During 1938 and 1939 petitioner resided in Los Angeles, California, and his income tax returns for those years were filed on the cash basis with the collector of internal revenue for the sixth district of California. The respondent has determined income tax deficiencies of $172.08 for 1938 and $124.86 for 1939, and the petitioner requests a redetermination thereof. The contested adjustments result from respondent's disallowance of claimed deductions for payments made during the taxable years under certain guaranties and for certain expenses.

FINDINGS OF FACT.

In 1923, petitioner organized the Hogan Finance & Mortgage Co. (hereinafter referred to as the finance company), with authorized capital stock of $2,000,000, about $1,250,000 of which was sold. The petitioner owned about $50,000 of the corporation's stock and was its president.

The finance company engaged a fiscal agent to market its stock and the fiscal agent in turn engaged petitioner as one of its salesmen to sell said stock at a 15 percent commission. During 1924 and 1925 petitioner made numerous sales of the finance company stock, reporting on his income tax returns commissions of $2,211.61 for 1924 and $2,029.02 for 1925. Included among these sales were sales to Ann Powell and Margaret Jack. Ann Powell was then petitioner's mother-in-law and Margaret Jack was employed as a nurse in petitioner's household. As a condition to their purchase of the stock, these two individuals requested that petitioner guarantee them against loss and petitioner did so, agreeing orally to reimburse them for the full purchase price of the stock if the company got into trouble, the stock went down, or became worthless. It was not petitioner's general practice to guarantee purchasers of the stock of the finance company against loss, and he had done so only in one other transaction. The finance company subsequently became insolvent and it was dissolved in 1932. Apparently prior thereto Ann Powell and Margaret Jack had called upon petitioner to make good on his guaranties, but due to his then unfavorable financial condition he was unable to do so. However, he gave each of them a note to cover his liability under his guaranty and made periodic payments thereon. As the notes matured they were replaced by renewal notes for the unpaid balances. Ann Powell died in 1931 and petitioner subsequently issued renewal notes in favor of her heirs. In 1938 petitioner paid $600 on his notes to two heirs of Ann Powell and $550 to Margaret Jack; in 1939 he paid $250 to Margaret Jack.

Petitioner's 1938 and 1939 returns state his principal occupation as "dog kennels." These were operated at net losses of $7.290.59 in 1938 and $5,706.12 in 1939. His income for these years was principally derived as beneficiary of several trusts. On his 1938 and 1939

returns he claimed deductions of $221.70 and $350.15, respectively, which he testified were composed of the following items:

1 Petitioners testimony as to this item results in a total which is $10 in excess of the amount actually deducted. This discrepancy is not explained in the record. For reasons which will appear hereinafter, it is not necessary to determine the exact figures.

The payments to attorneys in 1938 and 1939 of $135 and $325, respectively, were in connection with claims for refund, subsequently allowed, of interest overpaid by petitioner with respect to his Federal tax liability for 1924, 1925, and 1926.

OPINION.

ARNOLD, Judge: We have here under review respondent's disallowance of several items claimed and deducted by petitioner upon his income tax returns for 1938 and 1939. The first of these items consists of payments totaling $1,150 in 1938 and $250 in 1939 to make good upon petitioner's guaranties to two purchasers of stock in the Hogan Finance & Mortgage Co. Petitioner contends that these payments are deductible as losses, under section 23 (e) of the Revenue Act of 1938 and the Internal Revenue Code or, alternatively, as expenses, under section 23 (a) of the same statutes, as amended by section 121 of the Revenue Act of 1942.

The other group of items sought to be deducted, and disallowed by respondent, is composed of expenses paid in the taxable years for the preparation of income tax returns, the prosecution of claims for refund, and long distance telephone calls. These are claimed as deductible expenses under section 23 (a), supra. The applicable statutory provisions are set out in the margin.1

1 SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

(a) EXPENSES.

(1) TRADE OR BUSINESS EXPENSES.

(A) In General. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business

(2) Non-Trade or Non-Business Expenses.-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.

(e) LOSSES BY INDIVIDUALS.--In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise

(1) if incurred in trade or business; or

(2) if incurred in any transaction entered into for profit, though not connected with the trade or business;

We consider first whether the payments which petitioner made in the taxable years to heirs of Ann Powell and to Margaret Jack, in order to make good upon his guaranties to the named individuals when they purchased stock in the finance company, are properly deductible as losses under section 23 (e).

In support of his position that the claimed items are not deductible as losses, the respondent cites Frank G. Hogan, 35 B. T. A. 26, wherein we held that the same petitioner was not entitled to a loss deduction with respect to payments arising out of the only other instance in which he had guaranteed stock of the finance company. Upon analysis, however, it becomes clear that the decision therein is not controlling here. The crucial factual distinctions from the situation now before us are apparent from what we there said, at page 28:

There is no evidence to show that this payment was made either in the course of his trade or business or in a transaction entered into for profit. He was not selling the shares, and what his trade or business was is not shown. Apparently he acted voluntarily and gratuitously.

Thus, the decision in that case was dictated by petitioner's failure to prove the facts necessary to bring him within the provisions of section 23 (e).

The facts here are that petitioner was an officer and stockholder of the finance company. He had also been engaged by the finance company's fiscal agent to sell the company's stock for a 15 percent commission, and he made a number of sales. Ann Powell and Margaret Jack wished to purchase some of the stock, but they would not do so without petitioner's personal guaranty against loss. To effectuate the sales, petitioner gave the requested guaranties. He received his commissions upon the sales, which he reported as income. Subsequently he was called upon to make good upon his guaranties and he did so, the amounts now claimed as deductions being in part payment of the notes issued by him as a consequence of the guaranties.

