Picker v. United States , 371 F.2d 486 ( 1967 )

Per Curiam :

This case was referred to the late Trial Commissioner Robert K. McConnaughey, with, directions to make findings of fact and recommendation for conclusions of law. The commissioner did so in an opinion and report filed on January 26, 1966. Exceptions to the commissioner’s report were filed by the defendant. The parties have filed briefs and the case has been orally argued. Since the court is in agreement with the opinion, findings and recommendation of the trial commissioner, with modifications, it hereby adopts the same,-as modified, as the basis for its judgment in this case, as hereinafter set forth. Plaintiffs are, therefore, entitled to recover and judgments are entered for plaintiffs with the amounts of recovery to be determined pursuant to Eule 47(e).

Commissioner McCoimaughey’s opinion,^* as modified by the court, is as follows:

The plaintiffs in these cases seek to recover, with interest, refunds of amounts paid by Plarvey Picker, one of the plaintiffs, and his father, James Picker (who died June 28, 1968) ,¹ as income taxes for 1958, and as interest thereon.

The Pickers’ claims derive from allegedly improper dis-allowance of their deduction, in computing their 1958 taxes, of two payments of $50,000 each, which they made in 1958 to F. Eberstadt & Co., an investment banking firm in New York City, for investment and financial services rendered by Eberstadt & Co. between 1951 and 1958.

The basic issue is whether, within the meaning of section 212 of the Internal Eevenue Code of 1954,² the payments made by the Pickers to Eberstadt & Co. were deductible as ordinary and necessary expense incurred by the Pickers as individuals for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

That issue turns upon a decision whether the services for which the Pickers made the payments were performed for the Pickers individually, or for a group of corporations (hereafter called the Picker group), most of the stock of which the Pickers owned, and whether, if the services paid for were performed for the Pickers individually, the payments properly should be regarded as ordinary and necessary expenses of the Pickers or as capital expenditures incurred by them.

The answers to these questions depend primarily on the facts, which differ substantially from those of any of the cases upon which the parties rely. The facts are rather fully summarized because significant implications from details of the transactions afford the basis for gauging the extent to which principles announced in previous cases may or may not apply.

The events that gave rise to the controversy occurred over a period of approximately 7 years — from 1951 to 1958 — during which Eberstadt & Co. performed services, hereafter described, in response to a succession of requests made by the Pickers.

The genesis of Eberstadt & Co.’s employment was the Pickers’ dissatisfaction, in the early 1950’s, with the pattern of their investments, which then were largely concentrated in stocks of the corporations composing the Picker group.

At that time the Pickers were the dominant personalities in the Picker group. They were the chief executive officers, and members of the board of directors of each of the Picker corporations. They owned all of the stock of the two principal Picker corporations. Such stock in the Picker group as they did not own was stock in subsidiary or affiliated corporations that had been bought by corporate officials to whom it had been offered for incentive purposes.

The Pickers each drew salaries of over $100,000 a year as compensation for their services as officials of the Picker corporations. Their salaries, supplemented by relatively small amounts from outside investments, provided most of their income. Their investment in stock of corporations in the Picker group was by far their most substantial investment.

The Picker stocks were not listed on any securities exchange. Nor does it appear that they had any market over-the-counter, or that they provided the Pickers with any substantial income in the form of dividends.

The corporations composing the Picker group were variously engaged in the manufacture, sale, and servicing of X-ray equipment, and related activities.

The two principal corporations in the group, each of which was wholly owned by the Pickers, were Picker X-Ray Corporation (hereafter called Picker X-Ray), a New York corporation with offices in White Plains, New York, and Picker X-Ray Corporation-Waite Manufacturing Division, Inc. (hereafter called Picker-Waite), an Ohio corporation that manufactured X-ray equipment at Cleveland, Ohio. Picker X-Ray sold and serviced, in the eastern United States, the X-ray equipment manufactured by Picker-Waite.

The other corporations composing the Picker group, some of which were partially owned by their officers through minority stock interests, were subsidiary or affiliated companies, engaged primarily in the manufacture, sale, and servicing of X-ray equipment in other parts of the United States and in foreign countries.

The Picker group had grown out of a pharmacy business formed by James Picker in the early 1900’s, which progressed into the distribution of X-ray supplies (through Picker X-Ray, incorporated in 1922), and, beginning in the 1930’s, into the manufacture of X-ray equipment. As the business grew, subsidiaries and affiliated corporations were formed to serve various particularized functions. By the 1950’s, the Picker group had become the largest manufacturer and distributor of X-ray equipment in the United States and one of the largest in the world.

The Pickers were proud of the reputation and public standing of the Picker enterprise and its products. There is no evidence that they were ever discontented with its financial condition, or that improvement of its fiscal welfare was ever a primary or an independent objective of any of their dealings with Eberstadt & Co. Their principal concern centered, throughout, on adaptation of their personal investments to what they considered to be the welfare of their personal estates and their personal requirements for income. They consistently sought assurance, however, that these objectives would be achieved without detriment to the commercial and professional reputation of the Picker name or to the prospect that Picker products would continue to command high public regard.

Sometime before April of 1951 the Pickers became convinced that it was unwise for them to continue to have the preponderant bulk of their estates invested in securities of the Picker group, which produced little, if any, income from dividends and, because they were not actively traded in the securities markets, were not readily marketable. For these reasons they decided to seek ways to achieve greater diversification, marketability, and income than their investments in the Picker group provided.

The Central Hanover Bank had been advising them on their investments, but the official of the bank with whom they had been dealing suggested that an investment banker would be better equipped than a commercial bank to advise them on the kinds of problems involved in a program of the sort they had in mind. Accordingly, in the spring of 1951, he introduced the Pickers to Ferdinand Eberstadt, the senior partner of Eberstadt & Co.

The Pickers’ dealings with Eberstadt & Co. extended by fits and starts over a period of about 7 years but failed to produce the completed transactions whereby the Pickers’ investments in the Picker group were finally diversified into other securities.

The Pickers’ first meeting with Eberstadt was in April of 1951. They explained their concern about the concentration of their investments in the Picker group and inquired about means of achieving greater diversity, greater liquidity, and more investment income.

At the same time they made evident their personal pride in the Picker enterprise and their desire to accomplish their personal investment objectives in a manner that would not be detrimental to it.

Eberstadt told the Pickers there were various ways to achieve what they wanted, and that he believed Eberstadt & Co. could be helpful to them, and he undertook to give the matter further thought. Although there may have been some general discussion of alternative means of proceeding, apparently Eberstadt made no very specific suggestions at the first meeting. Eberstadt & Co.’s compensation for whatever services it might perform was not mentioned.

The Pickers met with Eberstadt again many times between April of 1951 and May of 1958. Early in the course of these discussions, Eberstadt suggested several ways the Pickers might diversify the base of their investments so as to acquire greater liquidity and greater investment income. He did not consider their problem unusual and regarded the kinds of remedies he suggested as conventional ways of achieving the objectives they had outlined to him.

He made, and explained to them, in general terms, three principal suggestions for accomplishing what they wanted to do.

One was a public sale of some or all of their holdings in the Picker enterprise and investment of the proceeds in selected, diversified securities.

The second was a private sale of their Picker stock, for cash, to a single purchaser, such as a large corporation, followed by reinvestment of the proceeds in securities that would afford them the desired diversification, liquidity, and income.

The third was an exchange of their Picker securities for stock of some large, listed corporation that would provide the investment qualities they sought, or, if it did not, could be sold readily and replaced by other securities that did fulfill their objectives.

At a meeting late in January of 1952, the third alternative, the possibility of merging the Picker enterprise with some listed company through an exchange of stock, was discussed generally, and Eberstadt suggested several companies as specific merger prospects that might meet the Pickers’ requirements.

At that meeting Eberstadt told the Pickers that Eberstadt & Co.’s fee would be between 2y2 and 3 percent, in case a merger should be accomplished through its efforts. He said they could terminate Eberstadt & Co.’s work at any time without being committed for compensation, but that they might wish to reimburse Eberstadt & Co. for expenses, depending on the amount of work done.

The meeting in January 1952, and another general discussion, held in September 1952, both ended inconclusively. In each case, the Pickers were to get in touch with Eberstadt after thinking the matter over.

Nothing more happened until July 7, 1954, when the Pickers again discussed with Eberstadt, in general terms, the possibility of a merger with some outstanding, listed company. Eberstadt again suggested a number of companies as possibly suitable candidates for a merger. It was apparent to Eberstadt, however, that the Pickers had not yet made up their minds what course to pursue, and he emphasized the need for them to decide between a merger, a public offering, or continuing the situation that then prevailed.

At the meeting on July 7, 1954, Eberstadt told the Pickers that Eberstadt & Co. was prepared to assist in making a public offering of their Picker stock for approximately 8 percent of the amount realized, or, if a merger should be effected through the efforts of Eberstadt & Co., the commission would not be higher than 3 percent. He also said that, as a prelude to either a merger or public offering, it might be necessary to consolidate some of the corporations in the Picker group.

The Pickers again made clear their belief that the Picker enterprise was what they called a “Tiffany” organization and should be merged only with a company of top rank, and, again, at the conclusion of the July 7, 1954 meeting, the Pickers said they would be in touch with Eberstadt when they had come to a decision.

It was apparent to Eberstadt, from a summary financial statement the Pickers had at the meeting on July 7, 1954, that information concerning the Picker enterprise had never been assembled in the form necessary for effectuating either a public offering of the Pickers’ stock or a merger of the Picker group with some other corporation.

A few days later, on July 12, 1954, Eberstadt wrote Harvey Picker suggesting that Eberstadt & Co. might prepare a confidential report on the Picker enterprise that would include a comprehensive analysis of the business and confidential recommendations concerning the relative advantages to the Pickers, as owners of the enterprise, of various courses they might pursue.³

About a month later Eberstadt submitted to Harvey Picker a specific proposal that Eberstadt & Co. “undertake a study of your business”, report its conclusions concerning the value of the business “whether by private or public sale or issuance of securities”, and make recommendations “as to the best course for the present owners to pursue, considering * * * not simply business and financial elements, but also the need and desires of the principals.”

