Comm'r of Internal Revenue

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Tax Court of the United States.Apr 11, 1956
26 T.C. 73 (U.S.T.C. 1956)

Docket No. 48362.



H. William Ihrig, pro se. Thomas J. Donnelly, Jr., Esq., for the respondent.

H. William Ihrig, pro se. Thomas J. Donnelly, Jr., Esq., for the respondent.

Petitioner, officer-stockholder of corporations without current resources, having paid corporate expenses to forestall enforced corporate liquidations and so avoid secondary personal liabilities, held not entitled to deductions as business expenses; held, further, additions to tax under section 291(a), Internal Revenue Code of 1939, properly imposed.

This proceeding involves a deficiency of $539 in income tax and $134.75 in delinquency ‘penalties' for the calendar year 1948. The issues to be decided are whether amounts paid by petitioner on behalf of two corporations of which he was a stockholder are allowable as his business deductions, and whether the delinquency ‘penalty’ under section 291(a) of the Internal Revenue Code of 1939 is applicable.


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

Petitioner is an individual who, during 1948, resided in Milwaukee, Wisconsin. Sometime prior to March 15, 1949, he requested the Commissioner of Internal Revenue to grant an extension of time within which to file his individual income tax return for the calendar year 1948. On March 16, 1949, this request was granted, extending the time for filing to May 15, 1949. On May 5, 1950, petitioner filed his 1948 return with the collector of internal revenue for the district of Wisconsin.

On this return petitioner claimed deductions, as business expenses or as bad debts, for payments made by him in 1948 in the total amount of $3,677.63. These expenditures were made to pay expenses of $1,262 incurred by Wisconsin Industrial Alcohol Company, hereinafter called Industrial, and $2,415.63 incurred by Cedar Creek Distillery Incorporated, hereinafter called Cedar Creek, and normally would have been made by these two corporations if funds had been available to them. Petitioner made these payments without expectation of reimbursement from either of the corporations. Petitioner does not now contend that a debt existed.

During 1948 Cedar Creek, a Wisconsin corporation, operated as a registered distillery and Internal Revenue bonded warehouse at Cedarburg, Wisconsin, in property leased from Industrial. The latter, also a Wisconsin corporation, occupied premises in Cedarburg, adjacent to those occupied by Cedar Creek. Industrial was equipped to operate as an industrial alcohol plant, but it was not licensed by either the Federal Government or the State of Wisconsin to operate as such a plant. During 1948 petitioner was president of both Cedar Creek and Industrial, and he was engaged in the practice of law, his clients including both of these corporations. He was not in the business of lending money.

On January 1, 1948, petitioner owned 250 of a total of 500 authorized and outstanding voting shares of Cedar Creek, and after February 6, 1948, he owned 249 of the 500 shares. On January 1, 1948, he owned 125 of a total of 250 authorized and outstanding voting shares of no-par class common stock of Industrial and 306 of its total of 348 authorized and outstanding $100-par-value class B preferred shares. After February 6, 1948, he owned 124 of the 250 shares of class A stock and 181 of the 438 shares of class B stock. At the end of 1947 he was the holder of unsecured notes of Industrial.

Of the $1,262 paid by petitioner for expenses of Industrial, $625 was paid to satisfy a judgment against Industrial, $600 was paid to the attorney for the lessor of the premises upon which the buildings of the corporations were located for advising the lessor against dispossessing Industrial, and $37 was paid to first mortgage note holders of Industrial. Of the $2,415.63 paid by petitioner for expenses of Cedar Creek, $162.66 was paid for light and power bills, $492.32 for men, $21 for hauling, $224.73 for coal, $63.12 for petty cash items, $538.01 for a bond premium, $156.91 for delinquent Federal income taxes of the corporation, and $64.17 for a Federal stamp tax liability.

