This section contains the nature of the case and procedural background.

Encyclopaedia (P) decided to publish a book call the Dictionary of Natural Sciences. It hired an outside firm to do the work. Under that contract, David Stewart Publishing agreed to do all necessary research work and to prepare, edit, and arrange the manuscript and all other material for the book. It was contemplated that Stewart would do all the work with approval from P but that in exchange it would receive advances against the royalties that P expected to earn from the book. P treated the advances as ordinary and necessary business expense deductions. The IRS disallowed the deductions on that basis. P petitioned the Tax Court for a redetermination of the liability and prevailed. The Court held that the expenditures were for services and not the acquisition of an asset. The agreement provided for substantial editorial supervision by P and Stewart’s work product was merely the embodiment of P’s ideas and desires. The Court held that Stewart was merely selected to assist with the editorial phase of the work. The IRS petitioned for review under 7482.

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