Bishop v. Comm'r of Internal Revenue

Decision Date31 January 1956
Docket Number49941,Docket Nos. 49939,49942,49940,49943.
PartiesCHARLES KAY BISHOP, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

The minority stockholder of a corporation, holding one-third interest, claimed that the holders of the other two-thirds interest who were partners in two other businesses were conducting their partnership businesses in a manner detrimental to the corporation. Held, the fees of attorneys employed to advise the corporation, and who rendered services culminating in an agreement settling the rival claims were properly deductible by the corporation as ordinary and necessary business expense. Held, further, turning over the partnership income to the corporation in the year it was received, constituted the partner's renunciation of their claim of right thereto and resulted in no taxable income to them but was properly reported by the corporation. Carl E. Davison, Esq., for the petitioners.

John H. Welch, Esq., for the respondent.

OPINION.

MULRONEY, Judge:

This consolidated proceeding arises in connection with five petitioners contesting the determination by the Commissioner of deficiencies in income tax, as follows:

+-----------------------------------------------------------------------------+
                ¦Docket¦                                                   ¦Taxable¦          ¦
                +------+---------------------------------------------------+-------+----------¦
                ¦No.   ¦Petitioner                                         ¦year   ¦Deficiency¦
                +------+---------------------------------------------------+-------+----------¦
                ¦49939 ¦Charles Kay Bishop                                 ¦1946   ¦$23,338.13¦
                +------+---------------------------------------------------+-------+----------¦
                ¦49940 ¦Robert C. Bishop and Charles Kay Bishop Trust, C.M.¦1946   ¦23,338.13 ¦
                ¦      ¦Bishop, Trustee                                    ¦       ¦          ¦
                +------+---------------------------------------------------+-------+----------¦
                ¦49941 ¦Robert C. Bishop                                   ¦1946   ¦23,338.13 ¦
                +------+---------------------------------------------------+-------+----------¦
                ¦49942 ¦Pendleton Woolen Mills                             ¦1946   ¦6,755.51  ¦
                +-----------------------------------------------------------------------------+
                
                   1947 4,297.12
                49943 C.M. Bishop  1946 32,243.80
                

The petitioner, Pendleton Woolen Mills, was, in the years 1946 and 1947, an Oregon corporation with its principal place of business in Portland, Oregon. Its returns for the taxable years 1946 and 1947 were filed with the collector of internal revenue at Portland, Oregon. C. M. Bishop, Robert C. Bishop, and Charles Kay Bishop are individuals. The returns for C. M. Bishop, as an individual and as trustee for Robert C. Bishop and Charles Kay Bishop Trust, for the calendar year 1946, were filed with the collector of internal revenue at Portland, Oregon.

All of the facts were stipulated and are accordingly so found.

The following is a summary of the stipulation. Pendleton Woolen Mills, hereinafter called Pendleton, is a corporation, existing since 1909, and engaged in the manufacture of woolen products in the vicinity of Pendleton, Oregon, under the ‘Pendleton’ label. All of the stock was at all times owned by members of the Bishop family. In 1946 Roy T. Bishop owned one-third of the stock and his brother C. M. Bishop owned one-third, and controlled the balance as trustee of the estate of R. C. Bishop, a third brother who died in 1927. The beneficiaries of the trust estate were the sons of R. C. Bishop, deceased, Robert C. and Charles Kay Bishop.

During the years 1946 and 1947, the officers and directors of Pendleton were: C. M. Bishop, president; Roy T. Bishop, vice president; and Robert C. Bishop, secretary. Actually C. M. Bishop was the general manager of Pendleton, and Robert was the garment production manager, advertising manager, and labor relations manager. Charles Kay Bishop and Roy T. Bishop did not participate in the day-to-day management of Pendleton.

Beginning in the year 1936, and continuing until the year 1946, a partnership operating under the name of Pendleton Woolen Mills Garment Factory at Portland, Oregon, hereinafter called the Portland partnership, and from 1941 through 1946 a partnership operating under the name of Pendleton Woolen Mills Plant No. 2, at Los Angeles, California, hereinafter called the Los Angeles partnership, were engaged in the manufacture of woolen sportswear apparel. The said sportswear was marketed under the trade name of ‘Pendleton’ with the same label as that used by Pendleton Woolen Mills in marketing the products manufactured by it, from which it appeared that the products had been manufactured by Pendleton Woolen Mills. The members of the said partnerships were C. M. Bishop, individually as to a one-half interest, and C. M. Bishop, trustee for Robert C. and Charles Kay Bishop Trust, as to the remaining one-half. All of the products manufactured by the two partnerships were sold by the representatives of Pendleton and invoiced and sales price collected by Pendleton, the office force of Pendleton doing much of the paper work of the two partnerships.

Roy T. Bishop, who was a minority stockholder owning one-third of the stock of Pendleton, had no interest in the two partnerships. He became extremely dissatisfied because of these partnership operations, the profits of which were going to the holders of two-thirds of the stock of Pendleton. On September 12, 1945, Roy T. Bishop wrote a letter to C. M. Bishop stating his position as follows:

There is nothing in either the Directors or Stockholders minutes of this Corporation which authorizes or warrants a partnership composed of yourself individually and as trustee for the R. C. Bishop estate, to operate a garment factory under the name of this Corporation. Nor is there anything in the minutes of this Corporation, or was I ever advised or did I ever understand that a garment factory owned by you would be permitted to make a profit through its manufacturing operations with this Corporation.

I have always believed that you were strictly observing the rule that a Director occupied a trust relationship to stockholders and as such a Director would make no personal profit in your dealings with this Corporation. It would appear from your letter that the Pendleton Woolen Mills Garment Factory has made a substantial profit, which has inured to your personal benefit, from its dealings with this Corporation. I am unwilling to countenance this arrangement and hereby protest the use of the Pendleton name in connection with said garment factory and any private or personal profits inuring to your benefit through your dealings on behalf of this Corporation with said garment factory.

The same situation relates with reference to Pendleton Woolen Mills Plant No. 2, and my position as to it is similar.

Paragraph 21 of the stipulation states:

As a result of the claim of Roy T. Bishop and discussions between him and the other directors of Pendleton Woolen Mills, it was agreed on December 21, 1945 that Abe Eugene Rosenberg and V. V. Pendergrass should be employed by the corporation to advise the corporation of its rights, particularly the rights as between Pendleton Woolen Mills and C. M. Bishop, individually and as trustee, with reference to the income of the Portland Partnership and the Los Angeles Partnership.

During the year 1946 Abe Eugene Rosenberg and V. V. Pendergrass worked out a settlement of the matters in controversy which culminated in a written agreement dated December 31, 1946, signed by C. M. Bishop, individually, and C. M. Bishop, trustee, Roy T. Bishop, and Robert C. Bishop. The stipulation outlines much of the work done by the attorneys and states, in part:

Abe Eugene Rosenberg and V. V. Pendergrass had advised the directors of Pendleton Woolen Mills that in their opinion the income of the said partnerships should belong to Pendleton Woolen Mills and that the matters in controversy should be settled and disposed of in the manner as set forth in said agreement of December 31, 1946.

The attorneys were paid $7,500 each by Pendleton, which respondent admits were reasonable charges for their services. Pendleton deducted these amounts in its corporate income tax return for 1946. The respondent contends that the services of the attorneys were for the benefit of the individual stockholders and members of the Bishop family and therefore not...

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