Mosser v. Commissioner

CHARLES F. MOSSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mosser v. Commissioner Docket No. 55399. United States Board of Tax Appeals 27 B.T.A. 513; 1933 BTA LEXIS 1351; January 6, 1933, Promulgated *1351 A payment made to procure the withdrawal of a partner, whose activities were damaging the partnership business, which payment directly benefited the business, is deductible from gross income A. King Aitkin,12 B.T.A. 692, followed. Fred A. Woodis, Esq., for the petitioner. C. C. Holmes, Esq., for the respondent. SMITH *513 The Commissioner determined a deficiency of $725.93 in the petitioner's income tax for 1927. The only issue is whether a payment of $15,000 to procure the withdrawal of a partner from a copartnership of which the petitioner was a member, is deductible from petitioner's gross income as an ordinary and necessary business expense. FINDINGS OF FACT. The petitioner is a resident of Allentown, Pennsylvania. During the taxable year 1927 he was a member of a copartnership known as W. F. Mosser & Son, engaged in the business of founders and machinists. This copartnership was formed on December 31, 1925, under articles of agreement entered into between the petitioner, Joseph F. Mosser, Harold J. Bogert, and William F. Mosser, and was to continue for a term of five years commencing January 1, 1926. The capital*1352 of the copartnership consisted of $50,000 and the respective interests of the partners were as follows: Charles F. Mosser 2/5 or $20,000 Joseph F. Mosser 1/4 or 12,500 Harold J. Bogert 1/4 or 12,500 William F. Mosser 1/10 or 5,000 In addition to his capital interest in the copartnership, the petitioner owned the plant in which the firm conducted its business. *514 Prior to December 31, 1927, it became apparent that the affairs of the copartnership were not being conducted to the mutual satisfaction of all the partners. The activities of Harold J. Bogert, petitioner's son-in-law, were damaging the business of the firm, and, being unable to get Bogert to desist from his activities, the petitioner paid him $15,000 to withdraw from the copartnership. Bogert's interest in the copartnership was purchased by Joseph F. and William F. Mosser, who, with their father, the petitioner herein, formed a new copartnership to continue the business under the firm name of W. F. Mosser & Son, with a capital of $50,000, of which the petitioner and Joseph F. Mosser each contributed two-fifths and William F. Mosser contributed one-fifth. In his income tax return for*1353 1927, the petitioner deducted the $15,000 which he paid to Bogert as a loss sustained by him by reason of his having been obliged to pay that sum to secure Bogert's consent to the cancellation of the copartnership agreement. The respondent disallowed the deduction in determining the deficiency. OPINION. SMITH: The petitioner claims that the expenditure of $15,000 is deductible either as a loss or as an ordinary and necessary expense of carrying on business. Obviously, the amount is not deductible as a loss, but the record shows that the payment to Bogert had a direct relation to and was made to preserve the copartnership business; it was not made in payment for Bogert's interest in the copartnership. Bogert demanded the payment of $15,000 in addition to his capital investment before he would consent to the dissolution of the copartnership. The petitioner testified as to the activities of Bogert which were directly injuring the business of the firm and it was in order to be relieved of the possible consequences of Bogert's activities that the petitioner procured his withdrawal from the copartnership. A payment in excess of a retiring partner's investment was allowed as*1354 a deductible expense in , where the retiring partner demanded a similar payment before he would consent to the dissolution of the firm. We there said: The payment which these petitioners made to protect themselves against the future actions of Dippy was directly connected with and proximately resulted from their business. No capital asset was acquired. The situation is not unlike that presented to the Supreme Court in ; ; 6 Am.Fed. Tax Rep. 7358, where expenses of defending an action for an accounting, instituted by a former partner, were allowed as a deduction from income as ordinary and necessary business expenses. We are of the opinion that the Commissioner erred in refusing to allow the deductions claimed. *515 That case is not distinguishable from the instant proceeding, and the $15,000 here involved should be allowed as an expense deduction, since it directly benefited this petitioner's business. See also *1355 ; ; . Cf. . Judgment will be entered for the petitioner.