Opinion
Docket Nos. 21028 21029 21030 21031.
1950-12-15
B. W. STURDIVANT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE of M. P. STURDIVANT, DECEASED, BEN W. STURDIVANT, W. M. YANDELL, SR., and J. C. WILBOURN, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARGARET YANDELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.GARNETT S. WILBOURN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert Ash, Esq., and Carl F. Bauersfeld, Esq., for the petitioners. J. Frost Walker, Esq., for the respondent.
Legal fees were paid by a partnership for the defense of two partners and employee indicted for murder. The partnership also paid legal fees and $25,000 in settlement of a civil claim arising out of the homicide. Held, these expenditures are not deductible as ordinary and necessary business expenses of the partnership. Robert Ash, Esq., and Carl F. Bauersfeld, Esq., for the petitioners. J. Frost Walker, Esq., for the respondent.
Respondent has determined deficiencies in the income tax liability of each of the petitioners for the calendar years 1943 and 1944 as follows:
+-----------------------------------------------------------+ ¦Docket No. ¦Petitioner ¦Year ¦Deficiency ¦ +------------+--------------------------+------+------------¦ ¦ ¦ ¦{1943 ¦$917.52 ¦ +------------+--------------------------+------+------------¦ ¦21028 ¦B. W. Sturdivant ¦{1944 ¦4,160.20 ¦ +------------+--------------------------+------+------------¦ ¦21029 ¦Estate of M. P. Sturdivant¦1944 ¦13,395.37 ¦ +-----------------------------------------------------------+
{1943 901.73 21030 Margaret Yandell {1944 3,875.69
{1943 932.11 21031 Garnett S Wilbourn {1944 3,912.28
The proceedings were consolidated for hearing.
The issues for our determination are:
(1) Whether legal fees paid by the partnership M. P. Sturdivant Plantations during the fiscal years ended February 28, 1943, and February 29, 1944, for the defense of two of the partners and an employee in a criminal action, and the negotiation and settlement of a civil claim arising out of the homicide of one M. D. Alexander and also the sum paid in settlement of the claim are deductible as ordinary and necessary business expenses.
(2) Was a retainer fee of $1,800 paid J. C. Wilbourn during the fiscal year ended February 28, 1943, for legal services unrelated to the homicide and if so, is it deductible as an ordinary and necessary business expense?
FINDINGS OF FACT.
M. P. Sturdivant Plantations is a partnership having a fiscal year ending February 28. The partnership's books of account were kept and its returns were filed on an accrual basis of accounting.
The members of the partnership during the fiscal years ended February 28, 1942, February 28, 1943, and February 29, 1944, were M. P. Sturdivant, Glendora, Mississippi, who died in 1948 and whose estate is a petitioner in these proceedings; B. W. Sturdivant, Glendora, Mississippi; Garnett S. Wilbourn, Meridian, Mississippi, and Margaret Yandell, Glendora, Mississippi.
For each of the fiscal years above the partnership filed a partnership information return, Form 1065, with the collector of internal revenue for the district of Mississippi. Each of the partners filed individual income tax returns for the calendar years 1943 and 1944 with the above collector.
B. W. Sturdivant, Garnett S. Wilbourn, and Margaret Yandell are brother and sisters, and their father was M. P. Sturdivant. J. C. Wilbourn is the husband of Garnett S. Wilbourn.
Jack Taylor is the stepson of B. W. Sturdivant and during 1942 was employed by the partnership.
During the fiscal years ended February 28, 1943, and February 29, 1944, M. P. Sturdivant owned a 50 per cent interest in the partnership and B. W. Sturdivant, Garnett S. Wilbourn and Margaret Yandell each owned a 16 2/3 per cent interest.
During 1943 and 1944 B. W. Sturdivant was the general manager of the partnership and in such capacity received from the partnership an annual salary of $10,000 in addition to his distributive share of the partnership profits.
The partnership is engaged in the business of farming and operates cotton plantations in the Mississippi Delta. It maintains its principal office at Glendora, Mississippi. The principal income crop is cotton. In addition, the partnership receives income from the operation of several stores, cotton gins, and the raising of corn, hogs, cattle and seed.
In 1938 B. W. Sturdivant orally agreed with M. D. Alexander to clear Alexander's land in return for the wood thereon. It was intended that the wood be used as firewood for the partnership's tenants and employees. The partnership operated under this contract each year from 1938 until August 14, 1942.
On August 14, 1942, wagons and employees of the partnership were sent to Alexander's farm to gather the wood and haul it away. Alexander refused to allow the wood to be hauled off his property and instructed that it be unloaded and the wagons leave his property.
B. W. Sturdivant met the wagons returning empty and was informed by the drivers that Alexander had said they were ‘tramping‘ down his corn and told them to unload the wood and get out of the field.
Later in the day, about noontime, B. W. Sturdivant met Alexander at Tom Smith's filling station and inquired of him why he refused to allow the wood to be hauled away. B. W. Sturdivant offered to make restitution for damage done, but an understanding could not be reached. An argument arose during which B. W. Sturdivant stated Alexander had broken his contract. Alexander called B. W. Sturdivant a liar. Sturdivant believed he should not take this and that he should uphold his personal honor and a fist fight ensued.
