Court Opinion

ID: 4608514
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:53.111321+00
Date Added: 2024-06-11T07:53:43.278412
License: Public Domain

NORTH STAR GRANITE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.North Star Granite Corp. v. CommissionerDocket No. 37299.United States Board of Tax Appeals21 B.T.A. 222; 1930 BTA LEXIS 1894; November 6, 1930, Promulgated *1894  1.  DEDUCTION - AS BUSINESS EXPENSE OR LOSS. - The petitioner was organized as a result of the consolidation of four corporations, the assets and liabilities of which were transferred to petitioner.  Held that the payment by petitioner of the liability incurred by each of the old corporations for an audit and an appraisal prior to the consolidation did not constitute a business expense or a loss.  2.  Id. - Held that amount paid to an accountant employed by petitioner for an audit of its books and records, including those taken over from the four old concerns, constituted a deductible business expense.  Henry A. Johnson, Esq., for the petitioner.  B. M. Coon, Esq., for the respondent.  TRUSSELL *222  The respondent has determined a deficiency in the amount of $1,509.19 in this petitioner's income tax for the year 1925, and the greater portion thereof is in controversy in this proceeding.  The petitioner assigns as error the respondent's disallowance of a deduction for fees paid for a certain audit and appraisal and fees paid to an accountant for services rendered.  FINDINGS OF FACT.  The petitioner is a corporation engaged in the*1895  production of granite at St. Cloud, Minn.*223  In 1924 and prior thereto the following corporations were engaged in the granite business at St. Cloud: Campbell North Star Granite Co., Pioneer Granite Co., Great Northern Granite Co., Alide Sawing Co. (which was owned and operated jointly by the three former companies), Granite City Granite Co., and A. M. Simmers & Sons, Inc.  In the summer of 1924 it was proposed that the said six companies be consolidated, but it was found necessary to secure a loan of several hundred thousand dollars if the consolidation were to be carried to a successful conclusion.  The six companies approached Lane, Piper & Jaffray relative to a bond issue by the proposed consolidated corporation and that concern requested an appraisal of the assets by the American Appraisal Co. and an audit of the accounts of each of the six companies by Arthur Anderson & Co.  The appraisal and audit were completed and a report thereof submitted to each of the six companies about the 15th day of November, 1924, and at or about the same time Lane, Piper & Jaffray advised the said companies that the proposed bond issue could not be floated because the earnings of the*1896  group as a whole were not sufficient.  The fee charged for the appraisal of the six companies amounted to $2,922.86, which was prorated among them in proportion to the value of their respective assets.  The fee charged for the audit of the six companies amounted to $4,069.60, which was prorated among them in proportion to the amount of work performed for each company.  The Granite City Granite Co. and A. M. Simmers & Sons, Inc., withdrew from the proposed consolidation and each paid or made arrangement for the payment of their respective proportions of the appraisal and audit fees.  Within one or two days after Lane, Piper & Jaffray had refused to float the desired bond issue, the Campbell North Star Granite Co., Pioneer Granite Co., Great Northern Granite Co., and the Alide Sawing Co. agreed to consolidate on the basis of the book values of their respective assets and without reference to or use of the above-mentioned appraisal and audit, which were discarded at that time and have not been used since for any purpose.  On December 1, 1924, the petitioner was organized as a result of the consolidation of the said four companies and the petitioner's stock was issued to the stockholders*1897  of the old companies.  The petitioner opened a new set of books showing the consolidated assets and liabilities of the four old companies as shown by their books on November 30, 1924.  The petitioner assumed the liabilities of the four old companies and paid in cash their respective proportions of the charge for the appraisal, and, as to their respective proportions of the charge for the audit, petitioner paid $1,000 in cash and executed three promissory notes for $1,000 each.  The notes were paid *224  during 1925.  The amounts so paid by petitioner were charged to expense.  Curtis Wise, a public accountant who had audited the books of the Campbell North Star Granite Co. since 1920, was employed by the petitioner to make an audit of its books and records, including those taken over from the four old companies which consolidated; to prepare income-tax returns for 1924 for the said four companies; to open a new set of books for the petitioner, and to make the first quarterly audit of petitioner's books in 1925.  