*91 Decision will be entered under Rule 50.
1. Held: Expenses attributable to abandoned plans of liquidation and partial liquidation of a corporation are deductible in the year of abandonment by the corporation.
2. Held: That portion of expenses of a partial liquidation attributable to the distribution of corporate assets is deductible by the corporation.
*1100 The respondent determinted deficiencies in income tax against the petitioner as follows:
| Year: | Deficiency |
| 1946 | $ 16,168.77 |
| 1947 | 2,385.71 |
The petitioner also made claim for overpayments in the amounts of:
| Year: | Overpayment |
| 1946 | $ 1,954.59 |
| 1947 | 784.31 |
The issues presented are whether certain expenditures arising out of a reduction*93 in capital and distribution of corporate assets are deductible, and whether petitioner is entitled to a dividends received credit on a gain derived from the sale of stock rights in 1946.
*1101 FINDINGS OF FACT.
The facts stipulated are so found.
The petitioner, Tobacco Products Export Corporation, is a New York corporation, organized in 1919 for the sole purpose of engaging in export trade. The petitioner filed income tax returns for the calendar years 1946 and 1947 on the accrual basis, with the collector of internal revenue for the second district of New York.
As of December 31, 1945, the petitioner had 472,500 shares of no par value stock issued and outstanding which were carried on its books at a value of $ 472,500. A partial liquidation was effected as of November 30, 1946, pursuant to action taken at a meeting of the stockholders held on November 27, 1946. As of December 31, 1946, petitioner had 45,810 shares of no par value stock issued and outstanding which was reflected on its record at a value of $ 45,810. Under the plan of liquidation substantially all 56,076 shares of Philip Morris & Company, Ltd., Inc., common stock, then owned by petitioner, were distributed, *94 together with $ 206,145 in cash to petitioner's 1,502 stockholders pro rata. In exchange therefor 412,290 shares of petitioner's capital stock were surrendered and canceled. Under the plan, 14,400 shares of petitioner's stock held in its treasury were also canceled. The market value of the Philip Morris stock, as of the date of distribution, was $ 2,032,590. The reasons for the partial liquidation given by petitioner's directors to the shareholders, in a proxy statement, were the following:
(1) The Corporation's assets are now greatly in excess of the needs of its export business; (2) the Corporation was organized solely to engage in export trade, and its continued ownership of stock in Philip Morris & Company, Ltd., Incorporated, has no relation to this purpose; (3) ownership of the stock in Philip Morris & Company, Ltd., Incorporated, results in a corporation income tax on 15% of dividends received and additional New York State franchise taxes, which will be saved if the stock is distributed to the stockholders; (4) a substantial number of stockholders have urged upon the management the propriety of such a partial liquidation.
The petitioner had lost the greater part of its *95 initial capital by 1924 in business operations in Europe, Asia, and Canada. It continued to sell cigarettes and tobacco in the West Indies and Central America although its business was small in comparison with the years prior to 1924. In 1934 petitioner invested $ 567,700.10 in the common stock of Philip Morris & Company, Ltd., Incorporated, hereinafter referred to as Philip Morris. Petitioner received an exclusive territorial agency in parts of the West Indies and Central America for the sale of Philip Morris "English Blend" cigarettes. The petitioner's stockholdings accumulated and increased to 56,076 shares in Philip Morris, which was a small fraction of the total outstanding stock of that corporation.
*1102 In 1943 the Securities & Exchange Commission held that the petitioner was an investment company of the closed-end management type and subject to regulation under the Investment Company Act. The petitioner owned stock in the British-American Tobacco Company (China) Ltd., hereinafter referred to as "China." These shares had been valuable prior to World War II but no dividends had been paid since the Japanese occupation of China. In 1942 the petitioner wrote the value*96 of this stock down from $ 1,500,000 to $ 1.
A substantial group of petitioner's stockholders demanded that petitioner distribute its Philip Morris and "China" stock. The largest stockholder in petitioner was the British-American Tobacco Company, a British corporation, which owned 37 per cent of petitioner's stock. As a result of conferences among several stockholder groups, the directors, in 1946, had John H. Jackson, Esq., prepare a plan for the transfer of petitioner's business and good will to a new corporation, and the distribution in liquidation of the Philip Morris and "China" stock.
In March 1946 the demand by some stockholders for distribution of the Philip Morris and "China" stock prompted petitioner's directors to seek the legal advice of Joseph M. Hartfield, Esq., of the firm of White & Case. Attorneys Jackson and Hartfield negotiated with the minority stockholder group and worked upon the plan to distribute the Philip Morris and "China" stock and transfer petitioner's business to a new corporation. This plan was later modified by eliminating the proposed new corporation leaving only the distribution of the Philip Morris and "China" stock. Subsequently, the plan was*97 further amended, in July 1946, by abandoning the distribution of the "China" stock and the plan was then adopted to distribute only the Philip Morris stock and cash.
