*893 Under a stock purchase plan certain of petitioner's key employees purchased through petitioner stock of petitioner bought on the open market. In a later year the stock greatly declined in value and petitioner voluntarily reduced the price for which the stock was originally purchased, paying cash readjustment to those who had finished paying for their stock and crediting the accounts of those who had not finished paying for their stock with an equivalent adjustment. Held, amounts thus absorbed by petitioner are not deductible either as ordinary and necessary business expenses or as losses.
*769 Respondent determined a deficiency in petitioner's income tax for the calendar year 1931 in the sum of $235.20, and petitioner also seeks a refund of taxes paid in the amount of $8,069.95. A single question is raised, whether the sum of $69,209.59 is deductible as an ordinary and necessary expense or as a loss. This sum represents as aggregate of cash paid by petitioner to certain employees who had been induced to buy its stock, and of canceled indebtedness*894 of others on stock purchases, the payments and cancellations being made to compensate its employees for a sharp decrease in the stock's market value. A stipulation of certain of the facts was filed.
FINDINGS OF FACT.
The Western Maryland Dairy Corporation was incorporated on April 24, 1926, under the laws of Maryland, with its principal office at Baltimore. The National Dairy Products Corporation was incorporated on December 8, 1923, under the laws of Delaware, with its principal office at New York City. During the years 1928 to 1931 the Western Maryland Dairy Corporation, and during the years 1930 and 1931 the National Dairy Products Corporation, respectively, had outstanding approximately 75,000 and 6,000,000 shares of common stock.
On May 15, 1932, petitioner duly filed a consolidated return for itself and its subsidiaries for the calendar year 1931 and paid income tax in the amount of $132,088.74.
At a meeting of the board of directors of petitioner held on November 5, 1928, the following resolution was adopted:
RESOLVED that whenever the employees of this corporation desire to purchase its common stock on the installment plan and to have such purchases financed*895 by this corporation, and whenever such employees shall also notify *770 this corporation and sign the appropriate forms therefor to be provided by this corporation, the President and Treasurer thereof be and hereby are authorized in their sound discretion to purchase such stock in the open market and to pay for the same out of the funds of this corporation and such officers be and hereby are directed in such event to charge such payments against the said respective employees according to the number of shares respectively so bought by them, such expenditures to be repaid to this corporation by its said employees in monthly or weekly installments aggregating not less than Ten Dollars ($10.00) per share per annum, together with interest on all unpaid balances at the rate of 6% per annum, such shares of stock to be held in this corporation by way of security for such unpaid balances until such balances have been fully paid, and when so paid, and not before, such stock to be transferred to the purchasers thereof on the books of this corporation and the shares of stock to be thereupon delivered to such purchasers; provided, that should any dividends be declared on this common stock*896 before payment of it by the employees has been completed, such dividends shall be credited to the employees according to the number of shares of stock respectively subscribed for by them; and, provided further, that in the event any such employee shall leave the employ of this corporation before completing payment for the stock so bought, such employee or his heirs shall have the option of completing payment within ten (10) days form the termination of his employment for the number of shares of stock originally subscribed for by the employee and receiving a certificate for such number of shares; if, however, this option is not exercised by the employee or his heirs within the ten (10) days specified, the corporation shall have the right to sell in the open market the stock originally subscribed for by such employee, any amount received in excess of the unpaid balance to be returned to the employee or his heirs.
A resolution was also adopted appointing Charles R. Bowman and George S. Jackson as trustees to act for the corporation and its employees in carrying out the above purchase plan, and all necessary powers to effect the plan were conferred upon them. Bowman was president of*897 the company and the owner of over 80 percent of its common stock. It was his idea to insure the permanent interest of the more prominent employees by inducing them to become shareholders in the corporation.
In accordance with this plan 16 employees, including master mechanic, country manager, plant superintendent, counsel, sales manager, auditor, medical director, and the assistant treasurers, applied in November 1928 for common stock of the petitioner on the partial payment plan, two others coming in on the same basis in 1929. On or about the date of each application, Bowman and Jackson, as trustees, purchased the number of shares named in the application at a price ranging from $97.69 to $100 share, with funds provided for the purpose by the petitioner, the total amount of such funds being $132,706.59, which was used for the purchase of 1,361 shares. The amount of the petitioner's advances to the employee in each instance was charged on petitioner's books to the account of the employee with this title: "Account receivable for *771 common stock subscriptions." Interest at the rate of 6 per centum per annum was charged currently to each account on the balance due and the*898 shares so purchased were registered in the names of Bowman and Jackson, as trustees.