Eberstadt’s letter proposed to charge $7,500 for the study and reports, plus expenses, and proffered the services of Eberstadt & Co. to aid in consummating whatever program the Pickers might finally adopt. He restated, essentially unchanged, his earlier proposals as to the rates of Eberstadt & Co.’s compensation for handling either a merger or a public or private sale of the Picker securities, and suggested that the amount paid for the reports might be credited against Eber-stadt & Co.’s compensation for perfecting either a public offering or private placement of securities “for the account of the company or its principal stockholders,” or “the negotiation of a merger.”

On August 17, 1954, the Pickers agreed to Eberstadt’s proposal, including the proposed range of Eberstadt & Co.’s compensation in case of a merger, and arrangements were made for preparation of the report.

The Pickers asked that if, in preparing the report, Eber-stadt & Co.’s representatives should find it necessary to tell officers of the Picker group what they were doing, they should say that they were working on a report in conjunction with the giving of financial advice to the Picker family with regard to possible public distribution of some of their stock holdings.

This request was consistent with a policy the Pickers followed throughout their dealings with Eberstadt, of proceeding as individuals, without giving others in the Picker organization any more information than necessary about what they were doing, and without procuring any formal grants of corporate authority for their negotiations. Participation by other Picker officials in the work connected with the development and consideration of various proposals was limited to that needed to furnish essential information.⁴

The report was completed in November of 1954. Two employees of Picker X-Ray (Zysman and Barney) assisted in its preparation.

It was submitted in two parts, with covering letters addressed to the Pickers as chairman and president, respectively, of Picker X-Ray. It was marked “Confidential,” with an admonition, on its cover, that its “use or dissemination without prior approval of Messrs. James Picker or Harvey Picker is not authorized.”

The total cost of the report was billed to, and paid for, by Picker X-Ray. Harvey Picker explained that the intimate knowledge he and his father had of the details of the business had precluded any need, in connection with the routine management of the enterprise, for a comprehensive report of the kind Eberstadt & Co. prepared, but that, in dealing with other large firms, he had sometimes found it awkward to try to describe the Picker enterprise, and that he regarded the report as providing an organized statement about the Picker group that would be useful to him as a corporate officer. As a consequence he considered the report as an asset the company ought to have, and he and his father decided that Picker X-Ray should pay for it.

On one or two occasions, later, Harvey Picker discussed with Eberstadt the possibility that the cost of the report might be offset against Eberstadt & Co.’s charges for perfecting arrangements then currently under consideration, but none of the arrangements was consummated, and the $100,000 the Pickers ultimately paid Eberstadt & Co. was not subject to any specific offset of the $7,500 paid by the corporation for the report.

In December 1954, a month or so after the report was submitted, a decision was made to embark upon a “dual program,” simultaneously exploring the possibilities of a merger with Sylvania Electric and preparing for a public offering.

At a meeting on December 29, 1954, representatives of a public accounting firm were asked to prepare financial statements in a form that would be useful in connection with either a public offering or a merger. Arrangements for simplifying the structure of the Picker enterprise, preparatory to a merger or public sale of the Pickers’ stock, were also discussed, and Eberstadt asked that, in addition to the contingent compensation he had previously proposed, Eber-stadt & Co. be paid a fee of $5,000 a month, plus expenses, until the Pickers elected to go ahead on one course or the other. Unlike the fee for the report, the proposed $5,000 monthly retainer was not to be subject to credit against Eberstadt & Co.’s compensation for a consummated transaction. The Pickers did not accept the proposal for a $5,000 monthly retainer.

Nevertheless, between the end of 1954 and April of 1956, Eberstadt & Co. initiated a succession of contacts with large, established corporations, in an effort to elicit interest in a merger with the Picker group, and worked up general outlines of several proposals for specific transactions, none of which materialized.⁵

On April 4, 1956, conversations were initiated with Textron Inc. On August 22, 1956, after an exchange of unacceptable proposals, Textron offered $13 million for 100 percent of the stock of all the Picker corporations, or somewhat less if minority interests should not participate. The offer involved $8 million in cash and $5 million in Textron notes. The Pickers made a counter-proposal, calling for $10 million in cash and $3 million in notes, the terms of the notes to be satisfactory to the Pickers.

On September 13, 1956, Eberstadt & Co. received a proposal from Textron which appeared to meet the terms of the Pickers’ counter-proposal of August 22, and the investment objectives the Pickers had expressed to Eberstadt throughout their dealings, but Harvey Picker rejected the proposal. He had not discussed it with anyone in the Picker group except his father and Zysman, the auditor. In a letter to Textron, he said:

After careful investigation and deliberation, Dad and I feel that it probably is not to the best interest of Tex-tron and Picker X-Ray for the two organizations to1 join forces at 'present.

Apparently this was a euphemistic way of saying that the Pickers had decided they did not want the proposed $3 million of Textron notes which, according to the proposal, were to be subordinated to Textron’s bank debt.

In the course of Harvey Picker’s telephone conversation with Eberstadt & Co.’s representative, when he first indicated the Pickers were going to reject the Textron proposal, he said they felt that they should now try to acquire another company to use up excess cash of the Picker group and improve earnings. Shortly thereafter, in October of 1956, he specifically asked Eberstadt & Co. to make a brief examination of Tracerlab, Inc., and to recommend means whereby Picker X-Ray might acquire Tracerlab. Eberstadt & Co. prepared a six-page memorandum on the subject, part of which was sent to Picker, but no action was ever taken toward acquiring Tracerlab.

Thereafter negotiations lapsed until June of 1957 when Harvey Picker called Eberstadt & Co. and again asked them to find merger candidates. Arrangements were made then to bring the 1954 report up to date and Eberstadt requested a $7,500 retainer fee and proposed, in case a merger should be accomplished, a contingent fee, equal to 3 percent of the value of any shares received by the Picker stockholders. The $7,500 retainer was to be offset against the 3-percent fee if a merger should be consummated. Eberstadt explained the 3-percent rate (which was at the top of the range previously discussed), by saying that it took into account the considerable amount of work Eberstadt & Co. had done for the Pickers, including tbe development of the Textron offer, on ostensibly acceptable terms, which the Pickers had rejected. The Pickers never accepted the proposal for a $7,500 retainer.

During the summer and fall of 1957, various additional companies were sounded out but found to be not interested. A public offering of approximately a third of the Pickers’ holdings of a proposed new Picker common stock was also considered, but no definite action was taken.

In February of 1958 discussions of a deal with Bell & Howell commenced and meetings and correspondence ensued that led to the development of a proposal for a merger on terms that would afford the Pickers positions in the merged company and would continue the Picker trade name on the products of a proposed Picker division or subsidiary of the combined enterprise.

A specific proposal by Bell & Howell was submitted to the Pickers on May 2, 1958, together with an analysis by Eber-stadt & Co. of the earning power of the combined companies and of the securities to be received by the Picker stockholders. What was proposed was a statutory merger in which the Pickers and other stockholders of Picker X-Ray, Picker-Waite, and the subsidiary corporations, would receive preferred and common stock in the merged company, and stockholders of the affiliated corporations would receive cash. The total value of the shares and cash to be paid for the Picker holdings was in the neighborhood of $20 million.

The Bell & Howell proposal conformed with the investment objectives the Pickers had expressed to Eberstadt.

On May 5, 1958, Harvey Picker authorized delivery of a letter to representatives of Bell & Howell saying that the Pickers were prepared to enter into a transaction along the lines proposed, if tax problems could be worked out, but, on May 13, 1958, he wrote to Eberstadt saying, “[W]e have decided not to go ahead with the proposed merger of Picker X-Ray and Bell & Howell.”

The letter included, also, the following statement:

In spite of the fact that our agreement was that you would be paid upon the consumation [sic] of a merger or sale, _my father and I feel it would be fair at this time to provide some compensation to your organization for its efforts on. our behalf. This is probably an appropriate time also to express our appreciation for the work you and your colleagues have done.

The Pickers’ preference for an all-common-stock deal instead of the preferred and common stock and cash offered by Bell & Howell may have contributed to their rejection of the Bell & Howell proposal but their decision was influenced primarily by developments in direct negotiations with C.I.T. Financial Corporation on a deal which they ultimately accepted.

The Pickers had advised Eberstadt early in 1958 that they had been approached by C.I.T. and had told C.I.T.’s representatives to talk with Eberstadt. This C.I.T. refused to do, preferring to deal directly with the Pickers. As a consequence, Eberstadt & Co. had no direct part in the negotiations that led to the deal finally perfected with C.I.T., although, during the course of their negotiations with C.I.T., the Pickers lent C.I.T. a copy of the updated Eberstadt & Co. report.

In May of 1958, Harvey Picker submitted to C.I.T. a set of proposals for handling minority interests in the various Picker corporations in a manner designed to maintain management incentive in the merged enterprise. In the main, these suggestions were embodied in the completed transaction with C.I.T., which was consummated on August 12, 1958, through an exchange of 341,063 shares of C.I.T. common stock for all of the stock of Picker X-Bay and Picker-Waite, and part of the common stock of nine of the ten affiliated Picker companies.

The value the Pickers received in the C.I.T. transaction was about the same as the price Eberstadt & Co. had negotiated with Bell & Howell, and there were similarities between the C.I.T. transaction and some of the deals with other companies which Eberstadt had proposed or recommended, but none of the earlier proposals was identical with the transaction finally consummated.

The Pickers had doubtless learned a lot through their dealings with Eberstadt, and with the candidates for merger unearthed by Eberstadt & Co., but they had undertaken no obligation to pay Eberstadt & Co. for instruction, and Eberstadt & Co. bad no direct responsibility for the C.I.T. transaction.

Following the Pickers’ rejection of the Bell & Howell proposal, and Harvey Picker’s spontaneous offer to “provide some compensation” to Eberstadt & Co., the Pickers and Eberstadt had several conferences concerning the amount to be paid Eberstadt. On June IT, 1958, during one of the conferences, Eberstadt said his company would be prepared to discuss a settlement if it could be reached promptly and without lengthy discussion.

