35 T.C. 571 (1961), 69698, Reise v. C. I. R.

Docket Nº:69698.
Citation:35 T.C. 571
Opinion Judge:WITHEY, Judge:
Party Name:ELMER REISE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:Paul P. Lipton, Esq., Richard A. Petrie, Esq., and Robert D. Hevey, Esq., for the petitioner. Delman H. Eure, Esq., for the respondent.
Case Date:January 18, 1961
Court:United States Tax Court
 
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Page 571

35 T.C. 571 (1961)

ELMER REISE, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

No. 69698.

United States Tax Court.

January 18, 1961

During 1949 the petitioner paid his Wisconsin State income tax for 1948, deficiencies in his State income taxes for 1945 through 1947, interest on deficiencies in his State and Federal income taxes for 1945 through 1947, and legal fees incurred in connection with State and Federal investigations of his income tax liability to the respective entities for 1945 through 1947 which resulted in the determination of deficiencies in his State and Federal income taxes for those years. The State income tax for 1948 and the deficiencies in State and Federal income taxes for 1945 through 1947 were imposed with respect to business income. Held, that the State income tax for 1948, the deficiencies in State income taxes, interest on the deficiencies in State and Federal income taxes, and the legal expenses were ordinary and necessary expenses of the trade or business regularly carried on by petitioner, were attributable to the operation of such trade or business, and were properly deductible in computing a net operating loss carryback pursuant to section 122, I.R.C. 1939.

Paul P. Lipton, Esq., Richard A. Petrie, Esq., and Robert D. Hevey, Esq., for the petitioner.

Delman H. Eure, Esq., for the respondent.

OPINION

WITHEY, Judge:

The respondent determined a deficiency of $34,782.09 in the petitioner's income tax for 1947 and an addition to tax for that year under section 293(a) of the Internal Revenue Code of 1939[1] of $3,639.45.

The issues for determination are whether Wisconsin State income tax of the petitioner for 1948 and deficiencies in his State income taxes for prior years paid in 1949, interest on Federal and State income tax

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deficiencies for prior years also paid during 1949, together with legal fees paid by him in 1949 for services rendered in connection with Federal and State investigations of his income tax liabilities for prior years, were deductible as business expenses in computing a net operating loss carryback from 1949 to 1947 under section 122(d) of the Code.

All of the facts and evidence have been stipulated by the parties and are so found.

The petitioner is an individual residing in Milwaukee, Wisconsin, who with his wife, Lillian C. Reise, filed a timely joint Federal income tax return for 1949 with the collector of internal revenue at Milwaukee. From and including 1945 through 1949 the petitioner, operating as a sole proprietor, was engaged in business as a dealer in hides and skins. Petitioner was also engaged in the management of apartment buildings and other dwellings which he owned and held primarily for rental purposes. Petitioner also received other income in the form of dividends and interest.

The Federal and State income tax returns filed by petitioner for 1945, 1946, and 1947 were prepared on a cash basis method of accounting. There was no material difference between the amounts of net income reported in his Federal returns for the respective years and the amounts reported in his State returns for such years.

Early in 1949 the Wisconsin Department of Taxation made an investigation of the petitioner's State income tax liability for 1945 through 1947. Immediately following the foregoing investigation the respondent made an investigation of the petitioner's Federal income tax liability for the same years. As a result of his investigation, the respondent determined deficiencies in petitioner's Federal income taxes for 1945 through 1947. Substantially all of the deficiencies for those years arose from the respondent's determination that petitioner's income from sales of hides and skins should have been reported on an accrual rather than a cash basis. No change was made by the respondent with respect to the cash basis of accounting used by petitioner in reporting other income for 1945 through 1947. As a result of its investigation of the petitioner's State income tax liability, the Wisconsin Department of Taxation also determined deficiencies in petitioner's State income taxes for 1945 through 1947. In determining the deficiencies the Wisconsin Department of Taxation made essentially the same adjustments to the income reported by petitioner on his State income tax returns as respondent made in determining the deficiencies in petitioner's Federal income tax for the same years.

The petitioner's State income tax return for 1948 was filed on April 27, 1949, and the State income tax imposed for 1948 was in relation to business income.

Petitioner's income and expenses arising from sales of hides and

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skins during 1949 were reported and claimed on his Federal income tax return for that year on an accrual basis of accounting. All other items of income and expense were reported and claimed on a cash basis method of accounting.

During 1949 petitioner paid legal fees incurred for legal services rendered in connection with the investigations which resulted in the determination of deficiencies in his Federal and Wisconsin State income taxes for 1945 through 1947.

In determining the deficiency involved herein the respondent determined that certain deductions claimed by petitioner and his wife in computing a net operating loss for 1949 were not attributable to the operation of the petitioner's trade or business within the meaning of section 122(d)(5) of the Code and accordingly were allowable as deductions in computing the net operating loss only to the extent of $1,280.91, the total of dividends and interest, which was the reported gross income not derived from the petitioner's trade or business. The remainder of such items the respondent disallowed in determining the net operating loss for 1949. The items and amounts so disallowed and here in controversy are as follows:

Interest on Federal income taxes (1945, 1946, and 1947) $18,431.32

Interest on State income taxes (1945, 1946, and 1947) 1,297.75

State income tax (1948) 3,304.97

State income taxes (1945, 1946, and 1947) 17,268.15

Legal fees paid for services rendered in connection with Federal

and State income tax investigations 2,557.93

Wisconsin State income tax of the petitioner for 1948 and deficiencies in his State income taxes for prior years paid during 1949, interest on Federal and State income tax deficiencies also paid during 1949, together with legal fees paid by him in 1949 for services rendered in connection with Federal and State income tax investigations, were all ordinary and necessary expenses of the trade or business regularly carried on by the petitioner and were attributable to the operation of such trade or business. The question for...

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