Opening and closing balance sheets for 1948 show both corporations to have assets in excess of liabilities, although Industrial showed a deficit in its capital account. The principal asset on the books of Cedar Creek was an account receivable of approximately $40,000 on which action was commenced in 1947 and compromised without trial in 1950 at a book loss to Cedar Creek of over $30,000. Including in the assets of Cedar Creek on January 1, 1948, were the non-taxpaid contents of its bonded warehouse, the tax liability, both Federal and State, thereon being in excess of $280,000. The market for these contents in 1948 was such that a forced closing of the warehouse would produce no income above the tax liability, and it was questionable whether proceeds would even equal such liability. As of January 1, 1948, there was a transportation and warehousing bond securing the payment of $200,000 of the Federal alcohol tax liability. The application for this bond, made in the name of Cedar Creek and signed by petitioner ‘President & individually,‘ provided in part that— the undersigned, hereinafter called the Indemnitor, do jointly and severally undertake and agree:

3. That the Indemnitor will perform all the conditions of said bond, and will at all times indemnify and save the Surety harmless from and against any and all damages, losses, claims, costs, charges and expenses of every nature whatsoever (including counsel fees), which the Surety shall or may at any time sustain or incur by reason or in consequence of having executed or procured said suretyship, or its release therefrom; and will place the Surety in funds to meet all claims or expenses before it shall be required to make payment, and in case the Indemnitor request the Surety to join in the prosecution or defense of any legal proceedings, the Indemnitor will place it in funds sufficient to defray all expenses and all judgments that may be rendered therein. * * *

All of the liquor in the warehouse to which this contingent tax liability pertained as of January 1, 1948, was sold by September 1950, for amounts in excess of the Federal Alcohol tax liability and Wisconsin alcohol tax liability, and neither the bonding company nor petitioner incurred any liability for alcohol tax. None of the payments made by petitioner during 1948 were made to discharge an alcohol tax liability or any obligation of his own; they were made solely to pay expenses of the corporations.


OPPER, Judge:

Petitioner, an officer-stockholder of two corporations which lacked cash to meet current expenses, paid certain corporate expenses to keep the corporations alive. The claimed benefit to him was to forestall enforced closings of the businesses and thus avoid personal liabilities which might otherwise be imposed upon him as a stockholder and surety or guarantor. He seeks to justify his deduction of these payments as expenses incurred by him in carrying on a trade or business. Petitioner's payments were primarily those required in the current operation of the business and not the expenses which might ultimately devolve upon him as an individual. The latter included principally an obligation for Federal and State alcohol tax, and an indemnity agreement covering a warehousing bond.

The fact that an expenditure is necessary in the sense that it is compelled by a guaranty or other legal obligation, Interstate Transit Lines v. Commissioner, 319 U.S. 590, or even that it is ordinary, see Kornhauser v. United States, 276 U.S. 145; cf. Welch v. Helvering, 290 U.S. 111, does not necessarily show that it is a ‘business' expense. Bing v. Helvering, (C.A. 2) 76 F.2d 941; cf. Commissioner v. Heininger, 320 U.S. 467. Yet all three requirements must be fulfilled to secure the application of section 23(a)(1)(A). Petitioner, as the stockholder, was not operating the businesses of the corporations, Burnet v. Clark, 287 U.S. 410. And while the payments would have been expenses of the business of the corporations had they been paid by them, they were, as a necessary consequence, not the business expenses of petitioner. It follows that even to the extent that some of these payments may have been required by law to be paid by petitioner on the corporations' default, that would not eliminate the distinction between the business of the corporations and that of petitioner. See Interstate Transit Lines v. Commissioner, supra; Estate of C. L. Hayne, 22 T.C. 113, 120-121.

What petitioner was actually doing and what, in fact, he claims to have done, was to safeguard and maintain the existence of the corporations so as not to jeopardize his personal interest. ‘Payments made by a stockholder of a corporation for the purpose of protecting his interest therein must be regarded as additional cost of his stock and such sums may not be deducted as ordinary and necessary expenses.’ Eskimo Pie Corporation, 4 T.C. 669, 676, affirmed per curiam (C.A. 3) 153 F.2d 301.

Whether such payments, if not a capital investment, created a debt from the corporations to petitioner, whether that debt became worthless, and whether, if so, it would be deductible, we need not consider. See, e.g., Idol v. United States, (S.D., Cal., Feb. 7, 1956) 56-1 U.S.T.C.Par. 9384, 1956 P.H.Fed.Par. 72513. Petitioner does not now contend that the bad debt provisions are any ground for his claimed deduction.

No evidence was introduced as to the imposition of the ‘penalty’ under section 291(a). It is apparently conceded that the disposition of this issue must follow the substantive question.

Decision will be entered for the respondent.

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