Court Opinion

ID: 8592798
Source: CourtListenerOpinion
Date Created: 2022-11-23 15:54:00.0757+00
Date Added: 2024-06-11T16:54:37.983947
License: Public Domain

Davis, Judge,
dissenting in part:
Because I read the record quite differently, I dissent from the holding that plaintiff is entitled to deduct as an ordinary and necessary business expense all the legal fees paid in 1945, 1946, and 1947. I agree with the court that, from the beginning of the S.E.C. proceedings through the first half of 1945, Allied was plainly seeking to conserve its stake in American and to keep that company from dissolution. But the situation changed, in my view, during the year 1945, after the S.E.C. issued its Memorandum Opinion of June 2, 1945, re-interating its conclusion that American was to be dissolved, but providing, also, that the preferred stock should be redeemed at a fair and equitable amount. At that point Allied accepted, essentially, the dissolution of American as settled, and directed its primary efforts to showing that the preferred had a value much higher than the par of $25 which it was at that stage assured of receiving. Although Allied continued to oppose dissolution in its presentation to the Commission in 1945 (and to some extent in 1946),1 its briefs and memoranda to the S.E.C. (which are in the record before us) show that its chief concern was the highest possible valuation of the stock.2 That certainly was its interest in *2831947 when it changed its stance and demanded that American be dissolved.
My conclusion is that, contrary' to the court’s position, all the legal expenditures from 1940 to 1948 were not of the same nature. The earlier ones were undoubtedly for the primary end of preventing the dissolution of American but those made in the latter half of 1945, and in 1946 and 1947— the only years involved here — had the main purpose of increasing the sum which Allied would be paid for its preferred stock.
That crystallization of Allied’s principal objective (during 1945-1947) brings our case, I believe, within the rule that legal fees (and like expenses) paid in an effort to increase the value of, and obtain a higher price for, a capital asset are not deductible as ordinary and necessary business expenses. Ward v. Commissioner, 224 F. 2d 547 (C.A. 9); Munson v. McGinnes, 283 F. 2d 333 (C.A. 3), cert. denied, 364 U.S. 880; Victoria Paper Mills Co. v. Commissioner, 32 B.T.A. 666, 667, affirmed, per curiam, 83 F. 2d 1022 (C.A. 2).3 This court’s decision in Towanda Textiles, Inc. v. United States, 149 Ct. Cl. 123, 180 F. Supp. 373, is to the same effect; the ruling was that fees paid to attorneys to collect insurance on a burned building were not deductible as an ordinary and necessary expense. The Tax Court’s opinion in Allegheny Corp. v. Commissioner, 28 T.C. 298, is not opposed. That taxpayer was fighting reorganization plans which would have entirely wiped out its common stock; its main interest was to preserve that investment from total destruction, not merely to increase the value of the shares on distribution (see 28 T.C. at 303-304).
In that connection it does not seem material in the present case that Allied paid $30 for its preferred stock while the ■par value (at which other parties to the S.E.C. proceedings wished to redeem the shares and which, by 1945, Allied was certain to receive at the minimum) amounted to only $25. Efforts to retrieve what one has paid for an asset, rather than *284to be forced to accept par, do not move the case out of the value-increasing class into the category of those dealing with the preservation and conservation of assets, such as Allegheny Corp., supra (in which total destruction of the investment was threatened). In Towanda Textiles, Inc., supra, it was not certain in advance that the insurance ultimately paid by the insurer would turn out to be more than the cost (or basis) of the property, but this court nevertheless held the attorneys fees which had been expended for obtaining the insurance proceeds not to be deductible as ordinary expenses.
On the view that Allied’s expenditures for legal fees for 1945 (and perhaps for 1946) were divided between those concerned with preventing dissolution of American and those directed to increasing the value of the preferred stock on dissolution, this case should be sent to the Trial Commissioner, under Rule 88(e), to make such an allocation and to determine the amount of recovery, if any, for 1945. If plaintiff can show by adequate proof that its legal expenses for 1946 included a substantial portion directed to preventing the dissolution of Allied (as distinguished from increasing the value of the preferred on distribution), and that a definite division of such expenditures can be had, a similar allocation should be made for that year. Plaintiff’s claims for refunds premised on its expenditures for legal services in 1947 should be rejected outright. (On the other issue in the case I entirely agree with Judge Whitaker.)
JONES, Chief Judge, joins in the dissent.
In accordance with the opinion of the court and on an amended report of the commissioner as to the amounts due thereunder, it was ordered on March 8, 1963, that judgment for the plaintiff ,be entered for $167,736.15, with interest according to law on the sums and from the dates,set' forth below: ,
(1) $109,172.86 in excess profits tax paid for 1945, together with interest thereon from ■ December. 13, 1946, ■ .
*285(2) $10,367.82 in income tax and $2,095.72 in assessed interest paid for 1946, together with interest thereon from September 19,1950,
(3) $39,340.39 in income tax and $6,759.36 in assessed interest paid for 1947, together with interest thereon from October 3,1951,
less an offset of $12,000.

 The Commission again ruled on April 30, 1946, that American should be dissolved, 22 S.E.C. 704.

 See, e.g., Allied’s statements in its brief of December 8, 1945 (after the hearings in September 1945) that “the principal contention which will be made in this brief is that the treatment accorded by the plan to the preferred stock of American Light is unfair and inequitableand its statement in its brief in support of its application for reimbursement of expenses that “So far as Allied was concerned, the principal question remaining [after the Commission’s decision of June 2, 1945] for the hearings on Application 21 was the amount which should be awarded to the preferred stockholders for the termination of their interest in the enterprise.”

 The contrary holding in Heller v. Commissioner, 147 F. 2d 876 (C.A. 9), cert. denied, 325 U.S. 868, turned on the effect of the then-prevailing rule in Dobson v. Commissioner, 320 U.S. 489. Naylor v. Commissioner, 203 F. 2d 346, 347 (C.A. 5), seems to rest on the court’s view that the attorneys fees were paid for collection of the proceeds of a prior sale of stock.