Odorono Co. v. Commissioner

THE ODORONO COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE GLAZO COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Odorono Co. v. Commissioner Docket Nos. 51195, 51196. United States Board of Tax Appeals 26 B.T.A. 1355; 1932 BTA LEXIS 1157; October 26, 1932, Promulgated *1157 Attorney fees paid by corporations A and B in connection with the sale, in a nontaxable transaction, of their assets and business to corporation C are not deductible by corporations A and B, either as ordinary and necessary expenses of that year, or as losses incurred upon their dissolution within the taxable year. Clyde Y. Morris, Esq., Henry Herrick Bond, Esq., and Carl M. Jacobs, Esq., for the petitioners. Isador Graff, Esq., and James H. Yeatman, Esq., for the respondent. SMITH *1355 These proceedings are for the redetermination of deficiencies in income tax for the period January 1 to December 27, 1928, in the amounts of $7,318.50 in Docket No. 51195, and $3,937.50 in Docket No. 51196. The single issue presented in each proceeding is whether certain legal expenses incurred and paid by the petitioners during the taxable year in connection with the sale and transfer of all of their assets to a third corporation, and their subsequent dissolution, are deductible either as ordinary and necessary expenses or as losses of that year. The proceedings were consolidated for hearing. FINDINGS OF FACT. The Odorono Company was a corporation, *1158 organized under the laws of the State of Ohio in 1913. The Glazo Company was also an Ohio corporation, organized in 1918. Both corporations were dissolved at the end of 1928, the certificates of dissolution being filed in the office of the Secretary of State of the State of Ohio on December 29, 1928. Both corporations were engaged during their corporate existence in the manufacture and sale of toilet preparations, with their principal place of business at Cincinnati, Ohio. All the outstanding stock of the Odorono Company, except qualifying shares, and one-half of the stock of the Glazo Company, was owned by Edna M. Albert, who was president of both companies. The other half of the stock of the Glazo Company was owned by Frederick L. Allen, who was vice president of both companies. In May, 1928, the petitioners' attorney, Carl M. Jacobs, was approached by the representative of a New York concern in regard *1356 to the acquisition by it of the petitioners' assets and business. jacobs consulted with the petitioners' two principal officers and stockholders and was authorized to investigate the proposition. It was later ascertained that the concern desiring to acquire*1159 the petitioners' business was the Northam Warren Corporation, a New York corporation, also engaged in the business of manufacturing and selling toilet articles. After extended investigations by Jacobs, and after several conferences between representatives of the petitioners and the Northam Warren Corporation, a plan was finally agreed upon, evidenced by a written instrument dated November 17, 1928, whereby the Northam Warren Corporation was to be reorganized and was to acquire all of the assets and business of the petitioners in exchange for the following consideration: (a) The assumption by the Warren Company of the trade accounts payable of Odorono and The Odorono Company, Ltd., as the same shall exist at the time of closing; (b) The assumption by the Warren Company of certain promissory notes of Odorono now held by the National City Bank of New York in an aggregate principal amount of $157,817.43 and interest, and the Warren Company agrees that it will (if said Bank shall consent thereto) pay and discharge said notes within three months after date of closing; (c) The issue to Odorono of 17,326 shares of the full paid and non-assessable Preference stock of the Warren Company; *1160 (d) The issue to Odorono of 17,500 shares of the full paid and non-assessable Common Stock of the Warren Company; (e) The execution and delivery to Odorono of a series of 6% corporate debenture notes of the Warren Company, in the face amount of $1,000. each or any multiples thereof, and in the aggregate face amount of $455,000., the terms and provisions of which shall be substantially as set forth in Exhibit E hereto annexed. * * * (a) The assumption by the Warren Company of the trade accounts payable of Glazo as the same shall exist at the time of closing; (b) The issue to Glazo of 32,674 shares of the full paid and non-assessable Preference stock of the Warren Company; and (c) The execution and delivery to Glazo of a series of corporate debenture notes of the Warren Company in the aggregate face amount of $110,000., which notes shall be identical in all respects with the corporate debenture notes specified in sub-paragraph (e) of paragraph 6 of this agreement. It was further agreed that the petitioners would dissolve immediately after transferring their assets and business. This agreement was duly approved at meetings of the petitioners' directors and stockholders*1161 and was fully carried out prior to the close of the year. The petitioners' businesses and assets were transferred and certificates of dissolution of the petitioners were filed in the office of the Secretary of State on December 29, 1928. It was resolved at a directors' meeting held on December 31, 1928, that a portion of the bonds received from the Northam Warren *1357 Corporation should be held by the directors of the petitioners, as liquidating trustees, to pay the obligations of the petitioners, and the remainder thereof distributed to the petitioners' stockholders in liquidation. In their negotiations with the Northam Warren Corporation, and in all the resulting transactions, the petitioners were represented by their