The precise implications intended by Eberstadt’s statement are not wholly clear.⁶ Pie testified that he regarded the Pickers, rather than the corporation, as his clients, and that, although he did not believe Eberstadt & Co. was entitled to the full amount it would have received if one of the transactions it had initiated had been consummated, he did believe Eberstadt & Co. was entitled to substantial compensation for bringing them the Textron and Bell & Howell transactions, which met their stated objectives, but which they rejected. Regardless of whether litigation would have established that Eberstadt & Co. had a legal right to compensation, it is evident that Eberstadt was claiming such a right in his discussions with the Pickers, and Harvey Picker was under the impression that his statement at the meeting on June 17, 1958, implied a threat of a law suit if some settlement were not reached promptly. That impression was one of the factors that ultimately induced the Pickers to pay Eberstadt & Co. the $100,000 finally agreed upon.

On October 7, 1958, the Pickers’ attorney sent Eberstadt & Co. two checks of $50,000 each, and, on October 9, a receipted bill was sent to each of the Pickers for $50,000 “for financial and investment advice for the period from April 1957 to date.”

On their federal income tax returns for 1958, the Pickers each claimed a deduction of $50,000 for financial and investment advice. The deductions were disallowed and deficiencies were assessed and paid by the Pickers, each of whom filed a timely claim for refund, which was disallowed. These suits followed in due course.

By its terms, section 212 of the Internal Bevenue Code, under which the Pickers claim the right to deduct the payments they made to Eberstadt & Co., applies only to individuals, not to corporations.⁷

According to the regulations issued to implement the statute, an individual’s expenses, in order to be deductible under section 212, must be “ordinary and necessary,” and, in order to be ordinary and necessary, they must be “reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income, or the maintenance of property held for the production of income.” ⁸

The regulations specifically include, among the kinds of expenses that are deductible, fees for services of investment counsel paid or incurred for the production of income or for the management, conservation, or maintenance of investments held for the production of income, if such fees are “ordinary and necessary under all the circumstances, having regard to the type of investment and to the relation of the taxpayer to such investment.”⁹

The plaintiffs agree that payments made by a corporation or by corporate shareholders on behalf of a corporation are not deductible by the shareholders.¹⁰

To a considerable extent, the defendant’s arguments as to why the court should hold that the payments made to Eber-stadt & Co. by the Pickers in 1958 were not deductible expenses within the meaning of the statute and the regulations depend upon its contention that the payments were made on behalf of the Picker corporations, or for corporate purposes. The evidence does not support these arguments or bring these cases within the ambit of the cited cases which rest upon a determination whether all or a part of the expense sought to be deducted was a corporate expense, or upon a failure to show clearly that the amount claimed did not include some corporate expense.¹¹

In this case, from the beginning to the end of their dealings with Eberstadt & Co., the Pickers’ consistent, dominant objective was a reorientation of their personal investments in a way that would give them a more broadly diversified investment base, provide greater liquidity, and produce more investment income than they could realize from the securities of the Picker group.

With one possible exception,¹² the transactions which Eber-stadt proposed, and the Pickers considered, were all designed to achieve that personal investment objective in one way or another. Meanwhile, the Pickers were quite content with the corporate form and the financial strength of the Picker group. They had no desire to change its financial structure, except as some change might be an incidental consequence of action necessary to the achievement of their personal investment objective. Their interest in the corporate consequences of the various transactions suggested was limited to assuring themselves that the public and commercial reputation of Picker products and public regard for the Picker name would not suffer detriment as a result of the means adopted for improving their investment position, and that any exchange they might make would not lessen the investment quality of their holdings or diminish, any more than necessary, their personal participation in the management of the enterprise in which their funds were invested.

These concerns, although coordinate rather than subordinate to their primary, personal objective, were wholly incidental to it. They are fully consistent with a sensible regard for the risks of exchanging investments in the business they had developed and controlled for other securities, the future value of which would depend upon factors that would be largely beyond their power to control after the exchange had occurred. Such concerns would not have arisen independently of the Pickers’ desire to change the character of their personal investments.

The fact that the payments here were made for personal, rather than corporate purposes, is confirmed by the evidence that, throughout their negotiations with Eberstadt, the Pickers proceeded without formal corporate authority, without consulting anyone else in the management of the Picker enterprise on matters of policy concerning the proposals they considered, and without participation by officials of the Picker group, other than themselves, in the development, analysis, or appraisal of the transactions suggested, except for work by an auditor and the corporate treasurer that was necessary to provide them with essential facts and figures.

None of the Pickers’ actions suggests any deviation, during the 7 years they were dealing with Eberstadt, from their initial purpose to alter the character of their personal investment portfolio so as to avoid the disadvantages of excessive concentration in unlisted securities of a closely held enterprise, operating in a limited field. They were obviously in no great hurry about this, and there is no persuasive evidence that they had any interest in alterations of the corporate or financial structure of the Picker enterprise, except as such alterations might be incidental consequences of the means proposed for accomplishing their personal investment objective.

For these basic reasons, those cases the defendant relies upon which hold, with respect to varying factual circumstances, that corporate shareholders may not deduct pay-merits made for corporate purposes are tangential to the issue established by the evidence in this case. Here, the persistent and unvarying purpose of the Pickers’ utilization of Eberstadt & Co.’s services was plainly a personal purpose to rearrange their individual investments so as to improve, among other things, their capacity to produce income, and the two $50,000 payments the Pickers made to Eberstadt & Co., in 1958, were made to cover expenses the Pickers incurred personally in the course of a deliberate effort to manage the personal property they held invested in securities for the production of income in a way that would result in its producing more income.

Similarly inapplicable, and for basically similar reasons, are those cases which deny deductions because of a failure of a corporate shareholder, claiming a deduction, to separately identify amounts paid for individual purposes and distinguish them from other amounts paid for corporate purposes.¹³

There is no need or reason here, nor any basis, for sorting out and allocating the payments made to Eberstadt between corporate and individual expense. The Pickers’ corporate objectives, if indeed they could fairly be said to have had any, were entirely incidental to their primary personal objective. The evidence affords no ground for belief that they ever would have initiated discussions with Eberstadt, or would have continued them over 7 years, for any corporate purpose.

Inevitably, however, each of the conventional means for achieving their individual purposes projected corporate consequences, and the Pickers had a reasonable degree of concern with what those consequences would be. They wanted to be satisfied, with respect to each of the transactions proposed, that it would not frustrate the most advantageous practicable fulfillment of their personal objective. But their concern with these consequential factors would not reasonably require or permit an allocation to a corporate purpose of all or a portion of the cost of exploring the relative advantages, disadvantages, and risks of various suggested ways of achieving their personal objective, even if that was what they paid Eberstadt & Co. for. It would be even less reasonable to treat as a corporate expense the cost of developing only the two proposals that met their stated requirements for altering the composition of their investment portfolios. That is all Eberstadt said he was claiming and that is what they thought they were paying for.

According to the defendant, however, even if Eberstadt’s services were rendered to the Pickers as individuals, rather than as officers and directors of the Picker corporations, the costs of those services were not “ordinary and necessary” expenses of the Pickers.

Taking account of the Pickers’ investment position, which led them to seek Eberstadt’s services, and, ultimately, to exchange their Picker stock for the stock of C.I.T., it cannot be found that what they sought to do was not an ordinary and necessary expedient for conserving and enhancing their individual estates.

According to Eberstadt, their situation was not unusual, and the methods he proposed for remedying it were conventional ways of improving the investment position and investment income of persons so situated. There is no evidence to the contrary. His efforts were directed toward the development of a transaction designed to- diversify the base of their investments in a way that would afford them greater liquidity and improve their investment income. From an investment viewpoint, these are ordinary, and, if maximum feasible income is to be realized, necessary objectives of the management of property invested in industrial securities for the purpose of producing income.

In none of the cases cited by the defendant are there facts sufficiently similar to the facts of these cases to establish any controlling principle that overrides that conclusion, or to require detailed discussion in order to distinguish the cases.¹⁴

The question, also raised by the defendant, whether the payments made to Eberstadt & Co., even though made by the plaintiffs to effectuate ordinary and necessary personal objectives, were nondeductible capital expenditures rather than deductible personal expenses likewise turns mainly on the facts.

There is no serious dispute with the broad proposition that reorganization expenses of a corporation are not deductible by the corporation.¹⁵ Nor is it necessary to consider here whether there may be circumstances in which, if a shareholder pays expenses of a completed reorganization, he may deduct any of the amounts so paid. The amounts the Pickers paid to Eberstadt were not paid for any services rendered in connection with the transaction that was completed with C.I.T.

None of the transactions Eberstadt & Co. developed into a specific proposal was ever consummated, nor was any transaction or proposal on which Eberstadt & Co. did any work. Two of the Eberstadt proposals, the one with Textron and the one with Bell & Howell, reached a point where it was apparent that they conformed generally with the Pickers’ stated investment objectives. But the Pickers rejected both. All of the Eberstadt proposals, including those two, were mutually exclusive, both in relation to each other and to the transaction finally consummated with C.I.T.¹⁶

In Massillon Bridge & Structural Co. v. Commissioner, decided September 28, 1935 (P-H B.T.A. Memo, par. 35,335), the product of accounting work done in preparation for a transaction that fell through was used later in another transaction that was completed, and deduction of the cost of the accounting work was not allowed. But the evidence here affords no basis for identifying any portion of the amounts paid to Eberstadt & Co., in 1958, as expense incurred in developing or perfecting the transaction that was completed with C.I.T. The Pickers handled the C.I.T. negotiations without any direct help from Eberstadt & Co. They did use the report Eberstadt & Co. had prepared, but one of the Picker corporations had paid in full, in 1954, what Eberstadt & Co. had asked for that. There is nothing to indicate that the $100,000 the Pickers paid to Eberstadt & Co. in 1958 included any added charge for the report, or any charge for such informal education in corporate financial matters as the Pickers may have accumulated through their contacts with Eberstadt and their dealings with the various companies whose interest in negotiating with them had been aroused by Eberstadt & Co.’s efforts.

