Source: https://law.justia.com/cases/federal/appellate-courts/F2/203/459/360486/
Timestamp: 2020-01-20 11:48:58
Document Index: 708606206

Matched Legal Cases: ['§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 578']

C. Ludwig Baumann & Co. v. Marcelle, Collector of Internal Revenue et al, 203 F.2d 459 (2d Cir. 1953) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1953 › C. Ludwig Baumann & Co. v. Marcelle, Collector of Internal Revenue et al
C. Ludwig Baumann & Co. v. Marcelle, Collector of Internal Revenue et al, 203 F.2d 459 (2d Cir. 1953)
US Court of Appeals for the Second Circuit - 203 F.2d 459 (2d Cir. 1953) Argued March 3, 1953
H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Melva M. Graney, Special Assts. to the Atty. Gen., and Frank J. Parker, U. S. Atty., Brooklyn, N. Y., for defendants-appellees.
This is an action brought against a collector of internal revenue and the United States to recover some $64,000, plus interest, paid as a deficiency in income tax resulting from the disallowance of a deduction taken in the plaintiff's tax return for 1942. The case was tried to the court without a jury upon stipulated facts. In an opinion reported in 105 F. Supp. 780, the trial court dismissed the complaint. The taxpayer, which kept its books on the accrual basis, in the year 1942 accrued on its books and claimed as a deduction in its income tax return, an obligation of $132,960 incurred in settlement of a claim for damages asserted against it. The deduction was disallowed.1 The taxpayer paid the resulting deficiency, filed a claim for refund thereof, and thereafter duly brought the present suit. The question presented by the appeal is whether the obligation so accrued was properly deductible either under § 23(a) (1) (A) as a business expense or under § 23(f) as a loss not compensated for by insurance or otherwise.2
This conclusion is enough to make the compromise payment a "necessary" expense for purposes of deduction under § 23(a) (1) (A) of the Code, for a compromised claim need not be so perfect as to foreclose the possibility of its defeat if litigated.9 Good faith business judgment is the test, and the law does not require infallible foresight.10 We are also satisfied that the expense was "ordinary." As stated by Justice Cardozo in Welch v. Helvering, 290 U.S. 111, at page 114, 54 S. Ct. 8, at page 9, 78 L. Ed. 212: "Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack." We find nothing to the contrary in Deputy v. Du Pont, 308 U.S. 488, 60 S. Ct. 363, 84 L. Ed. 416, which on completely different facts held the transactions there involved to be not "ordinary." In the words of Justice Douglas, 308 U.S. at page 495, 60 S. Ct. at page 367, "it must be of common or frequent occurrence in the type of business involved." In the case at bar the transactions giving rise to the claim against the taxpayer were dealings between two corporations having common directors. In such a situation unhappily it is not uncommon for the majority directors at times to use their powers for the benefit of one corporation and to the detriment of the other. The resulting claim was settled in good faith for less than one-half the amount for which the taxpayer might have been held liable. We hold it to have been an "ordinary and necessary expense * * * incurred * * * in carrying on" the taxpayer's business, and hence deductible under § 23(a) (1) (A). Whether it might also be considered a "loss" deductible under § 23(f) we need not consider.
Due to an arithmetical error by the taxpayer only $129,600 instead of $132,960 was deducted on the income tax return
The Internal Revenue Code, 26 U.S.C.A., reads:
"(A) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * * * rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
The agreement further provided that upon payment of the full sum of $132,960 the lessee would have an option to purchase the bonds and stock of the lessor owned by the bondholders for $75,000, payable ratably and in installments of $5,000 quarterly
During the period from December 1942 to December 31, 1948, the lessee in fact did pay to the bondholders $132,960
The lessor's balance sheet for 1942 showed it to be insolvent by more than $100,000
See Welch v. Helvering, 290 U.S. 111, 114, 54 S. Ct. 8, 78 L. Ed. 212; Friedman v. Delaney, 1 Cir., 171 F.2d 269, 271, certiorari denied 336 U.S. 936, 69 S. Ct. 746, 93 L. Ed. 1095; A. Giurlani & Bro. v. Commissioner, 9 Cir., 119 F.2d 852, 857
Cf. dicta in Adcock v. New Crystal Ice Co., 144 Tenn. 511, 515-516, 234 S.W. 336
See Jenkins v. Bradley, 104 Wis. 540, 562-563, 80 N.W. 1025; Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481, 496-497, 81 N.W. 1064; Sale v. Ambler, 1939, 335 Pa. 165, 6 A.2d 519, 521-522; Alexander v. Quality Leather Goods Corp., 150 Misc. 577, 269 N.Y.S. 499, 503-504; 18 C.J.S., Corporations, § 578
William L. Butler, 17 T.C. 675, 680; Great Island Holding Corp., 5 T.C. 150, 163
"* * * business, like everything else, can only be conducted upon prophecies, and prophecies are never infallable", Judge Learned Hand in Levitt & Sons v. Nunan, 2 Cir., 142 F.2d 795, 798. See also Dunn & McCarthy, Inc., v. Commissioner, 2 Cir., 139 F.2d 242