attorney, Carl M. Jacobs. As compensation for such services, Jacobs was paid, in the year 1928, 6 per cent debenture notes of the Northam Warren Corporation in the face amounts of $54,687.50 by the Odorono Company and $32,812.50 by the Glazo Company, which were accepted by Jacobs at their face value in lieu of cash. In their income tax returns for the period January 1 to December 27, 1928, the petitioners deducted the aforesaid amounts which they*1162 had paid to the attorney in the above transactions as ordinary and necessary expenses of that year. The respondent has denied the deductions in whole. OPINION. SMITH: The petitioners contend, first, that the amounts which they paid to their attorney in 1928 for legal services performed in connection with the transfer of their assets to the Northam Warren Corporation are deductible as ordinary and necessary business expenses of that year, under the provisions of section 23(a) of the Revenue Act of 1928. This section of the statute permits a deduction from gross income in computing net income of "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered." Were the attorney's fees paid for the purpose of carrying on any trade or business? The petitioners were both engaged in the regular business of manufacturing and selling toilet preparations. In 1928 they entered into negotiations looking to either a sale of the assets and business to, or a merger with, another corporation engaged in a similar business. They*1163 employed an attorney to make an investigation and perfect plans for such a step. As the petitioners state in their brief, the attorney "represented the petitioners in the proposed merger, he investigated the financial set-up of all the companies, and he assisted in the financing arrangements whereby the transfer of the Odorono and Glazo businesses could be effected." It seems to us that the attorney's fees were paid by the petitioners not for the purpose of carrying on any regular business, but for the purpose of merging or reorganizing or completely disposing of their businesses. *1358 The plan by which this was accomplished may be considered, for our purposes, as a reorganization or other nontaxable transaction such as is referred to in section 112 of the Revenue Act of 1928. It has been so treated both by the petitioners and by the respondent. However, it is not necessary in these proceedings to determine the exact nature of the transaction. Our question is whether the attorney's fees paid in connection therewith are deductible either as expenses of carrying on a business or as losses of that year. We have held in a number of cases that expenses incident to the*1164 organization or reorganization, or merger of corporations are capital expenditures which may not be deducted from gross income as business expenses of the taxable year when paid or incurred. ; ; . This is also true of fees paid by a corporati0n to increase its capital stock; ; ; and commissions and fees paid in connection with the sale by a corporation of its capital stock. ; ; affd., ; certiorari denied, ; . We have also held that fees paid bt an individual to an attorney for investigating investment projects are not deductible in the year when paid, either as expenses of a trade or business, or as losses. *1165 . In , we said: Those expenses which are ordinary and necessary in carrying on a business may be deducted from annual income when paid or incurred. Expenditures which are made for the acquisition of capital assets represent the cost of the asset and, if the assets are exhausting, deductions for exhaustion make capital whole in such cases before income is taxed. * * * However, all expenditures need not fall into one or the other of these two classes. * * * The expenditures for attorneys' fees in this case may be such an expenditure. It can be argued, and not without merit, that no capital asset is acquired when attorneys' fees are paid in connection with an increase in capitalization, but it does not follow that the payments are ordinary and necessary expenses of the year when made. It may be that the scheme of the taxing statute fails to provide for their reflection in the computation of the petitioner's tax, but in any event they are not ordinary expenses in carrying on the business during the year 1921, within the meaning of section 234(a)(1) of the Revenue Act of 1921. * * * *1166 Ordinarily, the costs incident to the acquisition or sale of property are considered capital expenditures, which, in the case of a purchase, are added to the cost of the property (see ; affd., ; ), and in the case of a sale are deducted from the sale *1359 price, thereby, in taxable transactions, either reducing the amount of the gain or increasing the amount of the loss. See . Cf. also . Regardless of whether or not the amounts here in dispute may be classified as capital expenditures, we are of opinion that they were not ordinary and necessary expenses of carrying on a business. The petitioners contend, in the alternative, that the attorney's fees, if representing capital expenditures, are nevertheless deductible as losses, under the provisions of section 23(f) of the 1928 Act, which losses were incurred upon their dissolution within the taxable year. There is no merit in this contention. There is nothing in the evidence to indicate, and it is not claimed*1167 by the petitioners, that there was any loss upon the transfer of the petitioners' assets to the Northam Warren Corporation. We assume, in the absence of evidence to the contrary, that the transaction was mutually beneficial to all of the parties concerned and that value was received by the petitioners on account of the expenditures for the attorney's fees. Reviewed by the Board. Judgment will be entered for the respondent.