In carrying out the plan of partial liquidation, the Lawyers Trust Company was employed as depositary under two agreements. One contract related to petitioner's capital stock, the other to distribution of the Philip Morris stock. The Bankers Trust Company was employed as exchange agent with regard to these depositary agreements.
In executing the partial liquidation, petitioner made expenditures to cover printing and mailing costs, accountants' and legal fees, and other items of expense. The total expenses incurred in 1946 by petitioner, in connection with the partial liquidation, were $ 34,560.34. Included within this total was the sum of $ 5,015 representing the fee of White & Case for professional services rendered in connection with the partial liquidation and the work preceding it. Approximately 70 per cent of this bill represented services rendered in connection with the minority stockholders' demand and the earlier abandoned plans of distribution. Approximately 30 per cent represented services performed in*98 connection with the adopted plan. Also *1103 included in the total aggregate of expenses were charges of $ 20,300 for the services of John H. Jackson, Esq., who has since died. Approximately 60 per cent of the bill rendered by John H. Jackson, Esq., represented work performed in connection with the minority stockholders' demand and the earlier abandoned plans. Included also in the aggregate amount of expenses were Federal and New York State transfer taxes in the amount of $ 846.64.
Of the total expenditures made in 1946 in connection with the partial liquidation which were not attributable to earlier plans, approximately equal amounts were expended for the reduction of capital stock and the distribution of the Philip Morris stock and cash.
A total of $ 3,062.85 was incurred as expenses in 1947 in connection with the consummation of the partial liquidation. Approximately half of this amount was incurred in altering petitioner's capital structure and half with respect to the distribution of assets.
The deficiency determined for 1946 further involves the correct treatment of $ 12,685.23 proceeds of sale of rights to subscribe for preferred stock of Philip Morris & Co. Ltd., *99 Inc., which rights petitioner received as a holder of the common stock of said corporation. Said proceeds were treated as capital gain in petitioner's return. Respondent's position is that said amount is "ordinary income." Petitioner's said refund claim for 1946 is based upon its position that it is entitled to dividends received credit upon said $ 12,685.23. Petitioner concedes that said amount was not capital gain.
The petitioner deducted $ 34,560.34 in 1946 as expenses in connection with the partial liquidation. The sum of $ 5,947.62 was deducted as such an expense for the year 1947. These amounts were disallowed as deductions by respondent. The petitioner's claim for dividends received credit was denied by respondent.
OPINION.
The first issue to be determined is whether the petitioner corporation can deduct, as expenses, in 1946, all, or any part, of the $ 34,560.34 expended in connection with the partial liquidation carried out in that year. 1 Prior to the execution of the plan to *1104 distribute Philip Morris stock and cash to the stockholders in exchange for approximately 90 per cent of its outstanding stock, two separate plans were considered and then abandoned. *100 The demand of a group of stockholders that petitioner distribute its Philip Morris and "China" stock, motivated the retention of counsel to determine a method of distribution. The first proposal to achieve this end called for the transfer of petitioner's business to a new corporation and liquidation of petitioner's remaining assets. Upon the abandonment of this proposal the attorneys presented a plan to distribute the Philip Morris and "China" stock without creating a new corporation to carry on petitioner's business of exporting tobacco. Upon rejection of this plan a third method of appeasing the stockholders' demand was presented and accepted. Petitioner undertook to distribute only its Philip Morris stock and cash and reduce its capitalization by 90 per cent.
*101 We have found that 60 per cent and 70 per cent of the services performed by Jackson and Hartfield, respectively, were redered in connection with the two abandoned plans. The expenses of investigating the possibilities of a corporate merger, which was abandoned, have been held deductible. Doernbecher Manufacturing Co., 30 B. T. A. 973, affd. 80 F. 2d 573. The expenses incurred in formulating and investigating plans of liquidation and partial liquidation are similarly deductible when the programs are abandoned. The proposals upon which the attorneys spent most of their time and effort were not alternative proposals presented to petitioner for it to choose between. Nor were the earlier plans merged into the final liquidation. The first plan called for complete liquidation of the petitioner and did not relate to a reduction of capitalization. The second plan included distributions of the "China" stock valued at $ 1. Distribution of these shares would not bring about the reduction of capital achieved by the distribution of $ 206,145 in cash in the final plan. Each plan was separate and distinct in so far as the result to*102 petitioner is concerned. Each plan was presented as a new proposal when the preceding one was rejected. The legal expenses attributable to the first and second plans which were abandoned by petitioner are deductible by it. Sibley, Lindsay & Curr Co., 106">15 T. C. 106. The fact that the legal fees were not broken down into components but paid as one sum does not prevent allocation of a proper proportion of the counsel fees to the abandoned plans. Barbara B. LeMond, 13 T.C. 670">13 T. C. 670.
The portion of the total expenses for 1946 of $ 34,560.34 remaining after deducting the above amounts on account of legal expenses, and the 1947 expenses of $ 3,062.85 are attributable to the partial liquidation finally carried out. The partial liquidation consisted of the alteration of petitioner's capital structure by acquiring and canceling 90 per cent of its outstanding stock and the distribution of the Philip *1105 Morris shares, together with cash. We have found that the expenses of executing the partial liquidation were approximately equally divided between the reduction of petitioner's capital stock and the actual distribution of the*103 Philip Morris shares and cash. The expenses of the depositary and exchange agent, together with the numerous items of printing and mailing costs, accountants and legal fees, were about equally divided between the two phases of the partial liquidation. Expenses of organization and refinancing are capital expenditures. Grain King Manufacturing Co., 14 B. T. A. 793. However, expenses incurred in carrying out a complete liquidation are deductible. Pacific Coast Biscuit Co., 32 B. T. A. 39. The allocation and deduction of that portion of the partial liquidation expenses attributable to the distribution of assets, has been recently upheld by this Court. Mills Estate, Inc., 17 T. C. 910 (on appeal). The remaining portion of the 1946 expenses and the 1947 expenses, therefore, are deductible in the respective years to the extent of 50 per cent thereof.
One further item included in the 1946 expenses must be given special consideration. Payments for New York State and Federal transfer taxes aggregated $ 846.64. The evidence does not disclose what portion of this total represented Federal taxes*104 and what amount represented state taxes. The petitioner, on brief, contends that the total transfer taxes were greater than $ 846.64. The evidence presented does not bear out this claim. Of the total of $ 846.64 transfer taxes paid, the amount paid to the State of New York is deductible as taxes under section 23 (c) of the Internal Revenue Code. 2Section 23 (c) (1) (F), I. R. C., states that Federal excise and stamp taxes are not deductible but that this subsection shall not prevent such taxes *1106 from being deductible under subsection (a). Section 23 (a) (1) (A), I. R. C., allows deduction of ordinary and necessary business expenses. Although Federal transfer taxes were not ordinary expenses of petitioner's business of exporting tobacco, they were expenses incurred in the partial liquidation.
*105 The partial liquidation consisted, in part, of the transfer of Philip Morris stock to petitioner's shareholders and transfers by the shareholders to petitioner of its stock. The transfer of stock in petitioner corporation for its shareholders to itself for cancelation is not subject to Federal transfer tax. Regulations 71, sec. 113.34 (c). The transfer tax paid on the distribution of Philip Morris stock to the shareholders of petitioner constitutes an expense of that distribution. As such an expense wholly attributable to the distribution of assets in partial liquidation, it is deductible under the principle applied in Mills Estate, Inc., supra.Therefore, we conclude that the entire amount of $ 846.64 transfer taxes paid is deductible by petitioner as taxes under section 23(c), I. R. C., in regard to the amounts paid to the state, or as business expenses under section 23(a), I. R. C., with respect to the amounts paid to the Federal Government.
The second issue in this proceeding is whether the petitioner is entitled to a dividends received credit under section 26(b), I. R. C., 3 on the proceeds of $ 12,685.23 received from the sale of Philip Morris*106 stock rights.
We have set out in the findings of fact the entire paragraph of the stipulation of the parties referring to this issue. These few facts, with nothing more, are insufficient*107 to establish petitioner's contention or to demonstrate that respondent erred. As to this item, we therefore find for respondent.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
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2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
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(c) Taxes Generally. --
(1) Allowance in general. -- Taxes paid or accrued within the taxable year, except --
(A) Federal income taxes;
(B) war-profits and excess-profits taxes imposed by Title II of the Revenue Act of 1917, Title III of the Revenue Act of 1918, Title III of the Revenue Act of 1921, section 216 of the National Industrial Recovery Act, section 702 of the Revenue Act of 1934, or Subchapter E of Chapter 2, or by any such provisions as amended or supplemented;
(C) income, war-profits, and excess-profits taxes imposed by the authority of a foreign country or possession of the United States, if the taxpayer chooses to take to any extent the benefits of Section 131;
(D) estate, inheritance, legacy, succession, and gift taxes;
(E) taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph shall not exclude the allowance as a deduction of so much of such taxes as is properly allocable to maintenance or interest charges: and
(F) Federal import duties, and Federal excise and stamp taxes (not described in subparagraph (A), (B), (D), or (E)), but this subsection shall not prevent such duties and taxes from being deducted under subsection (a).
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3. SEC. 26. CREDITS OF CORPORATIONS.
In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax --
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(b) Dividends Received. -- 85 per centum of the amount received as dividends from a domestic corporation which is subject to taxation under this chapter, but not in excess of 85 per centum of the adjusted net income. The credit allowed by this subsection shall not be allowed in respect of dividends received from a corporation organized under the China Trade Act, 1922. 42 Stat. 849 (U. S. C., Title 15, c. 4), or from a corporation which under section 251 is taxable only on its gross income from sources within the United States by reason of its receiving a large percentage of its gross income from sources within a possession of the United States.
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