Three other employees of petitioner, the vice president, advertising manager and order and complaint department manager, purchased on the open market 33 shares of petitioner's common stock at a price ranging from $100 to $105, paying a total price of $3,415. No money was lent by petitioner to these employees for the purchase of the shares, which were bought out of their individual funds.
On February 4, 1931, petitioner's board of directors held a meeting, at which, according to the minutes:
The Chairman then stated that under the terms of the agreement between Mr. Charles R. Bowman and National Dairy Products Corporation dated September 25, 1930, as amended by agreements dated October 28 and November 25, 1930, it was proposed to exchange for shares of common stock of that corporation all the shares of common stock of this corporation held for account of its employees under installment purchase, subject to the consent of such employees.
Thereafter it was resolved that subject to the consent of the employees, Bowman and Jackson, as "Trustees, be and hereby are authorized and directed to exchange*899 1,111 shares of said stock [petitioner'] so issued and standing in their names as such Trustees for a like number of shares of the common capital stock without par value of National Dairy Products Corporation pursuant to the agreement between Charles R. Bowman and National Dairy Products Corporation dated September 25, 1930 as amended by agreements dated October 28 and November 25, 1930." It was further resolved that the trustees be authorized to endorse all the certificates for delivery to the National Dairy Products Corporation and to have issued to the petitioner that corporation's certificates in exchange which petitioner was to hold in trust for its employees who had signed the purchase agreements under the conditions already set forth; the original trust to terminate after completion of the exchange of certificates.
The employee-purchasers still indebted to petitioner on their stock on or about this date executed the formal authorizations mentioned above; and pursuant to these authorizations the exchange of certificates took place on or about February 10, 1931, and the shares of common stock of the National Dairy Products Corporation received by petitioner in exchange were*900 held by it subject to the authorization.
About the same date, the two employees who had paid in full for their stock, 250 shares, before February 4, 1931, and the three employees who had bought their stock, 33 shares, in the open market, *772 all likewise exchanged petitioner's shares for an equal number of shares of the National Dairy Products Corporation.
On April 30, 1931, all of the rights and obligations of two employee-purchasers who had left petitioner's employ were transferred to another employee-purchaser by formal instruments.
The closing market price on the New York Stock Exchange for the common stock of the National Dairy Products Corporation on April 30, 1931, was $43 a share.
At an adjourned regular meeting of the board of directors of petitioner held on May 1, 1931, the action which raised the question in controversy, was taken, which, with the reason therefor, is shown by the minutes:
The Chairman directed attention to the employees common stock installment purchase plan embodied in the resolutions adopted by this Board of Directors on November 5, 1928 and reminded this Board that the purpose of the plan was to further the mutual relationships existing*901 between this corporation and its "key" employees. The Chairman stated that pursuant to the purchase agreements signed by employees of this corporation under the common stock purchase plan Trustees had purchased shares of said common stock on the market with funds advanced by this corporation for such purchase; that an average price of $97.50 per share was paid by the Trustees for said common stock of this corporation; that in course of time some of the employees fully repaid to this corporation the funds so advanced for their account, and the stock so bought for them was transferred to them and was in due course exchanged by them for common stock of National Dairy Products Corporation on a share for share basis; that pursuant to the direction of those employees who had not fully repaid to this corporation the funds so advanced for their account as aforesaid, and pursuant to appropriate resolutions adopted by this Board of Directors on February 4, 1931, the shares of common stock of this corporation which were then held by said Trustees for the account of said employees were exchanged for a like number of shares of common stock of National Dairy Products Corporation on a share for*902 share basis.
* * *
The Chairman further stated that upon his recommendation some of this corporation's "key" employees also purchased thirty-three (33) other shares of its common stock for which they paid cash at the time of purchase at an average price of approximately $103.48 per share, all of which said thirty-three (33) shares were in due course exchanged by such employees for common stock of National Dairy Products Corporation on a share for share basis.
The Chairman further stated that the market value of all the stock purchased as aforesaid as well as the market value of the common stock of National Dairy Products Corporation at the time of such exchange of stocks had declined to and now is at a quoted price far below the price so paid for the common stock of this corporation, and because of that fact the officers of this corporation now deem it advisable to adjust the prices per share for all said stock to a fair and equitable basis.
The Chairman reported that the officers of this corporation accordingly recommend (1) that the purchase price for its said common stock purchased by and/or for its employees pursuant to said purchase plan, as modified February *773 *903 4, 1931, be reduced to $48 per share; (2) that the outstanding common stock purchase agreements with its employees, including the two aforementioned agreements with former employees if they be assigned to an employee of this corporation as aforesaid, be revised so as (a) to reduce the purchase price payable to this corporation to $48 per share for each share of common stock covered by said purchase agreements, (b) to make said price reduction effective as of January 1, 1931, and (c) to require the complete payment by all such employees of the purchase price as so reduced on or before December 31, 1931; (3) that this corporation refund to its employees who have fully paid for said stock a sum sufficient to reflect the aforesaid per share price adjustment; and (4) that this corporation refund to said employees who purchased said 33 shares of common stock of this corporation at the average price of approximately $103.48 per share, upon the recommendation of the President of this corporation, sums sufficient to reduce the purchase price paid by them for said shares to $48 per share.
