Opinion
Docket No. 16357.
1949-05-31
ROBERT EDWARD KLEINSCHMIDT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Don O. Russell, Esq., for the petitioner. George E. Gibson, Esq., for the respondent.
During the taxable year petitioner paid out $1,881 as court costs, attorney fees, and other expenses in connection with three libel suits that he brought against certain newspaper publishers for alleged libelous statements made against him as a candidate for circuit judge. Petitioner deducted the $1,881 as ordinary and necessary expenses of his law office. Held, the expenditures did not constitute ordinary and necessary expenses of carrying on his trade or business. Don O. Russell, Esq., for the petitioner. George E. Gibson, Esq., for the respondent.
Respondent determined a deficiency in income and victory tax for 1943 in the sum of $306.57. Petitioner challenges respondent's determination upon the ground that he is entitled to deduct as business expenses under section 23(a), Internal Revenue Code, his expenses aggregating $1,881 in connection with certain libel suits. The other error alleged by petitioner was abandoned at the hearing.
FINDINGS OF FACT.
Petitioner, a resident of Hillsboro, Missouri, filed his income tax return for 1943 with the collector of internal revenue for the district of Missouri.
In or about 1912 petitioner was admitted to the practice of law in Missouri and began practicing law in Hillsboro. In 1914 he was elected prosecuting attorney of Jefferson County, Missouri, and was reelected in 1916. In 1918 he was in the Army, returning to Hillsboro in 1919. In 1920 he was again elected prosecuting attorney for a two-year term. He continued his law practice in Hillsboro after his third term as prosecuting attorney. He also had an abstract business, was a director, vice president and president of the Bank of Hillsboro, and was a steward in the Methodist Church of Hillsboro.
In 1938 petitioner was a candidate for judge of the Circuit Court for the Twenty-first Judicial Circuit of Missouri. On November 7, 1938, the day before the election, a news article was published by the St. Louis Globe-Democrat and two other newspapers regarding petitioner's candidacy and his conduct as a prosecuting attorney in his third term, 1920-1922. Petitioner was defeated at the election on November 8, 1938. Petitioner considered the news articles libelous and filed certain libel suits, three of which were Kleinschmidt v. Globe-Democrat Publishing Co., 165 S.W.(2d) 620; Kleinschmidt v. Nettie Johnson, 183 S.W.(2d) 82; and Kleinschmidt v. Bell, 183 S.W.(2d) 87. In each suit petitioner asked for actual and punitive damages in substantial amounts.
The petitions in the three suits alleged in part as follows:
That plaintiff (petitioner) was greatly injured (by the publications) * * * in the 21st judicial circuit and elsewhere shere said newspapers were circulated and read; that as a result thereof he was defeated in the election for circuit judge; was greatly injured in the loss of his good name and the reputation he had previously borne, as a citizen, lawyer, banker and a churchman; that plaintiff has suffered great humiliation and shame by reason of the publication of said article; that he has been brought in contempt and disgrace thereby and has suffered great mental pain and anguish and has been greatly damaged and injured in his profession, in his banking business and among the people of his church, and that all of the acts of defendants in publishing and procuring the publication of said libelous article were knowingly, intentionally and maliciously done for the purpose of injuring the plaintiff.
In each case the verdict was for the defendant or defendants and against the plaintiff. In Kleinschmidt v. Globe-Democrat Publishing Co., petitioner filed a petition for a writ of certiorari to the Supreme Court of the United States, which was denied on January 18, 1943, 317 U.S. 701.
During 1943 petitioner expended $1,881 in connection with the suits. He deducted the $1,881 in his 1943 income tax return, with the following explanation:
Court costs, attorney's fees, and other expenses in connection with three libel suits by taxpayer as plaintiff in circuit courts of Missouri, the Missouri Supreme Court and the United States Supreme Court.
In explaining his disallowance of the deduction respondent stated that ‘such expenditures are considered personal.‘
The court costs, attorney fees, and other expenses paid out by petitioner in connection with the libel suits did not constitute ordinary and necessary expenses in carrying on his trade or business.
OPINION.
ARNOLD, Judge:
Section 23(a)(1) of the Internal Revenue Code authorizes a taxpayer to deduct from his gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Petitioner contends that the expenses of $1,881 paid in connection with the libel suits were ordinary and necessary expenses of his law practice. Such expenses, he says, were ‘ordinary and necessary expenditures directly connected with or pertaining to‘ his trade or business, as set forth in section 29.23(a)-1 of Regulations 111.
