## Facts

- Morton Frank and Agnes Dodds Frank filed a joint federal income tax return for 1946.
- After Morton Frank’s discharge from the Navy in November 1945, the couple sought to acquire and operate a newspaper or radio station.
- From late 1945 into early 1946, they traveled across multiple states to investigate potential newspaper and radio properties and to interview individuals about those businesses.
- They estimated travel and related communication expenses from January 1 to February 12, 1946, at $1,596.44.
- From February to mid-July 1946, both petitioners worked for *The Arizona Times* in Phoenix, but the disputed expenses were not connected to that employment.
- While employed in Phoenix, they continued searching for a business to purchase and made additional trips; they estimated travel, telephone, and telegraph expenses from March through December 1946 at $5,027.94.
- The claimed expenses included a $1,000 legal fee related to unsuccessful negotiations to purchase a newspaper in Wilmington, Delaware.
- In November 1946, the petitioners acquired a newspaper in Ohio.
- The Commissioner disallowed a $5,965 deduction claimed as “traveling and legal expenses” and determined a deficiency of $2,914.92; petitioners sought redetermination in the Tax Court.

## Issues

1. Whether travel, communication, and legal expenses incurred to investigate and attempt to acquire a newspaper or radio business are deductible as “ordinary and necessary” expenses incurred “in carrying on” a trade or business.
2. Whether such costs are nondeductible investigatory or preparatory expenditures incurred before the taxpayers began the relevant trade or business.

## Decision

- The Tax Court sustained the Commissioner’s determination and upheld the deficiency.
- The court held the expenses were not deductible as ordinary and necessary business expenses because they were not incurred in carrying on an existing trade or business of the petitioners.
- The court treated the expenditures, including the legal fee, as preliminary investigatory and acquisition-related costs associated with entering a new business.

## Legal Principles

- A deduction for ordinary and necessary business expenses requires that the taxpayer be carrying on the relevant trade or business during the taxable year when the expenses are incurred.
- Expenses incurred to investigate, locate, and negotiate the acquisition of a business, before the taxpayer begins operating that business, are not current deductible business expenses.
- Costs tied to an attempted acquisition (including legal fees) are not deductible as operating expenses when they relate to entering a new business rather than conducting an existing one.
- The existence of wage employment in a related industry does not convert separate investigatory expenses into expenses of that employment when the expenditures are not connected to the job.

## Conclusion

The Tax Court held that the petitioners could not deduct 1946 travel, communication, and legal expenses incurred to search for and negotiate the purchase of a newspaper or radio business because those costs were incurred before they began carrying on that trade or business and therefore fell outside the business-expense deduction.


Frank v. Commissioner, 20 T.C. 511 (1953)