APPEAL OF EMERSON ELECTRIC MANUFACTURING CO.

• Decision Date: 19 February 1926
• Docket Number: Docket No. 1010.
• Citation: 3 BTA 932
• Court: U.S. Board of Tax Appeals
• Parties: APPEAL OF EMERSON ELECTRIC MANUFACTURING CO.

3 B.T.A. 932 (1926)

APPEAL OF EMERSON ELECTRIC MANUFACTURING CO.

Docket No. 1010.

Board of Tax Appeals.

Submitted November 17, 1925.

Decided February 19, 1926.

William F. Fahey, Esq., for the taxpayer.

Robert A. Littleton, Esq., for the Commissioner.

Before STERNHAGEN, LANSDON, and ARUNDELL.

This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended September 30, 1920, in the amount of $44,394.46. The deficiency arises from the refusal of the Commissioner to allow as deductions the amount of $104,501.25 paid as brokers' commissions, attorneys' fees, and fees to the State of Missouri incident to the increase in the capital stock of the taxpayer and the issue and sale of certain of its preferred stock.

FINDINGS OF FACT.

The taxpayer was incorporated under the laws of the State of Missouri in September, 1890. Its original capital was $50,000, which was increased to $75,000 in 1892, to $300,000 in 1901, to $600,000, in 1907, to $800,000 in 1917, and to $2,800,000 in November, 1919. Some of the increases in capitalization prior to November, 1919, were due to the issuance of stock dividends. It was the practice of the corporation to charge to expense all expenditures incurred incident to the increase of its capital stock. The greatest expense incident to an increase of its capital stock prior to the increase of November, 1919, did not exceed the sum of $360.

The increase authorized in November, 1919, took the form of 20,000 shares of preferred stock of the par value of $100 each, carrying 7 per cent cumulative dividends. The stock was callable at the option of the taxpayer at the price of $115 per share and accrued dividends to the date of redemption. The firm of Spencer Trask & Co., a copartnership, subscribed for 10,000 shares of the authorized increase in the capital stock of the corporation of the par value of $1,000,000. An agreement existed between the taxpayer and the firm of Spencer Trask & Co. whereby the latter agreed to sell and distribute the $1,000,000 of preferred stock. This agreement was fully complied with, and thereafter, during the taxable year, Spencer Trask & Co. paid to the taxpayer $1,000,000 in cash and received from it $100,000 as a commission for selling and disposing of this stock as agreed.

The taxpayer, during the same year, paid to the law firm of Koerner, Fahey & Young the sum of $3,500, for legal services rendered in connection with its negotiations with Spencer Trask & Co. and the amendment of its charter authorizing an increase of its capital stock.

During the taxable year in question, the taxpayer paid to the State of Missouri, as fees in connection with the amendment of its charter, the sum of $1,001.25, without which payment it would not have been authorized to sell its stock.

The business of the taxpayer had increased to such volume that it was necessary and expedient for it to acquire additional capital, and it procured such capital by the sale of its preferred stock on the advice of its bankers, lawyers, and stockholders. In order to sell such stock, it was necessary for the taxpayer to employ persons engaged in the business of stock selling, as the taxpayer was not familiar with this line of work. Under the laws of Missouri, if the consideration received for stock is cash, cash must be received by the corporation in the full amount of the par value of the stock issued.

DECISION.

The determination of the Commissioner is approved.

OPINION.

ARUNDELL:

The taxpayer claims as a deduction from its gross income for the fiscal year ended September 30, 1920, the amount of $104,501.25 paid for the purposes set forth in the findings of fact. The major item is the sum of $100,000 paid to Spencer Trask & Co. incident to the...