The Chairman further reported that if the price adjustments as recommended above be put into effect this*904 corporation would be required to absorb a difference of $69,209.59, being the difference between $136,121.59, the amount paid for all the shares of common stock so purchased as aforesaid, and $66,912.00, the adjusted price of all said shares of stock; and also that this corporation would be required to absorb any abatement of interest caused by dating the adjustment back to January 1, 1931.
In accordance with the recommendations above set out by the chairman, resolutions were adopted carrying them into effect, and appropriate agreements executed by the purchaser-employees accordingly.
Pursuant to the resolutions adopted on May 1, 1931, the accounts of all the employee-purchasers were adjusted as of January 1, 1931, by reducing the original amount payable to the petitioner to the amount which would have been payable had the shares of common stock of that corporation been purchased by the employees at the price of $48 a share, the difference being deducted from the balance due by the employee-purchaser on May 30, 1931. To those employees who had bought their shares outside, or had at that time fully paid for their shares, the petitioner made a cash refund on the same basis. As*905 a result of these adjustments, the aggregate reduction on May 30, 1931, of accounts receivable to the petitioner amounted to $49,794.59. The aggregate amount refunded on or about the same day to other employee-purchasers as the result of the same adjustments amounted to $17,584. The aggregate of reductions in accounts receivable and refunds was $69,209.59, which was charged to the surplus account of petitioner.
Petitioner delivered the certificates of stock of the National Dairy Products Corporation to all those employee-purchasers who on December, 31, 1931, had fully paid up the balance of indebtedness due.
Petitioner, in its income tax return, did not claim as a deduction from gross income for the year 1931 the sum $69,209.59.
*774 OPINION.
MATTHEWS: Petitioner, a corporation, seeks the deduction in 1931 of $69,209.59, representing the total sum of reductions by petitioner of its employees' indebtedness to it and actual cash payments by petitioner to its employees, both reductions and payments being intended to relieve hardship on its employees resulting from their purchase of its own stock. This is the sole issue. The deduction is claimed as an expense under*906 section 23(a), Revenue Act of 1928, or, failing that, as a loss under section 23(f). Petitioner did not take this deduction in its income tax return, but now seeks on account thereof a refund for taxes erroneously paid in the amount of $8,069.95, and a denial of the deficiency determined by the respondent in the amount of $235.20.
Briefly summarized, the facts are that the president and other officers of petitioner devised a scheme in November 1928 by which it would secure the faithful cooperation of its "key" employees in its dairy business by financing the purchase by them of stock in the corporation. It was arranged, therefore, that petitioner's president and another should act as trustees to hold the stock purchased by the employees until it should be fully paid for. It was then to be delivered to the purchasers. In the meantime, however, they were to reduce the principal obligation by as much as $10 a share a year and pay interest on the balance, but were to have credited to them any dividends declared. The money for the purchase was advanced by the corporation, the total being $132,706.59. Eighteen employees responded and bought stock through the corporation on credit. *907 Three others bought in the open market at the suggestion of the president of petitioner. The trustees held the stock until February 4, 1931, when it was exchanged, pursuant to authorization by the directors and the employee-purchasers, for the stock of the National Dairy Products Corporation, share for share. Those employee-stockholders who by then had paid up for their stock and also those who had bought originally in the market came in under the same plan and made an exchange. The exchange was part of a plan by which the National Dairy Products Corporation was to absorb petitioner. Petitioner had in 1930 and 1931 about 75,000 shares of common stock outstanding while the National Dairy Products Corporation then had some 6,000,000 shares. On May 1, 1931, the directors of petitioner decided to make the reductions and cash payments in question, and did so on the basis of a cost of $48 a share. The then market value of the National Dairy Products Corporation stock was $43 a share. The reason for this adjustment, as Thomas, the petitioner's assistant treasurer testified, was to relieve the hardship of the employee-stockholders who had been induced by the corporation *775 *908 to buy its stock, and thus to remove the general soreness and dissatisfaction toward petitioner which the fulfillment of their contracts of purchase with petitioner was causing. In other words, the interest of petitioner's principal employees in the corporation which would nominally have resulted from stock ownership, had now, owing to the fall in market value of the stock, become a burden and, their purchases having been induced by the corporation, this burden a source of estrangement between the corporation and its employees.
