Olinger Mortuary Ass'n v. Commissioner ( 1931 )

OLINGER MORTUARY ASSOCIATION, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THE IMPERIAL INVESTMENT COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Olinger Mortuary Ass'n v. Commissioner

Docket Nos. 29291, 36502.

United States Board of Tax Appeals

23 B.T.A. 1282; 1931 BTA LEXIS 1738;

August 5, 1931, Promulgated

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">*1738 1. Payments made to a dissatisfied minority stockholder to secure his acquiescence in a transaction regarded by the manager of the corporation as necessary for the good of the corporation, are not ordinary and necessary business expenses within the meaning of section 234(a)(1), Revenue Act of 1924.

2. Payment by petitioner of a sum of money to secure the cancellation and abrogation of a contract whereby the holder thereof is to receive 15 per cent of the net profits of another corporation is which petitioner owns all the capital stock, is a capital transaction and does not represent ordinary and necessary business expenses within the meaning of the Revenue Act of 1924.

3. Payment by petitioner of a sum of money in the taxable year to secure the release of certain collateral vitally needed in the conduct of its business and to secure release from payment of $250 per month salary where the party drawing such salary is rendering no services therefor, is an ordinary and necessary business expense and should be allowed as a deduction from gross income in the year when paid.

Walter E. Schwed, Esq., and Richard M. Crane, C.P.A., for the petitioners.

J. E. McFarland,">*1739 Esq., for the respondent.

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BLACK

">*1282 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income-tax liability for the period from May 23, 1924, to December 31, 1924, for which period the respondent has determined a deficiency against the Olinger Mortuary Association in the amount of $4,920.31, and ">*1283 against the Imperial Investment Company in the same amount, reduced by a tax previously assessed in the amount of $643.53, making a net deficiency as to it in the amount of $4,276.78.

At the hearing it was stipulated that there was but one tax liability involved, that the petitioners were affiliated, the Imperial Investment Company being the parent company, and that as to whatever liability is found, the payment by either one of the petitioners will extinguish the primary liability.

The sole issue in these proceedings is whether or not the respondent erred in disallowing as expense items certain sums paid in 1924 by the Imperial Investment Company in the amount of $33,047.59, and increasing the net income of each petitioner by the same amount.

FINDINGS OF FACT.

The Olinger">*1740 Mortuary Association and the Imperial Investment Company, the petitioners herein, are both corporations organized under the laws of the State of Colorado and have their principal offices in Denver, in that State. The Imperial Investment Company was organized in 1924 and Joseph E. Bona is its president and owns all of its capital stock except three qualifying shares.

In October, 1921, Bona was general manager of the Olinger Mortuary Association and had been such for nearly 20 years. On or about October 11, 1921, he entered into a contract in writing with George W. Olinger, Inc., and George W. Olinger, for the purchase of the entire capital stock of the Olinger Mortuary Association. Under that contract the total purchase price to be paid for the stock was $350,000. Of that amount $150,000 was paid in cash. Bona procured $125,000 of said cash payment by borrowing the same from the Collbran-Bostwick Development Company, paying a commission for the procural thereof of $12,500. This particular $12,500 is not in issue in this proceeding. This loan ran for a period of two years. The other $25,000 needed was procured from the American National Bank of Denver. The bank required a">*1741 comaker of the note and Ben Grimes was procured as the comaker. At the time Bona entered into this agreement with Grimes, they agreed that as payment for Grimes' accommodation in becoming a cosigner and maker of the note, when the indebtedness to the bank was discharged, Grimes was to participate in the net profits of the Olinger Mortuary Association to the extent of 15 per cent, Bona reserving the privilege, however, of repurchasing this participation of Grimes in the profits by paying him $15,000 in cash.

The note to the Collbran-Bostwick Development Company was secured by all of the capital stock of the Olinger Mortuary Association.

">*1284 During the time this loan was in existence a voting trust agreement of date October 11, 1921, between the stockholders of the Olinger Mortuary Association, George W. Olinger and the Collbran-Bostwick Development Company was entered into. When the Collbran-Bostwick loan fell due in October, 1923, the unpaid balance was extended for a period of two years in consideration of an agreement to put Collbran of that company on the pay roll of the Olinger Mortuary Association at $250 a month during the life of the loan, which was done.

">*1742 The Imperial Investment Company was incorporated in May, 1924, and all rights and liabilities of Joseph E. Bona pertaining to the purchase of the stock of Olinger Mortuary Association were assigned to and assumed by the Imperial Investment Company.

On or about January 1, 1922, Bona entered into an agreement in writing to sell three-tenths interest in said stock of Olinger Mortuary Association to Frank W. Farmer. Farmer was to make payment of his stock on the installment plan under terms not material here.

