Menihan v. Commissioner of Internal Revenue
| Citation | 79 F.2d 304 |
| Decision Date | 29 July 1935 |
| Docket Number | No. 377.,377. |
| Parties | MENIHAN v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Jacob Ark, of Rochester, N. Y., for appellant.
Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and J. P. Jackson, Sp. Assts. to Atty. Gen., for appellee.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
In 1924, the petitioner, a resident of Rochester, N. Y., was president of the Menihan Company, a New York corporation, engaged in the business of manufacturing ladies' shoes. The corporation's capital stock consisted of 500 shares, of which the petitioner owned 497 and controlled the other 3, which stood in the name of his nominees for qualification purposes. During the three years immediately preceding, the corporation had expanded rapidly, and in 1924, because of a serious strike in one of its plants coupled with adverse trade conditions, it had become insolvent. The petitioner had indorsed its notes and guaranteed its accounts to the amount of $655,695.14 and had also become insolvent.
With the affairs of his corporation and himself in this situation, he applied to creditors for an adjustment in an endeavor to avoid bankruptcy proceedings and save the business if possible. A creditors' committee was formed to which he transferred all the Menihan Company stock to enable it to assume complete control of the business. A voting trust agreement was subsequently made under which the stock was held. The creditors' committee took over the business and employed the petitioner to manage it at a salary plus a percentage of the net profits above an amount stated. A plan of reorganization was finally agreed to by all concerned which provided that the bank creditors of the corporation should receive, in full satisfaction of the liability of the corporation on their claims, bonds of the corporation of the face value of 50 per cent. of their claims secured by a mortgage upon the real estate of the corporation subject to existing liens, and that all other creditors should accept the promissory notes of the corporation to the amount of 50 per cent. It was agreed that the voting trust should continue for the protection of the creditors until the bonds and notes were paid in full. The petitioner also agreed that the acceptance by creditors of the corporation's offer of compromise "shall in no wise lessen, modify, alter or release me from any liability on account of any endorsement or guaranties which I may have heretofore given on account of the Menihan Company." The petitioner reached an agreement with the creditors of the corporation holding paper he had indorsed or claims he had guaranteed to pay 15 per cent. of those debts in full discharge of his personal liability upon the express condition that his payment of the 15 per cent. should not be made the basis of any claim by him against the company. To secure the payment of notes he gave to pay 15 per cent. of such claims, the petitioner executed and delivered to the Union Trust Company of Rochester a deed of trust dated October 1, 1924, though not formally executed until June 30, 1925, which covered his home, ten notes of the Menihan Company, each for $2,732.71, which had been given him on account of his payment of debts of the corporation out of his own funds, the voting trust certificate for the stock he had transferred to the creditors' committee, and a one-half interest in the bonus he might receive under his employment contract as manager of the corporation. Upon his payment of the notes, the property so placed in trust was to be returned to him.
The petitioner paid $12,877.36 in 1925 on account of the agreement to pay the 15 per cent. to discharge his liability as indorser or guarantor for the corporation. He claimed this amount as a deductible loss for that year, and the Commissioner allowed it. In 1926 he paid $16,469.34, and in 1927 $68,645.09, for a like purpose, and claimed a deductible loss in each year of the amount so paid. The Commissioner disallowed both of these deductions on the ground that the payments were capital contributions rather than losses. The decision of the Board of Tax Appeals sustaining the disallowance of the deductions is here for review.
In 1927 the Menihan Company itself had outstanding notes and bonds which it had given its creditors under the 50 per cent. compromise agreement which required $68,769.96 for their redemption. The petitioner in that year advanced $78,769.96 to the corporation which was used to retire the bonds and notes and to give him a credit of $10,000. He treated this advance as a capital expenditure for which he claimed no deduction. By such advance and the payment of his obligation to the extent of 15 per cent. of the corporation's debts, he succeeded in having the compromise settlement with creditors fully carried out and regained his...
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