Court Opinion

ID: 4633530
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:14:06.93857+00
Date Added: 2024-06-11T07:58:04.108843
License: Public Domain

S. CUPPLES SCUDDER, EXECUTOR, ESTATE OF CLIFTON R. SCUDDER, SR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Scudder v. CommissionerDocket No. 33075.United States Board of Tax Appeals22 B.T.A. 1294; 1931 BTA LEXIS 1966; April 27, 1931, Promulgated *1966  Certain sums paid by petitioner's decedent in 1923 and representing legal expenses incurred in unsuccessfully defending a suit brought against him to void a contract whereby he was attempting to secure control of a corporation by acquisition of 160 additional shares of stock, held to be deductible from gross income as a loss sustained in that year.  Joseph Renard, Esq., for the petitioner.  O. J. Tall, Esq., for the respondent.  MARQUETTE *1294  This proceeding is for the redetermination of a deficiency in income tax asserted against the estate of Clifton R. Scudder, Sr., petitioner's decedent, in the amount of $4,045.77 for the year 1923.  The only error assigned is respondent's action in disallowing a deduction from gross income of $6,549.17 taken by the petitioner and representing legal fees paid in that year.  FINDINGS OF FACT.  Shortly prior to July, 1903, the capital stock of the Samuel Cupples Envelope Company, a Missouri corporation, was $100,000, and its surplus $150,000.  A 150 per cent stock dividend was thereupon declared, increasing the authorized and issued stock to 2,500 shares of the par value of $100 each.  *1295 *1967  At the time this action was taken, Samuel Cupples was president of this corporation, owing approximately two-thirds of the stock, and C. R. Scudder, petitioner's decedent, was vice president and treasurer, owning approximately one-third of this stock.  Certain individuals, James A. Rogers, John J. Hamilton, James H. Hewitt, and Frank M. Kimbark, had long been in the service of this corporation and the retaining of their services was deemed desirable, and Samuel Cupples on July 9, 1903, in lieu of offering these individuals increases in their salaries, entered into contracts with each for the sale to him of certain shares of stock of the corporation of $100 per share, receiving promissory notes for the full amount from each.  Under these contracts Rogers, Hamilton, and Hewitt each received 80 shares of stock, Kimbark 200 shares, and on April 19, 1910, by a similar contract one Snyder, another employee, received 100 shares.  In the case of each of these employees the contract under which the stock was sold provided that, should they cease to be in the employ of the corporation, Samuel Cupples would have an option at any time within 90 days to repurchase the stock at its book value.  In*1968  each case it was provided that the stock when issued should be held by a trustee and in each case the stock as issued was delivered to and accepted by Albert N. Edwards, trustee, it being noted on the face of each certificate that it was issued and accepted subject to the terms and conditions of the contracts in question.  One-third of all the stock so issued to these employees was taken from the stock dividend allotted to C. R. Scudder and two-thirds from that allotted to Samuel Cupples.  On April 19, 1910, the said Cupples and Scudder entered into a written agreement providing that in the event Cupples exercised any one of the aforesaid options and repurchased any one of the blocks of stock sold these employees he would deliver to Scudder one-third of the number of shares so reacquired, at the same price he was required to pay these employees for them.  Samuel Cupples died January 6, 1912.  In April, 1913, Hewitt's employment with the corporation terminated and the trustees of the estate of Samuel Cupples exercised the option provided for in the aforesaid contract with Hewitt, took up the stock, and delivered one-third of it to Scudder in accordance with the agreement between*1969  the latter and Cupples.  In the latter part of 1917 or early in 1918 the same transactions were had with respect to Snyder's stock.  The contract with Kimbark had previously been rescinded by mutual agreement.  On December 13, 1917, Scudder, desiring to acquire all the stock held under the aforesaid agreements by Hamilton and Rogers, took from them assignments of their interests in such stock and on January 29, 1917, made demand upon the trustees of Samuel Cupples' *1296  estate, one of whom was Albert N. Edwards, the trustee holding the Hamilton and Rogers stock, offering to pay the balance due on the notes given for this stock and requesting certificates for the same.  The securing of 160 additional shares of stock by Scudder would have given him ownership or control of the majority of the stock of the corporation.  The trustees in answer replied that Hamilton and Rogers had breached their several agreements by their attempted sales of the stock, which was thereupon free from the trust agreement, and made offer to pay these parties the respective sums due them under the terms of the agreement.  Thereafter, these trustees, under the will of Samuel Cupples, brought suit*1970  against C. R. Scudder, James A. Rogers, John J. Hamilton, and the Samuel Cupples Envelope Company, claiming a breach of the agreements between Rogers and Hamilton and Samuel Cupples, and asking the court to direct the transfer of the 80 shares of stock held by the trustee under each of the agreements of July 9, 1903, free of any claims of said Rogers and Hamilton.  