The only compensation Eberstadt claimed his company was entitled to receive, after the Pickers had rejected the Bell & Howell transaction, was compensation for producing the proposals by Textron and Bell & Howell, which conformed with their stated investment objectives but which they rejected. Whether any obligation the Pickers might have had to pay Eberstadt & Co. was wholly contingent upon completion of a transaction initiated through its efforts, and whether, in contested litigation, Eberstadt & Co. could have established a legal right to compensation for producing the rejected Textron and Bell & Howell proposals, remains, of course, undetermined. It is clear, however, that Eberstadt was seeking, aggressively, to procure such compensation, and that Harvey Picker thought he intended to bring a suit to establish a right to it if some settlement were not agreed upon promptly.

In Braznell v. Commissioner, 16 T.C. 503 (1951), acquiescence, 1951-2 Cum. Bull. 1, the Tax Court allowed a deduction where the amount deducted was paid in satisfaction of a judgment for breach of an obligation to pay a commission to a real estate broker for obtaining a prospective buyer whose offer was rejected. In Swaim v. Commissioner, 20 T.C. 1022 (1953), acquiescence, 1954-1 Cum. Bull. 6, the Tax Court allowed deduction of an amount paid a broker for producing an unaccepted offer for real estate, even though the court found the taxpayer had no contractual obligation for the fee and made the payment only to get the broker off his back. In this case there has been no specific determination whether there was, or was not, a legal obligation to pay Eberstadt a fee. Plainly, however, the payment was not a mere gratuity. It was made in satisfaction of a claim, apparently asserted seriously, for compensation for services rendered by Eberstadt & Co. in an effort, which proved to be futile, to develop means acceptable to the Pickers for improving the capacity of their investments to produce income. The fact that the property concerned was in the form of securities rather than real estate is immaterial. The payments were clearly expenses incurred in the course of the Pickers’ efforts to so manage their property as to improve its production of income.

Because Eberstadt & Co.’s efforts were not successful in accomplishing a kind of change in the Pickers’ investments which they were willing to accept, and resulted in no exchange of securities, or any other change in the form of their investments, the amount they paid Eberstadt & Co. cannot be treated as a capital expense affecting the basis of either their Picker stock or any new securities received as a consequence of the fruitless efforts for which the payments were made.¹⁷ In any realistic sense, the payments appear clearly to be fees for investment counsel, incurred as expenses of the management of property held in the form of securities for the production of income.

In summary, taking into account the type of the Pickers’ investment and their relation to it, the fact that, at the time the payments were made, Eberstadt & Co. was vigorously asserting a claim for a fee for its services as investment counsel, and the fact that the services paid for were all rendered in connection with abandoned transactions, unrelated to the merger ultimately completed, the payments are properly to be regarded, within a reasonable interpretation of the statute and the regulations, as ordinary and necessary expenses paid during 1958 for the management of property held for the production of income. Accordingly they are appropriate subjects for deduction under the statute.

FINDINGS oe Fact

1. (a) The plaintiffs in these cases, which have been consolidated, are, in No. 370-63, Harvey and Jean Picker, husband and wife, and, in No. 371-63, Evelyn Picker (the widow of James Picker, Harvey Picker’s father, who died June 28, 1963), and Harvey and Evelyn Picker, as executors of the estate of James Picker.¹

(b) In No. 370-63, the plaintiffs seek to recover, with interest, $47,713.40, as a refund of $39,900.09 of income tax for 1958 and interest of $7,813.31 thereon from the due date of the return to July 20, 1962.

(c) In No. 371-63, the plaintiffs seek to recover, with interest, $44,493.29, as a refund of $36,944.47 of income tax for 1958 and interest of $7,548.82 thereon from the due date of the return to September 10, 1962.

(d) The claims in each case are based on allegedly improper disallowance of duly claimed deductions from income for 1958 of payments of $50,000 which J ames Picker and Harvey Picker each made in that year to F. Eberstadt & Co. (an investment banking firm in New York City, hereafter called Eberstadt & Co.) for investment and financial services rendered by Eberstadt & Co. between 1951 and 1958, inclusive.

2. During the period from 1951 to August 12, 1958, the Pickers were directors, the principal executive officers, and controlling shareholders of a group of corporations, called the Picker group, which was engaged hi the manufacture, sale, and servicing of X-ray equipment.

3. (a) The principal corporations in the Picker group were Picker X-Ray Corporation (hereafter called Picker X-Ray), a New York corporation with offices in White Plains, New York, and Picker X-Ray Corporation-Waite Manufacturing Division, Inc. (hereafter called Picker-Waite), an Ohio corporation which manufactured X-ray equipment at Cleveland, Ohio. Picker X-Ray was engaged in selling and servicing, in the eastern United States, the X-ray equipment manufactured by Picker-Waite.

(b) The other corporations in the Picker group were engaged in the manufacture, sale and servicing of X-ray equipment, and related activities, in other parts of the United States and in foreign countries.

4. (a) The Picker group grew out of a pharmacy business founded by James Picker in the early 1900’s. In 1922 he incorporated Picker X-Bay to distribute X-ray supplies. In the 1930’s the corporation entered the X-ray manufacturing business. As the business grew, various subsidiary or affiliated corporations were formed.

(b) During the 1950’s the Picker group was one of the leading manufacturers and distributors of X-ray equipment and accessories in the world, and the largest in the United States. Between 1947 and 1953, the combined sales of the Picker group ranged between $14 and $25 million. The net profits of the group during those years ranged between $924,000 and $1,380,000. The combined balance sheet of the group showed a net worth of $10,409,000 as of June 30, 1954.

5. In all, the Picker group included 28 corporations. Picker X-Bay and Picker-Waite were wholly owned by James and Harvey Picker. Both corporations had subsidiaries. These included holding companies, and regional and foreign sales and manufacturing companies. Some of the subsidiaries were partly owned by minority interests. In addition to the subsidiaries of the two main corporations, there were some affiliated corporations, mostly regional sales companies, in which a majority of the stock was held by either James or Harvey Picker and the remainder by minority interests. One of the affiliated sales companies in turn had several foreign subsidiaries.

The minority interests in the subsidiaries and affiliates were held by management employees who had been offered opportunities to purchase stock interests for incentive purposes.

6. James and Harvey Picker were members of the board of directors of each of the corporations in the group. They were also the chief executive officers. James Picker was chairman of the board of Picker X-Bay and participated in all top-level policy and financial decisions. Harvey Picker was the chief operating executive of the group and, with another executive, supervised a management committee that ran the factory. James and Harvey Picker each drew a salary of over $100,000 a year from the company. The other top executives drew salaries ranging between $12,000 and $48,000 a year.

7. The Pickers’ holdings of stock of corporations in the Picker group constituted by far their most substantial investment. The major portion of their income consisted of their salaries as officials of the Picker group. They had a relatively small amount of income from outside investments. The Picker stocks were not listed on any exchange. Nor were they, as far as this record shows, sold over the counter.

8. (a) Sometime before April of 1951, the Pickers came to believe that it was unwise for them to remain in a position where most of their estate was invested in securities of the Picker group which paid few, if any, dividends and which were not readily marketable, because they were not actively traded in the securities markets. They decided to seek ways to achieve greater diversification, marketability, and income than their investments in the Picker group could provide.

(b) The Central Hanover Bank had been advising the Pickers concerning their investments, but the head of the trust department of the bank told them that an investment banker would be better suited than a commercial bank to advise them on a program of the sort described in finding 8(a), supra, and introduced them to Ferdinand Eberstadt, the senior partner of Eberstadt & Co.

(c) At the Pickers’ first meeting with Eberstadt in April of 1951, Harvey Picker explained that the Pickers were concerned about their investment in the Picker group being their largest personal holding and that they wanted to know what could be done to achieve greater diversity in their investments, and the advantages of liquidity and greater investment income.

(d) The Pickers also revealed that they had great personal pride in the Picker enterprise and wanted to handle whatever was done in a way that would not be detrimental to its established standing.

(e) At the first meeting, Eberstadt told the Pickers be thought their problem was one Eberstadt & Co. could handle competently, that it seemed to him there were various ways it could be solved and that he would like to think about it. The record does not show that he then suggested specific ways of accomplishing their objectives, although there may have been some general discussion of alternative means of doing so. Eberstadt & Co.’s compensation for whatever services it might perform was not discussed at the first meeting.

9. (a) The initial meeting between the Pickers and Eber-stadt was followed by numerous others over a period of about 7 years. During the early discussions, Eberstadt suggested various alternative ways of accomplishing the Pickers’ stated objectives of diversifying their investments in a manner that would afford greater liquidity and produce increased income. His suggestions included a public sale of the Pickers’ stock in the Picker enterprises, a sale of their stock to a single purchaser, such as a large corporation, for cash, and an exchange of their stock for securities of some large, listed corporation into which the Picker enterprise would be merged or with which it would be consolidated. Eberstadt regarded these general approaches to the problem as conventional remedies for a situation of the kind that then confronted the Pickers. He did not consider their situation unusual.

(b) Eberstadt explained to the Pickers how these several alternatives would work in principle, as means of achieving their stated objectives. He explained that, if their stock should be sold to the public, or to a single, large, corporate purchaser for cash, they could invest the proceeds in diversified securities of their own choosing, whereas, if they should exchange their stock for stock of another corporation, they would automatically acquire whatever liquidity, diversity of investment, and prospects of dividend income were characteristic of the stock received in exchange. He explained further that, if they were not satisfied with the liquidity, diversification, and income potential realized by an exchange of their stock for shares in another corporation, they could readily market part, or all, of the stock acquired in the exchange and attempt to improve the liquidity, diversification, and income prospects of tbeir investments through selective reinvestment of the proceeds.

10. (a) The possibility of merging Picker with some listed company was again discussed at a meeting between the Pickers and Eberstadt on January 21, 1952, and Eberstadt suggested several companies as good merger prospects.

