*18 Decision will be entered under Rule 50.
Petitioner gave a written option to purchase stock owned by him for the "net value thereof as shown by the books" of the corporation. Upon the exercise of the option, the optionee offered to pay the book value of the stock but petitioner concluded that he was justly entitled to the amount the optionee had contracted to receive on a resale, and engaged counsel, on a contingent fee basis, to endeavor to obtain his proportionate share of the price for which the optionee intended to sell all of the corporation's stock. Negotiations conducted by counsel resulted in a compromise settlement, reached by arbitrary methods, for an amount about 30 per cent in excess of book value. Held, under the circumstances, that the fee charged by counsel for his services is an offset against price received as an expense of the sale and, therefore, is not deductible as a nonbusiness expense.
*959 This proceeding involves a deficiency of $ 10,074.67 in income taxes for 1946. The sole issue raised by the petition is whether an attorney fee paid in connection with a transaction involving the sale of stock is deductible as an ordinary and necessary expense. Petitioner alleges that he is entitled to a refund in an amount of $ 3,837.70. Respondent by affirmative pleading, raising issues in the alternative, asks that the deficiency be increased to $ 76,576.25. The stipulation of facts filed by the parties is adopted, and the facts therein recited are found as agreed to therein. Parts thereof regarded as necessary for proper consideration of the issues will be set forth in connection with findings made from other evidence, in our findings of fact.
FINDINGS OF FACT.
Petitioner, a resident of Atlanta, Georgia, filed his income tax return for 1946 with the*20 collector of the district of Georgia. Petitioner paid and received credits for income taxes in 1946 in the total amount of $ 98,596.49, of which $ 695.12 was applied as a credit against income taxes for 1947.
Petitioner was president of Lane Drug Stores, Incorporated, a Delaware corporation, hereinafter sometimes referred to as Lane, from about June 1, 1942, until June 30, 1947. As of June 1, 1942, he owned about 1,000 shares of stock of Lane, and Interstate Drugs, Inc., a Delaware corporation, hereinafter sometimes referred to as Interstate, owned a majority of the stock.
On June 1, 1942, petitioner and Interstate entered into a written agreement by the terms of which Interstate gave petitioner an unassignable *960 irrevocable option until May 31, 1952, to purchase from time to time in units of 25 shares, a total of 1,000 shares of stock of Lane at the price of $ 140 a share. The same instrument gave to Interstate by the terms of article SIXTH the right to purchase from petitioner at any time in the manner set forth in clauses 3 and 4 of the article, all of the stock of Lane theretofore and thereafter acquired by petitioner.
Clause 3 of the instrument provided that in the*21 event Interstate exercised its right to purchase, it "shall send to the other party by registered mail a written notice of the exercise of such right, which notice shall specify a date at least ten (10) days after the date of mailing on which, and the place at which, the purchase * * * shall be consummated." Clause 4 provided that Interstate "shall pay for such shares so purchased * * * the net asset value thereof as shown by the books of Lane Drug Stores, Incorporated, on the last day of the month preceding the date on which the purchase * * * is consummated." On August 22, 1946, petitioner owned 2,000 shares of stock of Lane, or about 20 per cent of its authorized capital. On that date Interstate informed petitioner by telephone that an agreement had been reached for the sale of Lane, and that it expected to abide by the contract of June 1, 1942, and pay petitioner the minimum amount possible to acquire the stock held by him. During the course of the telephone conversation Interstate refused to divulge to petitioner the name of its purchaser or the amount for which it intended to sell the stock. The telephone call was followed by a registered letter on August 23, 1946, confirming*22 "* * * our telephone advice of yesterday to the effect that an agreement has been reached for the sale of the Lane Drug Stores, Inc." The letter also contained the following provision:
It will be necessary for us to repurchase the shares of common stock owned by yourself and Mr. Zicht at the book value as of July 31, 1946, and, to this end, it is asked that you kindly bring your shares with you to New York on September 3rd. Please bring the stock book as well as the minute books at the same time.
The "book value" of petitioner's stock, as determined by Interstate, was $ 440,000.
Petitioner was of the opinion that Interstate was using the option agreement to compel him to sell his stock for a price much less than what it had contracted to sell. He knew that some of the assets of Lane were being carried on the books at figures much less than their true value and believed that, based upon a fair capitalization of the earnings of Lane, his stock had a value higher than the amount of $ 440,000 and to be forced to sell his stock for less than the amount Interstate had contracted to receive would be an injustice to him and, therefore, not a "fair price" for his shares.
Petitioner realized*23 that he needed professional assistance in connection with the transaction. Thereafter petitioner engaged counsel to *961 represent him in negotiations to obtain for his stock a proportionate share of the amount Interstate would receive for all of the stock, which amount petitioner considered to be a fair amount for his stock. It was agreed that the fee of counsel would be contingent upon the results accomplished, but no definite percentage was fixed.
