Higgins v. Commissioner of Internal Revenue, Docket No. 80052

• Decision Date: 24 May 1939
• Docket Number: Docket No. 80052,85961.
• Parties: EUGENE HIGGINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

39 B.T.A. 1005 (1939)

EUGENE HIGGINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 80052, 85961.

Board of Tax Appeals.

Promulgated May 24, 1939.

Orwill V. W. Hawkins, Esq., and Harry H. Wiggins, Esq., for the petitioner.

C. P. Reilly, Esq., for the respondent.

The two proceedings above named were consolidated at the time of hearing. There are involved the income tax returns of Eugene Higgins for the years 1932 and 1933. The Commissioner determined a deficiency of $126,730.08 for the year 1932, and a deficiency of $24,542.65 for the year 1933. The only issue left for determination is the propriety of certain deductions claimed as ordinary and necessary expenses paid or incurred in carrying on trade or business, under section 23 (a) of the Revenue Act of 1932. For the year 1932 petitioner claimed a deduction of $76,498.37 of which respondent, contending that investment in securities was not trade or business, in the notice of deficiency disallowed $38,487.41; for the year 1933 the petitioner claimed a deduction of $74,502.26 of which respondent in the notice of deficiency disallowed $48,802.35. A stipulation was filed as to some of the facts involved, which stipulation we adopt (setting forth hereinafter facts stipulated only as necessary to discussion); and in addition thereto, we make the following findings of fact.

FINDINGS OF FACT.

The petitioner, a citizen of the United States, during the taxable years maintained an office in New York and an office in Paris, France. William S. Whitehead was office manager of the New York office and D. P. Cousteau constituted the personnel of the Paris office. William S. Whitehead had as assistants Martin J. Dietz, Gustav Zimmerman as accountant, and one Bessenbeck as stenographer and clerk. The office, which occupied rented space at No. 50 Union Square East, New York City, consisted of four rooms. The office in Paris consisted of a small two-story building, the second floor of which was entirely occupied as an office. It consisted of several rooms, the building measuring about 50 by 20 feet. It was not connected with petitioner's residence, though upon the same grounds. It contained filing cabinets, desks, typewriters, and a sort of library.

The petitioner owned approximately 26 pieces of real estate in the Borough of Manhattan, County of New York, of which four were vacant land; and three pieces — two one-acre plots in Pelham Manor, New York, and another 1¾ acres in the city of Morristown, New Jersey, said three plots being undeveloped and vacant. The value of this real estate was approximately $10,000,000. In addition thereto the petitioner owned securities of a value of approximately $25,000,000 or $26,000,000.

Petitioner maintained in his New York office an organization known as a board of control, consisting of three members, which board in the taxable years consisted of William S. Whitehead, Gustav Zimmerman, and Marshall Stearns, who was an attorney and petitioner's personal counsel. The duties and functions of this board were to pass upon all applications for leases upon real estate and to pass upon all payments made by the office in New York, with the exception of payments for Federal and New York income taxes and New York City real estate taxes and attorneys' fees, which items the petitioner paid by check or by authorizing a New York bank to do so upon advice from his New York office. The board of control met on Tuesday and Friday of each week. At such meetings the discussions were limited to matters pertaining to real estate. Minutes were kept of each meeting, which were signed by the members and sent to the petitioner, and a copy kept in the New York office. There were invariably recorded in the minutes of the board of control any propositions for new tenants and notations of the expiration of leases three months before expiration. The routine has been the same, under the petitioner's orders, since about 1902. The board of control had nothing to do with the petitioner's securities, but dealt with petitioner's real properties, most of which are leased for terms of various lengths. These leases were arranged by the board of control, which investigated the financial stability of the prospective tenant and all other details and submitted the proposition to the petitioner, who either rejected or accepted. If the offer was accepted, petitioner's attorneys prepared a lease, which was printed, signed by the prospective tenant, and, after being approved by the attorneys, was sent to the petitioner in Paris for signature. The petitioner would not sign any document unless the approval thereof by his attorneys was endorsed upon the document. No one had authority to sign any lease for the petitioner, and no one has ever done so in 30 years. No lease was final until returned from the petitioner with his signature thereon, although the prospective tenant was required to sign first, and tentative payment of rent was required. Any modification of leases went through the board of control to the petitioner. This has been the procedure under instructions of the petitioner given many years ago. Petitioner seldom accepted the board's recommendation in total, and usually wished something changed. Upon receipt of a letter he would usually either cable or radio, being a prolific user of the cable and radio. He was in touch with his New York office by letter or cable almost daily.

