Klein v. Commissioner, Docket No. 11395-80.
Decision Date | 16 December 1982 |
Docket Number | Docket No. 11395-80. |
Citation | 45 TCM (CCH) 340,1982 TC Memo 724 |
Parties | Peter and Nina Klein v. Commissioner. |
Court | U.S. Tax Court |
Sidney Gelfand, 225 Broadway, New York, N.Y., for the petitioners. Geraldine R. Eure, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $12,295.40 in petitioners' 1978 Federal income tax. We must determine whether petitioners are entitled to a deduction for legal fees, travel costs, and miscellaneous expenditures pursuant to section 212 and, if so, in what amount.1
Some of the facts have been stipulated and are found accordingly.
Petitioners, Peter and Nina Klein, resided in New York, New York, at the time they filed their petition in this case. Petitioners, in 1978, used the cash-basis method of accounting.
Blue Shore Development Company (Blue Shore or the corporation) is an Israeli corporation organized in 1962 or 1963. The corporation holds undeveloped land in Herzliya, Israel, on which it originally had planned to build a convention center and hotels. Due to differences of opinion between the municipality of Herzliya and the Israeli government concerning the planning and development of the land, no construction has taken place.
Blue Shore's 51-percent shareholder is a Netherland's trust, Beleggingsmaatschappij Mabemij N.V. (the trust). At all times relevant hereto, the largest interest in the trust was held by Aaron Gutwirth (Gutwirth). Gutwirth acted as sole trustee for approximately 10 years. Since August 19, 1963, the trust has held Blue Shore stock, 50,088 shares, and certificates of indebtedness representing 268,329 Israel pounds in trust for Nina. Nina has never received any interest or dividends from Blue Shore.
From 1970 until 1976, Peter attended informal annual or biannual shareholder meetings of Blue Shore in New York. In 1976, Peter heard rumors of a possible foreclosure against the corporation for its non-payment of real estate taxes.
Upon the advice of his accountant, Philip Trestyn (Trestyn), Peter hired Leon Charney (Charney), a lawyer. In 1977, Charney billed petitioners $1,202 for "disbursements re Israel trip." Petitioners' check to Charney in payment of this amount was dated December 30, 1977.
In 1978, Peter, accompanied by Trestyn and Charney, traveled to Israel. Peter hoped that his presence in Israel would "start the ball rolling" and supply the contracts and energy needed to breathe life into Blue Shore. In Israel, the three met with an architect, a former deputy prime minister, and the mayor of Herzliya to discuss whether Blue Shore could obtain the building rights required for construction. They met with the manager of and bookkeeper for Gutwirth's affairs in Israel to review Blue Shore's books and records and to discuss what concrete steps could be taken to obtain building rights and pay off the back taxes. Charney also conferred with Gutwirth's manager to discuss possible liquidation of a joint venture into which Blue Shore had entered which was thought detrimental to the corporation's interests. Finally, they spoke to Gabriel Cohen, a lawyer hired by Peter to research the question of a shareholder's liability for Israeli taxes in the event of Blue Shore's liquidation.
In connection with the trip to Israel, the parties have stipulated that petitioners paid the following amounts in 1978:2
Retainer for Charney ......................... $15,000.00 Airfare to Israel and cab fare for Charney .................................... 2,070.00 Hotel accommodations for Charney ............. 773.20 Legal fee of Cohen ........................... 224.00 Hotel accommodations for Trestyn ............. 425.83 Hotel accommodations for Peter ............... 531.21 __________ $19,024.24
Nina's sister and mother also held interests in Blue Shore.3 In connection with the expenditures listed above, petitioners were reimbursed $2,224.22 by Nina's mother and brother-in-law, Paul Elkins.
By check dated March 16, 1978, petitioners paid $1,038 to Hewig & Marvic, Inc., a company of which Peter was president. The words "Blue Shore" appear in the upper left corner of the check and petitioners' check register bears the notation "Airline Tickets."
Neither Peter nor Nina were ever officers, directors, or employees of Blue Shore.
Petitioners own mineral interests in Alabama from which they receive royalty income from Getty Oil Company (Getty) and other oil companies. In 1978, Peter, and two lawyers, Sidney Gelfand and Wallace Musoff, traveled to Alabama to discuss with Getty its plan for unitization of the oil field and to negotiate lower extraction charges in determining the amount of royalties.