The court decided for the plaintiffs and directed that the 160 shares of stock in question be delivered by the trustee, Edwards, to the plaintiffs, upon payment by them of the book value of such stock less the amounts remaining unpaid on the notes of Rogers and Hamilton.  The court further required the plaintiffs to deliver one-third of such stock to the defendant, Scudder, upon the payment by him to the plaintiff of the book value thereof as paid to the defendants, Rogers and Hamilton.  This decision was on appeal affirmed by the ). Petitioner's decedent, Clifton R. Scudder, filed his return for 1923 on the cash receipts and disbursements basis.  In that year he paid the sum of $6,549.17, representing attorney's fees and expenses in connection with the litigation above*1971  detailed.  On the return in question he deducted $6,549.17 as representing such attorney's fees and expenses and respondent disallowed this entire amount.  OPINION.  MARQUETTE: The facts are not in dispute.  Petitioner contends that the amounts paid in 1923 by the decedent Scudder, and representing legal fees and expenses pertaining to the litigation detailed in the findings, were business expenses properly to be deducted from gross income.  Respondent contends that they were capital expenditures representing a part of the cost to Scudder of 53 1/3 shares of stock of the Cupples Envelope Company.  The facts show that the expenditures in question were in defending a suit brought against Scudder, together with Hamilton and Rogers, to have declared void a transfer to him by these two parties of 160 *1297  shares of stock.  These particular shares were held in trust under an agreement whereby the Samuel Cupples estate had an option to purchase them under certain conditions.  This estate was obligated in turn if it exercised this option, to sell one-third or 53 1/3 shares to Scudder.  However, Scudder needed more than the 53 1/3 shares to give him control of the company and*1972  so undertook to obtain all of these 160 shares direct from Hamilton and Rogers.  Scudder was unsuccessful in his defense of this litigation, the court voiding the transfer and holding further, as to Hamilton and Rogers, that their attempt to sell the stock was a breach of the contract under which the stock was held in trust and that this gave the right to the Cupples estate to exercise its option and acquire the stock.  We can not see that Scudder, by provoking this litigation and incurring the attendant expense in defending it, acquired anything.  His attempted acquistition of 160 shares of stock from Hamilton and Rogers, and by that the control of the corporation, was unsuccessful and it was in this unsuccessful attempt that the amounts in question were expended.  It is true that as a result of the court's decision in respect to Hamilton and Rogers, that their action in attempting to dispose of the stock gave the Cupples estate the right to exercise its option to repurchase it, Scudder ultimately obtained the right to purchase from the estate 53 1/3 of the 160 shares in question, but this was a right accruing to him under his contract with Samuel Cupples and it does not appear*1973  that the validity of this contract was in issue in the litigation.  It is true that the court recognized in its decree the obligation of the Cupples estate, in the event it exercized the option and reacquired the Hamilton and Rogers stock, to sell one-third of it to Scudder, but it is not indicated that such obligation was denied by the trustees of the estate.  On the other hand, these trustees had recognized this obligation in each case of stock reacquired from other employees and had delivered one-third of it to Scudder.  On the facts we can not conclude that the expenditure in question was an item of the cost to Scudder of the 53 1/3 shares of stock ultimately acquired by him.  On the other hand, it is clear that it was incurred in an unsuccessful effort to defend the validity of a contract through which Scudder would have succeeded in securing 106 2/3 additional shares of Hamilton and Rogers stock, thereby gaining control of the corporation.  Stated in another and shorter way, the expenditure was made in an attempt to acquire 106 2/3 shares of the Hamilton and Rogers stock.  Both the petitioner and the respondent cite and rely upon the case of *1974 , as supporting their respective *1298  contentions.  We are of opinion that neither contention is wholly correct.  The expenditure in question was made in maintaining litigation which if favorable to the petitioner would have resulted in the acquisition by him of a capital asset, and in that event it would have been a part of the cost of that asset. ;; . But the litigation and the attendant expenditure did not result in the acquisition of any asset.  The expenditure was, however, capital in its nature, even though futile, and must be considered as having become a loss in the year in which it was made.  In this view of the transaction we think that the petitioner, in computing his net income for the year 1923, is entitled to deduct the amount of the attorney's fees and expenses paid in connection with said litigation.  Reviewed by the Board.  Judgment will be entered under Rule 50.