Wells-Lee v. CIR, 18002.

• Decision Date: 10 May 1966
• Docket Number: No. 18002.,18002.
• Citation: 360 F.2d 665
• Parties: William WELLS-LEE, James A. Yeoham and Velma Yeoham, Leslie E. Stiles and Avis V. Stiles, E. O. Martin and Dorothy Martin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

360 F.2d 665 (1966)

William WELLS-LEE, James A. Yeoham and Velma Yeoham, Leslie E. Stiles and Avis V. Stiles, E. O. Martin and Dorothy Martin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18002.

United States Court of Appeals Eighth Circuit.

May 10, 1966.

COPYRIGHT MATERIAL OMITTED

William C. Myers, Jr., Webb City, Mo., for petitioner.

Martin T. Goldblum, Attorney, Tax Div., Dept. of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Dept. of Justice, Washington, D. C., and Lee A. Jackson and Harry Baum, Attorneys, Dept. of Justice, Washington, D. C., for respondent.

Before MATTHES and GIBSON, Circuit Judges, and LARSON, District Judge.

LARSON, District Judge.

Petitioners William Wells-Lee, James A. Yeoham, Leslie E. Stiles, and Edward O. Martin seek review of an adverse decision of the Tax Court.¹ Osteopathic physicians and surgeons practicing in Joplin and Southwest Missouri, petitioners paid various amounts to the Tri-State Osteopathic Hospital Association during the years 1959, 1960 and 1961. These payments were deducted as ordinary and necessary business expenses but respondent Commissioner disallowed the deductions and determined deficiencies in petitioners' income tax for the years in question. The Tax Court upheld the Commissioner in this respect.²

The facts are essentially undisputed. Petitioners and other osteopathic doctors encountered difficulty in using hospitals in the area of their practice. Thus, in June, 1958, an unincorporated organization was formed, known as the Tri-State Osteopathic Hospital Association (Association) for the purpose of acquiring hospital facilities for osteopaths. Petitioners and other persons made contributions to the Association. About six months later, on January 15, 1959, Tri-State Osteopathic Hospital Association (Tri-State) was incorporated under Missouri law as an exempt charitable corporation. The Association's assets were turned over to Tri-State. The Tax Court found that the immediate purpose of Tri-State was to acquire Joplin General Hospital for use by osteopathic doctors, with the additional objective of constructing a new hospital. On June 10, 1959, Tri-State acquired all the outstanding stock of Joplin General Hospital, Inc., a Missouri corporation. Thereafter, and up until September 17, 1963, Tri-State operated Joplin General pursuant to a lease from the Joplin corporation at an annual rental of $1.00. Joplin General was in need of repairs and the State of Missouri threatened to close it unless improvements were made. In June, 1961, Tri-State initiated plans to build a new hospital and on September 17, 1963, Joplin General was closed and a new and larger facility, Oak Hill Hospital, was opened.

Under the by-laws of Tri-State, the hospital was managed by a Board of Directors. Although no osteopath ever served as an officer or director, the professional staff was permitted to nominate persons for election to the Board, and the Chief of Staff regularly attended Board meetings. The Tri-State osteopaths had to reapply each year for staff privileges. After an application was submitted to the professional staff, it was transmitted to the Board with a recommendation, but no application was ever rejected.

The Tri-State doctors paid a staff fee and it is these payments which are in question here. Shortly after the incorporation of Tri-State in 1959, petitioners, along with other osteopaths, signed a memorandum agreement which stated that they supported the efforts of Tri-State to acquire Joplin General and to build a new hospital. By signing this memorandum petitioners agreed (1) to join the staff of Joplin General; (2) to pay a staff fee of $2,000 for the use of Joplin General; and (3) to pay a prorata share, up to $1,000 per year and subject to a total maximum of $3,000, to satisfy any default under Tri-State's contract to purchase Joplin General. None of the petitioners, or any other doctor, was called upon to make the latter payments.

This agreement was signed prior to June 9, 1959, and the $2,000 staff fee was the subject of action by the Board of Directors at its meeting on June 16, 1959. The minutes of that meeting indicate the Board unanimously resolved that the staff fee be $2,000, payable in cash or by a promissory note, on terms and conditions agreeable to the hospital administrator and the Board of Directors.

