In James J. Standing, supra, the year of the claimed business expense deduction was 1951, and in Elmer Reise, supra, the year was 1949. In both cases the expenses were incurred in income tax disputes, and although in both years the regulations allowed the deductibility by an individual of his expenses in income tax controversies as nonbusiness expenses, this Court and the Court of Appeals for the Fourth Circuit held that such expenses, if incurred in connection with the individual's business, were deductible as business expenses. We do not believe that new section 212 (3) changes this result. In enacting this section Congress was concerned only with nonbusiness expenses of individuals and there is nothing to suggest that it sought to deprive individuals of business deductions which they had hitherto enjoyed. We believe that the statutory scheme under the Internal Revenue Code of 1954 permits an individual taxpayer to deduct his expenses in any tax controversy either as a business expense under section 162(a) or as a nonbusiness expense under section 212(3), depending upon the facts of the particular case.

Respondent next argues that even if an individual taxpayer may claim a business expense deduction for tax litigation expenses in connection with business income, the petitioner has failed to show that the tax controversy for which the legal and accounting fees were incurred was related to his business. This case was fully stipulated. The legal and accounting fees here in question were in connection with the tax controversy involving the years 1944, 1945, and 1946 and in those years the petitioner was engaged in an oil-producing business, farming operations, the operation of nightclubs, and he also had income from coin or slot machines, rental property, and stocks and bonds. All of these operations were certainly business activities with the possible exception of the rental property and the securities. Some idea of the relative insignificance of petitioner's income from these nonbusiness activities may be gathered from the amounts reported by him from various sources in his income tax returns for the years 1944 through 1946, which showed the following:

Respondent used the net worth plus personal expenditures method to compute petitioner's income for these years and on this basis deter

mined deficiencies, additions to tax, and interest for this period totaling $657,402.30. Under the settlement reached by respondent and petitioner there were no deficiencies in income tax due for the years 1944 and 1945, but there were deficiencies in income tax and additions to tax under sections 293 (b) and 294 (d) (2) of the Internal Revenue Code of 1939 for 1946 in the respective amounts of $84,875.51, $42,437.76, and $2,686.73. Obviously, under the net worth method the sources of income cannot be identified. But we are satisfied from the nature of petitioner's activities during the years 1944 through 1946, the source of income listed on his returns, the extent of the proposed deficiencies for this period as compared to the list of his income-producing activities, and other indications gleaned from the pleadings filed in this Court in Docket No. 64893 as to the nature of the disputed items between the parties, that the asserted deficiencies were based for all significant purposes on adjustments to business income.

Finally, respondent makes the contention on brief that the "central issue" in the tax controversy for the years 1944 through 1946 was whether or not the petitioner had filed a false and fraudulent return with the willful intent to evade tax for one or more of such years, and that "Under such circumstances, *** the settlement of this prior litigation on the basis of an agreement to deficiencies which specifically included substantial fraud penalties and aggregated $130,000.00, exclusive of interest, provides ample justification for concluding that the legal and accounting fees incurred in effecting such settlement were not ordinary and necessary business expenses." Respondent then adds that "the filing of false and fraudulent income tax returns has not yet come to be one of the ordinary and usual incidents of engaging in any trade or business."

There is no merit in respondent's contention. In James J. Standing, supra, a net worth statement was made the basis of a settlement under which the individual taxpayer paid a deficiency of $63,601.32 for the years 1945 through 1949, additions to tax for fraud in the amount of $26,074.87 (for the years 1945 to 1948), and an addition to tax for negligence (for 1949) of $762.76. The presence of the civil fraud penalties did not affect the deductibility of the legal and accounting fees incurred by the taxpayer in the tax controversy as business expenses under sections 22(n) (1) and 23(a)(1)(A) of the Internal Revenue Code of 1939. In Greene Motor Co., 5 T.C. 314, we said:

The liability for the deficiencies in tax, together with that for the fraud penalties authorized by section 293(b), supra, is purely a civil and not a penal liability. Such penalties are not imposed as "personal punishment on violators." See Commissioner v. Heininger, 320 U.S. 467. Rather they are "provided primarily as a safeguard for the protection of the revenue and to reimburse the

Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud." Helvering v. Mitchell, 303 U.S. 391. The expenses in connection with settling that liability are to be considered as "ordinary and necessary," we think, under the authority of Commissioner v. Heininger, supra, and Bingham v. Commissioner, 325 U.S. 365. In the latter the Supreme Court approved the deduction, as ordinary and necessary "non-trade or non-business" expense, of legal expenses incurred in contesting unsuccessfully a deficiency in income tax. In Longhorn Portland Cement Co., 3 T.C. 310, we allowed deduction of attorneys' fees and legal expenses paid in compromising a suit brought by the State of Texas to recover penalties for the violation of state antitrust law. We also allowed deduction of the amounts paid the State of Texas in compromise of the action. The Commissioner acquiesced in our allowance of the attorneys' fees and expenses, though he appealed the allowance for the amounts paid in compromise, and we were on that question reversed, Commissioner v. Longhorn Portland Cement Co., 148 Fed. (2d) 276.

