Case Name: Appeal of EMERSON ELECTRIC MANUFACTURING CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-02-19
Citations: 3 B.T.A. 932
Docket Number: Docket No. 1010
Parties: Appeal of EMERSON ELECTRIC MANUFACTURING CO.
Judges: Before SteRnhagen, Lansdon, and Arundell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 3
Pages: 932–936

Head Matter:
Appeal of EMERSON ELECTRIC MANUFACTURING CO.
Docket No. 1010.
Submitted November 17, 1925.
Decided February 19, 1926.
William F. Fahey, Esq., for the taxpayer.
Robert A. Littleton, Esq., for the Commissioner.
Before SteRnhagen, Lansdon, and Arundell.

Opinion:
OPINION.
Arundell
: The taxpayer claims as a deduction from its gross income for the fiscal year ended September 80, 1920, the amount of $104,501.25 paid for the purposes set forth in the findings of fact. The major item is the sum of $100,000 paid to Spencer Trask & Co. incident to the marketing of the taxpayer's preferred stock of the par value of $1,000,000. The entire issue of 10,000 shares was subscribed for by Spencer Trask & Co., which paid the taxpayer in payment therefor $1,000,000. Under the laws of Missouri, if stock is issued for cash, it is necessary that the corporation receive cash in an amount not less than the par value of the stock issued therefor. It was by reason of this provision of the statute that the transaction took the form of the payment to the taxpayer by Spencer Trask <⅞ Co. of the full sum of $1,000,000 and a check by the taxpayer to the brokers in the sum of $100,000.
If the amount so paid to the brokers is deductible, it is by reason of section 234 (a) (1) of the Eevenue Act of 1918, which provides that there shall be allowed as deductions, " 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." The taxpayer contends that, the securing of additional capital in order to efficiently operate its business being absolutely necessary, the expenses incident thereto were not only necessary, but, in the cirmcumstances, ordinary expenses; and, further, that the amount paid to the brokers represented " other compensation for personal services actually rendered " and, therefore, constituted a proper deduction from income.
That the amount paid to Spencer Trask & Co. for services rendered in connection with the flotation of the taxpayer's capital stock represented compensation for personal services actually rendered is true, but that does not of itself bring the expenditure within the category of deductible expenses contemplated by the statute. The word " including," as used in the clause " including a reasonable allowance for salaries or other compensation," signifies the intent to include as deductible expenses only such salaries or other compensation as are ordinary and necessary expenses in carrying on a trade or business.
The use of capital is ordinarily and generally necessary in the conduct of a business enterprise, but it does not follow that the expense incident to its procurement is an ordinary and necessary business expense within the purview of the statute.
Expenses incurred by a corporation in selling its capital stock, the proceeds from which are to be permanently invested in property or otherwise used in the operation of the business, subject to all its risks and hazards, are not deductible expenses, for the reason that such expenses are incurred in connection with a capital transaction. The only effect of expenses of this character, as in the case of discount at which the shares of stock may be sold, is to reduce the capital available to the corporation, and they can not be used to reduce the income from operations. They represent a capital expenditure which should be charged against the pro-céeds of the stock and not recouped out of operating earnings. Further, it is clear to us that the revenue of a day or a year should not be burdened with the cost of acquiring additional capital, the benefits from which will inure the corporation over a long period of years. This is the doctrine generally recognized and adopted in the treatment of expenses incident to the procuring of temporary capital through the flotation of bonds and other term securities, and in such cases the expenses are written off over the life of the indebtedness.
We think it is perfectly clear that the amount received by a corporation in excess of the par value of its stock is not income to the corporation, but is in fact a paid-in surplus, and that the converse is equally true, that when stock is sold for less than its par value the corporation has not suffered a loss. Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803. It is contended, however, that this is not a case where stock is sold for less than par, but that the taxpayer in fact received $1,000,000 and thereafter paid out $100,000 as expense incurred in its sale and distribution. Obviously the net result to the corporation is the same whether it sells its stock to a broker at a discount or whether it sells the stock through salesmen employed for the purpose and pays a salary or other compensation for their services.
What has been said with reference to the payment of $100,000 incident to the sale of the taxpayer's preferred stock is equally true of the item of $3,500 paid for legal services in connection with the taxpayer's negotiations with the brokers and in the amendment of its charter authorizing the sale of its stock. Such an item is, in our opinion, a capital expenditure and not an ordinary and necessary expense of carrying on a business, and is, therefore, not deductible.
The fees paid to the State of Missouri, in the amotint of $1,001.25, in connection with the amendment of the taxpayer's charter in order that it might increase its capitalization, is not a tax, but is a fee, and as such is deductible only if it falls within the provisions of section 234 (a)(1). For the reasons heretofore advanced, we are of the opinion that this item is a capital expenditure and not an ordinary and necessary expense. Appeal of Logan-Gregg Hardware Co., 2 B. T. A. 647.