Carl Reimers Co. v. Commissioner

Carl Reimers Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Carl Reimers Co. v. Commissioner Docket No. 35782 United States Tax Court 19 T.C. 1235; 1953 U.S. Tax Ct. LEXIS 209; March 31, 1953, Promulgated *209 Decision will be entered under Rule 50. Carl Reimers had owned 51 per cent of the stock of a corporation which conducted an advertising agency and which had gone into bankruptcy in 1933. From 1933 to 1946 he and his wife operated an advertising agency as a partnership. Thereafter he became the dominant stockholder in petitioner which succeeded to the business of the partnership. In 1947 petitioner paid a portion of the unpaid claims of former creditors of the bankrupt corporation in order that it might be granted "recognition" by two newspaper publishers' associations which would permit it to establish business relations with their members on a credit basis and to receive commissions from such members. Held, payments were not deductible as "ordinary and necessary business expenses" under section 23 (a) (1), I. R. C.Welch v. Helvering, 290 U.S. 111, followed. Robert Lee Henry, Esq., for the petitioner. Francis J. Butler, Esq., for the respondent. Raum, Judge. Bruce, J., concurs in the result. Opper, J., dissenting. Van Fossan and Murdock, JJ., agree with this dissent. RAUM *1235 The respondent determined*210 a deficiency in the income tax of petitioner in the amount of $ 1,622.99 for the fiscal year ending March 31, 1947. The issue is whether a payment of $ 4,590.83, made by the petitioner to the American Newspaper Publishers Association, constituted a proper deduction from gross income for the taxable year under the provisions of section 23 (a) (1) (A) of the Internal Revenue Code. An issue relating to sales and entertainment expense was settled by the parties at the trial, the respondent conceding that the petitioner was entitled to deduct $ 2,000 of the amount of $ 2,465.01 claimed by it in its return, and the petitioner conceding that it was not entitled to any deduction for the balance of $ 465.01. FINDINGS OF FACT. The petitioner, a New York corporation with principal office located in New York City, filed its income tax return for its fiscal year ending *1236 March 31, 1947, with the collector of internal revenue for the third district of New York. It kept its books and filed its returns on an accrual basis. Petitioner was organized and started doing business on June 1, 1946. Carl Reimers, its president, owned 50 per cent of its stock, and his wife, Peg Reimers, the remaining*211 50 per cent. It operates an advertising agency and derives its income from commissions from radio, magazine, and newspaper advertising required by its clients. These commissions are paid, however, not by the clients but by the publications or radio stations. The business of petitioner is a continuation of a business which was operated by a corporation known as Reimers, Whitehall and Sherman, Inc., prior to the time it went into bankruptcy in 1933, and from 1933 to June 1, 1946, by a partnership composed of Carl Reimers and his wife. Carl Reimers owned 51 per cent of the stock of Reimers, Whitehall and Sherman, Inc. At the time it went into bankruptcy it owed certain newspaper publishers a considerable sum of money, and this indebtedness was not paid. During the period June 1 to October 1, 1946, petitioner's business was limited to magazine and radio advertising. On the latter date, it obtained a new client who required a certain amount of advertising in newspapers located in New York City. In order to place advertising with these newspapers and to obtain the usual 15 per cent commission from them on the gross amount of such advertising, petitioner had to obtain "recognition" *212 from the Publishers' Association of New York City. New York newspapers usually allow credit and commissions to advertising agencies that are recognized by either the American Newspaper Publishers Association or the Publishers' Association of New York City. The latter association is a local newspaper association in the metropolitan area of New York City. It has a committee which passes upon all applications for recognition, thus relieving each newspaper publisher of the burden of getting financial statements and other data from each advertising agency desiring to do business with it. As a general rule the New York newspapers do not allow commissions to an advertising agency within the 50-mile trading area of New York City unless such an agency is recognized. Recognition is granted to an agency that is solvent, that maintains a satisfactory liquid working capital of not less than $ 20,000 if located in New York City, and that is operated by people of good reputation with advertising experience and ability. Agencies failing to obtain recognition can do business on a cash basis with newspaper members of the association, but they have to pay in advance for advertising placed with *213 such members and do not receive the agency commission of 15 per cent. *1237 On or about October 1, 1946, petitioner applied to the Publishers' Association of New York City for recognition and received from it a circular