It is not suggested that the credits and payments were in the nature of additional salary, and there is no indication in the record that the number of shares bought by a particular employee had any relation to his salary as such, except, naturally, that those with larger salaries had more money to invest and for the most part bought more stock than the lesser employees.
Were these credits and cash payments either deductible expenses or losses? Petitioner made the credits and payments voluntarily and was under no legal obligation to do so. A gift made voluntarily is not in the category of losses, and we must conclude that they were not losses. It remains*909 to examine the question whether such payments made on grounds of business expediency, to secure the good will of its employees, can be called "ordinary and necessary expenses" within the meaning of the statute. We do not question the avowed purpose for which the payments were made nor attempt to set aside petitioner's judgment that it would in the long run be advantageous to it thus to remove the cause of disaffection of its principal employees. We are concerned only with the statutory definition which limits the deduction.
While it is clear that "ordinary" as used in the statute is not confined to what would be habitual in the experience of the particular taxpayer, it must be what is normal in the life of the group to which the taxpayer belongs, in the life of the community. Such an ordinary expense, for instance, would be counsel's fees incurred in a lawsuit affecting the safety of the business. It is the expected method of defending the taxpayer from attack. This was made clear by the Supreme Court in . The facts of that case set forth a situation closely paralleled by the situation here. There, the secretary of a corporation*910 which had been adjudged an involuntary bankrupt and had had a discharge from its debts, in order to solidify his personal credit with former customers of the corporation, decided to pay the corporation's debts so far as he was able, and accordingly made substantial payments over a period of years, which he sought to deduct as ordinary and necessary expenses. The Court pointed out that such conduct conformed to no known business practice, to no settled norm, for men do not ordinarily *776 pay debts of others without legal obligation to do so. "Indeed", said Cardozo, J., speaking for the Court, "if language is to be read in its natural and common meaning * * * we should have to say that payment in such circumstances, instead of being ordinary is in a high degree extraordinary." It was assumed by the Court that the expenses were "necessary for the development of the petitioner's business, at least in the sense that they were appropriate and helpful." "But", the Court continued, "the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary. *911 " In the instant case, therefore, even if we assume that the credits and cash payments by petitioner to its employee-stockholders were wholly desirable to promote its own interests, we can not say that the voluntary surrender of $69,000, without any legal compulsion, was an "ordinary" expense. On the contrary, we are of the opinion that it was quite extraordinary.
The cases upon which petitioner relies are clearly distinguishable. We may lay on one side the line of cases where the corporation has made contributions to charitable or educational institutions of the town where its works are situated in the expectation that it will reap a direct business advantage from the improved health or condition of its employees. (C.C.A., 6th Cir.); ; ; ; ; (App. D.C.). On one side also we must leave those cases allowing the deduction of contributions made to*912 combat dangers to the business itself. ; . Gifts made to a few individual employees are not expenditures for the benefit of all.
More nearly akin to the situation here was that prevailing in (C.C.A., 10th Cir.), where the corporation was denied the deduction of gratuitous payments to stockholders in settlement of disputes between them. (C.C.A., 5th Cir.), cited by petitioner, is similar, but distinguishable both on its facts and its ratio decidendi.There a department store compromised with its creditors by paying 50 cents on the dollar. It lost its credit thereby, and found, after several years' experience, that it could not profitably carry on its business on a cash basis. As it deemed absolutely necessary a return to its old credit basis and believed it could not effect it otherwise than by voluntarily assuming and paying the unpaid remainder of its extinguished obligation, it did so; and this amount was allowed as a *777 *913 deduction by the Circuit Court, reversing this . The court states in its opinion, one of the three judges dissenting, that the words "ordinary" and "necessary" in the statute were not to be read conjunctively, a view which the Supreme Court has since, as we have seen, repudiated in Welch's case. The facts are also distinguishable. The corporation in that case knew by trial and error that the payments were at least necessary, for it had tried for several years to do business on the new basis before yielding to the alternative; here, the asserted necessity is only a matter of opinion held by petitioner's officers. Again, the corporation there was paying obligations for which it felt itself morally liable (if moral compulsion may be said to act on corporations) and for which it had once been legally liable. Here, the petitioner bestowed a simple gratuity, paid something for which it had never been legally liable, and for which, so far as the record reveals (and unless strong pressure had been brought on unwilling employees to make them buy its stock, which is not suggested), the petitioner was not morally liable. A falling market was common to*914 practically all corporation stocks in the years in question, but it can not therefore be called usual conduct for a corporation voluntarily and of grace to relieve the resulting hardships on its stockholders.
We hold that the deduction should not be allowed.
Judgment will be entered for the respondent.