Woodward v. Comm'r of Internal Revenue, Docket Nos. 4363-65
| Decision Date | 23 January 1968 |
| Docket Number | Docket Nos. 4363-65,4364-65. |
| Parties | FRED W. WOODWARD AND ELSIE M. WOODWARD, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTF. R. WOODWARD AND M. JEANNE WOODWARD, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Donald P. Cooney, for the petitioners.
Ronald M. Frykberg, for the respondent.
Petitioners were stockholders of an Iowa corporation engaged in publishing a newspaper and operating a commercial printing plant and a radio station in Dubuque. The existence of the corporation was due to expire in 1961. In 1960 the majority stockholders voted to extend the corporate existence perpetually. One minority stockholder dissented. Under sec. 491.25, Iowa Code Ann., the stockholders voting for renewal were required to purchase at its real value the stock voted against renewal. The parties could not agree upon the real value of the minority stock. Petitioners filed a court action in equity to fix the value, and after litigation purchased the minority stock in 1965 at the value determined by the court. Petitioners paid attorneys', accountants', and appraisers' fees in 1963 incurred in the litigation to fix the value of the stock. Held, the litigation expenses are capital expenditures not deduction under sec. 212, I.R.C. 1954, as ordinary and necessary expenses paid for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.
These consolidated cases involve deficiencies determined by respondent for the calendar year 1963 as follows:
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¦Docket No. ¦Petitioners ¦Deficiency ¦
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¦ ¦ ¦ ¦
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¦4363-65 ¦Fred W. Woodward and Elsie M. Woodward¦$9,433.29 ¦
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¦4364-65 ¦F. R. Woodward and M. Jeanne Woodward ¦3,122.59 ¦
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The sole issue for decision is whether fees and costs paid in connection with litigation to determine the value of certain stock represented capital expenditures or deductible expenses. In docket No. 4363-65 petitioners claim an overpayment of $1,134.47. Certain concessions of the respondent may be given effect under Rule 50.
All the facts are stipulated and are so found.
Petitioners Fred W. Woodward and Elsie M. Woodward are husband and wife. Petitioners F. R. Woodward and M. Jeanne Woodward are husband and wife. F. R. Woodward is a son of Fred W. and Elsie M. Woodward. All of the petitioners are residents of Dubuque, Iowa. Each couple filed a joint Federal income tax return for the calendar year 1963 with the district director of internal revenue at Des Moines, Iowa.
The Telegraph-Herald is a profit corporation organized under the laws of the State of Iowa, and is engaged in publishing a daily newspaper and operating a commercial printing plant and a radio station in Dubuque.
On June 9, 1960, the Telegraph-Herald had 1,200 shares of common stock issued and outstanding. Ownership of such shares on that date was as follows:
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¦ ¦Number ¦
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¦Owner ¦of shares ¦
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¦Fred W. Woodward ¦398 ¦
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¦F. R. Woodward ¦58 ¦
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¦M. Jeanne Woodward ¦55 ¦
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¦Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward, and ¦ ¦
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¦American Trust & Savings Bank of Dubuque, Iowa, as trustees of ¦ ¦
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¦Fred W. Woodward Trust No. 1 ¦200 ¦
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¦Elsie M. Woodward, F. Robert Woodward, M. Jeanne Woodward, and ¦ ¦
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¦American Trust & Savings Band of Dubuque, Iowa, as trustees of ¦ ¦
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¦Fred W. Woodward Trust No. 2 ¦100 ¦
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¦Charles Murphy, executor of the Estate of Ellen Murphy, deceased¦10 ¦
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¦Margaret M. Quigley ¦379 ¦
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¦Total ¦1,200 ¦
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The Telegraph-Herald was originally incorporated in 1901. Its corporate existence was renewed in 1921 and 1941. Under the 1941 renewal its corporate existence was extended 20 years to November 1, 1961. The common stockholders of the Telegraph-Herald held a special meeting on June 9, 1960, for the purpose of renewing and extending its corporate existence and to consider placing certain restrictions on its common stock. This meeting was attended by all of the stockholders or their representatives, at which time a resolution was duly adopted by the holders of a majority of the stock extending the corporate existence of Telegraph-Herald perpetually.
A certificate for the renewal of the Telegraph-Herald's corporate charter was issued by the secretary of state for the State of Iowa on or about June 10, 1960.
The Telegraph-Herlad's 1,200 shares of common stock issued and outstanding were all voted in favor of the renewal of the corporate existence except the 379 shares owned by Margaret M. Quigley.
Section 491.25, Iowa Code Ann. (Supp. 1966), provides as follows:
491.25 Renewal— procedure
Corporations existing for a period of years may be renewed from time to time for the same or shorter periods, or may be renewed to exist perpetually, upon compliance with the provisions of this section and other applicable statutes.
The right of renewal is vested in the stockholders and shall be exercised by a resolution thereof adopted at any regular meeting or at any special meeting called for that purpose. Such resolution must be adopted by a majority of all the votes cast at such meeting, or by such vote as is authorized or required in the company's existing articles of incorporation.
If the renewal instrument in proper form and the necessary fees are tendered to the secretary of state for filing three months or less either prior or subsequent to the corporation's expiration date, such renewal shall take effect immediately upon the expiration of the corporation's previous period of existence, and in such case, the corporate existence shall be considered as having been extended without interruption. If the renewal is filed more than three months before or after the expiration date, such renewal shall take effect upon the date such renewal with necessary fees is accepted and filed by the secretary of state; and in cases where filed more than three months after the expiration date, shall not be in legal effect a renewal unless the procedure provided for and the additional fees provided for in section 491.28 are fully complied with and paid.
In all cases of renewal, those stockholders voting for such renewal must purchase at its real value the stock voted against such renewal, and shall have three years from the date such action for renewal was taken in which to purchase and pay for the stock voting against such renewal, which purchase price shall bear interest at the rate of five percent per annum from the date of such renewal action until paid. As amended Acts 1955 (45 G.A.)CH. 229, Sec. 1.
The majority stockholders voting to extend the corporate existence of the Telegraph-Herald, and Margaret M. Quigley were unable to agree upon the real value of the latter's stock. The majority stockholders, with the exception of Charles Murphy, executor of the Estate of Ellen Murphy, deceased, on February 9, 1962, filed a ‘Petition in Equity’ in the District Court of Iowa, in and for Dubuque County, asking the court to determine and fix the real value of Margaret M. Quigley's stock. A decision was entered by the District Court on May 18, 1963, establishing a value of $1,750 per share. The District Court ordered that the costs be taxed 68 percent to the plaintiffs and 32 percent to the defendant. This decision was appealed by all parties to the Supreme Court of Iowa.
In the case of Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38 (1965), the Supreme Court of Iowa determined the real value of Margaret M. Quigley's shares to be $1,650 per share. On rehearing the Supreme Court of Iowa, in Woodward v. Quigley, 257 Iowa 1077, 136 N.W.2d 280 (1965), determined the real value to be $1,620 per share. The Supreme Court ordered that the costs be taxed one-half to the defendant and one-half to the plaintiffs.
Subsequent to the entry of final judgment in Woodward v....
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