Each of petitioners paid $2,000 as a staff fee, and petitioners Yeoham, Stiles and Martin paid some additional amounts in excess of $2,000.³ The Tax Court found that petitioners' purpose in making these payments was to secure hospital facilities. It was also found that the payments were deposited to the general fund and were used for the hospital's operation. The Court also made findings that (1) the use of a hospital was essential to petitioners' osteopathic practice; (2) petitioners received substantial income as a result of the services they performed at the hospital; (3) that petitioners have practiced in Tri-State's two hospitals continuously from 1959 to the time of trial; and (4) that none of petitioners paid any additional staff fee for use of the new Oak Hill Hospital.

The Tax Court considered the $2,000 staff fee and the additional amounts as distinct items and held: (1) that the staff fee was not currently deductible as an ordinary and necessary business expense, but was a capital item; (2) that the staff fee could not be amortized since petitioners failed to prove the privilege had a determinable economic life; (3) that the additional payments were voluntarily made, and were not deductible as ordinary and necessary business expenses.

Our assessment of the Tax Court's decision is governed by § 7482 (a), Internal Revenue Code of 1954, 26 U.S.C., which provides for review of decisions of the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried to a court without a jury." This means that the clearly erroneous standard of Rule 52, Fed.R.Civ.Proc., applies to review of questions of fact determined by the Tax Court. Lessmann v. Commissioner of Internal Revenue, 327 F.2d 990 (8th Cir. 1964); Banks v. Commissioner of Internal Revenue, 322 F.2d 530 (8th Cir. 1963). "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Thus if the findings here can be said to be supported by substantial evidence upon the record as a whole, and are not against the clear weight of the evidence, or induced by an erroneous conception of the law, they will not be disturbed. Sachs v. Commissioner of Internal Revenue, 277 F.2d 879 (8th Cir. 1960); Stevens Bros. Foundation, Inc. v. Commissioner of Internal Revenue, 324 F.2d 633 (8th Cir. 1963); Wisconsin Memorial Park Co. v. Commissioner of Internal Revenue, 255 F.2d 751 (7th Cir. 1958).

Section 162(a) of the Internal Revenue Code of 1954, 26 U.S.C. (Code), permits a taxpayer to deduct all the ordinary and necessary expenses incurred during the tax year in connection with a trade or business. Although the terms "ordinary and necessary" have been repeatedly construed and applied, no definite standard can be formulated for determining whether a claimed deduction can qualify as an expense ordinary and necessary in the particular taxpayer's business. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Iowa Southern Utilities Company v. Commissioner of Internal Revenue, 333 F.2d 382 (8th Cir. 1964). In general, a business expense is tested by its normalcy and soundness considered in light of the nature of the taxpayer's trade or business, Byers v. Commissioner of Internal Revenue, 199 F.2d 273 (8th Cir. 1952), but the determination of whether an expense is ordinary and necessary and the taxpayer's purpose in making a particular payment are usually questions of fact. General Bancshares Corporation v. Commissioner of Internal Revenue, 326 F.2d 712 (8th Cir. 1964). Where a deduction has been disallowed, the burden rests with the taxpayer to demonstrate that the Commissioner erred. Dyer v. Commissioner of Internal Revenue, 352 F.2d 948 (8th Cir. 1965); Green v. Bookwalter, 319 F.2d 631 (8th Cir. 1963).

Staff Fees —

In the present case there is no question that the amounts sought to be deducted were paid or incurred in the years 1959, 1960, and 1961. Nor is there any dispute that the payments were made in connection with a business activity. The Tax Court expressly found that "the use of a hospital was essential to petitioners in the practice of their profession," and that their purpose "in making payments to Tri-State was to secure the facilities of a hospital where they could bring and treat their patients and earn income." These findings, which are upheld by the record, support the view that the staff fee was a necessary expense for petitioners' profession. No express finding was made with respect to the requirement that business expenses be ordinary, but the Commissioner makes no claim here that the payments do not satisfy that requirement. Nonetheless, even if the staff fee was both ordinary and necessary, we agree with the Tax Court that the payments brought about the acquisition of a capital asset and thus they are not currently deductible.

Under the Code, ordinary and necessary business expenses are distinguished from capital expenses which, pursuant to § 263(a) (1), are non-deductible in the year of payment, but may be depreciated or amortized over the life of the asset in accordance with § 167. Hence, to obtain the business expense deduction of § 162(a) the taxpayer must meet the criteria contained in that section and, in addition, must show that the payment did not result in the acquisition of a capital asset with a life in excess of one...