As we pointed out in our previous Hogan opinion, at page 28, petitioner's relationship to the corporation will not identify him with it. However, we need not consider his status as a stockholder and officer as a material factor in determining the allowability of the losses resulting from his guaranties. See, however, Camp Manufacturing Co., 3 T. C. 467, and Marjorie Fleming Lloyd-Smith, 40 B. T. A. 214; affd., 116 Fed. (2d) 642; certiorari denied, 313 U. S. 588. On the other hand, petitioner's relationship to his mother-in-law and to the nurse, a member of his household, will not prevent the allowance of losses incurred in unquestionably bona fide transactions with them. Cf. R. W. Hale, 32 B. T. A. 356.

Considering the circumstances under which petitioner gave the guaranties herein involved, it is obvious that they were given in the course of his activities as a salesman of stock of the finance company.

These activities constituted a trade or business. Petitioner stood to profit to the extent of his 15 percent commission upon the sales, which could not have been made without his personal guaranties against loss. These guaranties were not gratuitous; the consideration for each was an agreement to purchase, for which the guaranty was a condition precedent. It is also apparent that petitioner sustained actual losses, to the extent of the payments which he was required to make upon his guaranties, and that these losses proximately resulted from his trade or business or from transactions entered into for profit.

We are of the opinion that petitioner has demonstrated that he is entitled to loss deductions under section 23 (e) of the Revenue Act of 1938 and of the Internal Revenue Code, amounting to $1,150 in 1938 and $250 in 1939. Because of this conclusion, it is not necessary to consider petitioner's alternative contention.

In respect of petitioner's contention that accountant's and attorneys' fees paid for the preparation of income tax returns, attorneys' fees for the prosecution of refund claims, and long distance telephone charges are deductible as expenses under section 23 (a), supra, we are of the opinion that the petitioner has failed to prove sufficient facts to warrant the allowance of any of these items.

Although we have found that petitioner's business during the taxable years was the operation of dog kennels, these were operated at a considerable loss and his income was derived principally as beneficiary of several trusts. The petitioner's testimony was merely that he paid fees for the preparation of his returns, but he failed to show that these expenses were, in whole or in part, necessary in connection with his business activities. He also has not shown, and we doubt, that expenses for the preparation of income tax returns were necessary for the production or collection of his nonbusiness income or for the maintenance of property held for the production of income. We see no more reason for allowing these claimed deductions under section 23 (a) than we could find in Ralph J. Green, 3 T. C. 74; Aldus C. Higgins, 2 T. C. 948; or R. C. Coffey, 1 T. C. 579. See also T. D. 5196, C. B. 1942-2, pp. 96, 100. We hold that the accountant's and attorneys' fees for the preparation of income tax returns paid by petitioner during the taxable years are not deductible either as business or as nonbusiness expenses.

The claims for refund in connection with which the petitioner paid legal fees during the taxable years sought the recovery of excess interest previously paid by the petitioner with respect to his Federal tax liability for 1924 through 1926. It has not been shown that the prior tax liability in connection with which the excessive interest was paid resulted from any business activity in which petitioner was then engaged. Neither has it been shown that the fees were paid in carrying on any trade or business in which the petitioner

inafter called the institute, a corporation organized August 22, 1938, under pro forma decree of the Circuit Court pursuant to article 10, chapter 33, Revised Statutes of Missouri, 1939, relating to beneficial, educational, scientific, and miscellaneous associations. The purposes of the organization, as set out in its articles of incorporation, were to promote, foster, and improve the administration of justice. About one-third of its members were lawyers and two-thirds were laymen. The ultimate purpose of the institute was to secure the amendment of the Missouri State Constitution with respect to the methods of selecting the judges of certain state courts, and to that end a campaign was initiated in 1939 for the education of the electorate concerning the need for such a change. During the first half of 1940 the institute circulated petitions throughout the state to have its plan for the nonpartisan selection of judges placed on the ballot, and then urged the adoption of the amendment at the polls in November 1940. Speeches and round table discussions were broadcast by radio, under the institute's sponsorship, and literature explaining and supporting the plan was widely distributed. The amendment was adopted by a 90,000 majority, and became self-operative thirty days thereafter, without action of any kind by the legislature or the governor.

The amendment applied to the judges of the Circuit and Probate Courts of the city of St. Louis, and Jackson County, including Kansas City, the Supreme Court of Missouri, and the Kansas City, St. Louis, and Springfield Courts of Appeal. These constituted all the courts of record of original jurisdiction in the two metropolitan centers, and all the appellate courts of the state. It was optional as to the other circuit and probate courts. The plan, briefly stated, provided for the establishment of nonpartisan judicial commissions, one for the appellate courts, consisting of the Chief Justice of the Supreme Court of Missouri and six other members, and one for each judicial circuit, consisting of the presiding judge of the court of appeals and four members, half of whom were to be selected by members of the bar from among their own membership and half to be laymen appointed by the governor as provided.

It was to be the duty of these commissions to nominate three candidates for each judicial vacancy occurring within their respective jurisdictions, one of whom should be appointed by the governor. The judge so appointed was to serve until the end of the year following the next general election, at which election his name should be submitted to the voters on a separate nonpartisan judicial ballot reading "Shall Judge of the Court be retained in office? Yes. No." If a majority of those voting on the question should vote against him, upon the expiration of his term, the vacancy would be filled in the manner referred to above; other