Lewis v. Commissioner of Internal Revenue

• Citation: 253 F.2d 821
• Decision Date: 07 April 1958
• Docket Number: No. 77,Docket 24520.,77
• Parties: Joseph LEWIS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

253 F.2d 821 (1958)

Joseph LEWIS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 77, Docket 24520.

United States Court of Appeals Second Circuit.

Argued December 11, 12, 1957.

Decided April 7, 1958.

Paul Arnold, Richard Z. Steinhaus, New York City, for petitioner-appellant.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, J. Dwight Evans, Jr., Attys., Dept. of Justice, Washington, D. C., for respondent-appellee.

Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.

WATERMAN, Circuit Judge.

The taxpayer appeals from a decision of the Tax Court, 27 T.C. 158, sustaining the disallowance by the respondent of certain deductions claimed by the taxpayer in his income tax returns for the years 1947, 1948 and 1949. Each of the disallowed deductions was for expense incurred by the taxpayer in connection with litigation stemming from marital discord between him and his wife. The principal problem raised on this appeal is the recurring one of ascertaining whether a taxpayer's expenses are deductible from gross income under Section 23(a) of the Internal Revenue Code of 1939, 26 U.S.C. § 23(a),¹ or whether they are personal expenses which, under Section 24(a) (1)² are not so deductible.

The taxpayer, Joseph Lewis, at all times relevant herein, was the sole stockholder of three publishing companies, Eugenics Publishing Co., Personal Books, Inc., and Free Thought Press Association. In addition, he is the author of several controversial books and pamphlets of which about 500,000 copies have been sold. Among the books written by Mr. Lewis are "Thomas Paine, Author of the Declaration of Independence," "The Bible Unmasked," "Atheism," "The Ten Commandments," and "The Tyranny of God." On January 29, 1947 the taxpayer was arraigned in the Magistrate's Court of the City of New York upon a complaint filed by his wife charging that he was dangerously insane and seeking his commitment to a mental institution. Whether by coincidence or otherwise, January 29 was also the publication date of "Thomas Paine, Author of the Declaration of Independence." At the hearing before the Magistrate's Court petitioner was ordered to submit to examination by psychiatrists either at Bellevue Hospital or at a private sanatorium. He chose the latter in the belief that the publicity which would result from his admission to Bellevue for mental observation would have an adverse effect upon the sale of his books. Approximately one month later Mrs. Lewis withdrew her complaint in the Magistrate's Court; and then, in May 1947, commenced a proceeding in the Supreme Court of the State of New York to have taxpayer declared mentally incompetent. She requested that the court appoint her the committee over the petitioner's person and that she "and a banking corporation, or each, or both, be appointed a Committee over his property." Eventually, the court dismissed the proceeding and declared taxpayer competent to manage and control his property, but meanwhile taxpayer had expended $11,950.00 in defending himself against his wife's charges.³

In March 1947, subsequent to the dismissal of the commitment proceeding in the Magistrate's Court but prior to the commencement of the incompetency proceeding in the Supreme Court, Lewis revoked an inter vivos trust which he had created in 1931 for the benefit of his wife and others. In view of the questions which had been raised concerning the taxpayer's competency, the trustee of this trust demanded and obtained a judicial settlement of its account as trustee. The trustee, in connection with this proceeding, incurred legal expenses of $3,500 which Lewis was ordered to pay.

In October 1947 the litigious Mrs. Lewis, who was not living with taxpayer, instituted an action for legal separation. At the outset the taxpayer indicated that he did not contest his wife's right to a separation, but, through his attorneys, he vigorously contested the financial demands which she made. Among these demands were requests that she be awarded fifty per cent of the stock of Eugenics Publishing Company and fifty per cent of various securities which she claimed were held in brokerage accounts in her name and that of taxpayer jointly. The Tax Court found that "a major portion of the services rendered by petitioner's counsel in connection with this action for legal separation related to the form and amount of the maintenance and support provisions to be made for petitioner's wife and to the adjustment of their respective property rights."