(b) At that meeting Eberstadt advised the Pickers that Eberstadt & Co.’s fee would be between 2y2 and 3 percent in the event of a merger, depending upon the amount of work involved, and that the Pickers could terminate Eberstadt & Co.’s work at any time without commitment, except that, depending upon the work done, the Pickers might wish to reimburse Eberstadt & Co. for expenses.

(c) At the conclusion of the meeting, it was left that the Pickers would get in touch with Eberstadt after thinking the matter over.

11. Another meeting was held in September 1952. The whole situation was discussed with Eberstadt again, but no conclusion was reached as to what the Pickers wanted to do.

12. (a) The Pickers met with Eberstadt again on July 7, 1954. Again they discussed generally the possibility of a merger with some outstanding, listed company. Eberstadt suggested a number of possibilities. In the course of the discussion, Harvey Picker said he believed their company was a “Tiffany” organization and accordingly should be merged with a company of top rank.

(b) It was apparent to Eberstadt at this meeting that Harvey Picker had not yet made up his mind as to the course to pursue. Eberstadt emphasized that the Pickers must decide between a merger, a public offering, or continuing in the existing situation.

(c) Eberstadt also said, at the July 7, 1954 meeting, that Eberstadt & Co. was prepared to assist in accomplishing a public offering at approximately 8 percent, or, if a merger were effected through Eberstadt’s efforts, a commission not higher than 3 percent would be charged for Eberstadt & Co.’s services.

(d) At the July 7, 1954 meeting, Eberstadt said further that, in case of either a merger or a public offering, it might be necessary to consolidate some of the companies in the Picker group. The Pickers indicated that this presented no problem because they owned 100 percent of the larger companies and at least 60 percent of the smaller ones.

(e) The Pickers exhibited a summary financial statement at the July 7, 1954 meeting, indicating net worth and earnings of some of the companies in the group. It was apparent to Eberstadt at that time that information concerning the Picker group had never been gathered together in a form suitable for arranging either a public offering of the Pickers’ stock or a merger. The Pickers were furnished with a copy of an investigation form outlining the type of investigation of the Picker enterprise Eberstadt & Co. would wish to have made if it were to undertake a public offering or to' negotiate a merger.

(f) Again, at the conclusion of the meeting, it was left that the Pickers were to be in touch with Eberstadt when they had come to a decision.

13, On July 12, 1954, Eberstadt wrote to Harvey Picker, suggesting that, if the Pickers were interested, Eberstadt & Co. would be pleased to discuss with them preparing a confidential report on the Picker enterprise. He proposed that the report would include a comprehensive analysis of the business and confidential recommendations to the owners as to the advantages of various courses they might pursue, in relation to their personal situation and desires. He enclosed a comparable report by another investment banking firm on Sylvania Electric Products, Inc., and said:

I realize from the conversation we had July 7 that your father puts great emphasis on your contribution to the successful operation of the business and is obviously concerned as to what might occur if anything should happen to you. In these circumstances, companies of the stature of Minnesota Mining and Manufacturing, Radio Corporation of America, Sylvania Electric Products, and Square D would give your company an assured continuity of successful operations that it may not possess when its continued operation rests to such a degree upon your own and his knowledge and experience.

14. (a) On August 10, 1954, Eberstadt wrote to Harvey Picker, at bis borne, addressing him as “Dear Harvey,” and stating that Eberstadt & Co. was—

[P] repared to undertake a study of your business and to render you reports as follows:

1. A report substantiating the conclusions which we reach as to the value of the business, in present circumstances, whether by private or public sale or issuance of securities. * * *

2. A report embodying our recommendations as to the best course for the present owners to pursue, considering in our determination not simply business and financial elements, but also the needs and desires of the principals.

(b) The letter proposed a charge of $7,500 for completing the study and the reports, plus actual out-of-pocket disbursements.

(c) It also said that, upon completion of the reports, Eberstadt & Co. would be prepared to put its services at the disposal of the principals in connection with consummating whatever program they finally might adopt.

(d) The letter further said that Eberstadt & Co. would handle a public or private sale of securities on conventional terms, at compensation within the brackets customary in issues registered with the SEC, or, if there were a merger, Eberstadt & Co.’s compensation would run somewhere between 2 and 8 percent, depending upon the time and the amount of work involved.

The letter proposed that any compensation for the reports and recommendations would be credited against the compensation Eberstadt & Co. might receive “from you pursuant to either (a) public offering or private placement of securities of the company for the account of the company or of its principal stockholders, or (b) the negotiation of a merger.”

15. (a) At a meeting on August 17, 1954, attended by the Pickers, and by Eberstadt and one of his associates, it was agreed that Eberstadt & Co. would write a report on the Picker enterprise for $7,500 plus expenses.

(b) The Pickers asked that, if Eberstadt & Co.’s representatives working on the report should find it necessary to tell officers of the company what type of work they were doing, they should say they were working on a report in conjunction with the giving of financial advice to the Picker family with regard to possible distribution of some of their stockholdings to the public. This request was consistent with a policy, followed by the Pickers throughout the course of dealing that has led to these cases, of proceeding on their own, as individuals, without informing others in the Picker organization about their negotiations to any greater extent than was necessary, without procuring any formal grants of corporate authority for their negotiations, and with only the minimum of participation by other Picker officials in the work connected with development and consideration of various proposals that was needed to furnish essential information.

Except for a Mr. Zysman, the internal auditor, who prepared both the corporate tax returns and the Pickers’ personal returns, a Mr. Barney, the treasurer, and perhaps one other corporate official, they kept their negotiations with Eberstadt & Co. secret from the minority stockholders (who were all also officers) of the Picker group.

(c) It was also agreed at the August 17, 1954 meeting that, if there should be a merger, Eberstadt & Co.’s compensation would be between 2 and 3 percent.

(d) In the course of the meeting, Harvey Picker inquired what the company would be worth. Eberstadt made a preliminary guess of between 10 and 15 times earnings, and said that possibly it could be sold for 12 to 12% times earnings.

16. (a) Eberstadt & Co. prepared the report between August and November of 1954. Two employees of Picker X-Ray (Zysman and Barney) worked with Eberstadt & Co.’s representatives in its preparation. On October 12, a draft of the report was submitted to James Picker. He made several critical comments and said that it would be somewhat of a comedown for the company if it were sold to Sylvania or 3-M.

(b) Part I of the report was delivered to James Picker, with a covering letter dated October 28, 1954, addressed to James Picker, as Chairman, and Harvey Picker, as President of Picker X-Ray, at the corporation’s office in White Plains. It says, in part—

At your request we have made a study covering the business, competitive position and other pertinent facts concerning Picker X-Ray Corporation and tbe other corporations which you own. In so doing, we have visited the operating plant and have discussed the business with officers and key employees. * * *

$ $ $ $ 3*

(c) Part I is marked on its cover “Confidential. The information contained herein is confidential and its use or dissemination without prior approval of Messrs. James Picker or Harvey Picker is not authorized.” It also says on its cover that it has been prepared at the request of Messrs. James Picker and Harvey Picker. It contains no specific indication that it was prepared for the corporation.

(d) The text of Part I is a 60-page document which describes in detail the organization of the Picker group, its products, its marketing facilities, industry factors, its manufacturing operations and raw materials, its research and development, its properties, its operations and earnings, its financial condition, its management, and its history. According to the report, the finances of the Picker corporations and their staff and facilities for research, production, and sales all were sound.² Part I also contained consolidated financial statements for the group.

(e) Part II of the report was also sent to James Picker, as Chairman, and Harvey Picker, as President of Picker X-Ray, at the corporation’s address in White Plains. It contained Eberstadt’s “conclusions, recommendations, and valuations with respect to the corporations of which you are the owners.”

17» (a) The total cost of the report was billed to, and paid for, by Picker X-Ray. The first bill for $3,750 was sent September 3, 1954, while the report was being prepared, and the second, for an equal amount plus $408.11 of expenses, was sent November 3, immediately after delivery of the report, and was paid November 19, 1954.

(b) Harvey Picker explained that, although, previously, his father and he had known the details of the business so intimately that comprehensive reports of the kind needed to disclose tbe nature and condition of the company to prospective purchasers of stock were not necessary for their ordinary operations, he had sometimes found it awkward, in dealing with other large firms, to try to describe Picker X-Ray adequately. He considered the report as providing, in organized form, information that would be useful to him as a corporate officer. Accordingly, he regarded it as an asset that the company ought to have, and he and his father (but largely Harvey Picker himself) made the decision that Picker X-Ray should pay for it.

18. In December of 1954, after some intervening discussions of the recommendations made in the report during which James Picker reiterated his opinion that a merger with the companies recommended would not increase the prestige of the Picker enterprise, it was decided to embark on a “dual program,” consisting of (1) exploration of a merger with Sylvania Electric, and (2) preparation for a public offering.

19. (a) The “dual program” was discussed on December 29, 1954, at a meeting at the offices of Picker X-Ray, attended by two representatives of Eberstadt & Co., three men from Leidesdorf & Co., a public accounting firm, the Pickers, and Zysman and Barney of Picker X-Ray. Leidesdorf & Co. was asked to prepare financial statements suitable for either a public offering or a merger. The Pickers said they might wish to retain (and possibly liquidate prior to a public offering) their interest in certain ancillary corporations that had been established to utilize excess cash. All other Picker companies were to be acquired by or merged with Picker X-Ray.

(b) At the meeting on December 29, 1954, Eberstadt & Co.’s representatives delivered a new fee proposal, addressed to the Pickers, as officers of Picker X-Ray Corporation. The proposal stated :

Pursuant to our recent conversation we are now proceeding along lines of a dual program consisting of (i) exploration of a merger with Sylvania Electric and (ii) preparation for a public offering.

We have discussed previously the bases of our compensation in the event either one of the foregoing types of program is adopted. We suggest that, while this dual program continues and until you elect to go ahead on one course or the other, we receive a fee of $5,000 per month and be reimbursed for our reasonable out-of-pocket expenses. When you bave finally elected the course which you desire to pursue, the basis heretofore given to you will become applicable.

