Simmons Co. v. Commissioner of Internal Revenue

• Decision Date: 31 May 1929
• Docket Number: No. 2322.,2322.
• Citation: 33 F.2d 75
• Parties: SIMMONS CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

33 F.2d 75 (1929)

SIMMONS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2322.

Circuit Court of Appeals, First Circuit.

May 31, 1929.

Phillips Ketchum and Merrill G. Hastings, both of Boston, Mass. (Herrick, Smith, Donald & Farley, of Boston, Mass., on the brief), for petitioner.

Allin H. Pierce, of Washington, D. C. (Mabel Walker Willebrandt, Asst. Atty. Gen., J. Louis Monarch and Andrew D. Sharpe, Sp. Asst. Attys. Gen., and C. M. Charest, General Counsel Bureau of Internal Revenue, of Washington, D. C., on the brief), for respondent.

Before BINGHAM and ANDERSON, Circuit Judges, and HALE, District Judge.

ANDERSON, Circuit Judge.

On December 15, 1924, the Commissioner of Internal Revenue notified the petitioner of deficiencies in its income and profits taxes for 1919 of $222,319.71, and for 1920 of $61,327.77. On appeal to the Board of Tax Appeals, the deficiencies for 1919 and 1920 were redetermined as $188,383.20 and $29,298.62, respectively. On appeal to this court, the main contentions are: That commissions paid by the taxpayer on the sale of its own capital stock are, under section 234(a) (1) of the Revenue Act of 1918, chap. 18, 40 Stat. 1057, 1077, "deductible as ordinary and necessary expenses incurred * * * in carrying on" its "trade or business"; and that, if not so deductible, such commissions should be included as part of its invested capital under section 326(a), 40 Stat. 1092. Thus included, they increase the amount on which the taxpayer is entitled to normal profits, and hence tend to reduce its tax.

The facts out of which this appeal grows are as follows: In 1917 the petitioner issued 20,000 shares of preferred stock ($2,000,000 par value), which were sold to bankers for $87.50 per share. The bankers sold this stock to the public at $95 per share. The corporation actually received $1,750,000. It charged the difference of $250,000 as an expense.

In August, 1919, the petitioner redeemed the entire 20,000 shares at $110, and made a new issue of 70,000 shares, paying the bankers $525,255 in connection with the sale of this stock. This sum was also charged as an expense. This stock was in part sold to the public at $97 per share, and in part exchanged for the old issue on terms not now material.

Deducting the discount of three points on 70,000 shares ($210,000), the net commission to the bankers was $315,255. This sum, petitioner strenuously urges, should be deducted from its gross income for 1919 as an "ordinary and necessary" expense within the meaning of section 234(a), supra.

1. The Board adhered to its previous rulings in the appeal of Charles H. Lilly Co., 2 B. T. A. 1058, and Emerson Mfg. Co., 3 B. T. A. 932; and held that bankers' commissions paid for a sale of shares were not deductible as "ordinary and necessary expenses in carrying on the business."

We think this ruling was right, for the reasons adequately stated in the Emerson Mfg. Co. Case, 3 B. T. A. 932. While expenses for organization or for obtaining additional capital are frequent in growing and successful enterprises, we think it clear that they are not "ordinary and necessary expenses" in the productive operations of such concerns within the meaning of the tax laws.

If the language used seemed to us doubtful (as it does not), the practically contemporaneous construction by the Treasury Department in its regulations would require us to exclude expenses incident to the organization of a corporation and the sale of its capital stock as being within the fair meaning of "ordinary and necessary expenses incurred in carrying on the business" of such corporation. In effect, the regulations limit deductible expenses to the current operating expenses incurred in producing the income. See articles 21, 101, 582. The case in that regard falls under the familiar rule that contemporaneous construction given to an Act of Congress by the executive officers charged with its enforcement, though not controlling, is entitled to great weight. Baltzell v. Mitchell (C. C. A.) 3 F.(2d) 428, 430; compare National Lead Co. v. United States, 252 U. S. 140, 146, 40 S. Ct. 237, 64 L. Ed. 496, where the Supreme Court points out the addititonal weight attaching to such construction from the fact that Congress has, by subsequent legislation, given it implied approval. The construction that only operating expenses are deductible under section 234(a) (1) was being applied by the Treasury Department when Congress re-enacted the provision, in unchanged form, in the Revenue Acts of 1921, 1924, 1926, and 1928. 42 Stat. 254; 43 Stat. 283; 44 Stat. 41; 45 Stat. 799 (26 USCA §§ 986, 2023). See, also, Brewster v. Gage (C. C. A.) 30 F.(2d) 604, 606.

2. The petitioner's second contention (illustrated by its claim) that the payment...