After the fight B. W. Sturdivant and Jack Taylor returned to their plantation where the events were related to M. P. Sturdivant.
Alexander, shortly thereafter, came to the Sturdivant plantation looking for B. W. Sturdivant. Not finding him, Alexander left.
Unsuccessful attempts were made by M. P. Sturdivant and B. W. Sturdivant to locate friends by telephone to request them to intercede. Being unable to locate anyone, M. P. Sturdivant, B. W. Sturdivant and Jack Taylor, fully armed, proceeded to Glendora. As they came to Roundtree's filling station they saw D. E. Reynolds' automobile. They stopped their automobile to seek Reynolds' assistance.
Unknown to them, Alexander was inside the service station and as B. W. Sturdivant opened the door Alexander fired a shot at him. B. W. Sturdivant and M. P. Sturdivant returned the fire. Several shots were exchanged. M. P. Sturdivant fired one shot from a shotgun which hit Alexander who fell to the floor and later died in the ambulance on his way to Memphis.
As a result of the death of M. D. Alexander, M. P. Sturdivant, B. W. Sturdivant, and Jack Taylor, an employee of the partnership, were indicted for murder. They were tried for murder at the March Term, 1943, of the Circuit Court of the Second District, Tallahatchie, Mississippi. At the conclusion of the testimony for the State, the court directed a verdict of not guilty as to M. P. Sturdivant and Jack Taylor. The case proceeded thereafter as to the defendant B. W. Sturdivant and the jury returned a verdict also finding B. W. Sturdivant not guilty.
Following the death of Alexander, his wife, Ida Lee Alexander, through counsel, made demands for damages arising out of the injuries to and death of Alexander. No suit was filed.
The petition of Ida Lee Alexander for appointment of herself as guardian of the estate of her minor daughter reads in part as follows:
Petitioner shows unto the court that so far as she knows this is the only property which the said Betty Ann Alexander owns or in which she has any interest, except and save an interest in a cause of action which she may have by virtue of and arising out of an altercation between her father, M. D. Alexander, and M. P. Sturdivant and B. W. Sturdivant and Jack Taylor, at which time and during which altercation the said M. D. Alexander was shot by M. P. Sturdivant and as a result of which he died on the date aforesaid. All of the above are resident citizens of Tallahatchie County, Mississippi.
The order of the court appointing Ida Lee Alexander guardian reads in part as follows:
* * * except and save an interest in a cause of action which she may have by virtue of and arising out of an altercation between the father of the said Betty Ann Alexander, to-wit: M. D. Alexander, and M. P. Sturdivant, B. W. Sturdivant and Jack Taylor, which occurred on or about August 14, 1942, in Tallahatchie County, Mississippi, at which time M. D. Alexander was shot by M. P. Sturdivant.
The petition of Ida Lee Alexander for permission to settle the claim for damages on behalf of her minor daughter reads in part as follows:
Your petitioners claim that said M. D. Alexander came to his death by reasons of the real wrongful acts of the said Ben W. Sturdivant, M. P. Sturdivant and Jack Taylor, and that they are jointly and severally liable to petitioners, * * * .
* * * Your petitioner's attorneys have made formal demand upon said M. P. Sturdivant, Ben W. Sturdivant and Jack Taylor for damages, and were and are prepared to enter suit, if necessary, against them for your petitioners. Your petitioners' said attorneys have negotiated with the said parties, through their attorneys, to see if a satisfactory compromise and adjustment of the claim of civil liability against them for the injury to and death of M. D. Alexander could be obtained without instituting suit.
The decree of the court authorizing Ida Lee Alexander to settle reads in part as follows:
* * * for authority to compromise and settle with M. P. Sturdivant, Ben W. Sturdivant and Jack Taylor, the claim of her ward for damages of every kind to the ward, as a daughter and distributee of M. D. Alexander, deceased, and of her ward's interest in all damages of every kind to M. D. Alexander by reason of injuries to and death of M. D. Alexander on August 14, 1942, * * * .
On March 22, 1943, Ida Lee Alexander executed a release, individually and as guardian of her daughter, upon payment to her individually and as guardian the sums of $11,000 and $14,000, respectively. These sums were paid by checks dated March 22, 1943, drawn on the account of the partnership, M. P. Sturdivant Plantations, and signed by M. P. Sturdivant.
The release provided in part:
The undersigned do hereby full, finally and completely discharge and release the said M. P. Sturdivant, Ben W. Sturdivant, Jack Taylor, and M. P. Sturdivant Plantations, a partnership composed of M. P. Sturdivant, Ben W. Sturdivant, Mrs. Margaret Sturdivant Yandell, and Mrs. J. C. Wilbourn and all other persons from any and all such damages, * * * .
Attorneys were employed to represent M. P. Sturdivant, B. W. Sturdivant and Jack Taylor at the criminal trial and to handle the claims asserted by Ida Lee Alexander.