See also Commissioner v. Shapiro, 278 F. 2d 556, affirming a Memorandum Opinion of this Court.

We hold that the legal and accounting fees paid by petitioner in 1958 in contesting and settling his income tax liabilities for the years 1944 through 1946 were attributable to his trade or business within the meaning of section 162 (a) and therefore do not come within the limitation of section 172 (d) (4) in computing his net operating loss for 1958 and the net operating loss carryback from 1958 to 1955.

Decision will be entered for the petitioners.

CHARLES A. HAYWARD AND WINIFRED J. HAYWARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MAX E. HAYWARD AND EDNA L. HAYWARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 73960, 74003. Filed October 25, 1961.

Held, National Enforcement Commission determination, pursuant to the Defense Production Act of 1950, disallowing certain expenditures of a partnership and allocating this disallowance among the partners, is binding on the Commissioner of Internal Revenue, both as to its effect on the partnership and as to its allocation among the partners.

Dean S. Butler, Esq., for the petitioners.

Thomas F. Greaves, Esq., and Jack E. Roberts, Esq., for the respondent.

TRAIN, Judge: Respondent determined deficiencies for 1952 as follows:

tion Agency disallowed certain expenses of a limited partnership of which petitioners Charles A. Hayward and Max E. Hayward were the two general partners and, in its certificate of disallowance, allocated this amount among all the partners.

The issues presented are:

(1) Whether such allocation is binding on respondent under the provisions of the Defense Production Act of 1950, as amended, and related Executive orders and regulations;

(2) If not, whether respondent is collaterally estopped from asserting a position in conflict with such allocation; and

(3) If not, what the proper allocation is.

With respect to petitioner Max E. Hayward, the Commissioner also determined that an amount of $250 should be reflected as additional income by reason of his personal use of an automobile furnished him by a corporation of which he was an officer. This item is conceded by that petitioner.

FINDINGS OF FACT.

Some of the facts are stipulated and are hereby found as stipulated. Petitioners Max E. Hayward (hereinafter sometimes referred to as Max) and Edna L. Hayward, husband and wife, and petitioners Charles A. Hayward (hereinafter sometimes referred to as Charles) and Winifred J. Hayward, husband and wife, filed timely joint income tax returns on a cash basis for the calendar year 1952 with the district director of internal revenue, Los Angeles, California.

The two wives are joined as petitioners herein solely because they filed joint returns with their husbands. The husbands, Charles and Max, are hereinafter sometimes referred to as petitioners.

Petitioners were the general partners in Hayward Precision Products Company (hereinafter sometimes referred to as Company), a limited partnership organized on February 1, 1952, and dissolved on December 31, 1952. Company was created under the laws of the State of California for the purpose of continuing the machine tool and die manufacturing business carried on during the prior year by another partnership of the same name.

Company commenced business operations with $100,000 of capital contributed to it by its member partners. Its capital account was increased to $125,000 on July 1, 1952, by an instrument entitled "Amendment to Limited Partnership Agreement," in which the capital account of one of the limited partners-the Nancy M. Hayward Trust #2—was increased by $25,000, that is, from $23,000 to $48,000. The partners in Company, who remained unchanged during the year, their status as general or limited partners, also unchanged during the year, and their respective capital contributions, unchanged

during the year except for the Nancy M. Hayward Trust #2 were

Both the limited partnership agreement of February 1, 1952, and the amendment of July 1, 1952, contain the following language as part of their respective paragraphs IV :

The net profits and losses shall be divided between and borne by the partners in proportion to their capital contributions; provided, however, that when the losses chargeable against any Limited Partner shall equal the amount of capital contributed by said Limited Partner, the Limited Partner shall not be liable for any losses in excess of such amount, and any such excess of loss shall be borne by the General Partners. * * *

Company maintained its books of account on the accrual basis. In its partnership information return for the year ending December 31, 1952, it reported the amount of $206,046.41 as an ordinary net loss.

This ordinary net loss was allocated among all the partners in accordance with the profit- and loss-sharing provisions of paragraph IV of the partnership agreement, and is contained in a schedule. attached to Company's income tax information return for the taxable year ending December 31, 1952. The pertinent parts of this schedule follow: