Ringmaster, Inc. v. Commissioner

• Decision Date: 06 August 1962
• Docket Number: 73985.,Docket No. 73984
• Citation: 1962 TC Memo 187,21 TCM (CCH) 1024
• Parties: Ringmaster, Inc. (Formerly Vevier Loose Leaf Company) v. Commissioner. Irving S. Federbush and Sylvia C. Federbush v. Commissioner.
• Court: U.S. Tax Court

21 T.C.M. (CCH) 1024 (1962)

T. C. Memo. 1962-187.

Ringmaster, Inc. (Formerly Vevier Loose Leaf Company) v. Commissioner.

Irving S. Federbush and Sylvia C. Federbush v. Commissioner.

Docket Nos. 73984, 73985.

United States Tax Court.

Filed August 6, 1962.

Burnett Schwartz, Esq., for the petitioners. Robert A. Roberts, Esq., for the respondent.

Memorandum Findings of Fact and Opinion

WITHEY, Judge:

Respondent determined deficiencies in the income tax of petitioners for the years and in the amounts as follows:

                  ----------------------------------------------------------------------------------
                                                                         Taxable
                      Docket No.            Petitioner                  year ended    Deficiency
                  ----------------------------------------------------------------------------------
                       73984        Ringmaster, Inc. (formerly Vevier
                                      Loose Leaf Company)                11/30/52     $8,268.41
                                                                         11/30/53      8,463.69
                       73985        Irving S. Federbush and Sylvia C.    12/31/52        515.38
                                      Federbush                          12/31/53      3,921.11
                  ----------------------------------------------------------------------------------
                

At the trial, these cases were consolidated for trial and decision.

The issues presented for our decision are:

(1) Whether legal fees in the amount of $2,000 and expenses in the amount of $51.69 incurred by Ringmaster, Inc., during the taxable year ended November 30, 1950, in connection with its reorganization are deductible;

(2) Whether petitioner Ringmaster, Inc., incurred an allowable deduction for bad debts during the taxable year ended November 30, 1952, in the amount of $13,541.65;

(3) Whether certain fees incurred by Ringmaster, Inc., during the taxable years ended November 30, 1951, November 30, 1952, and November 30, 1953, constitute interest within the meaning of sections 433(a)(1)(N) and 433(a)(1)(O) of the Internal Revenue Code of 1939;

(4) Whether a deduction claimed by Ringmaster, Inc., for "brokerage fees" for the taxable year ended November 30, 1952, included $2,100 of expenses that was incurred and therefore accrued during a prior taxable year;

(5) Whether the expenditures by Ringmaster, Inc., for "legal fees" during the taxable years ended November 30, 1952, and November 30, 1953, in the respective amounts of $2,000 and $6,000 are deductible;

(6) Whether amounts claimed by petitioners Irving and Sylvia Federbush on their joint return for the taxable year 1952 for legal expense in the amount of $1,400 constitute ordinary and necessary expense within the meaning of section 23(a) of the 1939 Code;

(7) Whether Irving and Sylvia Federbush received income during the taxable year 1952 in the amount of $330.08 which they failed to report on their joint return for that year; and

(8) Whether petitioner Sylvia Federbush realized constructive dividends during the taxable years 1952 and 1953 in the total amounts of $2,000 and $12,240.07, respectively, by reason of the redemption of her preferred stock at par value of $17,900 and the payment by Ringmaster, Inc., of certain legal fees on her behalf in the amount of $8,000.

General Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Petitioner Ringmaster, Inc., was incorporated under the laws of the State of Missouri on December 10, 1946, as the Vevier Loose Leaf Company and operated under that name until June 3, 1955, when its name was changed to Ringmaster, Inc. During the years in issue Ringmaster, Inc., sometimes hereinafter referred to as Ringmaster or the corporation, was engaged in the manufacture and sale of loose-leaf binders with its principal office located in St. Louis, Missouri.

Ringmaster's income tax returns for the fiscal years ended November 30, 1950, 1951, 1952, and 1953, were filed with the director of internal revenue at St. Louis, Missouri.

Ringmaster kept its books and filed its returns on an accrual method of accounting.

Petitioners Irving S. and Sylvia C. Federbush are husband and wife residing in St. Louis, Missouri. They originally filed separate returns for 1952 and 1953 with the director at St. Louis, Missouri. On March 13, 1956, Irving S. and Sylvia C. Federbush, sometimes hereinafter individually referred to as Irving and Sylvia, filed a joint return for each of the years 1952 and 1953 with the director at St. Louis, Missouri.