Counsel retained by petitioner engaged in conferences, held in Atlanta, Georgia, and New York City, with officials of Interstate with regard to the selling price of petitioner's stock, during the course of which counsel questioned the right of Interstate to acquire the stock unless petitioner resigned or was discharged and contended that the option contract was not available to Interstate for the purpose of acquiring the stock from petitioner at one price and selling at another price and that the contract was not an illegal restraint upon alienation. Counsel had no confidence in any of the contentions and advanced them for the purpose of obtaining a settlement. He and petitioner at all times believed that petitioner was under*24 a legal obligation to deliver the stock.
Counsel also contended that the letter of August 23, 1946, was not a proper exercise of the option rights given Interstate in the option agreement. To correct the alleged defects, on September 4, 1946, Interstate mailed a registered letter to petitioner in which it informed him that it was exercising the rights given in the option agreement to purchase petitioner's stock "at the net asset value as shown by the books of the Lane Drug Stores, Incorporated as of August 31, 1946" and that the purchase would be consummated at its office in New York City on September 14, 1946.
Interstate took the position during the negotiations that the words "net asset value thereof as shown by the books" of Lane in the option agreement meant the book value of the assets, but petitioner's counsel interpreted the words as meaning the asset value of the stock, that the only fair way to determine that value was to capitalize the earnings and that such a method would produce a value considerably more than mere book value. The objective of the negotiations was to obtain a price in excess of $ 440,000, the amount offered by Interstate.
All of the negotiations with *25 Interstate in regard to the sale were conducted by the counsel who was engaged by petitioner to represent him.
On September 7, 1946, as part of counsel's plan to endeavor to obtain a better price for petitioner's stock, the directors of Lane adopted resolutions adjusting the valuation of various assets of the corporation to amounts considered to be fair valuations.
Interstate refused to disclose to petitioner's counsel to whom it had sold and the price it would receive for the stock. About September 14, 1946, counsel learned the identity and conferred with the purchaser. Later that day Interstate increased its offer by $ 140,000, or *962 to $ 580,000, which petitioner accepted and thereafter in 1946 that amount was paid to petitioner for his stock. The amount agreed to was a compromise settlement which petitioner and his counsel considered to be very advantageous under the circumstances. Petitioner and Interstate were able to reach the settlement through the instrumentality of the purchaser from Interstate.
No written contract was entered into, no bill of sale was given, and no legal proceedings were instituted in connection with the transaction.
During the course of the negotiations*26 with Interstate counsel informed petitioner that the fee for his services would be from 20 to 33 1/3 per cent of the amount recovered in excess of the $ 440,000 offered by Interstate.
In September 1946 petitioner paid to counsel for his services a fee of $ 28,000, or 20 per cent of the sales price in excess of $ 440,000. Petitioner deducted the amount from gross income reported in his return for 1946. Respondent disallowed the amount as a deduction but allowed it as a selling expense in his computation of capital gain realized in the sale.
OPINION.
The fee of $ 28,000 paid to counsel, the reasonableness of which is not in controversy, is alleged by petitioner to be deductible as a nonbusiness expense under the provisions of section 23 (a) (2) of the Internal Revenue Code. Respondent insists that, as held by him in determining the deficiency, the amount constitutes a selling expense and, therefore, must be used as an offset in computing gain on the sale.
The parties differ widely on the basis for the negotiations conducted by petitioner's counsel, the purpose of his employment and the legal effect of the results obtained.
Petitioner asserts in his opening brief that the exercise*27 by Interstate of the option converted the option agreement into an executed sales contract, under which he was obligated to deliver the stock in accordance with its terms, hence the sale was completed when the option was exercised, and that the negotiations were conducted, not to bring about a sale, but solely for the purpose of forestalling an injustice and obtaining a fair price. He alleges in his reply brief that counsel was engaged to obtain the price to which he was entitled under the contract of sale. Respondent's view is in effect that, absent performance at the book value specified in the option agreement, the contract which came into existence when the option was exercised remained executory, and that the negotiations resulted in a new sale at a different price, in connection with which the old contract was, in effect, rescinded.
