Opinion
No. 74.
December 5, 1932.
Appeal from the United States Board of Tax Appeals.
Petition by Glendinning, McLeish Co., Incorporated, opposed by the Commissioner of Internal Revenue, to review orders of redetermination made by the Board of Tax Appeals under which there are deficiency assessments of income taxes for the years 1922, 1923, 1924, 1925, and 1926.
Affirmed.
The petitioner is a New York corporation which was organized in January, 1918, to take over the American business of Glendinning, McLeish Co., Limited, of Belfast, Ireland. It entered into a written agreement with the Belfast company in February, 1918, under which it acquired that company's American business including all its tangible and intangible property in this country as of January 1, 1918, and it has since been a large importer of handkerchiefs and the sole outlet for the Belfast company's product in this country.
The agreement provided in part as follows:
"(6) In consideration of the sale and transfer to your company of said property, you will further agree that you will, at our request, at any time within one year from this date,
"(a) Guarantee the payment of all or any part of the five per cent. cumulative dividends upon the outstanding preferred stock of Glendinning, MeLeish Company, Limited, to an amount not exceeding the sum of 5,000 pounds yearly, and
"(b) We agree that if said company is wound up, and there shall, upon such winding-up or dissolution, be insufficient assets of Glendinning, McLeish Company, Limited, to pay the preferred stockholders of said company the par value of the preferred stock then outstanding, that you will make good any deficiency not exceeding 100,000 pounds.
"We agree that in no event shall your company be requested or required to make any guarantee or assume any obligation with regard to or in connection with the preferred stock of said company in excess of the contract obligations of said company to its preferred shareholders, and that your company shall in no event be obligated to advance any sums of money whatsoever to said Glendinning, McLeish Company, Limited, or to its shareholders, in the event of dissolution, unless and until there shall be a deficiency remaining after all of the assets of Glendinning, McLeish Company, Limited, shall have been first exhausted.
"We agree further that we will procure from Glendinning, McLeish Company, Limited, its agreement to reimburse you for any expenditures which you may make, pursuant to this clause of this agreement, on its behalf, or on behalf of its shareholders."
The capital stock of the petitioner of par value equal to the amount ascertained to be the fair value of the property purchased was agreed to be delivered to the Belfast company in payment for its American business and, in addition to the promises above quoted in (6) and some others not now material, completed the purchase price.
The petitioner paid to the Belfast company in accordance with its agreement to guarantee the dividends on the preferred stock of that company $10,588.80 in 1922, $3,089.23 in 1923, $21,850 in 1924, $23,250 in 1925, and $25,000 in 1926, and has not been reimbursed by the Belfast company. It was stipulated that the agreement has since remained in effect; also that the Belfast company has allowed the petitioner a discount of 5 per cent. off list prices on all purchases; supplied the services of a style originator without charge; and absorbed all inventory losses on raw materials purchased to manufacture the goods ordered by the petitioner. It was not shown, however, that the petitioner agreed to forego any right it had under the contract to be reimbursed for the payments now being considered. Each of these payments was charged by the petitioner to operating expense in the year in which it was paid, and its right to deduct from gross income the amount so paid in the respective years in computing its income tax for such years is now in issue. The deductions are claimed as ordinary and necessary expenses paid during the taxable years in carrying on its business.
Wm. E. Russell and Joseph B. Miller, both of New York City, for petitioner.
G.A. Youngquist, Asst. Atty. Gen., and Sewall Key and Morton X. Rothchild, Sp. Assts. to Atty. Gen. (C.M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Harold Allen, Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., of counsel), for respondents.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
The contention of the petitioner that the agreement for reimbursement applied only to subdivision (b) of paragraph (6) flies in the face of the fact that there was not only no limitation in terms to subdivision (b), but an apparent impossibility of performance if it covered only that. For, if the Belfast company upon dissolution should be without assets sufficient to pay to its preferred stockholders the par value of the preferred stock then outstanding, it would, of course, be without funds with which to reimburse the petitioner for any payments it made under subdivision (b). While nothing as to ability to perform is now directly before us, we mention this feature to point out that so far as the record now stands it would seemingly be impossible to give substance to the agreement to reimburse the petitioner and read into the language used a limitation that would exclude subdivision (a) from its coverage. For present purposes, that is but an added reason for declining to accept the construction urged by the petitioner in restriction of the natural, broad meaning of the words the parties chose to use.
Being advances made by the petitioner in accordance with its agreement to make them and the agreement of the Belfast company to repay them, the amounts here involved were not within the statute (Revenue Act 1921, § 234(a)(1), 42 Stat. 254; Revenue Acts 1924, 1926, § 234(a)(1), 26 USCA § 986(a)(1), permitting the deduction of ordinary and necessary business expenses, since they could not be expenses of any kind provided the petitioner could and did enforce its right to reimbursement. Although we know that it has not, there is no proof that it could not have required the agreed repayment if it had elected to do so. Perhaps it would be going far to call these advances loans in the ordinary sense, but there is no occasion to define them precisely, for we are now concerned only with their deducibility for the computation of the net income for purposes of taxation, and it is enough to determine negatively only that in none of the taxable years was the payment made in that year an expense of the business. The agreement for reimbursement made them at least advances on the credit of the Belfast company, and requires that they be so treated in computing the net income of the petitioner. As such they were not deductible. Cohan v. Commissioner (C.C.A.) 39 F.2d 540; Island Petroleum Co. v. Commissioner (C.C.A.) 57 F.2d 992.
In view of the above, we have no occasion to consider whether, in the absence of any agreement to reimburse, these payments would have been properly charged to business expense or would have been capital expenditures.
Affirmed.