Petitioner's policy for the last 10 or 15 years has been never to sell real property. The last sale was in 1927. He had his finger on every piece of business and his instructions were followed. The principal activity of petitioner's New York office was the management of his real estate. A weekly statement of receipts and disbursements was sent to petitioner every Friday and an annual report of receipts and disbursements was also sent to him. The annual report showed the percentage earned by petitioner's investments in real estate and in stocks and bonds, as against each individual parcel of real estate and each item of securities. The annual report took about two weeks to prepare and a week to typewrite.

The system of keeping petitioner's securities was that the New York office had two boxes, to one of which the petitioner only had access, and to the other of which William S. Whitehead and Marshall Stearns had access. In the box to which the petitioner only had access were kept mostly tax-exempt securities and railroad bonds, in about equal proportions.

Petitioner's securities were purchased for him by the United States Trust Co. In his directions to that company as to investments, the petitioner often stressed that investments be entirely safe. He often authorized the United States Trust Co. of New York to purchase registered bonds at prices within its discretion, within limits. In the year 1932 petitioner held nontaxable securities in the amount of $16,453,000, and in 1933 held nontaxable securities to the extent of $17,278,000. The nontaxable securities were fully registered as to the principal and interest, and no coupons were attached thereto. The income was paid on these registered bonds every six months by check. When these were received the envelopes were opened and deposit made, the big deposit days being four times a year. A record of the deposits was kept in the cash book and in the interest registry. After the deposit was made, that was the end of a matter, so far as the New York office was concerned. No one in that office had anything to do with the purchase of nontaxable securities, except to receive them from the United States Trust Co., to check them off with the Trust Co. list, and to place them in the safe deposit vault. which was done by Whitehead and Stearns. No one in the New York office made any recommendations or carried out any recommendations as to the purchase of nontaxable securities. In 1932 the only securities purchased by the petitioner were $675,000. These comprised bonds issued by the city of Boston in the sum of $361,000, the State of Massachusetts in the sum of $100,000, and the State of New York in the amount of $214,000. In 1933 the only securities purchased were United States of America bonds in the total sum of $1,052,000.

Petitioner's income all came to his New York office as rents, checks for interest coupons, checks for dividends, and other items of that kind, and was deposited to his account as it came in. The checks for interest and dividends which came to petitioner's office were endorsed by rubber stamp and deposited. Petitioner maintained two accounts in New York banks, the National City Bank and the United States Trust Co., in which all income of petitioner of every name and nature was deposited, and from which no one ever held any authority to withdraw funds except the petitioner himself, whose signature was necessary on all checks on those two bank accounts. He maintained for office expenses another bank account in the Chase National Bank, into which were transferred the proceeds of one check at a time from him, the check being sent by him marked for deposit to his credit, upon application of some one in his New York office. This was used as the office needed money for office expenses, salaries, repairs, and the like. Upon that account William S. Whitehead and Marshall Stearns wrote checks, but from that account no securities were bought. Petitioner did not borrow any money to invest in nontaxable securities.

Of the deductions claimed in the 1932 income tax return as to the New York office, the item of stationery, $287.69, represented writing paper, ink, and general run of stationery for the office use; radiograms, $476.76, were sent in connection with petitioner's office; postage, $150.60, was used in connection with petitioner's office; petty cash, $70, was for car fares, office help, and little incidentals, used in connection with petitioner's office; newspapers, $189.57, were real estate bulletins, the...