In October, 1924, imperial Investment Company negotiated a note issue with the American National Bank of Denver for $180,000. The reasons impelling the securing of this new loan were that it felt it was greatly restricted under the terms of the contract entered into by Bona with George W. Olinger and George W. Olinger, Inc. Under that contract the corporation, Olinger Mortuary Association, had no adequate operating funds or opportunity to accumulate them. The contract provided that when current expenses had been paid, together with the maximum salary that had been provided for Bona, which was $500 per month, and under which he devoted all his time to the business, all funds">*1743 were to be disbursed to George W. Olinger and the Collbran-Bostwick Development Company. Under the contract Olinger received a salary as president of the company and other withdrawals in the amount of $2,000 per month. He was not required to devote his entire time to the business, but served only in an advisory capacity. Under the aforesaid contract Bona was limited in the choice of personnel. In addition he was under jeopardy by reason of the fact that under the terms of the contract he would default if he should be absent on account of illness for a period of 90 days.

The expenditure of all funds received by the corporation, whether it meant additional equipment or adding to the building, or actual expenses that were necessary, was controlled and restricted under the contract. The amount of money which the Imperial Investment Company contracted to borrow from the American National Bank to pay off this burdensome contract with George W. Olinger was to be secured by all of the capital stock of the Olinger Mortuary Association. In connection with this American National Bank loan there was a commission by discount of $8,750 and other expenses of ">*1285 $997.50 which the">*1744 Commissioner has allowed in the usual way by prorating over the life of the loan and is not in controversy in this proceeding. The Imperial Investment Company thereupon went to the Collbran-Bostwick Development Company and asked to pay off their loan and secure a release of its stock under the loan agreement with them, but they refused, stating they were perfectly satisfied with the loan and the arrangements as they then existed; that the loan was not due and it was entirely agreeable that they should continue under the arrangements that existed at that time. Petitioner finally prevailed upon the Collbran-Bostwick Development Company to accept payment of the loan and release of the collateral for a payment of $12,500 in addition to all amounts due under the loan, which sum was paid to said company for the release of the loan and capital stock of the Olinger Mortuary Association held as collateral and for the further consideration of taking Collbran off the pay roll of Olinger Mortuary Association at $250 per month.

At or about this same time $8,250 was paid to Frank W. Farmer by crediting the said amount which he was due for stock which he had agreed to purchase in the Olinger">*1745 Mortuary Association and had agreed to pay for on the installment plan. This sum was paid because Farmer could not be reconciled to the large sums that were being paid for the release of the capital stock of the Olinger Mortuary Association by the Collbran-Bostwick Development Company. Farmer was complaining and to satisfy him it was agreed that his account be credited in the sum of $8,250.

In October, 1924, the sum of $15,000 was paid to Ben Grimes in purchase and settlement of the contract with him, already referred to in these findings of fact.

When the stock in the Olinger Mortuary Association, which was held as collateral by the Collbran-Bostwick Development Company, was procured from the last named corporation by the petitioner, the Imperial Investment Company, it then put up said stock as collateral security to the American National Bank for the $180,000 which the bank was lending to the Imperial Investment Company to pay off these various obligations and secure release from these various contracts and agreements. The money was received from the bank and so used by the Imperial Investment Company.

OPINION.

BLACK: Both petitioners allege that respondent erred in">*1746 overstating net income, due to the disallowance of commission expense in the amount of $33,047.59. The facts developed at the hearing show that the above amount claimed by petitioners as a deduction on their consolidated income-tax return, plus certain minor adjustments not in dispute, make up a total of $35,750 and consists of ">*1286 $8,250 credited to Frank W. Farmer by the Imperial Investment Company on its books, $15,000 which the Imperial Investment Company paid Ben Grimes in 1924, and $12,500 which was paid to the Collbran-Bostwick Development Company in 1924.

Petitioners treat all three of these expenditures as part of the expense in procuring the release of the loan and collateral previously deposited with the Collbran-Bostwick Development Company and lump them together and take all as an expense deduction in 1924. Respondent disallows this and treats all these items as expenses connected with petitioners' procuring the $180,000 loan from the American National Bank in October, 1924, and amortizable over the life of such loan. Respondent has prorated this amount on a three-year basis and has apportioned $2,702.40 of such expense to cover the period October 10, 1924, to">*1747 December 31, 1924. This is the period of time included in the taxable year before us, during which time the loan of $180,000 was in force.

We do not agree with petitioners' treatment of these deductions nor do we agree with respondent's treatment of them. The $8,250 payment made to Frank W. Farmer is not, in our judgment, a proper expense item. He had contracted to purchase a three-tenths interest in the Olinger Mortuary Association and to pay for same on the installment plan. He was complaining about the $12,500 which was being paid to Collbran-Bostwick Investment Company for cancellation of its contract and return of collateral and, in order to satisfy him and secure his acquiescence in the transaction, the Imperial Investment Company agreed to and did credit him with $8,250 on its books in part payment of the stock which he had contracted to purchase. We know of no provision of the applicable revenue act and we are cited to none which will permit a corporation to deduct as ordinary and necessary business expenses, in determining its net income for the taxable year, amounts which it has paid to a disgruntled monority stockholder to secure his acquiescence in business transactions">*1748 which he does not approve.

