Court Opinion

ID: 9652846
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:33:35.298162+00
Date Added: 2024-06-11T18:12:54.588024
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
The question presented is whether the Knight-Campbell Music Company1 was entitled to deduct $10,000 as an ordinary and necessary expense paid during the taxable year in carrying on its trade and business.
Receivers, appointed by the state court, took over the operation of the business of the taxpayer. Thereafter in a report filed September 7, 1934, the receivers stated that the business could not be disposed of as a going concern; that further operation would result in operating losses and prevent the receivers from making payments of claims of preferred stockholders in accordance with the decree of the state court; and that it was necessary to proceed with the liquidation of the taxpayer’s business. On September 8, 1934, the receivers served notice that on September 11, 1934, they would apply for an order directing them to proceed with the liquidation of the taxpayer. The firm of Grant, Ellis, Shafroth and Toll,2 and Victor A. Miller were employed by C. G. Campbell and Lillian E. Campbell to resist the application for an order of liquidation and to seek the discharge of the receivers and a return of the management to petitioner’s board of directors. To those ends, a petition was filed by C. G. Campbell, Lillian E. Campbell, C. R. Baker, W. W. Bradford, and a petition of intervention was filed by Marjorie C. Bryant. A hearing was had on the application of the receivers and the petitions referred to above. During the course of the hearing, a settlement was agreed upon. Thereafter, on May 8, 1935, a stipulation was filed and approved by the District Court, which provided that the preferred stockholders should be paid in full and retired; that certain secured notes should be paid; that the costs of the receivership should be paid by the receivers and that the receivers should be discharged; and that the taxpayer should be restored to private management. The stipulation was carried out. $97, 960 was paid in liquidation of the preferred stock and $48,092.03 was paid in liquidation of the notes.
On May 8, 1935, the taxpayer transferred the judgments against the individual defendants to C. G. Campbell and such judgments were released by Campbell.
On June 13, 1935, Lillian E. Campbell *841and Clarence G. Campbell paid the Grant firm and Miller $10,000 for services rendered. The fee was reasonable.
A forced liquidation sought by the receivers would have resulted in the termination of the business as a going concern. The taxpayer is now operating profitably and has net assets in excess of $200,000.
After the settlement, the appeal in the Supreme Court was dismissed. The Grant firm and Miller were not employed in, and did not participate in, the appellate proceedings, but appeared solely in the receivership proceedings.
The taxpayer borrowed $35,000 from the First National Bank of Denver to carry out the settlement agreement. The common stockholders, owning approximately 90 per cent of the common stock, agreed that as soon as the bank loan was paid off, or earlier, should the bank consent, the taxpayer would reimburse Lillian E. Campbell and Clarence G. Campbell for the $10,000 attorneys’ fees paid by them. On December 22, 1942, the board of directors of the taxpayer adopted a resolution authorizing the taxpayer to obligate itself to reimburse Lillian E. Campbell and Clarence G. Campbell. In 1942, the petitioner paid Clarence G. Campbell $2,500 in cash and Lillian E. Campbell $1,575 in cash and gave her a note for $5,925. Prior thereto, the bank had not consented and had not been willing to consent to such payment. The taxpayer keeps its books on an accrual basis. In its income tax return for 1942, the taxpayer deducted the $10,000 as a necessary and ordinary expense. The Commissioner disallowed the deduction and gave notice of the deficiency.
The taxpayer sought a review before the Tax Court. The facts were stipulated. The Tax Court found that the Grant firm and Miller were employed primarily to serve the common stockholders.
There can be no doubt that the motive which actuated Lillian E. Campbell and C. G. Campbell to employ the Grant firm and Miller was their self-interest, as common stockholders of the taxpayer. Nevertheless, it seems to me to indubitably appear that the services were actually rendered in behalf of the taxpayer. The Grant firm and Miller opposed the receivers’ petition for liquidation and sought the discharge of the receivers and the return of the business of the taxpayer to private management. The settlement effected those purposes and saved the taxpayer from destruction. The liquidation of the outstanding preferred stock, with cash in the hands of the receivers and cash borrowed from the First National Bank, was a corporate act. The borrowing of the money was a corporate act. The services, rendered in connection with the liquidation of the preferred stock, were rendered in behalf of the taxpayer. Of course, the common stockholders were benefited. Any benefit accruing to a corporation benefits its stockholders, but there is no reason here to disregard the corporate entity, or to regard the services as rendered to the stockholders rather than to the taxpayer.
If the services were rendered for and in behalf of the taxpayer, it is proper for it to obligate itself to make reimbursement.3
If the services were rendered for and in behalf of the taxpayer to prevent its liquidation, to restore it to private management, and to liquidate the preferred stock, it was an ordinary and necessary expense and was properly deductible. 4
While what is an ordinary and necessary expense is usually a question of fact, here the Tax Court adopted a test of the motive that induced the employment, rather than the test of to whom and for whom the legal services were rendered, and a question of law is unmistakably involved which this court may review.5
I would reverse.

 Hereinafter called the taxpayer.

 Hereinafter called the Grant firm.

 Grant v. Lookout Mountain Company, 93 Tenn. 691, 28 S.W. 90, 27 L.R.A. 98; Watson v. Johnson, 174 Wash. 12, 24 P. 2d 592, 89 A.L.R. 1527; Noxon Chemical Products Co., Inc., v. Commissioner, 27 B.T.A. 1028.

 Commissioner v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171.

 Commissioner v. Heininger, 320 U.S. 467, 475, 64 S.Ct. 249, 88 L.Ed. 171.