By check dated May 8, 1978, petitioners paid Hewig & Marvic, Inc., $660. The check bears the notation "RE-AIRLINE TICKETS" in the lower left corner.
In 1978, petitioners paid the following out-of-pocket expenses for taxis, postage, lunches, etc., in connection with Blue Shore and the Alabama mineral interests:
Blue Shore ......................... $120.10 Mineral interests .................. 8.25 Blue Shore and mineral interests ... 73.76 _______ $202.11Opinion
We must determine whether petitioners are entitled to a deduction under section 212 for expenses incurred in connection with Nina's interest in Blue Shore.4 A further question exists as to whether petitioners have substantiated certain of those expenditures and expenditures incurred in connection with their Alabama mineral interests.
Petitioners claim they are entitled to a section 212 deduction in the amount of $19,892.13.5
First, we will deal with the Blue Shore expenses. Petitioners argue that these expenditures are ordinary and necessary expenses paid for the production or collection of income or for the management, conservation, or maintenance of property held for the collection of income and, thus, are deductible under section 212(1) or (2).6 Respondent, on the other hand, argues that the expenditures are not ordinary and necessary expenses because such expenditures (1) are not usual or customary for a shareholder with a small interest in a corporation, (2) were not reasonably or proximately related to the production of petitioners' income, and (3) were for the benefit of Blue Shore and not petitioners. In addition, respondent argues that petitioners have not shown that the purpose of the expenditures or the motive of petitioners in making them was for the production of income or the maintenance of property held for the production of income.7
"Ordinary and necessary" nonbusiness expenses are deductible under section 212. To satisfy the requirements of section 212, expenses must be reasonable in amount and proximately related to the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Trust of Bingham v. Commissioner 45-2 USTC ¶ 9327, 325 U.S. 365, 370 (1945), Deely v. Commissioner Dec. 36,819, 73 T.C. 1081, 1097-1098 (1980); Hewett v. Commissioner Dec. 28,338, 47 T.C. 483, 487 (1967); section 1.212-1(d), Income Tax Regs. As with business expenses deductible under section 162, nonbusiness expenses are deductible only if they represent an expense of the taxpayer himself rather than an expense of the corporation in which he holds stock or the trust of which he is a beneficiary. Deputy v. du Pont 40-1 USTC ¶ 9161, 308 U.S. 488 (1940);8Low v. Nunan 46-1 USTC ¶ 9208, 154 F. 2d 261, 264 (2d Cir. 1946), affg. a Memorandum Opinion of this Court Dec. 14,098(M); Deely v. Commissioner, supra; Hewett v. Commissioner, supra at 487-488; Bautzer v. United States, 36 AFTR 2d 75-5868, 75-1 USTC ¶ 9246, adopted 207 Ct. Cl. 1038 (1975). See also Erdman v. Commissioner Dec. 25,408, 37 T.C. 1119, 1122 (1962), affd. 63-1 USTC ¶ 9391 315 F. 2d 762 (7th Cir. 1963). Although the line of demarcation between those expenditures which are currently deductible by a shareholder and those which are not may often be a shadowy one,9 we believe that the expenditures involved herein fall on the side of nondeductibility.
Courts have consistently held that a shareholder may not deduct currently expenditures which relate to the business of the corporation. See, e.g., Deputy v. du Pont, supra ( ); Low v. Nunan, supra ( ); Rand v. Commissioner Dec. 24,720, 35 T.C. 956 (1961) ( ); Perlman v. Commissioner Dec. 22,243, 27 T.C. 755 (1957), affd. 58-1 USTC ¶ 9349 252 F. 2d 890 (2d Cir. 1958) ( ); Estate of Steckel v. Commissioner Dec. 21,803, 26 T.C. 600, 607 (1956), affd. per curiam 58-1 USTC ¶ 9311 253 F. 2d 267 (6th Cir. 1958) ( ); Bautzer v. United States, supra ( ). Peter testified that his activities and those of Trestyn and Charney while in Israel concerned matters such as: (1) how building rights could be obtained so that Blue Shore's land could be developed, (2) whether a joint venture between Blue Shore and another entity should be liquidated, and (3) how Blue Shore could generate money to pay its corporate tax liability. According to Peter, the main reason for the trip to Israel was "to meet * * * people personally and to start the ball rolling because he thought what was missing was any energy, any contact, anything going on." Peter's efforts were not directly or immediately related to the production of petitioners' income or the management of petitioners' income-producing property but rather to the production of Blue Shore's income and...
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