United States v. General Bancshares Corporation

• Decision Date: 02 January 1968
• Docket Number: No. 18756,18757.,18756
• Citation: 388 F.2d 184
• Parties: UNITED STATES of America, Appellant, v. GENERAL BANCSHARES CORPORATION, Appellee. GENERAL BANCSHARES CORPORATION, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

388 F.2d 184 (1968)

UNITED STATES of America, Appellant, v. GENERAL BANCSHARES CORPORATION, Appellee.

GENERAL BANCSHARES CORPORATION, Appellant, v. UNITED STATES of America, Appellee.

Nos. 18756, 18757.

United States Court of Appeals Eighth Circuit.

January 2, 1968.

COPYRIGHT MATERIAL OMITTED

Gilbert F. Andrews, Atty., Dept. of Justice, Washington, D. C., for the United States. Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Martin T. Goldblum, Attys., Dept. of Justice, Washington, D. C., and Richard D. Fitzgibbon, Jr., U. S. Atty. for the Eastern District of Missouri and John A. Newton, Asst. U. S. Atty., same district, were with Gilbert F. Andrews, Washington, D. C., on the brief.

Owen T. Armstrong, of Lowenhaupt, Chasnoff, Freeman & Holland, St. Louis, Mo., for General Bancshares Corp. and filed brief.

Before BLACKMUN, GIBSON and LAY, Circuit Judges.

GIBSON, Circuit Judge.

This appeal and cross appeal concern questions of deductibility for federal income tax purposes of expenses incurred in carrying out a plan of divestment of non-banking assets intended to bring the taxpayer, General Bancshares Corporation, formerly General Contract Corporation, in compliance with the Bank Holding Act of 1956, 12 U.S.C. §§ 1841-1848; and the complementary income tax sections 26 U.S.C. §§ 1101-1103.

The District Court,¹ Chief Judge Harper, held that $15,318 of the $18,295 involved was deductible as an ordinary and necessary business expense and that $2,977 was nondeductible as a capital expenditure. The Government and the taxpayer appeal the adverse holdings.

The relevant facts were stipulated and consequently are not in dispute. The taxpayer was a holding company as defined under the Act, owning eight banks and approximately thirty finance, insurance agencies and other non-banking corporations. The book value of the non-banking assets accounted for approximately 45 per cent of the total assets of the taxpayer. After the enactment of the Bank Holding Act of 1956 the taxpayer proceeded to divest itself of all of its non-banking assets in order to comply with the Act. On February 21, 1958 taxpayer's directors adopted a plan of divestment which was certified by the Federal Reserve Board on August 14, 1958. A favorable tax ruling with respect to the divestment plan was issued by the Commissioner on September 11, 1958. The plan was approved by taxpayer's shareholders on November 11, 1958 and was carried out by December 31, 1958.

Under the plan of divestment the taxpayer organized a new corporation, General Contract Finance Corporation (G.C. F.C.), and transferred all of its non-banking assets, shares in non-banking corporations, to the new corporation in exchange for all of the stock of the new corporation. The new corporation stock was then immediately distributed pro rata to the shareholders of the taxpayer. The Act sets forth no particular method of separating and disposing of banking or non-banking assets. The plan utilized by the taxpayer is permissible and meets the requirements of §§ 1101-1103 I.R.C. of 1954, granting tax relief when compliance with the Act occurs by way of certain distributions to shareholders. The taxpayer also changed its name from General Contract Corporation to "General Bancshares Corporation." No outstanding shares of the taxpayer were redeemed or transferred, nor were any additional shares issued. New shares, of course, evidencing the change of corporate name were issued in exchange for the old shares.

On its federal income tax return for 1958, the taxpayer claimed six items as currently deductible business expenses: (1) Documentary stamps, $2,808 (excise tax on the transfer of the taxpayer's non-banking stocks to G.C.F.C.); (2) Accounting fees, $2,677 (primarily the cost of preparing financial statements for submission to the stockholders prior to to their approval of the plan); (3) Engraving plates, $1,140 (cost of making plates for new stock of taxpayer in order that the stock certificates read "General Bancshares Corporation"); (4) Printing stock certificates, $1,837 (cost of printing new stock certificates of taxpayer); (5) Fee of transfer agent, $7,295 (cost of distributing G.C.F.C.'s stock to the shareholders of taxpayer); (6) Transfer tax, $2,546 (cost of the excise tax on the transfer of G.C.F.C.'s stock from the taxpayer to the shareholders of taxpayer).

The Commissioner disallowed all of the above expenses as claimed deductions in failing to meet the requirements of § 162(a) of the Internal Revenue Code, 26 U.S.C. § 162(a), "* * * There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. * * *." Taxpayer paid the resulting deficiency, filed a claim for refund which was denied, and then brought suit in the District Court. Our jurisdiction rests on 28 U.S.C. § 1291.

The sole issue before the District Court, and reviewed by this Court, is whether the amounts spent by the taxpayer in connection with the divestiture of its non-banking assets are currently deductible ordinary and necessary business expenses, or nondeductible capital expenditures. The Government contends that the District Court erred in holding that costs of documentary stamps, accounting fees, transfer agent fees, and transfer taxes (items 1, 2, 5 and 6 above) were deductible as ordinary and necessary business expenses. Taxpayer contends that the District Court erred in not holding the costs of making new engraving plates and the printing of new stock certificates in connection with its corporate name change (items 3 and 4 above) deductible as ordinary and necessary business expenses.

Whether expenses are ordinary and necessary and thus currently deductible or are capital in nature and must be added to the cost basis of the capital asset depends on the character of the transaction to which they relate. The fact that the expenditures are incurred involuntarily because of the Bank Holding Act would not of itself make them deductible as ordinary and necessary expenses. Woolrich Woolen Mills v. United States, 289 F.2d 444 (3 Cir. 1961); R.K.O. Theaters, Inc. v. United States, 163 F.Supp. 598, 143 Ct.Cl. 39 (1958).

Generally capital expenditures occur when an improvement or betterment is made to a capital asset (§ 263 I.R.C.) or an expense is incurred in the purchase or sale of a capital asset or the collection of capital proceeds. See 4A Mertens, Law of Federal Income Taxation, (1966 Rev.) § 25.20, Capital Expenditures. To a considerable extent the tax treatment that is accorded the gain or loss realized on a financial transaction determines the proper characterization of the expense item which was incurred in effecting and completing the financial transaction. (Towanda Textiles, Inc. v. United States, 180 F.Supp. 373 (Ct.Cl. 1960)). Thus selling expenses incurred in the sale of a capital asset are treated as capital in nature and chargeable only against the capital proceeds;² while on the other hand expenses in maintaining a capital asset are currently deductible as are the usual and ordinary business expenses incurred in carrying on any trade or business. The precise slot into which a given expense is to be placed is at times extremely difficult to determine, as the expenses will often partake of the nature of both current and capital items. It, therefore, becomes necessary to view the expenses in context with the transaction in which they are incurred to assess their proper characterization. Mr. Justice Stewart in discussing this issue in Commissioner of Internal Revenue v. Tellier, 383 U.S. 687 pointed out at p. 689, 86 S.Ct. 1118, at p. 1120, 16 L.Ed.2d 185 (1966):

"Our decisions have consistently construed the term `necessary\' as imposing only the minimal requirement that the expense be `appropriate and helpful\' for `the development of the taxpayer\'s business.\' Welch v. Helvering, 290 U.S. 111, 113 54 S.Ct. 8, 9, 78 L.Ed. 212. Cf. Kornhauser v. United States, supra 276 at 152 48 S.Ct. at 220, 72 L.Ed. 505,; Lilly v. Commissioner of Internal Revenue, 343 U.S. 90, 93-94 72 S.Ct. 497, 96 L.Ed. 769,; Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 471; McCulloch v. State of Maryland, 4 Wheat. 316, 413-415 4 L.Ed. 579. The principal function of the term `ordinary\' in § 162(a) is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are in the nature of capital expenditures, which, if deductible at all, must be amortized over the useful life of the asset. Welch v. Helvering, supra, at 113-116 54 S.Ct. 8, 78 L.Ed. 212."

Also, whether expenditures are ordinary and necessary business expenses is a question of fact. General Bancshares Corp. v. Commissioner of Internal Revenue, 326 F.2d 712, 717 (8 Cir. 1964); see also Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 475, 64 S.Ct. 249, 88 L.Ed. 171 (1943) ("Questions of fact in most instances."); Long v. Commissioner of Internal Revenue, 277 F.2d 239, 240-241 (8 Cir. 1960). As this Court observed in General Bancshares, supra, 326 F.2d, at 714, the language of Mr. Justice Cardozo contained in Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933), concerning the meaning of "ordinary and necessary expenses" within the context of § 162 is appropriate:

"Here, indeed, as so often in other branches of the law, the decisive distinctions are those of degree and not of kind. One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle." 290 U.S. at 114-115, 54 S.Ct. at 9.

In General Bancshares, supra, the Court felt that the answer to the "riddle" confronting it was compelled by established and controlling precedent differentiating between ordinary and necessary business expenses on one hand, and capital...