55 F. Supp. 109 | Ct. Cl. | 1944
Lead Opinion
delivered the opinion of the court:
Plaintiff, in its income-tax return for the year 1933, claimed a bad-debt deduction of $115,500 because of a charge-off in that year as worthless of a note of one Utech for that amount which plaintiff held, and a business loss of $32,369.13 occasioned by the sale of 1,000 shares of stock to. one Amberg for that amount less than the cost of the stock to plaintiff. The Commissioner of Internal Revenue disallowed the bad-debt deduction entirely, and partially disallowed the loss on the sale of the stock, reducing that loss to $19,619.13. Plaintiff paid the taxes as computed by the Commissioner, filed a claim for refund and, upon its dis-allowance, brought this suit.
The Government’s defense as to the bad debt deduction is that the Utech note, charged off by plaintiff as worthless in 1933, was worthless when made in November 1932, and that the charge-off should have been taken in that year, if at all. The facts of the transaction are fully set forth in the findings, and a full recital of them will not be given here. In brief they are as follows: In 1929 Utech purchased 2,200 shares of common stock of the Crown Cork and Seal Company, which company was controlled by plaintiff. Utech was a, close personal friend of Charles E. McManus, the principal stockholder of Crown, and of Leroy W. Bald
In 1931 and 1932 the price of the stock continued to decline and by April 1932, all of the Crown stock, 7,700 shares, pledged with Empire on the Utech loan, was worth $75,000 less than the amount of the loan. Empire was demanding additional collateral from Utech and the plaintiff. On November 7, 1932, Utech wrote McManus that Empire had given him notice that it was going to sell the Crown stock and that Utech was helpless to prevent it. The Crown stock was at that time quoted at $21 per share, so that the 7,700 shares had a market value of $161,700. Utech’s loan with accrued interest amounted to $150,679.07. Utech had another note with Empire for $25,000, secured by shares of various stocks other than Crown, which in November 1932 had a market value of about $23,000. Most of these stocks belonged to Utech’s wife, but the plaintiff’s officers were not aware of that fact.
On November 19,1932, in order to get back its 5,500 shares of Crown stock, and to prevent Empire from putting Utech’s 2,200 shares on the market, plaintiff loaned Utech $115,500, the market value of plaintiff’s 5,500 shares, on Utech’s unsecured demand note bearing interest at 5%. Utech turned the money over to Empire, together with $10,089.86 of his own money, as a payment on his $147,000 note and its accrued interest; thus reducing that note to $25,089.21. That
When the plaintiff learned that Empire had sold some of the Utech collateral and returned the rest to Utech, together with the excess cash realized on the sale, it demanded payment of his note for $115,500 to it. Utech made no such payment. The plaintiff then concluded, after further investigation, that Utech was financially irresponsible and that the note was worthless. It charged the note off as a bad debt in 1933. It filed no suit to collect the note at that time, thinking that a judgment would be uncollectible. It made
We think the plaintiff was entitled to charge off the Utech note in 1933 as a bad debt, and that the Government’s claim that the note was worthless in November 1932 when given, is not valid. Utech could not have paid the note in full, at the time he gave it, out of his assets at their then market value. But he did find some $10,000 at that time to pay on his note to Empire, and he left collateral with Empire on his remaining indebtedness to it which was substantially in excess of that indebtedness. He seemed to the plaintiff, therefore, to have resources which could and would be used to make payments on plaintiff’s note after the collateral shares had made a further recovery, which plaintiff expected, not unreasonably, that they would do. In fact, if Empire had waited only one month longer to sell the Utech collateral, and had happened to sell it at the high prices of that month, June 1933, the proceeds of the sale and the returned collateral would have considerably more than paid Utech’s notes to Empire and to the plaintiff. Since the plaintiff in 1932 expected that these increases would occur somewhat as they did occur, it could not honestly have charged off Utech’s debt to it as bad, at that time. In 1933, however, Utech lost his Crown stock, so that he could no longer gain by increases in its market value. He failed to apply the excess cash turned over to him by Empire, to reduce the plaintiff’s note. He failed to give the plaintiff the security of the excess collateral which Empire had turned back to him. The plaintiff then concluded that Utech’s note was uncollectible, and again subsequent events have shown that that conclusion was correct. We think the plaintiff was entitled to the bad debt deduction which it attempted to take in 1933, and should win that phase of its suit.