This item of $8,250 paid to Farmer is not an allowable deduction for any year and respondent should not so treat it in redetermining the deficiency. Forty-four Cigar Co.,2 B.T.A. 1156">2 B.T.A. 1156.

The next item for our consideration is the payment of $15,000 to Grimes in 1924 under the circumstances and for the considerations which we have already detailed in our findings of fact. We think this was a capital transaction and therefore not an allowable deduction.

Undoubtedly where an individual or a corporation taxpayer makes expenditures for the purpose of getting some one to guarantee the payment of taxpayer's bonds or other evidence of indebtedness, the sum of such expenditures is a proper part of the cost of procuring ">*1287 the money which the indebtedness represents and is amortizable over the life of the loan. Liberty Farms Co.,22 B.T.A. 1298">22 B.T.A. 1298.

So if when Bona secured the agreement of Grimes to guarantee the payment of his note to the American National Bank for $25,000, he had agreed to pay Grimes a certain sum of money, say $5,000, for such guaranty, this amount would have been a part of Bona's cost in procuring">*1749 the $25,000 and would have been amortizable over the period of the loan, but he did not do it that way. What Bona agreed to pay Grimes in consideration of his guaranteeing to pay said note at maturity was 15 per cent of the profits of the Olinger Mortuary Association, after said $25,000 should be paid. In other words, Grimes became the beneficial owner of 15 per cent of the profits coming to Bona from the Olinger Mortuary Association. If no profits were made, Grimes got nothing. This agreement was made in 1921 and certainly Bona could not have accrued anything as a liability on his books by reason of his contract with Grimes. It was entirely uncertain whether Grimes would ever receive anything. He would receive anything only if and when the $25,000 note was paid to the American National Bank and if and when thereafter the Olinger Mortuary Company made profits, and then to the extent of 15 per cent of such profits. Under such a situation no liability could be accrued on account of the contract. S. Naitove & Co. v. Commissioner, 32 Fed.(2d) 949.

In 1924, when the Imperial Investment Company, succeeding to the rights and assuming the liabilities of Bona, ">*1750 paid Grimes $15,000 for the purchase and abrogation of the contract, it was a capital transaction and we fail to see where it has any proximate connection either as a part of the cost of paying off the Collbran-Bostwick Development Company loan or as a part of the cost of the $180,000 loan secured from the American National Bank in October, 1924.

This payment of $15,000 to Grimes should not be allowed as a deduction in determining the deficiency.

We come last to a discussion of the $12,500 payment which petitioner, the Imperial Investment Company, made to Collbran-Bostwick Development Company in the taxable year in order to get it to allow the payment to it of the balance on an indebtedness not yet due and thereby stop the payment to Collbran of $250 monthly salary which he was receiving from the Olinger Mortuary Association and for which he was performing no services and secure the release of the stock of the Olinger Mortuary Association which was being held as collateral to secure the loan.

Petitioners, the Imperial Investment Company and Olinger Mortuary Association, at that time were being held to a very burdensome and restrictive contract which was entered into in 1921">*1751 with George W. Olinger, Inc., and George W. Olinger as an individual. ">*1288 Some of the terms of that contract have been set out in our findings of fact. Petitioners wanted to be released from it and found that they could get released from all these burdensome restrictions by borrowing $180,000 from the American National Bank and using the money to pay all the amounts due under the several contracts.

But in order to get the money, the American National Bank required that petitioners deposit with it as collateral security all the stock of the Olinger Mortuary Association, except the three qualifying shares. This was already up as collateral, as we have stated, with the Collbran-Bostwick Development Company and in order to get it back petitioners paid the Collbran-Bostwick Development Company $12,500 for that purpose and the other purposes which we have already enumerated.

In Higginbotham-Bailey-logan Co.,8 B.T.A. 566">8 B.T.A. 566, we held that upon the cancellation of a lease the owner of the fee merely acquires possession and does not acquire any new estate or asset which is exhaustible, and hence a payment made by him to secure cancellation of the lease and possession">*1752 of the premises for use in his business is deductible as a business expense in the year of payment and may not be amortized over the unexpired term of the lease. In the instant case, petitioner, the Imperial Investment Company, was the owner of the stock of the Olinger Mortuary Association put up as collateral security with the Collbran-Bostwick Development Company for a loan. In October, 1924, it needed this stock badly for use in its business and paid the Collbran-Bostwick Development Company $12,500 for the consideration, among other things, of securing possession of this stock.

We think under the authority of 8 B.T.A. 566">Higginbotham-Bailey-Logan Co., supra, petitioner is entitled to deduct said amount as an ordinary and necessary business expense incurred and paid in 1924 and does not have to amortize it over the period of the new loan negotiated with the American National Bank, as contended by respondent. Respondent is overruled respecting his contention as to this item.

Decision will be entered under Rule 50.