the property with several real estate agents for sale, none of them exclusive. In 1947, the property was sold to a buyer for $175,000. The sale between the partnership and the buyer was effected without the help of any real estate broker. The partnership returned the profits from the sale in 1947, as a capital gain without the deduction of any real estate commission because none was paid. In 1947, a real estate firm brought suit against petitioner and his partner for $12,000, alleging that the firm was entitled to that amount as a commission. In 1948, this suit was compromised by the payment of $5,000. This compromise payment was paid, not as an acknowledgement of liability for the commission claimed but rather for the purpose of avoiding expensive litigation. Held, the $5,000 compromise payment was an ordinary and necessary expense paid during the taxable year for the management, conservation, or maintenance of property held for the production of income under section 23(a)(2) of the Code, and petitioner is entitled to deduct his one-half of the payment thus made. Carl W. Braznell, 16 T.C. 503, followed. Walter W. Flowers, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
The deficiency in question is described in the petition as follows:
The deficiency and liability as determined by the Commissioner, in income taxes for the calendar year 1948, in the amount of $1,487.75 of which approximately $1,350.00 is in dispute.
Petitioner makes the following assignment of error:
The determination of tax set forth in said notice of deficiency is based upon the following alleged errors: the Commissioner determined that an expense item of $5,000.00 which was paid by the petitioner as a compromise settlement of a civil law suit against him in the United States District Court at Jonesboro, Arkansas, should be deducted as an item incident to the sale of the business property of the West Memphis Compress Company, a partnership composed of K. H. Francis, a resident of the state of Texas, and Samuel G. Swaim, Tuscaloosa, Alabama. The Commissioner disallowed Petitioner's claim that this compromise settlement of the law suit referred to above should decrease the ordinary income of the West Memphis Compress Company and contends that the item served properly to decrease the profit on the sale of the partnership's interest.
FINDINGS OF FACT.
The petitioner, a resident of Tuscaloosa, Alabama, and his wife filed a joint Federal income tax return for the taxable year 1948, with the collector of internal revenue for the district of Alabama.
During the taxable year 1948, and prior thereto, petitioner and K. H. Francis were equal partners in a cotton compress and warehouse business in West Memphis, Arkansas, which they operated under the firm name of West Memphis Compress Company.
During the year 1946, the petitioner contacted several real estate agents in and around West Memphis, Arkansas, and advised them that the partnership property, that is to say the warehouse and compress, was for sale. None of these agents was given an exclusive right to sell the property. One of the agents so contacted was James Westbrook, a member of the real estate firm of Collins & Westbrook at West Memphis, Arkansas.
During the year, 1947, the petitioner negotiated a sale of the warehouse and properties, West Memphis Compress Company, to Walter May, president of the Farm Bureau of Crittenden County, Arkansas, for $175,000. All of the negotiations and contacts with Walter May were held and performed by the petitioner. The evidence showed that the question of commissions was discussed between the petitioner and the buyer and it was determined by them that no commissions were due any one in connection with this transaction. Thereupon the purchase price was agreed upon the sale was consummated.
Subsequent to sale of the property Westbrook & Collins filed suit in the United States District Court at Jonesboro, Arkansas, against K. H. Francis and the petitioner, in which suit they claimed commission in connection with the sale in the amount of $12,000. The petitioner was a bona fide resident of the State of Alabama. His partner, K. H. Francis, was a codefendant in the lawsuit and a bona fide resident of the State of Texas. The suit was filed in the State of Arkansas. During the year 1948, in order to avoid expending considerable sums in time and travel expenses on the part of both defendants in this lawsuit and to avoid the cost of defending a lawsuit in a foreign state, and for other considerations, the petitioner and his partner, K. H. Francis, entered into a compromise settlement of the lawsuit and paid to the plaintiffs the sum of $5,000 in settlement. The compromise settlement was paid, not as an acknowledgment of liability for the commission claimed by Westbrook & Collins, but rather for the purpose of avoiding expensive litigation.
Petitioner and his partner each claimed one-half the amount of the commission as a deduction for ordinary and necessary expense in arriving at net income for the year 1948.
OPINION.
BLACK, Judge:
The only question to be decided is the tax consequences of a $5,000 payment in settlement of a lawsuit. Respondent determined that the payment should reduce the sale price of certain capital assets of the business on which a capital gain was realized. Petitioner contends that it is an ordinary and necessary expense, fully deductible under section 23(a)(2), Internal Revenue Code, which provides as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) EXPENSES.
(2) NON-TRADE OR NON-BUSINESS EXPENSES.— In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.
The petitioner and K. H. Francis decided to terminate the cotton compress and warehouse business which they conducted as a partnership in West Memphis, Arkansas. They authorized several real estate agents, including the firm of Westbrook & Collins of West Memphis, Arkansas, to sell the warehouse and properties which they had used in the compress business. In 1947, petitioner transferred the property to Walter May, president of the Farm Bureau of Crittenden County, Arkansas, for $175,000. In 1948, Westbrook & Collins brought suit in the United States District Court in one of the districts of the State of Arkansas for recovery of commission in the amount of $12,000 arising out of the sale of the property. The petitioner and K. H. Francis compromised the suit in 1948 by payment of $5,000, the payment in issue here, without acknowledging liability.
It seems perfectly clear from the evidence that the sale of the compress and warehouse property which the partnership of petitioner and Francis made to May was not attributable to any efforts made by Westbrook & Collins, real estate agents. The $5,000 which petitioner and his partner Francis paid to Westbrook & Collins in compromise of the suit was paid, not as an acknowledgment of liability for the commission claimed by Westbrook & Collins, but rather for the purpose of avoiding expensive litigation. Such was the testimony at the hearing and we have so found in our Findings of Fact.
Under such circumstances, we think the instant case falls within the ambit of Carl W. Braznell, 16 T.C. 503. In that case, the facts were briefly these: In 1945, taxpayer Braznell paid a final judgment entered in a Florida state court which assessed damages of $16,500 against him for breach of his obligation to pay a real estate sales commission to a registered Florida brokerage firm for services rendered by said firm pursuant to certain sales negotiations the taxpayer had with this firm in early 1944. Sale of the same properties was actually consummated through a different broker and to different parties in December 1944. Petitioner's co-owners contributed $11,000 as their share of the judgment expenditure. On the foregoing facts, we held that the $5,500 representing taxpayer's proportionate share of the judgment expenditure was an ordinary and necessary expense paid during the taxable year for the management, conservation, or maintenance of property held for the production of income under section 23(a)(2) of the Code.
It seems to us that the Braznell case, supra, is controlling here and we decide the issue in favor of petitioner.
Decision will be entered under Rule 50.