Lastly, in January 1948, by a verified complaint Mrs. Lewis commenced an action against taxpayer for an accounting. She again alleged that she was the joint owner with the taxpayer of various securities purchased from brokerage firms and that she was the sole owner of certain government bonds that taxpayer had secreted from her. In addition, she claimed ownership of one half of the stock of the Eugenics Publishing Company and she alleged Lewis had appropriated this stock to himself. She sought recovery of these securities and interest and dividends thereon. The answer denied the material allegations of the complaint.

In November 1948 the taxpayer and his wife effected a settlement of all the litigation then pending between them. Under this agreement, which was incorporated in a judgment of the New York Supreme Court, petitioner's wife acknowledged his ownership of all of the Eugenics stock, released him from her claims to certain securities, agreed to consent to the accounting filed in connection with the revocation of the 1931 trust, and agreed to discontinue her own accounting action. In return, the taxpayer agreed, inter alia, to establish a trust fund, the income from which was payable to Mrs. Lewis for life, and to pay her attorneys a fee of $10,000. This $10,000 was paid in 1948. The petitioner also paid legal fees in excess of $15,000 to the law firm which had represented him in the separation action and in the two accounting proceedings.

In his income tax returns for the years 1947, 1948 and 1949 the petitioner claimed as deductions from gross income the expenses which had been incurred by him in connection with the above-detailed litigation in which he had been involved. Upon disallowance of the deductions by the Commissioner, the taxpayer filed a petition in the Tax Court to set aside the deficiencies assessed. From an adverse decision there, this appeal was taken.

I

The taxpayer urges alternative grounds in support of his contention that the respondent erred by disallowing as deductions the expenses incurred in connection with the incompetency proceedings against him. He contends first that the expenses were incurred by him in pursuit of his trade as an author, and hence that they are deductible under Section 23(a)(1). In support of this contention the taxpayer points out that the publicity attendant upon an adjudication of mental incompetency would have been extremely detrimental to the sale of his books, particularly in view of the concededly controversial nature of these writings. Relying upon Commissioner of Internal Revenue v. Heininger, 1943, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171; Draper v. Commissioner, 1956, 26 T.C. 201; Salt v. Commissioner, 1952, 18 T.C. 182, and Howard v. Commissioner, 1951, 16 T.C. 157, affirmed on other grounds, 9 Cir., 1953, 202 F.2d 28, the petitioner urges that expenses incurred to protect a trade or business from threatened destruction are deductible as "ordinary and necessary" business expenses, and that his expenses were of such a character. The Tax Court rejected this argument. It characterized these expenditures as "personal," because it found that the petitioner's primary purpose in contesting the incompetency proceedings was to maintain his freedom rather than to protect his business. The cases relied upon by the taxpayer were distinguished by the Tax Court on the ground that in each of them the taxpayer's dominant motive was to protect his business. Though we are in accord with the conclusion of the Tax Court we follow a somewhat different path, for we cannot agree that the peculiar personality characteristics of a taxpayer are determinative of his tax liability. That one taxpayer prizes his personal liberty more than his property, while another values property more highly, seems to us irrelevant to the allowance or disallowance of a claimed deduction.

Not every expenditure can be claimed as a deduction, and this is so whatever may be the effect of the expenditure upon the profit-seeking activities of the taxpayer. See Bonney v. Commissioner, 2 Cir., 1957, 247 F.2d 237. Determination of the deductibility of an item of expense surely depends upon the activity in connection with which the item was expended and to which it relates, Lykes v. United States, 1952, 343 U.S. 118, 72 S.Ct. 585, 96 L.Ed. 791; yet, when the activity has been determined, one must then determine the nature of that activity in order to discover if the item may be deducted. "For income tax purposes * * * An individual * * * is not regarded as a business automaton whose functions consist solely of profit-seeking activities. The income tax regards him as also a human being incurring expenditures that are not related to business or other gainful activity." Surrey and Warren, Federal Income Taxation 247 (1955). In broad outline, Section 23(a) provides that insofar as an individual taxpayer engages in a profit-seeking activity, he may deduct from gross income the expenses incurred in that activity, limited only by the requirement that the expenses be both "ordinary and necessary"; but, insofar as expenditures are incurred by a taxpayer in furtherance of an activity personal in nature, Section 24(a) (1) prohibits deduction from gross income.⁴ Since, however, a specific expenditure will often be capable of characterization under the language of either Section 23(a) or Section 24(a) (1), the problem in each case is to determine...