Primuth v. Comm'r of Internal Revenue

• Decision Date: 02 March 1970
• Docket Number: Docket No. 3954-68.
• Parties: DAVID J. PRIMUTH AND CAROL J. PRIMUTH, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 374

DAVID J. PRIMUTH AND CAROL J. PRIMUTH, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3954-68.

United States Tax Court

Filed March 2, 1970.

William F. Kolbe, for the petitioners.

Alan B. Shidler, for the respondent.

Held, fee expended in order to secure employment is deductible as an ordinary and necessary business expense within the meaning of sec. 162, I.R.C. 1954.

STERRETT, Judge:

Respondent determined a deficiency of $754.10 in the petitioners' Federal income tax for the taxable year 1966. The only issue for decision is whether respondent was correct in its determination that $3,016.43 expended by petitioners to secure new employment is not deductible under section 162 or 212, I.R.C. 1954.¹

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.

Petitioners David J. and Carol J. Primuth (Carol is involved herein solely by reason of filing a joint return and therefore the designation ‘petitioner,’ will refer only to David) resided at Glenview, Ill., at the time their petition was filed herein. They filed their joint Federal income tax return for 1966 with the district director of internal revenue at Milwaukee, Wis.

In May of 1961 petitioner was employed by Foundry Allied Industries, Inc., of Racine, Wis. (hereinafter referred to as Foundry), as controller. Subsequently he became secretary-treasurer at a base salary of approximately $22,000 per annum. His total compensation with bonus was approximately $30,000 per annum for the 2 years prior to his leaving Foundry.

As secretary-treasurer petitioner had fiduciary responsibility for the financial well-being of the corporation, we well as overall management responsibility for accounting, cost accounting, purchasing, and international finance.

As of May 1966 petitioner had become dissatisfied with his prospects at Foundry. He felt the corporation, itself, had a limited future and that there was organizational instability.

After seeing an advertisement in the Wall Street Journal petitioner contacted Frederick Chusid & Co. (hereinafter Chusid) at its office in Milwaukee, Wis., with the sole purpose of securing new employment. Chusid, though not licensed in its home State of Illinois as an employment agency, held itself out as ‘World's Largest Consultants in Executive Search and Career Advancement.’

Subsequent to his response to the newspaper advertisement petitioner was contacted by a Chusid representative, Mr. Fisher. On October 11, 1966, petitioner signed a contract by which he agreed to pay $2,755, or $2,636.25 if fee paid in full within 3 weeks, plus certain out-of-pocket expenses in return for Chusid's services.

According to the terms of the contract Chusid agreed to provide ‘consulting services and direct assistance’ for a period of 8 months, beginning with the date of the contract. Under this contract petitioner agreed to pay Chusid's fee without condition. On October 11, 1966, petitioner made a payment of $775 and on November 5, 1966, he paid the remainder, $1,861.25.

Although petitioner was aware of the fact that Chusid's fee was payable irrespective of whether new employment was obtained, this aspect was minimized by Fisher at their initial meeting. Petitioner was assured that, in cases of clients with qualifications such as those he possessed, employment was invariably secured. In addition Chusid furnished a guarantee that petitioner could utilize any unused portion of the 8-month contract period, for 3 years, if he was dissatisfied with the position Chusid secured for him. If the 8-month period had been expended he would be entitled to another 30 days of Chusid's services free of charge.

The aforementioned contract of October 11, 1966, set forth the various services that Chusid had agreed to perform for petitioner. These were as follows: (1) Assignment of the client's case to various staff members, such as a ‘supervising psychologist,‘ a ‘counseling psychologist,‘ promotional specialists, writers, financial advisers, and researchers; (2) research into the client's background, abilities and personality; (3) evaluation of the client by the psychological staff; (4) counseling; (5) career assessment; (6) evaluation of opportunities; (7) career planning; (8) establishment of a plan of action aimed toward realization of goals; (9) development of a ‘marketing image’; and (10) staff assistance in the preparation of marketing materials.

After execution of this contract petitioner's case was turned over to Charles Darwent (hereinafter Darwent) of Chusid's Chicago office. Darwent was to act as petitioner's consultant. Petitioner was interviewed by Darwent and spoke to him on a daily basis by telephone.

At Chusid's request in order to analyze the petitioner's potentialities he submitted to a series of tests which lasted 60 to 90 minutes and had at least one interview with a psychologist. Petitioner was indifferent to the results of these procedures; his purpose in consulting Chusid was to secure employment.