outlining qualifications for recognition and instructions for filing application. The circular stated in part that "Pending official notification of the granting of recognition, advertising agents will pay cash gross, publishers to refund commission if recognition is granted within a six months' period." In November 1946, petitioner executed and filed the application for recognition with the Publishers' Association of New York City. On November 26, 1946, that association wrote to Carl Reimers, petitioner's president, acknowledging receipt of the application and calling his attention to his statement in the application that no officers of petitioner were ever involved in any bankruptcy proceedings or connected with any firm that failed in business. After stating that the records of the American Newspaper Publishers Association showed that he was the principal in Reimers, Whitehall and Sherman, Inc., which went into bankruptcy in 1933 and that members of that *214 association and members of the Publishers' Association of New York City had suffered substantial losses by reason of the failure of that agency, the letter concluded by asking Reimers what steps would be taken to take care of the accounts which appeared on the records against his former agency. Reimers replied under date of December 6, 1946; he stated in substance that he was not personally responsible for debts incurred by a former corporation of which he was a part owner, and that he did not see how either he, or his present corporation, could pay out money to satisfy some of the 13-year old debts of a former company without having a moral obligation to make a similar offer to all creditors of the defunct corporation. On December 11, 1946, the Publishers' Association of New York City wrote Reimers acknowledging receipt of his letter of the sixth and stating that it regretted to note his attitude towards the old indebtedness of the former agency corporation which he headed at the time of its failure. The association again wrote Reimers on January 6, 1947, advising him that the application of petitioner for recognition as an advertising agency had been considered and had not been *215 granted. Subsequent to the receipt of the letter of January 6, 1947, the petitioner engaged an attorney to ascertain how much of the indebtedness of its predecessor corporation it would have to pay in order to obtain recognition. The attorney informed petitioner that it would have to pay $ 4,590.83, which was 51 per cent of the loss sustained by newspaper publishers as a result of the failure of the predecessor corporation. Carl Reimers owned 51 per cent of the stock of that corporation at the time it became bankrupt. *1238 After ascertaining the amount that would have to be paid in order to get recognition, the matter was discussed by the stockholders and directors of petitioner, and they decided that payment should be made and a proposal for the settlement of the indebtedness of the predecessor corporation to newspapers, by the payment of $ 4,590.83, was submitted to the American Newspaper Publishers Association on January 15, 1947. On February 25, 1947, the petitioner issued a check for $ 2,295.41, and two notes for $ 1,147.71 each, payable to the American Newspaper Publishers Association. One note, due on or before May 25, was paid by check dated May 22, 1947, and the *216 other note, due on or before August 25, 1947, was paid by check dated August 20, 1947. On March 10, 1947, the petitioner received a letter from the Publishers' Association of New York City stating that recognition had been granted to it for the 6-month period ending September 30, 1947, and that it would be automatically renewed each period provided petitioner conformed to the full requirements for recognition. On July 1, 1948, the petitioner received a letter from the American Newspaper Publishers Association stating that recognition of that association had been granted to its agency. After receiving recognition from these associations, the petitioner wrote to the New York Times, the New York Herald Tribune, the New York World Telegram, and the Wall Street Journal, and received from these papers commissions accrued to it prior to the time it was granted recognition. Carl Reimers never reimbursed the petitioner for the amount which it paid to the American Newspaper Publishers Association. This expenditure was made by the petitioner in order that it might establish business relations with the member publishers of that association and of the Publishers' Association of New York City*217 on a credit basis and receive from them commissions of 15 per cent on the amount of advertising placed with them. In its income tax return for its fiscal year ending March 31, 1947, the petitioner deducted the amount of $ 4,590.83 under the heading "Other deductions authorized by law." This deduction was disallowed by the respondent. The amount claimed as a deduction by the petitioner did not constitute an ordinary and necessary expense paid or incurred by it during its fiscal year ending March 31, 1947, in carrying on its trade or business. OPINION. Petitioner seeks to deduct the payment of $ 4,590.83 