Connelly v. Commissioner , 6 T.C. 744 ( 1946 )

James A. Connelly, Petitioner, v. Commissioner of Internal Revenue, Respondent

Connelly v. Commissioner

Docket Nos. 5153, 6006

United States Tax Court

6 T.C. 744; 1946 U.S. Tax Ct. LEXIS 227;

April 17, 1946, Promulgated

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Decisions will be entered under Rule 50.

1. In each of the taxable years the petitioner made a contribution to a county fair association which was required by its lease from the county to hold an agricultural fair each year. The Commonwealth of Pennsylvania appropriated money for the support of the association. Held, that the contributions are legal deductions from gross income under section 23 (o), I. R. C.

2. In 1941 the petitioner paid attorneys' fees in connection with litigation involving a deficiency in income tax for 1934. Held, that the amount is a legal deduction from gross income. Howard E. Cammack, 5. T. C. 467, followed.

M. L. Seidman, C. P. A., and S. J. Lasser, C. P. A., for the petitioner.

Homer F. Benson, Esq., for the respondent.

Smith, Judge .

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SMITH

These proceedings, consolidated for hearing, involve income tax deficiencies for 1940 and 1941 in the respective amounts of $ 1,229.38 and $ 3,783.52. The questions in issue are (1) whether contributions made by the petitioner to the McKean County Fair Association in 1940 and 1941 are legal deductions from gross income under section 23 (o) of the Internal Revenue Code, and (2) whether fees paid in 1941 to attorneys for services rendered in litigation contesting the disallowance of a deduction claimed for worthless stock in 1934 are legal deductions from petitioner's gross income for 1941.

Material facts have been stipulated and are found accordingly.

FINDINGS OF FACT.

The petitioner is a resident of Ludlow, McKean County, Pennsylvania, and he filed his 1940 and 1941 Federal income tax returns with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh.

In 1940 and 1941 the petitioner made contributions to McKean County Fair Association (hereinafter sometimes referred to as Fair Association), in the respective amounts of $ 2,600 and $ 2,700 and deducted those contributions, subject to the 15 percent limitation, in computing his net income for the respective years. The respondent disallowed these deductions.

The Fair Association was organized under the laws of the Commonwealth of Pennsylvania on July 22, 1905, "for the purpose of maintaining a public park for trotting and fair purposes, and the encouragement of agriculture and horticulture."

The petitioner at no time was a stockholder or officer of the Fair Association.

In accordance with the Act of May 5, 1933, of the Legislature of the Commonwealth of Pennsylvania, dealing with nonprofit corporations, the Fair Association amended its bylaws in effect in 1940 and 1941 to read:

No dividends shall be paid on any stock of the Association to the end that during the legal existence of the Association, all surplus earnings and profits may be used for the general welfare and betterment of the Association.

All and any provisions of present bylaws at variance with the amendments herewith proposed, are to be cancelled and made void.

The Act of the Pennsylvania Legislature of July 1, 1937, P. L. 2612, authorized county commissioners of any county to hold in trust for inhabitants and citizens of the county any real estate or property appropriate for agricultural fairs or exhibits, and to lease the same to any incorporated agricultural association to operate and conduct an annual fair within the county. In accordance with the aforesaid act and a resolution of a majority of its stockholders dated July 25, 1938, the Fair Association conveyed its real property to the county of McKean and commissioners thereof. The county of McKean accepted the conveyance of such real property and, on August 22, 1938, issued a lease to the Fair Association for said property on condition that it be used "for agriculture fairs and exhibits each year."

Under an act of the Legislature of the Commonwealth of Pennsylvania intended to encourage agriculture and the holding of agricultural exhibits in each of the years 1940 and 1941, the Fair Association received from the Commonwealth of Pennsylvania an appropriation of $ 2,500.

The Fair Association since its incorporation on July 22, 1905, has never made any distribution of its earnings, profits or otherwise to any private shareholder or other individuals.

During the years 1940 and 1941 the Fair Association operated at a loss and deficits were met through contributions of individuals.

The property, income, and funds of the Fair Association were used only for the purposes stated in the charter, and in accordance with its bylaws no part of its net earnings inured to the benefit of any private shareholder or individual.