The basis on which the four companies were consolidated had been determined and the consolidation had been perfected prior to the employment of Wise, who took no part*1898  in the organization of the petitioner.  In making his audit, Wise made no reference to the appraisal by the American Appraisal Co. nor the audit by Arthur Anderson & Co., but referred only to the books and records of the companies.  The petitioner gave Wise an advance $300of on January 31, 1925; and another advance of $150 on Februjary 28, 1925; and on May 2, 1925, petitioner paid Wise the sum of $1,025.37 upon the submission of his final bill for all of the said services rendered.  The amount of $1,475.37 paid to Wise was charged to expense.  In determining the deficiency in controversy the respondent has, inter alia, disallowed as a deduction the amount of $8,742.16 and has based his disallowance on the ground that the expenses totaling such amount constituted organization expense.  Included in the said amount is the $8,467.83 in controversy in this proceeding and also an additional sum of $274.33 about which no issue has been raised.  OPINION.  TRUSSELL: The petitioner contends that the amounts which it paid to the appraisal and audit companies were not organization expenses because the appraisal and audit were not used for any purpose in the consolidation of the four*1899  granite companies after the proposed bond issue had not materialized.  Petitioner further contends that the appraisal and audit were made solely for the use of Lane, Piper & Jaffray, that petitioner has never made any use thereof, and that the amounts paid by petitioner to the American Appraisal Co. and Arthur Anderson & Co. constituted either a business expense or a loss to petitioner.  The record establishes that the total cost of the appraisal and audit amounted to $6,992.46 for the six companies included in the proposed consolidation and that such cost was prorated among all six.  The record does not show for what amount each company became individually liable, nor does it show exactly what amount the petitioner paid in settlement of the liabilities of the four companies *225  which consolidated and formed the petitioner.  However, the record clearly establishes that the amounts paid by petitioner to the American Appraisal Co. and Arthur Anderson & Co. were paid in settlement of the individual liability of each of the four companies incurred by each of them prior to the consolidation and that the expenditure was not an expense incurred in the carrying on of the petitioner's*1900  business or a loss sustained by this petitioner, within the meaning of sections 234(a)(1) and 234(a)(4), of the Revenue Act of 1926, which sections became effective as of January 1, 1925, pursuant to section 286 of the said act.  With respect to the amount of $1,475.37 paid to Curtis Wise by the petitioner during 1925, and claimed by petitioner as a proper deduction in that year as a business expense, the record establishes that prior to the employment of Wise by petitioner the consolidation of the four companies had been perfected on the basis of their respective book values on November 30, 1924, and that Wise took no part in the organization of the petitioner.  The testimony is that the audit made by Wise in no way affected the basis of consolidation agreed upon by the four companies nor the proportions of petitioner's stock issued to the stockholders of the said companies prior to the employment of Wise.  We are of the opinion that the amount of $1,475.37 paid to Wise did not constitute an organization expense, but rather an ordinary and necessary business expense and deductible as such, which the meaning of section 234(a)(1) of the Revenue Act of 1926.  The petitioner made*1901  the said expenditure for an audit of its accounts, which, in view of the recent consolidation of four going concerns and the continuation of their business enterprises, included the accounts of its four predecessor corporations, and such audit amounted to no more than the usual annual audit made by many concerns whose businesses continue from year to year.  Wise was employed for the purpose of making an audit for the petitioner and the fact that the services for which he was paid $1,475.37 included the preparation of the tax returns of the four predecessor corporations does not change the character of the said item as a business expense, for the petitioner had taken over all of the assets and the books and records of the four old corporations, and, further, it was incumbent upon petitioner to pay the income taxes determined to be due from the said companies for 1924.  Judgment will be entered pursuant to Rule 50.