*2517 In order to raise needed capital for petitioner, certain of its stockholders sold shares of petitioner's stock then held by them and turned over to petitioner the proceeds. In the taxable year petitioner agreed to pay to its stockholders a certain sum for the use of the money. Petitioner being on the accrual basis, such sum held to be deductible in the year 1921, the year in which the liability accrued.
*799 In this proceeding, involving a deficiency of $2,093.74 in income and excess-profits taxes for the year 1921, the petitioner alleges as error respondent's disallowance of an item of $6,049.15 claimed as a deduction for interest paid during the year.
FINDINGS OF FACT.
The petitioner is a New York corporation, with principal offices in New York City. During the years 1918 to 1921, inclusive, it kept its books on the accrual basis.
On September 28, 1918, W. S. Hill, A. R. Boal and Charles O'Brien, hereinafter referred to as the "stockholders," owners of all of the petitioner's capital stock of $100,000, divided equally between*2518 common and preferred, entered into a written agreement with Angie M. Booth, by the terms of which the former agreed to sell to the latter 500 shares of petitioner's common stock and 160 shares of its preferred stock, par value of $66,000, for $60,000, payable in monthly installments of $5,000, commencing October 1, 1918. The buyer gave the "stockholders" an option to repurchase any part or all of the stock sold at any time between October 1, 1919, and October 1, 1920, at the price of $115 per share for the common stock and $125 per share for the preferred. The "stockholders" agreed to pay the money received for their stock into the treasury of petitioner for use in its business.
By the terms of a written agreement entered into the same day between the "stockholders" and petitioner, the former agreed to immediately pay over to the latter, all moneys thereafter received by them from Angie M. Booth under the provisions of the aforementioned contract and the petitioner agreed to pay to the "stockholders" before October 1, 1920, an amount of money equal to $115 for each share of common stock and $125 for each share of preferred stock they transferred to Angie M. Booth under their agreement*2519 with her.
*800 By July 9, 1919, Angie M. Booth had paid to the "stockholders" under the agreement of September 28, 1918, the sum of $45,000, and the latter had transferred to the former 258 shares of common stock and 72 shares of preferred stock, and were prepared to assign to her 129 additional shares of common stock and 36 shares of preferred stock to comply with the terms of the agreement.
Being of the opinion that not less than 260 shares of petitioner's common stock should be in the hands of the "stockholders" at all times, Angie M. Booth and the "stockholders," on July 9, 1919, entered into a further agreement by the terms of which the former agreed to transfer to the latter 18 shares of common stock held by her in exchange for 18 shares of preferred stock, and in lieu of the 242 shares of common stock and 88 shares of preferred stock to be transferred to her under the agreement of September 28, 1918, for installments payable on and after April 1, 1919, she agreed to accept preferred stock and bonds of petitioner in certain specified proportions. She also agreed to purchase from the "stockholders" in the event petitioner's sales reached a certain volume on or before*2520 September 30, 1919, $21,000 par value of preferred stock and $12,000 par value of bonds for the price of $30,000, payable $5,000 monthly commencing October 1, 1919. The agreement also gave the "stockholders" an option to repurchase all or any part of the stock owned by Angie M. Booth at any time between October 1, 1919, and April 1, 1921, at the prices specified in the first agreement.
The petitioner and the "stockholders" on July 9, 1919, entered into an agreement in which the latter agreed to pay to the former promptly upon receipt, all moneys received from Angie M. Booth under the agreement bearing the same date, and the former agreed to deliver to the "stockholders" such of its bonds, payable July 1, 1924, and bearing interest at the rate of 7 per cent, as they were obligated to deliver to Angie M. Booth. Petitioner also agreed to pay to the "stockholders" before April 1, 1921, an amount of money equal to the sum of $115 for each share of common stock and $125 for each share of preferred stock they had transferred, or thereafter transferred, to Angie M. Booth under the agreements of September 28, 1918, and July 9, 1919.