* * * # #

(c)One of the Pickers inquired whether this fee, and the $7,500 fee for the report, would be “offset” against the compensation for a consummated transaction. He was informed of Eberstadt’s intention that the $7,500 fee for the report would be offset, but that the proposed $5,000 monthly retainer would not. The Pickers did not accept Eberstadt’s proposal of December 29, 1954.

20. (a) Thereafter Eberstadt & Co. initiated inquiries with a number of corporations it thought might be interested in the Picker group. In early 1955, Minneapolis-Honeywell was sounded out but was not interested.

(b) In March of 1955, Plarvey Picker visited Eberstadt and told him he was no longer interested in a public offering but might still be interested in a merger.

(c) In April of 1955, Plarvey Picker called Eberstadt to discuss a merger with BCA or General Dynamics.

(d) In May and June of 1955, merger discussions were had with BCA. Eberstadt proposed that 275,000 shares of BCA common stock then worth about $14,850,000 be exchanged for the stock of the Picker companies but no agreement was reached.

(e) In October 1955, discussions were initiated with General Mills. Eberstadt recommended, after a study of General Mills, that 200,000 shares of General Mills stock then worth $18,800,000 be accepted in exchange for the stock of the Picker companies. After a careful look, General Mills advised Eberstadt that it was not interested.

(f) In November of 1955, Eberstadt made a study of American Hospital Supply Corporation and concluded that, if $2 million in liquid assets were withdrawn from the Picker companies, a fair price for the group would have been 500,000 shares of American Hospital Supply common stock and that such a transaction would have netted the Pickers $15 million.

21. In early January 1955, Eberstadt learned that Syl-vania would not be interested in the Picker companies.

22. Prior to January 10, 1956, the Pickers authorized Eber-stadt & Co. to enter discussions with General Dynamics. A proposal was evolved for the purchase of the operating assets and goodwill of the Picker companies for about $6.5 million, the liquid assets to be retained by the Pickers, and a letter to that effect was prepared by Eberstadt & Co. to be sent to General Dynamics, but was not mailed, for a variety of reasons, including the fact that it was decided to await the outcome of other discussions then going on.

23. At about the same time, the Pickers were approached by American Machine & Foundry (AMF). Eberstadt & Co. made an evaluation of a merger between the Picker companies and AMF which listed the following possible advantages : (1) To the extent that the Pickers would receive AMF common stock, they would be diversifying their investment holdings into several fields; (2) AMF’s experience in the design and development of complicated machinery would probably be helpful to Picker’s engineering department; (3) some manufacturing economies would probably result from AMF’s manufacture of certain components for X-ray equipment which Picker then contracted to outsiders; (4) some purchasing economies would probably result for Picker; (5) AMF’s experience in leasing machinery would probably be useful for leasing X-ray machinery; (6) Picker’s recent work on nuclear instruments would be useful to AMF; (7) Picker’s knowledge of radiation in general would be useful to AMF; (8) AMF was planning on building an experimental nuclear research reactor in cooperation with certain other companies. Harvey Picker would probably like to have an executive position in such a project and he would probably be welcome.

The Eberstadt evaluation of a merger between Picker X-Ray and AMF listed the following disadvantages: (1) To the extent that the Pickers would receive AMF common stock, they would be holders of a second-grade investment security; (2) no savings would ensue from a consolidation of Picker’s medical or industrial sales force with AMF’s sales force.

24. Early in 1956, RCA again indicated it might be interested. Eberstadt & Co. made a new study of an exchange of RCA common stock for Picker common stock and con-eluded that an. exchange for 300,000 shares of ECA common stock would result in a price of $12,750,000.

In March of 1956, Eberstadt & Co. devised a plan for discussion with ECA which provided that: (1) The Picker companies would merge into a new company called Picker, Inc. ; (2) ECA would form a wholly owned subsidiary called ECA-Picker X-Eay Company; (3) Picker, Inc., would sell to ECA-Picker X-Eay Company, for $6,290,000, the inventories, production facilities, and prepaid expenses of the business; (4) ECA-Picker X-Eay Company would pay to Picker, Inc., in addition to the cash payment, contingent payments equal to 25 percent of the pretax earnings of ECA-Picker X-Eay Company for 7 years. The record does not indicate that any action was taken on this proposal.

25. In February and March 1956, a number of other companies were sounded out by Eberstadt and found not to be interested.

26. (a) On April 4, 1956, conversations were initiated with Textron Inc. On April 23, 1956, Eberstadt & Co. prepared a plan for merger with Textron under which the Picker companies would consolidate, sell the operating assets to Tex-tron for $7,080,000, eventually liquidate the remaining assets, and the consolidated company would remain in existence as a private investment company. This plan was not followed.

(b) On May 9, 1956, Textron offered $13 million for Picker. The offer was not acceptable in form to the Pickers.

(c) On August 22, 1956, at a meeting at Eberstadt & Co.’s offices between the Pickers and officers of Textron, Textron offered $13 million for 100 percent of the stock of all Picker companies with a reduction in price if some of the minority shareholders did not wish to sell. The offer provided for a payment of $8 million in cash and $5 million in five separate 6 percent serial notes. The Pickers made a counter-proposal calling for $10 million in cash and $3 million in 6 percent serial notes, the terms of the notes to be satisfactory to the Pickers.

(d) On September 13, 1956, Eberstadt & Co. received a letter from Textron dated September 11, 1956, in which Tex-tron made a proposal which conformed with the investment objectives the Pickers had expressed to Eberstadt and which Eberstadt understood to meet the terms of the Pickers’ counter-proposal of August 22, 1956. The letter was read over the telephone to Harvey Picker by a Mr. Dineen of Eberstadt & Co. Harvey Picker said he and his father had decided not to go through with the deal.³ He read back to Dineen a letter he planned to send to Mr. Little of Textron. That letter, written on the Picker X-Bay letterhead and dated September 12, 1956, stated in part:

After careful investigation and deliberation, Dad and I feel that it probably is not to the best interest of Tex-tron and Picker X-Bay for the two organizations to join forces at present.

(e) The Pickers’ rejection of the Textron proposal was based primarily on their unwillingness to accept notes subordinated to Textron’s bank debt. In the course of his conversation with Dineen, Harvey Picker said they now felt that Picker should try to acquire another company in order to use up its excess cash and improve earnings.

27. In October of 1956, Harvey Picker called Eberstadt & Co. and asked that they make a brief examination of Tracer-lab, Inc., and recommend means whereby Picker X-Bay might acquire Tracerlab. Eberstadt & Co. prepared a six-page memorandum on the subject, three pages of which were sent to Picker. No further action was ever taken on the Tracerlab proposal.

28. (a) Nothing more happened until about the middle of June of 1957, when Harvey Picker called Eberstadt & Co. and asked them to find additional merger candidates. On June 24, 1957, Eberstadt & Co. wrote to Harvey Picker, requesting cooperation in bringing the 1954 report up to date and proposing that Eberstadt & Co. receive a $7,500 retainer fee, and, if a merger should be negotiated, a fee equal to 8 percent of the value of the shares received by the Picker stockholders in the merger, less the $7,500 retainer fee.⁴

(b) On July 2, 1957, the Pickers visited Eberstadt’s office and discussed the fee proposal of June 24, 1957. Harvey Picker wanted the $7,500 fee, which the corporation previously paid for the report in 1954, as well as the $7,500 retainer fee mentioned in the June 24 letter, to be credited against the total fee payable in case of a merger. The 3-percent rate of the fee proposed in case of a merger was also discussed, and Eberstadt said that it took into account a considerable amount of work Eberstadt & Co. had done for the Pickers, including the offer from Textron, at a price which the Pickers had told Eberstadt was acceptable but which they rej ected. Eberstadt also pointed out that the Pickers were not obligated to deal exclusively with Eberstadt & Co. but could deal with whomever they wished.

29. During July and August of 1957, several additional companies were sounded out and found to be not interested.

30. In September 1957, a public offering was discussed between Eberstadt and the Pickers. At that time Eberstadt & Co. prepared a memorandum outlining a financing program for Picker X-Kay directed toward a public offering of 350,-000 out of 1 million shares of a proposed new Picker common stock.

31. During November and December of 1957, discussions were had with Sylvania-Corning concerning a possible merger through a tax-free exchange of stock but, on December 13, 1957, Eberstadt was advised that Sylvania-Corning was not interested. Some discussions were also had with American Cyanamid at about this time, but it, too, was not interested.

32. During early 1958, the Pickers, on several occasions, advised Eberstadt that they had been approached by C.I.T. Financial Corporation and that they advised CJ.T.’s emissary to talk to Eberstadt.

33. (a) In February of 1958, Harvey Picker authorized Eberstadt & Co. to explore a deal with Bell & Howell. Over the next several months, numerous communications occurred between the Pickers, Zysman of Picker X-Ray, representatives of Bell & Howell, and representatives of Eberstadt & Co.

(b) On March 6, 1958, Eberstadt & Co. prepared a memorandum reflecting Bell & Howell’s position on the following aspects of the proposed transaction upon which the Pickers desired clarification: (1) Whether the transaction was viewed by Bell & Howell as a take-over of Picker or a merger in which the leading individuals would work together as partners; (2) the nature of the positions and duties that the Pickers would have; (3) whether the identity of the Picker name would be continued with respect to their products and whether the Picker organization would be preserved in the form of a subsidiary or division; (4) whether the Picker name would be made a part of the corporate name of the joint enterprise.

(c) Bell & Howell’s responses to these inquiries were that: (1) Mr. Percy, the primarily responsible officer of Bell & Howell, viewed the transaction as a merger between equals. The personal association would be in the nature of a partnership between the individuals. (2) James Picker would be offered a position such as honorary chairman of the board of directors. Harvey Picker would have a position of active importance and would head the Picker division or subsidiary. (3) The Picker trade name would continue to be attached to the products turned out by the Picker division or subsidiary. (4) Mr. Percy was not prepared to recommend inclusion of the Picker name in the corporate title.

