Opinion
Docket No. 35771.
1953-04-28
PRESSED STEEL CAR COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Lee W. Eckels, Esq., Richard E. Olwine, Esq., and John Logan O'Donnell, Esq., for the petitioner. A. W. Dickinson, Esq., for the respondent.
INCOME— DEDUCTION— PURCHASE OF STOCK TO SETTLE DISPUTE.— The stockholders of a Delaware corporation transferred all of its assets, except one contract with the petitioner, to another corporation and then sold all of their stock in the Delaware corporation to the petitioner. The petitioner purchased the stock solely for the purpose of settling a dispute about its liability under the contract and it then dissolved the Delaware corporation. Held, that the amount which the petitioner paid for the stock was deductible from its income at the time paid and was not in the nature of an investment in the stock. Lee W. Eckels, Esq., Richard E. Olwine, Esq., and John Logan O'Donnell, Esq., for the petitioner. A. W. Dickinson, Esq., for the respondent.
The Commissioner determined a deficiency of $50,385.15 in excess profits tax for 1941. The only issue for decision is whether $375,000 paid by the petitioner in 1941 to the stockholders of Illinois Armored Tank Corporation for all of the stock of that corporation was paid to settle a claim of that corporation against the petitioner and, therefore, was deductible in computing the excess profits net income of the petitioner for 1941.
FINDINGS OF FACT.
The petitioner, a Pennsylvania corporation, filed its return for 1941 with the collector of internal revenue for the twenty-third district of Pennsylvania.
The principal business of the petitioner prior to July 1940 was the production of various railroad cars. It had not manufactured armored tanks.
Officers of the petitioner and officers of Armored Tank Corporation, a New York corporation (hereafter called New York), signed an agreement on July 23, 1940, which provided in part that the petitioner would pay New York $750 for each tank sold by the petitioner ‘of a design other than that of‘ New York ‘as compensation for technical advice.‘ Thereafter, the petitioner manufactured many tanks for the British Purchasing Commission and for the United States War Department. It received an advance of $500,000 from the British Purchasing Commission in November 1940 and paid New York $75,000.
New York transferred all of its assets and liabilities to Armored Tank Corporation, a Delaware corporation (hereafter called Delaware I), in September 1941 and the president of the petitioner signed a letter on behalf of the petitioner consenting to the transfer. New York was dissolved after its stockholders had received the stock of Delaware I.
Thereafter, the petitioner repudiated the acts of its officers in relation to New York and Delaware I as unauthorized and tried to cancel the contract calling for the payment of $750 on each tank. Delaware I refused to cancel. Negotiations were carried on in an effort to settle the differences between the parties but the petitioner never offered an amount in settlement which Delaware I was willing to accept. The petitioner suggested that it might buy all of the stock of Delaware I and the stockholders of Delaware I offered to sell their stock for $50 a share if they could retain the name (Armored Tank Corporation) and all other assets except the contract of July 23, 1940. The petitioner agreed to pay $37.50 per share for the Delaware I stock under the conditions offered.
The name of Delaware I was changed to ‘Illinois Armored Tank Corporation‘ and a new corporation, ‘Armored Tank Corporation,‘ hereafter called Delaware II, was incorporated. Delaware I then assigned all of its assets, except the contract of July 23, 1940, to Delaware II for all of the Delaware II stock which then went to the Delaware I stockholders.
All of the stock of Delaware I, 10,000 shares, was transferred on October 15, 1941, to nominees of the petitioner for $375,000. Delaware I was dissolved on November 22, 1941.
The petitioner never made any payments under the contract of July 23, 1940, except for the $75,000 paid in November 1940 and the $375,000 paid to the Delaware I stockholders. The latter payment was made by the petitioner to settle the claim against it for $750 per tank under the agreement dated July 23, 1940.
The petitioner claimed the $375,000 as a deduction on its excess profits tax return for 1941. The Commissioner, in determining the deficiency, disallowed the deduction and explained:
It is determined that a loss deduction claimed by you in the amount of $375,000.00 in the year 1941, which deduction arose from the purchase of the stock of Armored Tank Corporation, represented a short-term capital loss, no part of which is deductible in 1941.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION;
MURDOCK, Judge:
The Commissioner ‘contends that the payment was in the nature of an investment, so that if there was a loss in 1941 it was a short term capital loss, now allowable under section 117(d) of the Internal Revenue Code since petitioner had no short term gains.‘ He cites but one case, Armored Tank Corporation (N.Y.), 11 T.C. 644, in which it was held that the $375,000 received by the Delaware I stockholders was an amount realized from the sale of their stock rather than a payment to Delaware I in settlement of its claim against the present petitioner. The Commissioner argues:
The theory upon which respondent relied in that litigation was precisely the theory upon which petitioner relies here, namely that the payment of $375,000.00 to the stockholders of Delaware I was in settlement with that corporation of the disputed agreement of July 23, 1940 rather than a purchase of stock from the shareholders. (11 T.C. 644, 652). The Court decided the issue against respondent.
It is submitted that, under the principle of stare decisis, the Court should here follow its ratio decidendi and holding in Armored Tank Corporation (N.Y.) et al, supra, and order entry of decision for respondent.
It is true, as the Commissioner contends and the Court held in the cited case, that the petitioner did not settle the claim against it by a direct deal with and payment of the $375,000 to Delaware I and the latter had no income from that payment. Nevertheless, the petitioner effectively relieved itself of all liability under the contract of July 23, 1940, by paying the $375,000 for the Delaware I stock and then dissolving that corporation. The cited case is not in point or in conflict here.
The evidence clearly shows that the only purpose of the petitioner in paying the $375,000 and acquiring the stock was to settle all claims against it under the agreement of July 23, 1940, and it had no intention of buying or holding that stock as an investment. The payment must be considered in accordance with the purpose for which the petitioner paid it in determining the tax consequences to the petitioner. Cf. Kimbell-Diamond Milling Co., 14 T.C. 74, affd. 187 F.2d 718, certiorari denied 342 U.S. 827; cf. Western Wine & Liquor Co., 18 T.C. 1090; Charles A. Clark, 19 T.C. 48; Hogg v. Allen, 105 F.Supp. 12. That purpose was to be relieved of a burdensome contract although the transaction took the form of a stock purchase. The amount is deductible as an ordinary and necessary expense of doing business or as a business loss. Helvering v. Community Bond & Mortgage Corporation, 74 F.2d 727; Camloc Fastener Co,, 10 T.C. 1024; Olympia Harbor Lumber Co., 30 B.T.A. 114, affd. 70 F.2d 394.
Decision will be entered under Rule 50.