In his income tax return for 1934 the petitioner claimed the deduction of a loss of $ 78,700 representing an investment by him in shares of stock of Warren Savings Bank & Trust Co., on the ground that the stock had become worthless prior to 1934. The respondent disallowed the deduction and determined a deficiency in income tax for 1934 of $ 14,478.88, which determination was sustained by a decision of the Board of Tax Appeals, 42 B. T. A. 237. The petitioner took an appeal from such decision to the Circuit Court of Appeals for the Third Circuit, which decision was affirmed on June 23, 1941, 121 Fed. (2d) 686. In connection with the proceedings before the Board of Tax Appeals and the Circuit Court of Appeals for the Third Circuit, the petitioner incurred attorneys' fees and disbursements which he paid in 1941 in the amount of $ 2,670.64 and in his income tax return for 1941 petitioner deducted this amount. The deduction was disallowed by the respondent.

OPINION.

The first question presented is whether the contributions made by the petitioner to the McKean County Fair Association in 1940 and 1941 are legal deductions from gross income under section 23 (o) of the Internal Revenue Code. That section provides in material part as follows:

(o) Charitable and Other Contributions. -- In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:

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(2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any State or Territory or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.

The respondent has disallowed these deductions upon the ground that the Fair Association is not "organized and operated exclusively for religious, charitable, scientific, literary or educational purposes." No contention is made that any part of the net earnings of the Fair Association inured to the benefit of any private shareholder or individual or that any substantial part of its activities is carrying on propaganda or otherwise attempting to influence legislation. The respondent's position is that the ordinary county fair is one that is organized for the social welfare of the public; that at such fairs, ordinarily, horse racing is carried on and other activities for the pleasure of the public, which takes the association out of the class of exempt organizations "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes." The respondent admits that the promotion of agriculture through prizes for best exhibits of live stock and other agricultural products may be broadly classified as scientific or educational, but he submits that the association can not be classified as organized and operated exclusively for scientific and educational purposes.

In Roy C. McKenna, 5 T. C. 712, we held that contributions to unincorporated organizations of voluntary firemen in various political subdivisions of the Commonwealth of Pennsylvania were organized for charitable purposes within the meaning of section 23 (o) (2) of the code and that they are legal deductions from gross income. We pointed out that the provisions of this section, like the provisions exempting charitable organizations from tax, should be liberally construed, "so that the result will not turn on accidental circumstances or legal difficulties," citing numerous cases. See also Isabella M. Sheldon, 6 T.C. 510">6 T. C. 510.

We think that an incorporated fair association which has for its primary object the holding of agricultural fairs qualifies as one "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes." The Commonwealth of Pennsylvania made annual appropriations for the support of the association. Quite clearly these appropriations were made in recognition of their educational value. In our opinion the entertainment features of such fairs are of minor importance. They are only incidental to the main purpose for which the fair is held. The Supreme Court has recognized that an otherwise tax-exempt charitable organization does not lose its exemption from tax merely because it has incidental income from other sources. Trinidad v. Sagrada Orden de Predicadores, etc., 263 U.S. 578">263 U.S. 578. Likewise, we think that a fair association does not lose its character as one operated exclusively for scientific and educational purposes because of incidental features, such as horse racing, which are designed to increase attendance. The respondent erred in the disallowance of the claimed deductions.

The second question is whether the petitioner is entitled to deduct payments of attorneys' fees made in 1941 in contesting a deficiency in income tax determined by the Commissioner for 1934. In Howard E. Cammack, 5 T.C. 467">5 T. C. 467, we held that payments of attorney fees by the taxpayer in 1940 in recovering an overpayment of income tax for 1932 was a legal deduction from gross income in the year in which paid. The only difference between that case and the instant proceeding is that there the taxpayer was successful in recovering the overpayment, whereas here the taxpayer was unsuccessful in contesting the deficiency. We do not think, however, that this is a material difference. Section 23 (a) (2) of the code, as amended, permits the deduction from gross income:

(2) * * * In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

The litigation expenses paid by the petitioner in 1941 were for the conservation of his property. We hold, upon the authority of the above cited case, that the amount of attorneys' fees paid by the petitioner in 1941 is allowable as a deduction from gross income of 1941.

Decisions will be entered under Rule 50.