under section 23 (a) (1) (A) of the Internal Revenue Code as an ordinary and necessary expense paid or incurred during its fiscal year ending March 31, 1947, in carrying on its trade or business. *1239 We see no difference in substance between the facts of the instant proceedings and those in Welch v. Helvering, 290 U.S. 111. In that case the taxpayer paid the claim of some former customers of a bankrupt corporation, of which he had been an officer, in order to strengthen his individual standing and credit, and to reestablish business relations*218 with the corporation's former customers. In the instant proceeding the petitioner paid a portion of the claims of some former customers of a bankrupt corporation, of which its president had been an officer and majority stockholder, in order that it might be granted recognition by newspaper publishers' associations which would permit it to establish business relations with their members on a credit basis and receive 15 per cent commissions on the amount of advertising placed with them. In the Welch case the Supreme Court sustained a determination that the expenditures involved were not deductible as ordinary and necessary business expenses. Cf. Mitten Management, Inc., 29 B. T. A. 569; Wallingford Grain Corp. v. Commissioner, 74 F. 2d 453 (C. A. 10), and cases cited, footnote 2; W. F. Young, Inc. v. Commissioner, 120 F. 2d 159, 166 (C. A. 1). We think the same result is required here. 1 Petitioner relies upon Catholic News Publishing Co., 10 T. C. 73. That case and several others (Edward J. Miller, 37 B. T. A. 830;*219 Scruggs-Vandervoort-Barney, Inc., 7 T. C. 779; L. Heller & Son, 12 T. C. 1109) have allowed claimed deductions under somewhat similar circumstances. Some of these decisions have endeavored to distinguish the Welch case. Thus, in both the Miller and Scruggs-Vandervoort-Barney cases, a distinction was drawn between payments made to "acquire" business or good will and payments made to "protect or promote" the taxpayer's business, the former being regarded as capital in nature and therefore not deductible. See 7 T. C. at 787. Such was the only ground on which these decisions distinguished the Welch case. We do not pause to inquire into the merits of such distinction, but to the extent that it has vitality it plainly calls for the application of the Welch case here. In the present case the payments to acquire "recognition" were similarly of a capital nature; they procured for petitioner a status which was in substance of indefinite future duration 2 and cannot *1240 therefore be regarded as a charge against current income. Accordingly, the Welch case is applicable*220 whether taken by itself or considered in the light of the rationale of the Miller and Scruggs-Vandervoort-Barney cases. *221 Decision will be entered under Rule 50. OPPER Opper, J., dissenting: On the present Findings of Fact, this proceeding seems to me to be controlled by such cases as First National Bank of Skowhegan, 35 B. T. A. 876; Edward J. Miller, 37 B. T. A. 830; Scruggs-Vandervoort-Barney, Inc., 7 T. C. 779; Catholic News Publishing Co., 10 T. C. 73; L. Heller & Son, 12 T. C. 1109, none of which, needless to say, was previously thought to be in conflict with Welch v. Helvering, 290 U.S. 111. See also A. Harris & Co. v. Lucas, (C. A. 5) 48 F. 2d 187. Those cases could not successfully have distinguished the Welch case, as the present opinion intimates, solely on the ground that no capital asset was acquired. They had to -- and did -- also decide that under the circumstances there present the expenditure was made to "protect" and to "promote" the taxpayer's business and hence was deductible as an ordinary and necessary expense. As to the capital asset question, *222 nothing of that nature was thought to be acquired or increased by the expenditures there made. See Hochschild v. Commissioner, (C. A. 2) 161 F. 2d 817. This seems to me equally or more so here, petitioner having already acquired its customer, and there is no finding to the contrary. Welch v. Helvering, supra, warns that for present purposes "what is ordinary * * * is * * * a variable affected by time and place and circumstance." In disregarding that injunction and treating the Welch opinion as an immutable doctrine of law, I think the present opinion errs. Footnotes 1. It is true that the opinion in the Welch case states that "what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance." 290 U.S. at 113-114. But petitioner, upon whom the burden of proof rests, has presented to us no facts whatever to show that either the "time", "place", or "circumstance" herein is different in any material respect from the corresponding factor in the Welch↩ case. 2. Recognition by the American Newspaper Publishers Association carried no fixed time limit, and although recognition by the Publishers' Association of New York City was granted in terms of a 6-month period there was provision for automatic renewal provided that there was continued compliance with the requirements for recognition. There is no showing in this record that in practical effect such recognition did not accord to petitioner a status of indefinite duration.↩