merely because the precise amounts are not determined when books are closed.

The Board was more liberal in Retailers Fire Ins. Co.'s Appeal (3 B. T. A. 1186). The Commissioner disallowed reserves for unpaid losses and refunds to policy holders for 50 per cent of their premiums. The Board in a well written opinion overruled the Commissioner. The reserves, however, represented the same sort of liabilities as have been denied as deductions to other taxpayers. In some cases the Board seems to go as far as reasonably could be asked. In Bump Confectionery Co.'s Appeal (4 B. T. A. 50) the Board said:

DECISION. Conceding that it may be proper to accrue any approximation, it is certainly essential that there be a recognized obligation to pay before one's right to accrue arises, and a mere liability to suit is not sufficient. Where the liability is denied and the injured party takes no action to compel payment, there is no basis for an accrual, and any amount set up on the books to take care of this liability would be in the nature of a contingent reserve.

In Pike County Coal Corp.'s Appeal (4 B. T. A. 625) the Board decided that expenses incurred during the first six months of 1919 were not chargeable to the year 1918. But the taxpayer must have had a poor year in 1918 since the Commissioner contended that the expenses belonged to 1918, even though the Board found that at December 31, 1918, the taxpayer could not ascertain the

amount.

Attorneys' fees, when deductible.-The Treasury, the Board, and to some extent the courts, have not always permitted the deduction of attorneys' fees as business expenses. Thus the Board has held that attorneys' fees paid in a will contest are not deductible. [Douglas's Appeal, 1 B. T. A. 372 (A)], and a federal court disallowed similar fees paid in connection with litigation regarding the control of certain stock (Laemmle v. Eisner, 275 Fed. 504). Similarly the Treasury disallowed legal and travelling expenses expended in contesting an additional assessment not connected with the taxpayer's trade or business. (C. B. I-1, 196; I. T. 1319.) These rulings and decisions which perhaps may be supported on a strict construction of section 214 (a-1), on the ground that the expenses are not incurred in carrying on a trade or business, are not so objectionable as several others, where the expense is closely connected with a business. Of this sort are the Court of Claims decision in Korn

hauser v. U. S. (Ct. Cls. Feb. 1, 1926), holding that the expense of defending a law partner's suit for an accounting is not deductible; and the Treasury's disallowance of expenses incurred by a retailer in defending prosecution for making illegal sales (C. B. 4, 209; O. D. 952).

The Treasury holds that fines, attorneys' fees and legal expenses incurred in connection with an indictment for an illegal violation of anti-trust laws are not deductible irrespective of the guilt or innocence of the taxpayer. (C. B. I-1, 269; I. T. 1174, and V-36-2898; I. T. 2303.)

In Joyce's Appeal (3 B. T. A. 393) the Board upheld the Commissioner in disallowing legal fees expended in resisting a claim by taxpayer's wife on the ground that the payment was not a business expense.

The Treasury formerly held that legal expenses incident to contested disbarment proceedings were not deductible. (C. B. IV-1, 140; I. T. 2168.) This ruling, however, has been overruled (C. B. V-1, 227; I. T. 2252), the Solicitor having held in another case that legal expenses incurred in defending a civil suit for professional malpractice were allowable deductions (C. B. V-1, 226; S. M. 4078).

Accountants' fee.-In Mattlage's Appeal [3 B. T. A. 242 (A)] the Board disallowed fees for accountants' services rendered in preparing income tax returns.

Expenses arising out of illegal and alleged illegal transactions. A contractor paid a bribe to a labor leader. (Backer's Appeal, I B. T. A. 214.) He testified at a hearing that he had made no such payments and was later indicted for perjury and tried. The case was dismissed. He deducted the costs of defense ($40,624) but the Commissioner disallowed it. The Board sustained the Commissioner.

Gifts alleged to be illegal.—A taxpayer in 1918 was charged with profiteering and a threat was made by the U. S. Food Administration that if $5,000 was not contributed to the Red Cross, taxpayer's license would be revoked. Taxpayer paid under protest. The Commissioner disallowed the deduction. The Tax Board overruled the Commissioner [Huff's Appeal 1 B. T. A. 542 (A)].

In Lindheim's Appeal (2 B. T. A. 229) the taxpayers deducted

the expenses of defending themselves in a criminal action under the Trading with the Enemy Act. The Commissioner disallowed the deduction. The Board upheld the Commissioner on the ground. that they were not legitimate business expenses but were personal expenses of the individuals.

In Frey's Appeal [1 B. T. A. 338 (A)] the Board ruled that losses sustained in illegal gambling operations were not deductible to determine net income. On the other hand, the Board held in McKenna's Appeal [1 B. T. A. 326 (A)] that the actual gain or profit derived from a taxpayer's operations in laying wagers on horseracing, known as bookmaking, is determined by applying against the total receipts therefrom, the sum of the amounts paid to bettors on his handbook, plus the amounts returned to bettors by reason of scratches, called off bets, and "lay-off" bets. From the foregoing it is apparent that gambling losses may be deducted from gross income against gambling winnings when such winnings are in excess of the losses but that losses in excess of winnings are not deductible, except when gambling is legal in the place in which it is carried on.

RULINGS. The amount expended for trial expenses and attorneys' fees in defending persons against criminal charges are under no circumstances to be considered as a business expense. (C. B. IV-1, 170; S. R. 3137.)

Amounts paid by the M. Railway Co. as penalties for violation of the Federal hours of service law during 1916 and 1917 are not deductible as items of ordinary and necessary business expenses. (C. B. IV-1, 140; S. R. 1448.)

The foregoing ruling is questionable. Probably all the company did was to make a mistake. Mistakes are quite ordinary if not

necessary.

In Cleveland Coal Co.'s Appeal (4 B. T. A. 93) the Commissioner disallowed a payment to a receiver to influence or expedite his action. The payment was made by the majority stockholder in the corporation which he was seeking to rehabilitate. Upon the face of the findings of fact the payment was proper and legal. The Board upheld the Commissioner and said: "A receiver is an officer of the court and is paid for his services by court decree. For an outside party to pay or agree to pay him for his services as a receiver is contrary to public policy."

The Board neglected to state how public policy was affected. It was not a bribe.

In Columbus Bread Co.'s Appeal (4 B. T. A. 1126) fines and expenses arising out of the violation of an anti-trust law were disallowed by the Commissioner, who was upheld by the Board. The Board said the expenses were neither ordinary nor necessary.

Expenses of abandoned project.-A taxpayer who sent an agent to Europe to organize an export business deducted the expenses. The report was unfavorable and the idea was abandoned. Held, that it was not an expense of the taxpayer's business because "his income consisted entirely of salaries and interest." But as it was a transaction entered into for profit the expenditure "became a loss which was deductible." (C. B. I-2, 112; I. T. 1505.)

For a distinction without a difference, the foregoing takes first prize.

LAW. Section 214. (a) In computing net income there shall be allowed as deductions: (2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title; . . . .

Section 234 (a-2), dealing with corporations is identical.

REGULATION. Interest paid or accrued within the year on indebtedness may be deducted from gross income, except that interest on indebtedness incurred or continued to purchase or carry securities, such as municipal bonds and first Liberty loan 31⁄2 per cent bonds, the interest upon which is wholly exempt from tax, is not deductible. Since other obligations of the United States issued after September 24, 1917, are not wholly exempt from taxation under this title, interest paid on indebtedness incurred or continued to purchase such obligations (whether or not originally subscribed for by the taxpayer) is deductible in accordance with the general rule. (Art. 121.)

...

[Former Procedure] See Income Tax Procedure, 1919, pages 454463; 1926, page 1218.