In the partnership information return for the fiscal year ended February 28, 1942, the partnership claimed as a deduction for legal and professional expenses the amount of $579.78.
In the partnership information return for the fiscal year ended February 28, 1943, the amount of $8,477.48 is claimed as a deduction for legal and professional expenses. Of this amount the respondent, in the statutory notices of deficiency, disallowed $7,575 as a deduction.
In the partnership information return for the fiscal year ended February 29, 1944, the amount of $8,552.81 is claimed as a deduction for legal expenses and under the heading ‘Other Deductions‘ the amount of $25,000 is claimed as a deduction for ‘settlement of suit,‘ making a total deduction of $33,552.81. Of this amount the respondent, in the statutory notices of deficiency, disallowed the total sum of $33,179.50.
OPINION.
JOHNSON, Judge:
The first issue for our determination is whether legal fees paid by the partnership, M. P. Sturdivant Plantations, during the fiscal years ended February 28, 1943, and February 29, 1944, for the defense of two of its partners and an employee in a criminal action and the negotiation and settlement of a civil claim arising out of the homicide of one M. D. Alexander are deductible as an ordinary and necessary business expense, and also, whether the sum of $25,000 paid in settlement of the civil claim is so deductible.
The ultimate question upon which this issue depends is whether, within the provisions of section 23(a)(1)(A) of the Internal Revenue Code, the expenses thus incurred were ordinary or necessary to the business of the partnership which is principally cotton farming.
It is asserted by petitioners that the incident out of which the payment of these sums of money resulted (the homicide of M. D. Alexander, arose directly from the refusal of Alexander to permit employees of the partnership to remove the wood from his farm in accordance with the contract between the parties.
If we should grant, which we do not, that the disagreement over the contract was the sole cause of the fist fight and fatal shooting, we still must determine whether these incidents proximately resulted from or were so directly connected with the business of the partnership that expenses incurred therefrom were ordinary and necessary. It is well founded doctrine that a partnership, and consequently, all of the partners, become liable for the acts of an individual partner performed within the course of his employment or for the benefit of the partnership. Were these acts performed by the partners within the course of their employment and for the benefit of the partnership? We think not. Granted that settling disputes or taking action to enforce a contract could be within the purview of a partner's duties and for the benefit of the partnership, still upon the facts before us we fail to see wherein settlement of a dispute or enforcement of a contract or any objective related to the business of the partnership was the purpose in mind at the time of the fist fight or at the time the partners went forth fully armed. We believe B. W. Sturdivant was acting on his own and not as a partner when he engaged in fisticuffs with Alexander in the defense of his honor. The law can not countenance and has long frowned upon the settlement of disputes by violence. Lawful avenues for settlement of the dispute and defense of honor are available upon recourse to the courts. It can not be said that settlement of a dispute or defense of honor in this manner was ordinary to this business or to business in general.
The crime with which the partners and employee were charged was purely personal. The partnership was not indicted nor were the expenses incurred in its defense. Although the partnership may have suffered from the loss of services of its partners, that loss would not have come about from activities engaged in on behalf of the partnership in normal accepted business practice.
These activities being the personal affairs of the partners and employee involved and not authorized nor within the scope of their employment, no civil liability could attach to the remaining partners through the partnership association. The amount paid in settlement of the civil claim was not a debt of the partnership and does not constitute ordinary and necessary business expense. The fact that it was paid out of partnership funds does not make it so. Pantages Theatre Co. v. Welch, 71 Fed.(2d) 68.
The petitioners cite Commissioner v. Heininger, 320 U.S. 467. That case involved the deductibility of legal fees incurred by a mail order dentist in an effort to enjoin enforcement of a fraud order issued by the Postmaster General. It was there decided that the mailing of the circulars and advertisements was part of the business of the dentists. To be denied this practice would have meant the destruction of his business. It was in defense of his business that the legal fees and expenses were incurred. In the case before us, the incident giving rise to the expenditures was not within the business of the partnership but was the personal affair of the parties involved.
The remaining issue to determine is whether the partnership paid to J. C. Wilbourn $1,800 as an annual retainer fee for services not connected with the death of M. D. Alexander. If this fee was paid, is it deductible?
B. W. Sturdivant testified that legal fees were paid during the fiscal years ended February 28, 1943, and February 29, 1944, in the total amount of $15,754.50, which was paid in two installments, one at the termination of the criminal case and one at the time of settlement of the civil claim. The total amount claimed on the tax returns for these two years as a deduction for legal fees was $17,030.29. No breakdown was made as to what amount was paid to whom and for what services, except, it was testified, that the amount $15,754.50 included the amount of $1,800 paid to J. C. Wilbourn as an annual retainer. There is insufficient evidence in the record to make a determination that $1,800 was paid in legal fees to J. C. Wilbourn for services not connected with the death of Alexander and to refute in part the determination of respondent that the amount of $7,575 paid in legal fees during the fiscal year ended February 28, 1943, should be disallowed as a deduction. Since evidence supporting such an assertion was wholly within the power of petitioners, failure to present it should weigh against them and we sustain the determination of respondent.
Decisions will be entered for the respondent.