By March 31, 1921, Angie M. Booth had acquired under*2521 the aforementioned agreements with the "stockholders," 500 shares of preferred stock, 240 shares of common stock and bonds of the par value of $35,000.
In an agreement dated March 31, 1921, the "stockholders" agreed (1) to pay Angie M. Booth on or before April 1, 1921, the sum of $7,549.15, this sum being the difference between $2,700.85, representing interest paid by petitioner prior to April 1, 1921, on coupon bonds *801 held by her, and $10,250, representing interest at 6 per cent per annum on sums she had paid to them from the date of payment to April 1, 1921, and (2) to deliver to her on or before April 1, 1921, $15,000 par value of petitioner's 7 per cent bonds, maturing July 1, 1924. Angie M. Booth in the same agreement gave the "stockholders" an option to purchase all or part of the preferred stock and bonds held by her at any time on or before July 1, 1924, at par, with interest at 6 per cent per annum from April 1, 1921, subject to certain conditions not here important, and agreed to transfer to the "stockholders" the 240 shares of petitioner's common stock then held by her.
On March 31, 1921, the petitioner owed W. S. Hill, $62,500, A. R. Boal, $16,905, and*2522 Charles O'Brien, $10,695, for sums loaned to it, these amounts being due and payable April 1, 1921. On the same day the petitioner and the "stockholders" entered into an agreement in which the former agreed to pay to the latter on or before April 1, 1921, the sum of $7,549.15 and to issue to them at the same time, its bonds of the par value of $15,000, the cash and bonds to be used by the "stockholders" to carry out their agreements with Angie M. Booth under the contract of March 31, 1921. By provisions of the instrument the "stockholders" agreed to accept from Angie M. Booth the 240 shares of petitioner's common stock held by her and to distribute 147 shares thereof to A. R. Boal and the remainder to Charles O'Brien so as to restore them to their original common stock holdings. The said agreement, in addition to provisions for the payment by petitioner to the "stockholders" on or before July 1, 1921, of sums to continue their option to purchase the stock and bonds in the hands of Angie M. Booth and to redeem the said stock and bonds, also provided for the cancellation of petitioner's indebtedness to A. R. Boal and Charles O'Brien, and for the payment of interest at the rate of*2523 6 per cent per annum from April 1, 1921, on petitioner's indebtedness to the "stockholders."
During the year 1921 the petitioner paid $6,049.15 of the sum of $7,549.15 it agreed to pay the "stockholders" under the terms of the agreement of March 31, 1921, and accrued the balance of $1,500 on its books as of December 31, 1921. The amounts were paid and accrued as interest. Of the amount paid, the Commissioner allowed $150 as a deduction in 1918; $2,360 in 1919, and $3,539.15 in 1920.
OPINION.
ARUNDELL: The transactions between petitioner and its "stockholders" on the one hand, and the "stockholders" and Angie M. Booth on the other hand, were, in so far as petitioner was concerned, *802 essentially ones for the securing of capital for use in its business. The money acquired by the "stockholders" from Mrs. Booth was immediately turned over by them to petitioner, which agreed on its part to pay the "stockholders" an amount sufficient to permit them to reacquire the stock held by Mrs. Booth on the terms set forth in the option.
It was deemed best by all parties concerned to modify the existing agreements. The contracts of March 31, 1921, were thereupon entered into. *2524 By the terms of these latter contracts petitioner became obligated to pay the sum of $7,549.15 and did within the year pay in cash $6,049.15. It is clear to us that the amount sought to be deducted represented an amount petitioner was obligated to pay for the use of money, and as such was properly deductible in determining petitioner's net income. Prior to March 31, 1921, the liability had not arisen and it was therefore improper for the respondent to apportion the deduction over the years 1918, 1919, and 1920. Inasmuch as petitioner was on an accrual basis, the sum of $7,549.15 should be allowed as a deduction in determining petitioner's net income for the year 1921.
Judgment will be entered under Rule 50.