The code expressions ‘ordinary and necessary expenses‘ and ‘in carrying on any trade or business‘ are statutory concepts that have been construed by the courts on many occasions. Welch v. Helvering, 290 U.S. 111; Deputy v. DuPont, 308 U.S. 488; Commissioner v. Heininger, 320 U.S. 467, and cases cited in these opinions. The decided cases lay down no general rule or definition as to what constitutes ‘ordinary and necessary expenses,‘ or what constitutes carrying on a trade or business. In the Welch case, supra, the Supreme Court remarked that ‘The standard set up by the statute is not a rule of law; it is rather a way of life.‘ In the DuPont case, the Supreme Court pointed out that the general rule on construction of Statutory provisions, under which a deduction is sought, is that the popular or received import of the words should be used. The Heininger case, supra, construed ‘ordinary and necessary‘ in accordance with ‘their commonly accepted meaning.‘ The present facts must be examined in the light of these pronouncements. The expenditures in question were not made by petitioner to augment his law practice. The taxpayer's business and his conduct thereof were not involved in the libel suits. Such suits involved an effort on his part to recoup in dollars the alleged damage to his personal reputation ad good name ‘as a citizen, lawyer, banker, and a churchman.‘ If he had spent an equal sum in acquiring or enhancing his reputation and learning as a lawyer, he could not have deducted the expenditures as ordinary and necessary expenses of his business, Welch v. Helvering, supra,
nor do we believe that the expenses here involved were ordinary and necessary expenses of his law practice.
In its opinion the Supreme Court said:‘Reputation and learning are akin to capital assets, like the good will of an old partnership. Cf. Colony Coal & Coke Corp. v. Commissioner, 52 Fed.(2d) 923. For many, they are the only tools with which to hew a pathway to success. The money spent in acquiring them is well and wisely spent. It is not an ordinary expense of the operation of a business.‘
The libel suits were filed as the result of published statements made in the course of a political campaign. The expenditures were post-campaign, rather than campaign expenses. Petitioner could not have deducted the costs of his campaign for the judgeship as ordinary and necessary expenses, McDonald v. Commissioner, 323 U.S. 57, affirming 1 T.C. 738, so he seeks to deduct his post-campaign expenses as ordinary and necessary expenses of conducting his law office. He reasons that, since he had to be a lawyer to be the prosecuting attorney for the county and since he had to be a lawyer to be the judge of the Twenty-first Judicial Circuit, the expenses constituted a part of the expense of operating his law office. We can not agree that these expenditures were ‘ordinary and necessary‘ business expenses of practicing law under any commonly accepted meaning of the terms. The expenditures were not made as an incident to earning income in the practice of law, and section 23 confines ‘deductible expenses solely to outlays in the efforts or services * * * from which the income flows.‘ McDonald v. Commissioner, supra.
In Lloyd v. Commissioner, 55 Fed.(2d) 842, affirming 22 B.T.A. 674, the president of a corporation incurred attorney fees and expenses in prosecuting a slander suit to judgment to protect his reputation and that of his business. In holding that such expenditures were not deductible as ordinary and necessary business expenses, the court said:
There can be no doubt that the slanderous reports circulated by Wardrop were such as would tend to blacken the character or reputation of petitioner. This was a personal injury, however, and one for which, under the law, he was entitled to recover damages. The suit was not instituted by the corporation of which he was president, but by petitioner himself. In practically every case where slanderous reports are circulated about an individual and damage his character or reputation, such reports affect indirectly, and, to a certain extent, the business in which he is engaged. Any expense, however, incurred by him in defending his good name under such circumstances cannot be said to be ordinary and necessary expenses incurred in carrying on his business.
‘Slander‘ has been defined to be ‘words falsely spoken, which are injurious to the reputation of another.‘ Bouv. Law Dict. Vol. 3, page 3079. This definition indicates that when the slanderous words spoken are about the reputation of an individual, such individual himself is the one who suffers the injury. Any damages recovered for such injury is recovered by the individual. Applying this rule to the instant case, the injuries were suffered by the petitioner, and had he collected the amount of the judgment, such sum would have been his own private property and would have had no connection whatsoever with his business. * * * To the same effect is Tinkoff v. Commissioner, 120 Fed.(2d) 564, which involved a proceeding to expunge order of suspension. Cf. Friedman v. Delaney, 75 Fed.Supp. 568.
Hyman Y. Josephs, 8 T.C. 583, cited by petitioner in support of his position, was reversed in Commissioner v. Josephs, 168 Fed.(2d) 233; certiorari denied, sub nom. Estate of Josephs v. Commissioner, 335 U.S. 871. Hochschild v. Commissioner, 161 Fed.(2d) 817, reversing 7 T.C. 81, and Luther Ely Smith, 3 T.C. 696, also cited by petitioner, are distinguishable.
Reviewed by the Court.
Decision will be entered for the respondent.