Petition for Review of Decision of the United States Board of Tax Appeals.
Before SPARKS, MAJOR, and MINTON, Circuit Judges.
The petitioner, S. B. Heininger, seeks to review a judgment of the United States Board of Tax Appeals which found the petitioner liable for deficiencies in income taxes for the years 1937 and 1938.
The petitioner, a dentist, conducted a mail order business in which he undertook to make false teeth and supply them by mail. The Post Office Department instituted a fraud order proceeding against the petitioner, which resulted in a finding that his methods were fraudulent, and an order against him denying to him the use of the mails. If he could not use the mails, he was out of business. Consequently, he filed suit in the District Court for the District of Columbia against the Postmaster General, and obtained a permanent injunction against him from enforcing the fraud order. On appeal to the Circuit Court of Appeals for the District of Columbia, the judgment of the District Court was reversed, and the fraud order of the Post Office Department was sustained.
In the defense of his business in the proceedings in the Post Office Department and the District Court and the Circuit Court of Appeals, the petitioner incurred and paid several thousand dollars for attorneys' fees and expenses. It is admitted that the expenses were reasonable. By these legal proceedings, the enforcement of the fraud order was enjoined and remained enjoined until the reversal by the Circuit Court of Appeals.
During this time, in the years 1937 and 1938, the petitioner continued in business and returned a gross income for 1937 of $287,582.82, and for 1938 of $150,168.27. While his litigation was ultimately unsuccessful, it did allow him to keep his business going in 1937 and 1938, and enabled him to earn the large income indicated above.
The petitioner sought to deduct from his gross income for 1937 and that for 1938, as an ordinary and necessary expense of carrying on that business, the attorneys' fees and expenses of the litigation. The Commissioner disallowed the deduction, and the Board of Tax Appeals affirmed. The question is: Are such expenses deductible as ordinary and necessary expenses in carrying on that business, within the meaning of Section 23(a)(1), 26 U.S.C.A., Int. Rev. Code, 49 Stat. 1648?*fn1
What is an ordinary expense is discussed by Mr. Justice Cardozo in Welch v. Helvering, 290 U.S. 111, 114, 54 S. Ct. 8, 9, 78 L. Ed. 212: "Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack."
By this standard, we think it plain that the expense in the instant case was ordinary. It was such an expense as related strictly to the life of the business.
Not only must the expense be ordinary; it must also be necessary. In Kornhauser v. United States, 276 U.S. 145, 153, 48 S. Ct. 219, 220, 72 L. Ed. 505, Mr. Justice Sutherland, in discussing the allowance, as a deduction, of attorneys' fees as a business expense, said: " * * * where a suit or action against a taxpayer is directly connected with, or, as otherwise stated, * * * proximately resulted from, his business, the expense incurred is a business expense within the meaning * * * of the act."*fn2
We think that where an expense is incurred which saves the life of a business, even for a time, it is, in the light of the above interpretation, not only a business expense, but a necessary business expense. Without the expenditure, there would have been no income in this case because there would have been no business. The business depended directly upon the expense incurred in the litigation. We therefore hold that the expense was both ordinary and necessary.
Our conclusion is supported by the case of Foss v. Commissioner, 75 F.2d 326, 1st Circuit, and Alexandria Gravel Co. v. Commissioner, 95 F.2d 615, 616, 5th Circuit. In the Foss case, Foss was the owner of stock in the American Blower Company and the B. F. Sturtevant Company. He was sued by the minority stockholders of the American Blower Company, and charged with entering a combination to divert the business of that company to the B. F. Sturtevant Company, and to violate the Sherman Anti-Trust Act, 15 U.S.C.A. §§ 1-7, 15 note. The District Court sustained the charges, and granted relief. The Circuit Court of Appeals modified the reief granted, but otherwise sustained the District Court. Foss incurred large attorneys' fees, which he sought to deduct from his income as ordinary and necessary expenses of his business. This deduction was disallowed by the Board of Tax Appeals, but on appeal to the Circuit Court of Appeals, the deduction was allowed, the court relying upon kornhauser v. United States, supra.
In the Gravel Company case, the Board of Tax Appeals had refused to allow the company to deduct, as an ordinary and necessary expense of its business of selling gravel, commissions paid to one Dore on sales to the State Highway Commission. The disallowance was because of the fact that Dore was a State Senator. There was no evidence that he was to use or did use his political influence to obtain contracts with the Highway Commission, as all of the contracts were let by competitive bidding. The Circuit Court of Appeals reversed the Board of Tax Appeals, and said: "The revenue laws of the United States are not over-squeamish. By the broad definition of gross income, income arising from an illegal business is taxed even though the illegality be one declared by the Constitution itself. United States v. Sullivan, 274 U.S. 259, 47 S. Ct. 607, 71 L. Ed. 1037, 51 A.L.R. 1020. The provisions of the statute fixing the deductions to be regarded in arriving at the net income which alone is taxed, 26 U.S.C.A. § 23 [26 ...