34. (a) On May 2, 1958, the Pickers were given Bell & Howell’s proposal, along with an 11-page Eberstadt & Co. memorandum analyzing the proposal with respect to the earning power of the combined companies and its effect on the earning power of the securities to be received by the Picker stockholders. The proposal contemplated a statutory merger in which the Pickers and other stockholders of Picker X-Ray and Picker-Waite and their subsidiaries would receive preferred and common stock of the merged company and stockholders of the affiliates would receive cash. The total value of these considerations was approximately $20 million.

(b) The Bell & Howell proposal conformed with the investment objectives the Pickers had expressed to Eberstadt.

(c) On May 5, 1958, Harvey Picker authorized delivery of a letter to a firm representing Bell & Howell, saying, in effect, that the Pickers were prepared to enter into a transaction along the lines proposed by Bell & Howell if tax problems could be worked out.

(d) On May 13, 1958, Harvey Picker wrote to Eberstadt, on the stationery of the office of the president of Picker X-Ray but without any other reference to his corporate title, stating: "[W]e have decided not to go ahead with the proposed merger of Picker X-Ray and Bell & Howell.” The letter also stated:

In spite of the fact that our agreement was that you would be paid upon the consumation [sic] of a merger or sale, my father and I feel it would be fair at this time to provide some compensation to your organization for its efforts on our behalf. This is probably an appropriate time also to express our appreciation for the work you and your colleagues have done.

The Pickers rejected the Bell & Howell proposal in part because they wanted all common stock instead of the securities and cash offered by Bell & Howell, but their decision was influenced also by the fact that they were negotiating directly with C.I.T. Financial Corporation on the deal they ultimately accepted.

35. (a) During the spring of 1958, the Pickers carried on negotiations with C.I.T. They would have used Eberstadt & Co. as consultants, but C.I.T. had objected.

(b) C.I.T. was a publicly held, diversified corporation. Its stock paid dividends and was listed on the New York Stock Exchange.

(c) During the course of their negotiations with C.I.T., the Pickers lent C.I.T. a copy of the 1954 Eberstadt & Co. report on the Picker companies which had been updated to 1957.

(d) On May 21, 1958, Harvey Picker wrote a letter to the president of C.I.T., setting forth his proposals for handling the minority interests in the various Picker corporations in a manner designed to retain certain minority interests to maintain management incentive. Picker divided the subsidiaries and affiliates into four groups, each group to be handled somewhat differently.

Group A consisted essentially of nonoperating companies where the retention of stock by minorities served no management purpose. Picker recommended that C.I.T. acquire 100 percent of the stock in these companies.

Group B consisted of affiliated sales companies in which minorities held between 33% and 50 percent of the stock and either James or Harvey Picker held the remainder. Picker proposed that C.I.T. acquire 80 percent or more of the stock of these companies with 20 percent or less to remain in the hands of the minorities. He requested that he be allowed some latitude in deciding the exact percentage of stock below 20 percent that the minority shareholders would retain.

Group C consisted of subsidiaries of Picker X-Ray or Picker-Waite. Picker proposed that the stockholders in these companies remain unchanged in that C.I.T. would acquire control through its ownership of Picker X-Ray and Picker-Waite.

Group D consisted of affiliated companies in which minority shareholders owned between 33% and 49 percent of the stock, and either James or Harvey Picker owned the remainder. Picker proposed that James and Harvey Picker would deliver their shares in these corporations to C.I.T. but that the minority interests would remain unchanged. Picker believed that the tax disadvantage occasioned by C.I.T. not acquiring 80 percent of these companies would be more than offset by the advantages to be gained by retaining the incentive to the operating executives.

(e) In consummating the C.I.T. transaction, the Pickers did not use an investment banker or broker such as Eberstadt & Co. and had advice only from their regular bank and legal advice.

36. (a) On August 12, 1958, C.I.T. exchanged 341,063 shares of its common stock for all of the stock of Picker X-Ray and Picker-Waite, and portions of the common stock in nine of the ten affiliated companies (one affiliated holding company was retained by the Pickers). The transaction was carried out substantially in the manner suggested in Harvey Picker’s letter of May 21, 1958, described in finding 35(d), supra, after the minority shareholders in certain of the subsidiaries (“Group A” and one corporation originally classified in “Group C”) bad exchanged their stock in the subsidiaries for stock in the parent company.

(b) The offer from C.I.T. was the only offer to the Pickers where the sole consideration was common stock of the acquiring corporation, although Eberstadt had recommended an exchange of common stock for common stock and had proposed to negotiate with several companies on that basis.

37. The Pickers reported the exchange of their stock in Picker X-Ray, Picker-Waite, and the affiliated companies in which C.I.T. had acquired an 86-percent interest as nontaxable reorganizations under sections 354 and 368(a) (1) (B) of the Internal Revenue Code of 1954, and reported capital gain on the exchange of their shares of the affiliated companies in which C.I.T. did not acquire an 80-percent interest.

38. The C.I.T. transaction bore a number of similarities to merger plans that had been proposed to the Pickers by Eberstadt & Co., particularly the Bell & Howell proposal. Eberstadt had recommended a tax-free reorganization. He had also recommended an exchange of common stock for common stock, and, although Eberstadt & Co. never secured an offer involving solely common stock, it had proposed to negotiate with several companies on that basis. Eberstadt had also recommended that the corporate structure of the Picker group be simplified prior to either a merger or a public offering of the Picker stock. The price obtained in the C.I.T. transaction was nearly the same as the prices Eber-stadt & Co. had negotiated with Bell & Howell, and had suggested to Sylvania-Corning shortly before the C.I.T. transaction.

39. The Eberstadt report on the Picker companies was used during the C.I.T. negotiations, and the advice the Pickers obtained from Eberstadt during the 7 years of their dealings, and the experience they gained from negotiations which Eberstadt had initiated, were probably valuable to them in negotiating the C.I.T. transaction. Initially, before consulting with Eberstadt, the Pickers had no experience in negotiating the merger of a closely held corporation such as the Picker group. They went to Eberstadt & Co. in the first place because their bank believed Eberstadt’s advice with respect to such a transaction would be more suitable than advice the bank was in a position to give them. Among other things, the Pickers acquired the impression, through their dealings with Eberstadt, that a common-for-common stock exchange would be beneficial. Eberstadt would have been used as consultant on the C.I.T. transaction, except that C.I.T. had objected.

40. (a) In June and July of 1958, several conferences were held between the Pickers and Eberstadt with respect to Eber-stadt’s fee. The Pickers had never agreed to any of Eber-stadt’s proposals that they pay for the services of Eberstadt & Co. on a current basis. It was their understanding that Eberstadt & Co. would be paid a fee when a transaction conforming to their investment objectives was consummated through the efforts of Eberstadt & Co. It was finally agreed that the amount of the fee would be $100,000, after Eberstadt had said, during a conference at his office on June 17, 1958, that Eberstadt & Co. would be prepared to discuss a settlement of the fee question, provided a settlement was reached promptly and without lengthy discussion. Harvey Picker regarded this comment as implying a threat of a lawsuit by Eberstadt & Co for compensation, and that impression was one of the factors that ultimately induced the Pickers to pay Eberstadt & Co. the $100,000 finally agreed upon, although the Pickers had spontaneously proposed previously, in Harvey Picker’s letter to Eberstadt, dated May 13, 1958, to make some payment to Eberstadt & Co. “for its efforts on our behalf.” (See finding 34(d), supra.)

(b) On October 7, 1958, the Pickers’ attorney sent two $50,000 checks to Eberstadt & Co. and requested that Eber-stadt send a receipted bill to each of the Pickers for $50,000, reading “for financial and investment advice for the period from April 1951 to date.” Receipted bills, in the form requested, were issued by Eberstadt on October 9, 1958. Eber-stadt did not consider that the fee was a sales commission and, as far as he was concerned, it did not matter whether the Pickers or the corporations paid the bill. He did, however, consider that the Pickers, rather than the corporation, were his clients, and believed that, although Eberstadt & Co. was not entitled to the full amount it would have been entitled to receive if one of the transactions initiated by Eberstadt & Co.’s efforts bad been consummated, it was entitled to substantial compensation for bringing tbe Pickers two transactions that met their stated investment objectives, both of which they had rejected.

41. (a) On their federal income tax returns for 1958, the Pickers each claimed a deduction of $50,000 for “Financial and Investment Advice: F. Eberstadt & Co.”

(b) On audit, those deductions were disallowed by the Internal Eevenue Service. A deficiency of $40,093.53 was assessed against Harvey Picker, of which $89,900.09 was allocable to the disallowance of his $50,000 deduction, and a deficiency of $37,086.12 was assessed against James Picker, of which $36,944.47 was allocable to the disallowance of his $50,000 deduction.

42. (a) On July 27, 1962, Harvey Picker paid the deficiency asserted against him, of $40,093.53 with interest thereon of $7,851.19.

(b) On September 7, 1962, James Picker paid the deficiency asserted against him, of $37,086.12 with interest thereon of $7,569.34.

43. (a) On September 20, 1962, Harvey Picker filed a claim for refund of $47,713.40 for 1958, representing $39,-900.09 in income tax and interest thereon of $7,813.31 from the due date of the return to July 20, 1962.

(b) On September 28, 1962, James Picker filed a claim for refund of $44,579.66 for 1958, representing $36,944.47 in income tax and interest thereon of $7,635.19 from the due date of the return to September 25, 1962.

(c) Both claims for refund were disallowed on September 16, 1963.

44. The Pickers’ primary and dominant objectives, in consulting Eberstadt, initially, and throughout their subsequent consideration of the suggestions and recommendations made by Eberstadt & Co., were to achieve greater diversity and liquidity in their personal investments and increase their personal investment income.

45. The Pickers were not discontented with the financial condition of the Picker enterprise, and merger or consolidation of the Picker group with some other corporation for the purpose of improving or maintaining its corporate welfare was not a primary or independent objective of the Pickers in consulting Eberstadt, or in evaluating the transactions Eberstadt & Co. proposed for their consideration.

