Peoples-Pittsburgh Trust Co. v. Commissioner of Internal Revenue
| Decision Date | 08 December 1930 |
| Docket Number | Docket No. 21946. |
| Citation | 21 BTA 588 |
| Parties | PEOPLES-PITTSBURGH TRUST CO. AND AMY H. DUPUY, EXECUTORS, UNDER THE WILL OF HERBERT DUPUY, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Thomas Watson, Esq., and D. G. Sisterson, C. P. A., for the petitioners.
R. W. Wilson, Esq., for the respondent.
This proceeding is for the redetermination of an alleged deficiency in income tax of Herbert DuPuy for the calendar year 1921, amounting to $62,113.75. Only so much of the alleged deficiency as arises from the action of the respondent in disallowing as a deduction the amount of $162,048.12 attorney fees and other incidental expenses is in dispute, and the petitioners allege as error the respondent's action in refusing to allow such deduction.
The death of Herbert DuPuy, the original petitioner, subsequent to the filing of the petition herein, having been suggested to the Board, the Peoples-Pittsburgh Trust Co. and Amy H. DuPuy, executors under the will of Herbert DuPuy, were, on motion, substituted as parties petitioner. The facts were stipulated.
FINDINGS OF FACT.
Herbert DuPuy until the time of his death was a citizen of Pittsburgh, Pa. He graduated from Lehigh University in 1878, after having completed a course in metallurgical engineering. Thereafter, he entered the employment of Andrew Carnegie in the iron and steel business and continued in the iron and steel business continuously until 1919, making such business his life work.
During 1917 and 1918 he was chairman of the board of directors of the Crucible Steel Co. of America, and during those years he devoted his time and attention almost exclusively to the affairs of the Crucible Steel Co. of America, giving his personal attention to the consideration of war contracts for shells and other munitions. His compensation as salary and bonus from that company was $548,877.25 for 1917 and $596,725.39 for 1918. As the executive head of the Crucible Steel Co. of America he signed and made affidavit to the income and excess-profits-tax returns of that company and its subsidiaries for the fiscal years ending in 1917 and 1918.
Revenue agents examined and investigated the income and excess-profits-tax returns of the Crucible Steel Co. of America and its subsidiaries for the fiscal years ending in 1917 and 1918 and, being of the opinion that such returns were incorrect, fraudulent, and evasive, caused criminal charges to be preferred against Herbert DuPuy. The matter was so proceeded with that a Federal grand jury in the District Court of the United States for the Western District of Pennsylvania found an indictment or true bill (No. 159, November term, 1920) against Herbert DuPuy and George A. Turville, secretary and treasurer of the Crucible Steel Co. of America and its subsidiaries, who, together with Herbert DuPuy, had signed and made affidavit to the tax returns of that company and its subsidiaries for the fiscal years ending in 1917 and 1918. The indictment charged Herbert DuPuy and George A. Turville, among other things, with conspiracy to defraud the United States out of taxes legally and properly payable to the United States by the Crucible Steel Co. of America and its subsidiaries.
Herbert DuPuy employed counsel, special auditors, and other representatives to take charge of his case and to prepare a defense in his behalf. He was arraigned for trial in the District Court of the United States for the Western District of Pennsylvania and after a trial by a jury extending over a period of four weeks was found not guilty by the jury on April 8, 1921. He paid in fees to his attorneys and to his accountants and auditors, and for traveling and other incidental expenses, the amount of $162,048.12, as follows:
Attorneys' fees____________________________________________ $150,000.00
Accountants' fees__________________________________________ 2,987.50
Traveling and incidental expenses__________________________ 9,060.62
___________
Total__________________________________________________ 162,048.12
Herbert DuPuy instituted legal action against the Crucible Steel Co. of America in 1922 in the District Court of the United States for the Western District of Pennsylvania to recover the foregoing costs and expenses. The defendant company demurred to the plaintiff's declaration and the demurrer was sustained. Du Puy v. Crucible Steel Co. of America, 288 Fed. 583.
The issue in this case is whether the amount of $162,048.12 paid out by Herbert DuPuy as fees to attorneys and accountants and incidental expenses in connection with defending himself from a criminal charge for conspiracy is deductible in computing his taxable net income for the calendar year 1921. Counsel for petitioners, on brief, after citing numerous decisions of the Board, including several decisions relating to the character of expenses incurred in defending criminal actions, contend that:
The United States of America prosecuted Herbert DuPuy on a charge of conspiring with George A. Turville to defraud the United States out of income and excess profits taxes legally and properly payable by the Crucible Steel Company of America and its subsidiaries to the United States for the years 1917 and 1918. Herbert DuPuy was the executive head of the Crucible Steel Company of America and of its subsidiaries. George A. Turville was Secretary and Treasurer of said corporations. The two defendants, in their official capacities, executed and made affidavit to the tax returns of the Crucible Steel Company, for the years 1917 and 1918. It is obvious that the above action of Herbert DuPuy related to the trade or business. The law required corporations to prepare and file income tax returns for the years in question. The law also required these returns to be signed and sworn to by the executive officers. In preparing and signing the income tax returns of the Crucible Steel Company and of its subsidiaries, Herbert DuPuy was at one and the same time, complying with the requirements of the Revenue Act and also performing his duty towards the Crucible Steel Company and it subsidiaries, as chief executive officer. It can not be said that Herbert DuPuy was acting beyond the scope of his authority and, hence, individually. The Government challenged the tax returns, not because Mr. DuPuy was acting beyond the scope of his authority (and hence individually), but solely because Mr. DuPuy, while acting within the scope of his authority, as conceded by the Government, was party to a conspiracy to make a false return and thus defraud the United States out of taxes lawfully due and payable.
It is conceded in the stipulation of...
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