Chenango Textile Corp. v. Comm'r of Internal Revenue

Citation1 T.C. 147
Decision Date01 December 1942
Docket NumberDocket No. 104873.
PartiesCHENANGO TEXTILE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

1. In 1929 petitioner purchased certain securities from one of its stockholders, agreeing to pay the purchase price 20 years later, with interest at 5 2/5 percent annually. A substantial portion of the securities was sold shortly thereafter. In 1935, in settlement of a suit by three of its stockholders charging that the original articles of incorporation, asking a return of all amounts paid in connection therewith, and for an order prohibiting any future payments, the petitioner and the vendor stockholder canceled the original agreement, the petitioner returning the unsold securities and, with respect to those which had been sold, the equivalent in cash as of the date of settlement, which amount was substantially less than the amount of the purchase price of the said securities under the original agreement. Held, that petitioner realized taxable gain in the year of settlement on the securities previously sold and that the settlement price is the basis for determining such gain.

2. At the time of the cancellation of the original agreement certain amounts due thereunder as interest remained unpaid, which amounts had been accrued in the years 1932, 1933, and 1934 on petitioner's books and deducted on its income tax returns for those years, but such deductions did not effect an offset of taxable income, since the reported net loss for each year substantially exceeded the deduction claimed for accrued but unpaid interest. Held, that the unpaid interest so voided does not constitute taxable Loan & Investment Co., 39 B.T.A. 981.

3. Respondent's disallowance of certain attorney fees as business expense deductions is sustained. C. Addison Keeler, Esq., for the petitioner.

Henry C. Clark, Esq., for the respondent.

The respondent determined deficiencies in income and excess profits taxes for the year 1935 in the respective amounts of $43,368.34 and $15,282.85. The question presented is whether there was a gratuitous forgiveness of indebtedness owing by petitioner to one of its stockholders or merely a reduction in the purchase price of securities previously acquired from the said stockholder, and whether under either circumstance income was realized by petitioner. A second question is whether amounts paid or accrued as attorney fees constituted ordinary and necessary business expense deductions.

FINDINGS OF FACT.

A substantial portion of the facts has been stipulated and is found as stipulated.

Petitioner, a New York corporation, was organized in 1922. It filed its income and excess profits tax return for the year 1935 with the collector of internal revenue for the third district of New York. Its books were kept on the accrual basis at all times material to this proceeding.

On April 29, 1929, petitioner's outstanding capital stock consisted of 6,652 preferred shares with a par value of $100 per share and 35,332 no par value common shares. On that date and prior thereto Josephine Ruegg Till (formerly Josephine Ruegg) was the owner of 2,179 of the preferred shares and her son, Erhart Ruegg, was the owner of 34 of the preferred and 26,339 of the common shares. At all times from 1929 through 1936 Erhart Ruegg was treasurer of petitioner and Frank Lynch was its secretary.

Petitioner and a predecessor corporation had engaged in the silk manufacturing business since 1902. Alfred Ruegg, the former husband of Josephine Ruegg Till and the father of Erhart Ruegg, together with Lynch, had been in control of the business since that time. Alfred Ruegg died in 1923.

Petitioner's bylaws, adopted in December 1922, authorized the board of directors to appoint an executive committee composed of two or more directors and empowered to exercise all the powers of the board delegated to it. On August 13, 1923, the board appointed Erhart Ruegg and Lynch to constitute the executive committee, with authority to exercise all the powers of the board when it was not in session. Thereafter and continuously through the year 1934 the committee, consisting of these two directors, met regularly and exercised the powers so delegated to it. Its authority was not to terminate until revoked by the board.

During a few years immediately prior to 1928, and due largely to the advent of rayon, the petitioner's business had declined to the extent that its current earnings were insufficient to pay the dividends on its preferred stock, although its earnings theretofore had always been adequate. Petitioner's bankers, E. Naumberg & Co., were of the opinion that the petitioner should purchase stocks. The said banking concern had organized Chain Store, and recommended its stock as the type of investment petitioner should acquire. Upon that recommendation, in December 1928, petitioner first started purchasing corporate stocks. Between then and April 1929 it purchased the following stocks at a total cost of $511,375:

+----------------------------------+
                ¦3,000¦Shares Chain Store  ¦$75,000¦
                +-----+--------------------+-------¦
                ¦3,500¦Shares Goldman-Sachs¦403,975¦
                +-----+--------------------+-------¦
                ¦300  ¦Shares Radio        ¦32,400 ¦
                +-----+--------------------+-------¦
                ¦     ¦                    ¦511,375¦
                +----------------------------------+
                

The shares were purchased through brokers and by April 1, 1929, there had been paid on the purchase price $278,200 in cash and $49,855 from the proceeds of the sale of 500 shares of Goldman-Sachs stock, leaving a balance due the brokers, after minor adjustments of interest and dividends, of $183,221.55.