In furtherance of this purpose an extensive resume of petitioner's background and qualifications was prepared and mailed, along with a transmittal letter, to various potential employers by Chusid. Petitioner desired and was aware of this activity on his behalf by Chusid.

Petitioner also received copies of followup letters to potential employers from Chusid that Darwent indicated had been sent on petitioner's behalf. Many of these letters emphasized petitioner's qualifications and contained Chusid's endorsement of petitioner's abilities. The letters also indicated that many prospective employers had evinced interest in the petitioner due to prior contacts initiated by Chusid. This, also, was the kind of activity for which petitioner employed the services of Chusid.

By check, dated November 28, 1966, petitioner made payment of $380.18 to Executive Advertising Services, Inc. This was pursuant to his agreement with Chusid to pay certain out-of-pocket expenses. The expenditure represented payment for the printing and mailing of 1,000 ‘Motivating Letters,‘ 300 ‘Brochures' (apparently the aforementioned resumes), 100 ‘Want Ads,‘ 100 ‘Master Leads,‘ and 100 referral letters.

Each week Chusid mailed petitioner a list of positions available, together with a brief description of each of them. Upon receiving one of these lists petitioner would indicate interest in certain of the positions listed and Chusid, where appropriate, would arrange an interview.

The foregoing efforts on the part of Chusid resulted in at least seven interviews with representatives of various companies. Chusid gave petitioner descriptions of his expected duties, potential responsibilities, and compensation with prospective employers but did not directly influence his negotiations with these firms. The interviews resulted in four specific offers of employment. one of these was with the Symons Manufacturing Co. of Des Plaines, Ill. (hereinafter Symons).

On March 23, 1967, petitioner accepted employment with Symons. He began his duties as secretary-controller² on May 15, 1967. He had terminated his employment with Foundry on May 12, 1967.

In October of 1968 petitioner was elected by the board of directors to his present post of vice president of Symons.

Petitioner considers his new employment to be more desirable than his position with Foundry due to his increased responsibilities, the greater remunerative potential, and the national scope of the company.

In order to keep the aforementioned 3-year guarantee in force petitioner was required to have a final interview with a Chusid representative. At this interview, which transpired approximately 20 days after he joined Symons, petitioner answered questions about how he was succeeding at his new employment.

Petitioner deducted $3,016.43 as ‘Employment Agency Fee’ on his Federal income tax return for the taxable year ended December 31, 1966. This amount represented Chusid's fee of $2,636.25 plus the amount of $380.18 which petitioner had paid to Executive Advertising Services, Inc.

By notice of deficiency, dated June 11, 1968, respondent disallowed the deduction, stating:

The fee of $3,016.43 paid to Frederick Chusid & Company³ is determined to be an expenditure for the purpose of seeking employment which is not deductible under Section 162 or Section 212 of the Internal Revenue Code, but constitutes a nondeductible personal expense under Section 262.

OPINION

The petitioner seeks to deduct a fee of $3,016.43 which he paid in 1966 to Frederick Chusid & Co. for its services in securing new employment for him. We have found as a fact that Chusid at the outset virtually guaranteed him a new position and that their efforts did, in fact, result in his accepting a new position.

Section 162(a) of the Code reads in part as follows:

SEC. 162. TRADE OR BUSINESS EXPENSES

(a) IN GENERAL.— There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *

We hold initially that the above-noted expenditure of $3,016.43 was incurred by the petitioner in carrying on his trade or business of being a corporate executive.

Over the years we have held on more than one occasion that a taxpayer may be in the trade or business of being an employee, such as a corporate executive or manager, Harold A. Chistensen, 17 T.C. 1456 (1952), Benjamin Abraham, 9 T.C. 222 (1947), Ralph C. Holmes, 37 B.T.A. 865 (1938), and Peoples-Pittsburgh Trust Co., 21 B.T.A. 588 (1930), affd. 60 F.2d 187 (C.A. 3, 1932). To the same effect are Hochschild v. Commissioner, 161 F.2d 817 (C.A. 2, 1947), reversing on other grounds 7 T.C. 81 (1946), Schmidlapp v. Commissioner, 96 F.2d 680 (C.A. 2, 1938), modifying a Memorandum Opinion of this Court, and Daily Journal Co. v. Commissioner, 135 F.2d 689 (C.A. 9, 1943), reversing a Memorandum Opinion of ...