Court Opinion

ID: 4477231
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:25.882118+00
Date Added: 2024-06-11T15:03:29.558147
License: Public Domain

Tietjens, J., dissenting: I respectfully dissent for the following reasons. The fact situation as I see it, reduces to this. Petitioner’s success was dependent upon the success of Underwriters in producing sufficient insurance sales to keep petitioner going. Underwriters, however, did not produce the business, and in order for petitioner to survive it became necessary that the agency contract with Underwriters be canceled. As a result of negotiation, a cancellation agreement satisfactory to all concerned and approved by the Insurance Department and by the Securities Commission of the State of Indiana was concluded. One of the provisions of this agreement was the assumption by petitioner of Underwriters’ obligation to mate the payments here in question. It so happened that the persons to whom such payments were due were also stockholders of petitioner. I do not think this latter fact affects the reality of the situation which is that petitioner became obligated to make the payments as part consideration for and under an arrangement which rid it of an otherwise onerous agency contract. The Commissioner does not argue that there was any sham about the cancellation arrangement or a lack of arms’-length negotiation. It had a plain business purpose for petitioner, i. e., to be “shut of” an unprofitable contract. That the termination of the contract was also advantageous to petitioner’s stockholders is beside the point. I think the facts force the conclusion that the payment of the assumed obligations by petitioner was an ordinary and necessary business expense. Louis C. Rollo, 20 B. T. A. 799; Camloc Fastener Co., 10 T. C. 1024; and cf. Charles J. Williams, 5 T. C. 639. While, as the Commissioner argues, it may not generally be ordinary for a corporation to return to its stockholders the purchase price of their stock, that must depend on the circumstances. We think it is “ordinary” for a taxpayer to bring about the termination of a contract onerous to its business and to pay out money or assume obligations in order to bring about the termination and that is the crux of the transaction here. The cancellation of the agency contract was not a transaction between the petitioner and its stockholders, but was a transaction between the petitioner and the assignee of the agency contract. The assumption of the obligation which the agent corporation (Underwriters) had to the petitioner’s stockholders was incidental to the cancellation and in part consideration thereof. I do not think the petitioner’s deduction claims were prejudiced by these incidental ramifications. Johnson and Bice, JJ., agree with this dissent.