Ruegg and Lynch, as the executive committee of petitioner, concluded that additional funds were needed in connection with the securities purchase program, and, knowing that Mrs. Till had outside capital, approached her with the idea of taking over her securities for the business. Ruegg handled his mother's business affairs and in such matters she always did what he advised. On April 29, 1929, Mrs. Till sold to petitioner her 2,179 shares of its preferred stock for $221,615 and a block of stock of other corporations for $428,385, or a total selling price of $650,000, which was substantially the then market value of the stock sold. The day following, she delivered the stocks to petitioner, receiving its receipt therefor, wherein petitioner acknowledged that it was indebted to her in the amount of $650,000 on account of such purchase. One week later, on May 6, 1929, petitioner and Mrs. Till executed a written agreement covering the above described purchase and sale of corporate stock and the payment of the purchase price, and reading in part as follows:

ARTICLES OF AGREEMENT, made this Sixth day of May, A.D. One Thousand and Nine Hundred and Twenty-nine (sic.) (1929), between Josephine Ruegg, now residing in the City of New York and State of New York, hereinafter called the party of the first part, and Chenango Textile Corporation, a corporation organized under the laws of the State of New York, with its principal office in the City of Binghampton and State of New York, hereinafter called the party of the second part.

First. The said party of the first part, for and in consideration of the sum of one dollar, by the party of the second part to the party of the first part, in hand paid, at and before the sealing and delivery of these presents, the receipt whereof is herewith acknowledged, and for the further consideration of the sum of six hundred fifty thousand dollars ($650,000.00) to be paid on the First day of October, A.D. One Thousand Nine Hundred and Forty-nine (1949), with interest as hereinafter mentioned, has granted, conveyed, bargained, sold, assigned and delivered, and by these presents, does grant, convey, bargain, sell, assign and deliver unto the said party of the second part, its successors, and assigns, all her right, title and interest in and to the securities described in paragraph Second thereof, together with the appurtenances, and all the estates and rights of the party of the first part hereto, provided, however, that if any time before the date fixed for the payment of the principal sum as aforesaid, Erhart Ruegg, son of the party of the first part, shall cease to be Treasurer of Chenango Textile Corporation, party of the second part, either by death, resignation, removal by Board of Directors, or otherwise, or if at any time default shall be made in payment of interest herein provided for space of ninety days after any payment thereof shall fall due, then the aforesaid principal sum shall become due and the payment of the same with interest, as aforesaid, besides costs of suit, may be enforced and recovered at once.

TO HAVE AND TO HOLD, all and singular, the above granted and described securities unto the said party of the second part, its successors and assigns forever.

Third. The party of the second part agrees to pay interest to the said party of the first part upon said principal sum mentioned in paragraph First at the rate of five and two-fifths (5 2/5) per cent per annum, in quarterly installments, on the 1st day of January, April, July and October, of each year until the said principal sum is due and payable. The said interest period shall commence on the First day of October, A.D. One Thousand Nine Hundred and Twenty-Nine (1929), and the first quarterly installment shall be due and payable hereunder on the First day of January, One Thousand Nine Hundred and Thirty (1930). And the said party of the second part further agrees to pay the said principal sum of six hundred fifty thousand ($ 50,000.00) dollars on the first day of October, A.D. One Thousand Nine Hundred and Forty-Nine (1949).

At a meeting held on May 6, 1929, petitioner's board of directors resolved that the 2,179 shares of its preferred stock acquired from Mrs. Till be held as treasury stock; that the said shares and all other stocks...

To continue reading

Request your trial
5 cases
  • Lomas & Nettleton Co. v. United States
    • United States
    • U.S. District Court — District of Connecticut
    • 27 August 1948
    ...also cite in opposition to these deductions Knight-Campbell Music Co. v. Commissioner, 10 Cir., 155 F.2d 837, and Chenango Textile Corp. v. Commissioner, 1 T.C. 147, affirmed 2 Cir., 148 F.2d 296. But in both of these cases, the only counsel fees payments for which were held non-deductible ......
  • Ringmaster, Inc. v. Commissioner
    • United States
    • United States Tax Court
    • 6 August 1962
    ...... 433(a)(1)(N) and 433(a)(1)(O) of the Internal Revenue Code of 1939; .         (4) ...13,683(M); Skenandoa Rayon Corp. v. Commissioner 41-2 USTC ¶ 9631, 122 F. 2d ... Chenango Textile Corporation v. Commissioner 45-1 USTC ¶ ......
  • Birmingham Terminal Co. v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • 17 December 1951
    ...(C.A. 2), 146 F.2d 553, 555-556, affirmed on another question, 326 U.S. 287; Main Properties, Inc., 4 T.C. 364, 380; Chenango Textile Corporation, 1 T.C. 147, 160, affirmed in part and reversed in part on other grounds (C.A. 2), 148 F.2d 296; Barnhart-Morrow Consolidated, 47 B.T.A. 590, 600......
  • C. LUDWIG BAUMANN & CO. BROOKLYN v. Commissioner
    • United States
    • United States Tax Court
    • 28 May 1943
    ...entry on its accounts and in its tax return, no tax benefit would have resulted as petitioner had no taxable income in 1932. Chenango Textile Corp., 1 T. C. 147, 160 Dec. 12,895; Barnhart-Morrow Consolidated, 47 B. T. A. 590, 600 Dec. On this issue petitioner is sustained. Decision will be ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT