JH Cooper Enterprises v. Commissioner of Int. Rev., 14944.

• Decision Date: 13 September 1954
• Docket Number: No. 14944.,14944.
• Parties: J. H. COOPER ENTERPRISES, Inc., and Joseph H. Cooper Estate, Transferee, Austin C. Keough, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

215 F.2d 723 (1954)

J. H. COOPER ENTERPRISES, Inc., and Joseph H. Cooper Estate, Transferee, Austin C. Keough, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 14944.

United States Court of Appeals Eighth Circuit.

September 13, 1954.

Richard A. Knudsen, Lincoln, Neb. (Arthur F. Driscoll, New York City, Maxwell V. Beghtol, John C. Mason, Kenneth E. Anderson and Roger V. Dickeson, Lincoln, Neb., with him on the brief), for petitioners.

Harry Marselli, Sp. Asst. to Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack and Meyer Rothwacks, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before GARDNER, Chief Judge, and JOHNSEN and COLLET, Circuit Judges.

JOHNSEN, Circuit Judge.

The Tax Court held that J. H. Cooper Enterprises, Inc. was not entitled to a capital-loss deduction, made in its income-tax return for the fiscal year ended June 30, 1948, and that it was accordingly liable for a tax deficiency. The taxpayer has petitioned for review.¹

The taxpayer had claimed the deduction, on the basis of stock owned by it in J. W. Cooper Corporation, representing an investment of $110,000, having become worthless during the tax year involved, and so being entitled to be charged off in its return for that period. The identifiable event, on which it predicated its right taxwise to demonstrate the worthlessness of the stock, was the adoption of a resolution by the board of directors of J. W. Cooper Corporation, in April, 1948, to liquidate and dissolve the corporation. The corporation had ceased carrying on its usual functions in 1946 and had thereafter engaged merely in preserving and attempting to sell its assets.

The Tax Court made a finding that the assets of J. W. Cooper Corporation had a value, over liabilities, on June 30, 1948, of $2,056.75, and that the stock of the corporation therefore "did not become worthless during the petitioner's fiscal year 1948." In arriving at this $2,056.75 margin of excess, in relation to the value of assets and the amount of liabilities which it found, the Tax Court had refused to recognize as a liability, on the part of the corporation, a charge of $2,500 in attorney's fees, set up on its records, for legal services claimed to have been rendered to it, up to that time, in litigation brought by a third party asserting title to an interest in some lands, of which the corporation was the record owner.

Thus, the Tax Court's determination that the stock of J. W. Cooper Corporation was not worthless, and that petitioner therefore could not make deduction on account of it, rested on the narrow basis of rejecting the $2,500 attorney-fee charge as a corporate obligation or liability. If the $2,500 was unwarrantedly rejected as a liability, then necessarily the finding that the corporation had assets on June 30, 1948, of $2,056.75 in excess of its liabilities, on which margin its stock could be regarded as not having been worthless, would automatically fall.²

The case has been submitted to us on the same narrow basis that it was considered and disposed of by the Tax Court — the question presented by petitioner being simply whether, on the evidence in the record, the Tax Court legally was warranted in making rejection of the $2,500 attorney-fee charge, as having been without any basis of obligation or liability on the part of the corporation.³

The evidence relating to the question is not as explicitly developed as it might have been — a not uncommon fault in many of the tax cases that come before us. The record shows, without dispute, that Joseph H. Cooper was, at the time of his death in 1946, the owner of all the shares of stock of J. H. Cooper Enterprises, Inc., the petitioner here, and also, as the Tax Court said, the owner directly or indirectly, of all the shares of stock of J. W. Cooper Corporation. It further undisputedly establishes that the principal asset of J. W. Cooper Corporation was a 76 per cent interest in 880 acres of land, near Millbrook, New York, to which the corporation held record title; that after administration was commenced of the estate of Joseph H. Cooper in 1946, his widow, who had been separated from him for many years, filed a petition in the Surrogate's Court of Duchess County, New York, where the administration was being had, to have it decreed that title to the real estate referred to, embracing J. W. Cooper Corporation's record interest, had become vested in her, under a provision of Joseph H. Cooper's will, devising to her any home in which they might be living at the time of his death;⁴ that the widow had carried this litigation through the Surrogate's Court and the Appellate Division of the Second Department of the State of New York, with unsuccessful result, and had thereafter made application for leave to appeal to the New York Court of Appeals, which was denied; and that it was in relation to this litigation, up to and including the disposition made by the Appellate Division, that J. W. Cooper Corporation had set up an accrued liability against itself for $2,500 attorney's fees.

The Tax Court recognized in its opinion that the litigation had involved "title to the property;" that it had operated to prevent J. W. Cooper Corporation from making any market sale of the real estate and so carrying out the directed dissolution of the corporation, during its pendency; and that, after the litigation was ended, and the corporation's title thus was left standing clear, the corporation had been in a position to make, and had effected, market disposition of the land.

In rejecting the $2,500 attorney-fee charge as a corporate liability, however, the Tax Court, as we read its opinion, took the view that the litigation brought by the widow was merely against Joseph H. Cooper's estate; that, though J. W. Cooper Corporation was the legal title-holder of the property, the corporation had not been made a party to the suit nor been involved as such in any way; and that there thus was no basis for any attorney-fee obligation to have come to exist against the corporation out of the litigation. The opinion of the Tax Court said: "The record shows that the widow sued the estate. We do not see why the Cooper Corporation should be liable for the fee."

As has been indicated above, it is true that the record does not establish, with explicit legal formality, that J. W. Cooper Corporation was a defendant in the litigation. On this aspect, the taxpayer apparently took it for granted that it naturally would be assumed that the corporation, as record owner, constituted a necessary party, and would conventionally...