On the contrary, throughout the course of the Pickers’ dealings with Eberstadt & Co., merger or consolidation of the Picker enterprise with some other corporation remained but one among several alternate, and mutually exclusive, possible means of accomplishing their principal purpose. As the years passed, between 1951 and 1958, a succession of possibilities for merger received more active consideration than a public or private sale of their individual holdings of Picker stock for cash, but a public offering of the Pickers’ stock remained under tentative consideration as an alternative until almost the end of the Pickers’ dealings with Eberstadt & Co., and Harvey Picker inquired of Eberstadt & Co. about the cost of a public offering of stock as late as May 8, 1958.

46. The Pickers were proud of the reputation and public standing of the Picker enterprise and its products, and were determined, initially, and throughout their dealings with Eberstadt & Co., that, regardless of which of the various, suggested methods was followed, their principal objectives should be achieved in a manner that would not lower the prestige of Picker X-Ray or its products. Accordingly, they told Eber-stadt that any merger of Picker X-Ray should be with a first-rate company and that they would be reluctant to merge with certain companies which they believed might lower the prestige of Picker X-Ray or its products. This desire to protect and preserve the Picker prestige was a repeated theme of the Pickers throughout their consideration of the various proposals suggested by Eberstadt & Co. for accomplishing their primary objectives, and formed the basis of their expressed disinterest in merging with some of the companies Eberstadt suggested as possible prospects for a merger. It was, nevertheless, an incidental condition to the accomplishment of their primary purpose to diversify the base of their personal investments, to achieve greater liquidity, and to procure greater investment income, and was wholly consistent with those objectives.

CONCLUSION OR Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgments herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, and judgments are entered to that effect. The amounts of recovery are reserved for further proceedings under Rule 47(c).

Pursuant to a stipulation for entry of judgment agreed to by the parties and in accordance with the opinion of the court, it was ordered on May 5, 1967, that judgment for the plaintiffs be entered in case No. 370-63 for $47,713.40, with interest thereon as provided by law.

Pursuant to a stipulation for entry of judgment agreed to by the parties and in accordance with the opinion of the court, it was ordered on May 5, 1967, that judgment for the plaintiffs be entered in case No. 371-63 for $44,484.89, with interest thereon as provided by law.

* The opinion, findings of fact, and recommended conclusion of law are submitted under tile orders of reference and Rule 57(a).

1 James and Harvey Picker are sometimes referred to hereafter as the Pickers.

2 26 U.S.C. (I.R.C. 1954) § 212 (1958 ed.) which provides:

EXPENSES EOR PRODUCTION OP INCOME.

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

3 Eberstadt’s letter of July 12, 1954, mentioned tlie Pickers* personal contribution to tbie successful operation of the business, and James Picker’s concern about what might occur if anything should happen to Harvey Picker. It emphasized the advantages of “assured continuity of successful operations” that might be achieved through a merger with some large, substantial corporation.

4 Except for a Mr. Zysman, the internal auditor, who prepared not only the corporate tax returns but the Pickers’ personal tax returns, Mr. Barney, the corporate treasurer, and perhaps one other corporate official, the officers and minority stockholders (who were also officers) of the Picker group were not informed of the Picker negotiations with Eberstadt & Co., or of the Pickers’ consideration of proposals emanating from those negotiations.

5 Included among the prospects sounded out were Minneapolls-Honeywell, RCA, General Mills, American Hospital Supply Corporation, Sylvania, General Dynamics, and American Machine & Foundry.

Eberstadt’s discussions with General Dynamics evolved a proposal, apparently never transmitted to General Dynamics, for the sale of Picker assets rather than an exchange of stock.

An evaluation of a possible merger with American Machine & Foundry, furnished to the Pickers by Eberstadt & Co., suggested that, in addition to diversifying the Pickers’ investment portfolios, such a merger would produce operating advantages favorable to the Picker enterprise, and interesting jobs for the Pickers.

6 The record does not disclose what amounts were considered in the prior discussions, or the precise basis of the effort to establish an appropriate measure of compensation. Nor does the record show whether Eberstadt intended to file a suit or intended his statement as a threat of litigation.

7 See n. 2, supra.

8 Treas. Reg. § 1.212-1(d) (1957).

9 Treas. Reg. § 1.212-1 (g) (1957).

10 Deputy v. duPont, 308 U.S. 488, 496 (1940) ; Low v. Nunan, 154 F. 2d 261 (2d Cir. 1946) ; Rand v. Commissioner, 35 T.C. 956 (1961) ; Kahn v. Commissioner, 26 T.C. 273 (1956) ; Kaplan v. Commissioner, 21 T.C. 134 (1953).

11 Cases where a deduction was allowed as a shareholder, rather than as a corporate, expense include: Beer v. United States, 132 F. Supp. 282 (S.D. Ala. 1955), and Jergens v. Commissioner, P-H T.C. Memo, par. 43,322 (June 1943).

Cases where a deduction was denied because the expense was a corporate, rather than a shareholder, expense include: Deputy v. duPont; Low v. Nunan; Rand v. Commissioner; Kahn v. Commissioner, and Kaplan v. Commissioner, supra, n. 10; Nichols v. Commissioner, P-H T.C. Memo, par. 63,148 (May 1963) ; Towers v. Commissioner, 24 T.C. 199, 233, 234 (May 1955), aff'd, 247 F. 2d 233, 237 (2d Cir.1957), cert. denied, 355 U.S. 914 (1958) ; O’Connor v. Commissioner, P-H T.C. Memo, par. 54,195 (June 1954).

The following cases involved disallowance of a deduction because of failure to allocate between shareholder and corporate expense: New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 442 (1934) ; White House Sightseeing Corp. V. United States, 156 Ct. Cl. 527, 532, 533, 300 F. 2d 449, 452 (1962) ; Nowland v. Commissioner, 244 F. 2d 450, 454 (4th Cir. 1957) ; Brinson v. Tomlinson, 264 F. 2d 30 (5th Cir. 1959), cert. denied, 361 U S. 830 (1959) ; Harden Mortgage Loan Co. v. Commissioner, 137 F. 2d 282, 284 (10th Cir. 1940,), cert. denied, 320 Ü.S. 791 (1943).

12 The Pieters’ inquiry about the acquisition of Tracerlab led to a report by Eberstadt & Co. but nothing further developed, and there is no adequate basis in the evidence for concluding that the work done on the Tracerlab report formed any part of the basis for Eberstadt’s demand for compensation or was a factor in fixing the amount paid Eberstadt & Co. by the Pickers.

13 New Colonial Ice Co., Inc. v. Helvering ; White House Sightseeing Corp v. United States; Nowland v. Commissioner; Brinson v. Tomlinson; Harden Mortgage Loan Co. v. Commissioner, supra, n. 11.

14 Cf. Deputy v. duPont, supra, n. 10; Bird v. Commissioner, P—H T.C. Memo, par. 63,016 (Jan. 1963) ; Nichols v. Commissioner, and Towers v. Commissioner, supra, n. 11; Kaplan v. Commissioner, supra, n. 10.

15 Skenandoa Rayon Corp. v. Commissioner, 122 F. 2d 268, 271, cert. denied, 314 U.S. 696 (1941) ; Motion Picture Capital Corp. v. Commissioner, 80 F. 2d 872 (2d Cir. 1936); Beneficial Industrial Loan Corp. v. Handy, 16 F. Supp. 110 (Del. 1936), aff’d per curiam, 92 F. 2d 74 (3d Cir. 1937) ; Bush Terminal Bldgs. Co. v. Commissioner, 17 T.C. 485 (1951), aff’d, 204 F. 2d 575, 578, cert. denied, 346 U.S. 856 (1953) ; Firemen’s Ins. Co. v. Commissioner, 30 B.T.A. 1004 (1934).

16 Cf. Libson Shops, Inc. v. Koehler (E.D. Mo., decided Mar. 23, 1955), (48 Am. Fed. Tax R. 1988), aff’d on another issue, 229 F. 2d 220 (8th Cir. 1956), aff’d, 353 U.S. 382, rehearing denied, 354 U.S. 943 (1957) ; Tobacco Products Export Corp. v. Commissioner, 18 T.C. 1100 (1952), modified on other issue, 21 T.C. 625 (1954), nonaequieseenee, 1955-2 Cum. Bull. 11 ; Sibley, Lindsay & Curr Co. v. Commissioner, 15 T.C. 106 (1950), acquiescence, 1951—1 Cum. Bull. 3; Warner Mountains Lumber Co. v. Commissioner, 9 T.C. 1171 (1947), acquiescence, 1948-2 Cum. Bull. 4.

17 Cf. Snively v. Tomlinson, 303 F. 2d 325 (5th Cir. 1962) ; Commissioner v. Murphy’s Estate, 229 F. 2d 569 (6th Cir. 1956) ; W. D. Haden Co. v. Commissioner, 165 F. 2d 588 (5th Cir. 1948) ; Boulton v. Heiner, 3 F. Supp. 372 (W.D. Pa. 1932),

1 James and Harvey Picker are sometimes referred to hereafter as the Pickers.

2 It was suggested in the course of discussions between tbe Pickers and Eberstadt that these aspects of the business might be improved by a merger, but there is no indication that the Pickers ever concurred in the view that a merger was necessary or desirable except as a means of accomplishing their personal investment objectives.

3 Dineen understood Harvey Picker to say that the decision to reject the Textron, offer had been made after discussion *with their management, attorneys, and accountants, and he had the impression that the Picker “management” had “submarined” the deal. Harvey Picker had no recollection of discussing the Textron proposal with anyone in the Picker group except his father and Zysman, the auditor. It is quite clear that the decision to reject the Textron proposal was made by the Pickers, without consultation with other officials of the Picker enterprise.

4 At about tbls time, Eberstadt & Co. had discussed Picker with Sobering and had arranged a luncheon, to be attended by the Pickers and representatives of Schering. Nothing ever came of this.