Commissioner of Int. Rev. v. People's-Pittsburgh Trust Co.

• Decision Date: 03 August 1932
• Docket Number: No. 4838.,4838.
• Citation: 60 F.2d 187
• Parties: COMMISSIONER OF INTERNAL REVENUE v. PEOPLE'S-PITTSBURGH TRUST CO. et al.
• Court: U.S. Court of Appeals — Third Circuit

60 F.2d 187 (1932)

COMMISSIONER OF INTERNAL REVENUE v. PEOPLE'S-PITTSBURGH TRUST CO. et al.

No. 4838.

Circuit Court of Appeals, Third Circuit.

August 3, 1932.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., of counsel), for petitioner.

Thomas Watson, of Pittsburgh, Pa., for respondents.

Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.

THOMPSON, Circuit Judge.

This is a petition of the Commissioner of Internal Revenue to review a decision of the Board of Tax Appeals. The matter originally came before the Board of Tax Appeals upon the petition of Herbert Du Puy, the taxpayer, for the redetermination of a deficiency in his income tax and surtax for the calendar year 1921. The determination of a deficiency was based upon the disallowance by the Commissioner of a deduction in the taxpayer's return of $162,048.12 for expenses incurred in the taxpayer's defense against a criminal charge. The Board of Tax Appeals decided that the deduction should have been allowed. The taxpayer's executors have been substituted as parties on the record.

The taxpayer, Herbert Du Puy, was continuously engaged in the iron and steel business from the time of his graduation in 1873 as a metallurgical engineer until 1919. During 1917 and 1918 he was chairman of the board of directors of the Crucible Steel Company of America, and devoted his time exclusively to the affairs of that company. His salary and bonus from the company amounted to $548,877.25 for 1917 and $596,725.39 for 1918. Part of his duties as the executive head of the company during these two years was to sign and make affidavit to the income and excess profits returns of the company and its subsidiaries. These returns were also signed by one George A. Turville, the secretary and treasurer of the company. They were deemed incorrect, fraudulent, and evasive by the Internal Revenue Bureau, which thereupon preferred charges against the taxpayer and Turville. Both men were indicted. The trial of the taxpayer extended over approximately four weeks. He was finally acquitted, but had expended $150,000 in attorney's fees, $2,987.50 in fees for accountants and auditors, and $9,060.62 for traveling expenses and incidentals. He instituted suit in 1922 to recover these sums from the Crucible Steel Company of America, but was unsuccessful. He deducted this amount in his personal tax return as an expense incurred in his business, but the Commissioner determined a deficiency.

The question is whether the fees paid to attorneys and accountants, and the incidental expenses paid by the taxpayer in his defense against a criminal charge of making a fraudulent income tax return, are deductible from the taxpayer's gross income as ordinary and necessary business expenses in carrying on a trade or business within the meaning of section 214 (a) (1) of the Revenue Act of 1921, 42 Stat. 239.

To determine this question, it is necessary to decide whether the expenses were incurred in the taxpayer's business and whether they were ordinary expenses within the meaning of section 214 (a) (1) and section 215 (a) of the Revenue Act of 1921, 42 Stat. 239, 242, which read as follows:

"Sec. 214. (a) That in computing net income there shall be allowed as deductions:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. * * *" (See 26 USCA § 955 (a) (1) and note.)

"Sec. 215. (a) That in computing net income no deduction shall in any case be allowed in respect of —

"(1) Personal, living, or family expenses." (See 26 USCA § 956 (a) (1) and note.)

The Board of Tax Appeals held that the taxpayer's business during 1917 and 1918, the years when the tax returns were made and signed, was that of being executive head of the Crucible Steel Company of America and its subsidiaries, and that expenses paid and incurred in defending a prosecution growing out of acts done in the ordinary course of a trade or business where no crime was committed...