*963 There is no essential difference between the parties as to the facts involved. The difference involved is in what the two parties to the option had in mind. After careful study of the situation presented, we are of the opinion that it can be viewed in either of two ways: (a) That without regard to the option agreement the attorney was*28 employed to secure for the stock more money than offered by Interstate; or (b) that he was employed to urge a contention, as to the interpretation of the expression "net asset value thereof as shown by the books," in the option agreement, which would if sustained obtain for petitioner his proper share of the actual net asset value as set by the actual sale by Interstate. Either view leads to the same result. If the attorney was merely trying to obtain more money for the property he was acting in essence as any broker would do, and though the petitioner now contends that he was obligated to deliver the stock so that sale was completed when the option was exercised, it is entirely clear that the attorney did not so concede in his negotiations with Interstate and treated any sale as depending upon whether a price could be agreed upon, as common in sales by brokers. Under our first view of the matter therefore, the fee paid to the attorney has the same essential characteristics as a brokerage fee or selling commission. As such it is an expense of sale and the amount is an offset against selling price. Spreckels v. Commissioner, 315 U.S. 626">315 U.S. 626; Don A. Davis, 4 T. C. 329,*29 affd. 151 F. 2d 441; James M. Straub, 13 T.C. 288">13 T. C. 288. On the other hand, under our second view of the matter, the attorney was employed to make and made a contention as to interpretation of the crucial point of the option agreement. The right of the optionee depended on such interpretation. It had no right to purchase except as provided by the option. Thus, whether the sale was to be made is seen to have depended upon the interpretation of the agreement of option. We see some reason in the contentions of both petitioner and the optionee, as to the meaning of "net asset value thereof as shown by the books * * *." The services of the attorney urging an interpretation thereof, to effect the sale, appears as an integral part of the process of sale, which would not have taken place without either agreement on the interpretation, or compromise. Amounts paid in compromise partake of the nature of the claim involved, Margery K. Megargel, 3 T. C. 238, and payments for services of an attorney taking part in a dispute over terms of purchase, set in an option agreement, are not in essence different from*30 other expenses of the sale, which depended upon the result of such services. Petitioner on reply brief refers to his claim as one for the price to which he was entitled "as he interpreted the provisions of the contract," and says: "It was an expense incurred in the collection of the proceeds of a sale which was already negotiated and legally binding on both parties * * *." Thus, he agrees that the $ 28,000 *964 is an expense having a connection with the sale; and, in our opinion, he is in error in the idea that it was already negotiated and legally binding on both parties, if he means, as he appears to mean, that the sale was so complete when Interstate exercised the option that he was in any event required by the option agreement to deliver title so that the attorney merely served to collect the purchase price. Sale and delivery of title was not required by the option agreement, except for a price therein provided for. The provision in that respect was not only, in our opinion, somewhat ambiguous but it was actually treated as so by the petitioner and his counsel. Therefore, interpretation or, in the absence thereof, compromise (or of course resort to either arbitration *31 or suit for specific performance by Interstate) was necessary before a sale could be completed. We think it obvious, therefore, that even if the attorney was not employed, regardless of the contract, to bargain for a higher purchase price than offered, as a broker might, he was employed to interpret the terms of the contract and bargain in that respect, and that in either event the services being essentially incidental and necessary to the consummation of passage of title were expenses of sale and deductible only as offsetting selling price under the above cases.
Petitioner cites Walter S. Heller, 2 T. C. 371, affd. 147 F. 2d 376, as requiring a conclusion contrary to that reached by us. In that case the taxpayer, a minority stockholder who refused to accept stock in a reorganization, sued under a state statute to recover the cash value of his stock and incurred a counsel fee in a successful prosecution of the suit. The issue before us there was the narrow question of whether the fee was paid in defense of title and therefore was a capital expenditure, as contended by the Commissioner, or a nonbusiness expense under section*32 23 (a) (2), Internal Revenue Code. The proceeding in Court involved the right of Heller to receive cash for his stock and a determination of the amount thereof. No contention was made, as here, that the fee was a selling expense and that question was not decided. There was an acknowledged contractual right here to receive at least $ 440,000 upon sale and the fee was paid, as pointed out, to procure for the property an amount in excess thereof. The California statute required the minority stockholder dissenting in a proposed reorganization to deliver his stock and left him merely a right to sue for the value thereof. Section 369 of the California Civil Code. Obviously, therefore, the sale was by force of statute consummated and the dissenting stockholder had nothing left except a suit for purchase price. Here the sale, in our view, was not consummated until the parties either agreed upon an interpretation of an ambiguous contract or compromised on the question.
In Carl W. Braznell, 16 T.C. 503">16 T. C. 503, another case relied upon by petitioner, the payment was for damages awarded in a suit for failure to *965 carry out a sale of real property after *33 the broker, the plaintiff in the action, had obtained a buyer. The amount was paid, not in connection with a consummated sale, as here, but for refusing to complete a sale.
Pierce Estates, Inc., 3 T. C. 875, involved legal expenses incurred in a suit for payment out of oil and other minerals produced on leases. The litigation was compromised after the Court decided, as a matter of law, the gas was a mineral, which interpretation settled the question of whether the taxpayer was entitled to receive income under the lease. No sale of capital assets was involved.
The suit in Stella Elkins Tyler, 6 T. C. 135, in connection with which the attorneys' fee there in controversy was paid, was instituted to construe a will to determine whether her interest therein was one-sixth, as she alleged, or less, as others contended. Such facts are unlike those involved here.
We conclude and hold that no error was committed by respondent in treating the fee as an offset against the amount received for the stock.
This conclusion renders it unnecessary to pass upon respondent's alternative contention.
To reflect adjustments agreed to in the*34 stipulation of facts
Decision will be entered under Rule 50.