As to the sale to Amberg, upon which the plaintiff claimed a deductible loss for 1933, which the Commissioner disallowed, the facts are these. In 1929 the plaintiff bought 1000
The plaintiff in its income tax return for 1933 claimed as a business loss the difference between the $42,369.13 which it paid for the stock in 1929 and the $10,000 which it received from Amberg in 1933. The Commissioner of Internal Eevenue determined that the allowable loss was only the difference between the cost of $42,369.13 and the price at which the stock would have sold on the Exchange on +he day of the sale to Amberg, which was $22,750, or $22.75 per share. We think the Commissioner was right. When the plaintiff gave to Amberg, without any legal consideration for it, an option to purchase the stock at a fixed price, in the future, it was entering into a bargain from which it could not possibly make a profit, and from which it might, as it did, suffer considerable loss. The plaintiff, as we have seen in our discussion of the Utech note transaction, expected Crown to increase in value, so that it must have anticipated not only a possible, but a probable loss. We think that one who enters into such an arrangement does so with the intention of making a gift to the optionee of the difference between the option price and the readily ascertainable market price at the time the option is exer
The plaintiff may recover upon the item of its claim which relates to the Utech note, with interest. Entry of judgment will await the filing of a stipulation as to the amount.
It is so ordered.
Concurrence in Part
concurring in part and dissenting in part:
I think the plaintiff is entitled to deduct the difference between the purchase price of the stock of the Crown Cork & Seal Company and the price for which it was sold to Max Amberg.
But whether or not the option was legally binding, plaintiff felt itself obliged to honor it in order to induce Amberg; to continue to boost the stock; in other words, it felt compelled to sell Amberg the stock for $10.00 a share and it-actually did so. Therefore, it is unquestionably out of pocket, the difference between what it paid for the stock and what it sold it for.
If a man enters into an unenforceable agreement to sell a piece of property at an agreed price and, although the market, for the property advances in the meantime, he nevertheless carries out his agreement merely as a matter of honor, he is bound to take the actual sale price as the basis in determining gain or loss.
Even though it properly can be said that plaintiff gave Amberg the difference between the market value of the stock and the price fixed in the option, I still think plaintiff is entitled to deduct the difference between the cost and, the price for which it actually sold the stock, because this, con-cededly, was done both for his past services in boosting the stock and to induce him to continue to do so. Plaintiff held a great deal of this stock and was constantly trading in it. Keeping up the value of the stock was a part of plaintiff’s business, which it thought it could promote by inducing Am-berg to continue to boost it. The transaction, therefore, might be viewed in the same light as gifts to customers and the expenses of entertaining them in order to retain their goodwill and business.
The Board of Tax Appeals (now The Tax Court) has held that both gifts to customers and the expenses of enter-
The Second Circuit Court of Appeals has held that entertainment expenses‘are deductible. Schmidlapp v. Commissioner, 96 F. (2d) 680; Blackmer v. Commissioner, 70 F. (2d) 255; Cohan v. Commissioner, 39 F. (2d) 540.
A taxpayer is entitled to deduct a bonus paid employees, not because the corporation was under the obligation to pay the bonus, but because it was done in order to improve the efficiency and productivity of employees. The sale to Am-berg at this low price was done for the same reason. Both the Commissioner’s regulations and the decisions of the Board of Tax Appeals recognize the right of the taxpayer to deduct bonuses to employees. Boericke & Runyon, 3 B. T. A. 684; Ferry Market, Inc. v. Commissioner, 5 B. T. A. 167; Ketcham v. Commissioner, 9 B. T. A. 1208; Liberty Hosiery Mills v. Commissioner, 31 B. T. A. 64; Guitar Trust Estate v. Commissioner, 34 B. T. A. 857; Regulations 103, sec. 19.23 (a)-8.
Although I think the taxpayer would have been entitled to the deduction as a business expense, it cannot recover on this ground in this case, since it did not base its claim for refund on this ground. Real Estate Land-Title & Trust Co. v. United States, 309 U. S. 13. However, I am of the opinion that it can deduct it on the ground it asserted in its, claim for refund, to wit, as a loss.
I concur in the majority opinion on the deductibility of the , bad debt.
In accordance with the above opinion of the court, upon the filing of a stipulation by the parties showing the amount due thereunder to be $18,932.62, with interest as provided by law, and upon plaintiff’s motion for judgment, it was ordered October 2,1944, that judgment be entered for the plaintiff in the sum of $18,932.62, with interest as provided by law.