Peaslee-Gaulbert Co. v. Commissioner

PEASLEE-GAULBERT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Peaslee-Gaulbert Co. v. Commissioner Docket No. 16247. United States Board of Tax Appeals 14 B.T.A. 769; 1928 BTA LEXIS 2922; December 17, 1928, Promulgated *2922 The entire amount claimed as a deduction from income disallowed where the evidence discloses that a part of this amount constituted a capital expenditure and the amount thereof is not shown. Ward Loveless, Esq., for the petitioner. Eugene Meacham, Esq., for the respondent. SIEFKIN *769 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $4,787.74. The petition alleges errors of the respondent in (1) including in the 1920 income an item of $9,623.82, representing allowances made to customers on paint sold during the year 1920 with a guarantee against a decline in price up to December 31, 1920, and (2) disallowing as a deduction from income for the year 1920 an item of $13,750 paid to John W. Barr for services rendered. In his answer the respondent admits that he erred as stated in the first assignment of error. *770 FINDINGS OF FACT. The petitioner is a Kentucky corporation with principal office at Louisville. Shortly after July, 1919, the petitioner employed John W. Barr, a lawyer and corporate finance adviser, to make an investigation and a recommendation*2923 with regard to a suggested merger of the petitioner and other companies in a similar business. Conferences were held and Barr studied the condition of each company. He concluded that it would be unwise for the petitioner to enter into a consolidation with the other companies. The investigation covered a period of several months. Besides this service, Barr rendered petitioner other services. He was consulted almost daily with regard to petitioner's affairs, its future development and the best way to finance it. The four individuals who had purchased the petitioner purchased it on credit and they were indebted to the banks to the extent of several hundreds of thousands of dollars. The petitioner needed money to expand its business but did not desire to lessen its bank credit. Under the advice of Barr, 7 per cent preferred stock was issued, the sale of which added about $1,000,000 to petitioner's assets. Barr convinced the stockbrokers that the stock stood all the financial and legal tests, and in their advertisement of the stock, it was stated that Barr had assisted in financing the petitioner. The brokers were paid commissions for selling the stock. Barr prepared amendments*2924 of petitioner's charter, assisted in the holding of meetings and gave advice on all these transactions. In October, 1920, Barr rendered petitioner a bill for $13,750 for all services rendered in 1920. Barr, in this bill, did not attempt to allocate the amount due for the various services rendered. All the services he rendered were valuable and the charge made was low. On October 6, 1920, the treasurer of petitioner paid Barr $13,750 in payment of his bill. The petitioner claimed the amount of $13,750 as a deduction in 1920, and the respondent disallowed the same. OPINION. SIEFKIN: The respondent having admitted error as set forth in one of the assignments of error in the petition, the only question remaining to be decided is whether he erred in disallowing as a deduction from income of petitioner for the year 1920 the amount of $13,750 paid to John W. Barr in that year. The evidence discloses that this amount was paid to Barr on October 6, 1920, for making an investigation and a recommendation *771 with regard to a suggested merger of petitioner and other companies for giving advice on miscellaneous financial matters, for advising as to the proper manner to*2925 finance the petitioner, for services in inducing stockholders to sell petitioner's 7 per cent preferred stock, and for preparing amendments to petitioner's charter. The petitioner, in accordance with Barr's recommendation, did not proceed with the merger. In , we held that fees paid to lawyers for negotiating with brokers for the sale of the corporation's stock, and for securing an amendment to its charter to authorize an increase in its capitalization are not deductible by the corporation as ordinary and necessary expenses in carrying on a trade or business. In the instant proceeding, the petitioner having failed to show what part of the $13,750 was paid for negotiating the sale of stock, which amount would not be properly deductible as an expense, the entire amount of $13,750 must be disallowed as a deduction. Judgment will be entered under Rule 50.