On September 30, 1949, Ringmaster filed a petition with the United States District Court for the Eastern District of Missouri for reorganization under Chapter X of the Bankruptcy. Act. On April 28, 1950, Ringmaster filed with the court a proposed plan of reorganization. By order entered August 16, 1954, the United States District Court confirmed Ringmaster's proposed plan of reorganization as amended by orders entered therein on June 12, 1950, and July 20, 1950. This plan provided, in part, as follows:

The Debtor, Vevier Loose Leaf Co., proposes the following Plan of Reorganization. This Plan is based upon a commitment of capital in the sum of $8,500.00, which sum is sufficient to provide Debtor with the necessary funds to make all cash payments designated in the Plan, together with a balance which, after confirmation of the Plan, may be used by the Debtor as additional working capital. * * *

During the period April 28, 1950, to August 16, 1950, Ringmaster filed a report with the United States District Court entitled "Preliminary Report of Progress in Carrying Out Plan of Reorganization" which provided, in part, as follows:

Treatment of Additional Capital

The persons advancing funds to the debtor under the provisions of the Plan of Reorganization agreed to accept preferred stock of the Debtor in lieu of the promissory notes originally provided for in the Plan, thus subordinating their claims to all claims of creditors. Accordingly, and with the consent of the other preferred and common stockholders, 200 shares of such preferred stock were issued, at par, for the amount of such advances, aggregating $20,000.00, including the $8,500.00 specifically provided for under paragraph I of the Plan.

On September 15, 1950, the United States District Court entered its "Final Decree" in the matter involving the corporate reorganization of Ringmaster under Chapter X of the Bankruptcy Act. This decree provided, in part, as follows:

IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED:

1. That the report of the Debtor respecting the acts done by it in connection with the consummation of the Plan of Reorganization be and the same hereby is in all respects approved.

2. That the Debtor be and it is hereby discharged of all its debts and liabilities, except as provided in the Plan of Reorganization and in the order of confirmation thereof entered August 16, 1950.

3. That the rights and interests of stockholders of the Debtor are hereby subjected to the Plan of Reorganization.

4. That all creditors of, claimants against, and stockholders of the Debtor, wheresoever situated or domiciled, are hereby restrained and enjoined from pursuing or attempting to pursue, and from commencing any suits or other proceedings at law, in equity or otherwise, against the Debtor or any assets or property of the Debtor, directly or indirectly, on account of or based upon any right, claim or interest which such creditor, claimant or stockholder may have had in, to or against said Debtor, except only with respect to such liabilities and claims as the Debtor has expressly assumed or agreed to pay, pursuant to the terms and provisions of said Plan of Reorganization confirmed by order entered herein on August 16, 1950.

As of August 21, 1950, the authorized capital stock of Ringmaster consisted of 500 shares of preferred stock, none of which was outstanding, and 20,000 shares of common stock, 8,500 shares of which were issued and outstanding and were registered in the names of Elwyn C. and Hortense J. Vevier.

On August 22, 1950, 8,500 shares of the common stock of Ringmaster, represented by stock certificates numbered 36 through 44, were issued to Sylvia in substitution for the 8,500 shares of common stock, represented by stock certificates numbered 1 through 35, heretofore issued to Elwyn and Hortense Vevier. Ringmaster also issued on August 22, 1950, 200 shares of its preferred stock to Sylvia.

The above-mentioned 200 shares of preferred stock were issued to Sylvia Federbush at par value of $100 per share in consideration of advances by her to Ringmaster in the amount of $20,000.

Throughout each of the years here involved, Sylvia owned all of the outstanding stock of Ringmaster and was in complete control thereof. She also had complete control of petitioner's books and records at all times here material.

Issue 1. Legal Fees (Reorganization).

Findings of Fact

The law firm of Fordyce, Mayne, Williams and Hartman represented Ringmaster before the United States District Court in connection with its corporate reorganization under Chapter X of the Bankruptcy Act.

On August 16, 1950, and September 15, 1950, the District Court granted the above-named law firm legal fees totaling $2,000 and related expenses in the amount of $51.69 for services rendered Ringmaster in connection with its reorganization.

The above-mentioned legal fees and attendant expenses in the aggregate principal amount of $2,051.69 were deducted by Ringmaster on its income tax return for the taxable year ended November 30, 1950.

The respondent disallowed in full the deduction for legal fees and expenses claimed by petitioners in the amount of $2,051.69 on its return for the year ended November 30, 1950.

Opinion

Petitioner Ringmaster, Inc., contends that the deduction claimed by it for legal fees and legal expenses on its return for its fiscal year ended November 30, 1950, and carried forward to its fiscal year ended November 30, 1952, as part of its net...