28 T.C. 789 (1957), 57030, Standing v. C.I.R.
|Citation:||28 T.C. 789|
|Opinion Judge:||MULRONEY, Judge:|
|Party Name:||JAMES J. STANDING AND MARIE S. STANDING, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.|
|Attorney:||Charles A. G. Dawe, Esq., and Leroy T. Canoles, Jr., Esq., for the petitioners. James A. Scott, Esq., for the respondent.|
|Case Date:||June 28, 1957|
|Court:||United States Tax Court|
Held, taxpayer James J. Standing was on an accrual method for reporting business income and held, further, items representing interest on income tax deficiencies for prior years and expenses incurred in settling the deficiencies were properly accrued under section 22(n)(1), I.R.C. 1939, as deductions allowed by section 23 attributable to the business carried on by James J. Standing.
The respondent determined a deficiency in the income tax of James J. Standing and Marie S. Standing for the taxable year 1951 in the amount of $23,542.96. Some of the adjustments made by respondent were not put in issue by petitioners and other have been conceded. The only issue presented here is whether petitioners were entitled to deduct as expenses in arriving at adjusted gross income (under sec. 22 (n(1), I.R.C. 1939) for the year 1951 the sum of $29,043.32 representing interest on income tax deficiencies and other expenses incurred in settling the deficiencies, which items were accrued by them in their Federal income tax return for 1951.
FINDINGS OF FACT.
Some of the facts are stipulated and are found accordingly.
James J. Standing and Marie S. Standing are husband and wife, residing at Virginia Beach, Virginia, and their tax return for the year involved was filed with the then collector of internal revenue in Richmond, Virginia.
From 1944 until sometime during the year 1952, petitioner James J. Standing operated as sole proprietorships a retail lumber and building supply business and a business of building and selling houses. The individual income tax liabilities of petitioner James J. Standing, for the taxable years 1945, 1946, and 1947, and the joint individual income tax liabilities of both petitioners for the taxable years 1948
and 1949 were made the subject of investigation by respondent's agents. As a result of this investigation, the respondent, in July 1951, sent to petitioner James J. Standing proposed adjustments for the years 1944 to 1949, inclusive, showing total deficiencies and additions to the tax amounting to $160,566.46. The transmittal letter in the usual form stated if taxpayer did not agree with the adjustments he could file a protest and have opportunity for a hearing. There was attached to the transmittal letter the report of the revenue agent, which report worked up Standing's income on the specific item basis, and it stated: ‘ The additional tax is due to increase in business income.’
The agent's report shows that the items of asserted deficiencies consisted of finding various errors, including failure to report some rents, failure to use a proper basis in reporting a capital gain for sale of a parcel of realty, improperly reporting gains realized from sales of realty as capital gains and not ordinary income, improperly reporting Standing's withdrawals from the business as a salary deduction, inventory variances, improperly charging capital improvements to cost of sales or charging them off as repairs, and improperly reporting the business income on the cash basis when it should have been reported on the accrual basis.
On July 26, 1951, petitioners entered into a contingent fee contract with Charles A. G. Dawe, an attorney, and Leroy T. Canoles, Sr., a certified public accountant, whereby the attorney and accountant agreed to represent petitioners before the Bureau of Internal Revenue or other departments or courts in connection with the proposed deficiencies, and petitioners agreed to pay them one-fourth of any saving effected in the total proposed tax and penalty of $160,566.46 not to exceed the sum of $15,000. The contract also provided for the payment of $1,500 by petitioners to the attorney and accountant upon the execution of the contract, and this sum was paid on that date.
After their employment the attorney and accountant had various meetings with respondent's agents and it seems to have been agreed taxpayer's records failed properly to reflect his income.
In December 1951 the accountant and attorney and the revenue agents jointly worked up a net worth statement which eliminated the year 1944 but which showed a deficiency for the years 1945 through 1949 of $63,601.32, with additions for fraud (for the years 1945 to 1948) of $26,074.87...
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