Decision will be entered under Rule 50.
In a proxy contest between management and a group of insurgent stockholders, the latter prevailed and obtained a majority of seats on petitioner's board of directors. Thereafter, petitioner's stockholders approved the payment of the ousted management's proxy-solicitation expenses as well as those of the insurgents (now the new management) incurred in 1959. The Commissioner has conceded, after originally disallowing, the deductibility of the ousted management's expenses. Held, on this record, the payment of the insurgents' expenses was no less proximately related to petitioner's business than the payment of the ousted management's expenses, and the former are also deductible as ordinary and necessary business expenses. Sec. 162, I.R.C. 1954.
*234 The Commissioner determined a deficiency in petitioner's income tax of $ 101,012.01 for 1958 and $ 97,622.76 for 1959. Petitioner disputed only so much of the *7 deficiency as reflected the disallowance of deductions taken on its returns for 1958 and 1959 in respect of expenses of a proxy fight between management and a group of successful insurgent *235 stockholders. The Commissioner subsequently conceded that petitioner's payment of management's costs in waging the proxy fight, which constituted the entire amount of the disallowed deduction in 1958, and a portion of the disallowed deduction in 1959, are properly deductible by petitioner. The only issue presently in controversy is whether petitioner is entitled to a deduction of the remaining portion ($ 95,726.40) of the amount disallowed for 1959, which represents its payment or reimbursement of the insurgent stockholders' 1959 expenses.
FINDINGS OF FACT
The Central Foundry Co. (hereinafter sometimes referred to as Central), petitioner herein, is a Maine corporation which was organized in 1911. At all times during the period from prior to October 1957 to about June 1959, its principal place of business was in Newark, N.J. Since June 1959, its principal place of business has been at 932 Broadway, New York, N.Y.
Central is a large manufacturer of cast-iron soil pipe and fittings, which are used *8 for the sanitary disposal of wastes and drainage from residential, industrial, and institutional buildings. At all times during the period October 1957 through May 1959 (hereinafter referred to as the contest period), Central had issued and outstanding between approximately 639,000 and 670,000 shares of common stock, and between 3,500 and 3,700 shares of $ 100 par value voting preferred stock, which were held by about 3,400 owners of record, including approximately 150 brokers or nominees who held of record shares which were owned beneficially by about 1,500 beneficial owners. The common stock of Central was registered, listed, and traded on the New York Stock Exchange.
Sidney Gondelman was a wealthy financier and investor, with a net worth of about $ 7 million and average annual gross income in excess of $ 200,000. He was president and sole stockholder of Mutual Factors, Inc., a commercial financing concern which from time to time made loans to enable the borrowers to purchase stock of various companies. He was also president and sole stockholder of the Herbert Lee Corp., which engaged in commercial financing and held real estate, principally a property at 932 Broadway in New York *9 City. He also owned shares of stock in 40 or 50 corporations, all of which were listed on the New York Stock Exchange. Gondelman had been disbarred as a lawyer in 1930, reinstated in 1932, again disbarred in 1940, and finally reinstated on newly discovered evidence in 1964.
In January 1957 Gondelman purchased some stock in Central. It was selling for about $ 8.50 or $ 9 a share, and paid a dividend of 65 cents. Gondelman considered it a good investment. Somewhat later, he looked further into the corporation, and met with John J. Nolan, *236 Jr. (Nolan), Central's president. Nolan had been Central's executive vice president from 1945 to 1951, and served as its president from 1951 to May 27, 1957. Gondelman was impressed with Nolan, and as a result of his conversation, he began to buy more stock in Central.
Central's sales, net income, and cash dividends per share of common stock over the period 1951-59 are shown in the following schedule:
| Sales | Net income | Dividends per | |
| common share | |||
| 1950 | $ 13,753,289 | $ 981,673 | $ 0.80 |
| 1951 | 15,212,378 | 891,795 | .80 |
| 1952 | 11,807,929 | 501,651 | .55 |
| 1953 | 18,196,868 | 631,203 | .40 |
| 1954 | 20,761,256 | 812,677 | .40 |
| 1955 | 24,900,336 | 1,178,244 | .65 |
| 1956 | 23,842,596 | 1,038,307 | .65 |
| 1957 | 23,018,381 | 982,954 | .65 |
| 1958 | 22,374,886 | 906,170 | .65 |
| 1959 | 26,163,723 | 1,275,575 | .80 |
On *10 March 19, 1957, Gondelman attended a meeting of Central's board of directors, at which he submitted a letter suggesting that he and his associates, as owners of approximately 35,000 shares of Central's stock, be allowed to name three directors to Central's seven-man board, and that he be nominated, along with two others, on the slate of directors to be submitted to stockholders at the May 1957 annual meeting. He assured the directors that it was his (and his associates') intent and desire to continue the present management, and noted that his several conferences with Nolan, the president of Central, had emphasized his opinion that the success of Central was due to Nolan's direction and loyalty. Finally, "as further evidence of our good faith," Gondelman and his associates offered to buy 209,568 shares of Central's unissued stock (equal to approximately 30 percent of Central's then-outstanding stock) at a substantial discount from the current market price.
Gondelman received no reply to his letter, and the board did not accede to his request either for directors or for the purchase of Central's stock. Moreover, at a meeting of the board on May 27, 1957, the directors elected James K. *11 Norris to replace Nolan as president of the company. Nolan had been reelected a director at the annual meeting of stockholders on May 14, 1957, however, and continued to serve in that capacity throughout the contest period.
On July 31, 1957, Gondelman wrote the board of directors of Central, attention James K. Norris, president. He pointed out that he had attended the annual meeting of stockholders on May 14, 1957, having traveled by train from New York to Portland (Maine), where the meeting was held, with Nolan and Fred J. Young, another of Central's directors; and that no other directors attended the meeting. During this trip "there was no mention made by Mr. Young that Mr. Nolan *237 was not to be continued as President." He stated that "Relying on the foregoing," he had "voted his stock in favor of the management, presuming of course that all of the officers likewise would be reelected by the board." Finally, he stated that he "was greatly surprised to learn that at the recent meeting of the board of directors, Mr. Nolan was not reelected and that in his stead you chose another person" and that it was "very mysterious * * * to find you dispensing with the services of a president *12 who had for 18 years faithfully, diligently, and successfully served the stockholder's [sic], and to substitute him with a man whose qualities are still to be proven and tried."
On October 21, 1957, Gondelman, through counsel, made formal written demand upon Central that he be permitted to inspect its corporate books and records. On November 20, 1957, Central refused to grant such inspection, stating in its reply to Gondelman's counsel that:
1. The activities and statements of your client, Mr. Sidney Gondelman, over the past number of months make the Company unable to accept the assertion that the demand is made in good faith. On the contrary, the Company is convinced that the demand is made for Mr. Gondelman's own particular purposes and not in the best interests of the Company and its stockholders.
On December 16, 1957, Gondelman instituted a proceeding pursuant to article 78 of the New York Civil Practice Act seeking to compel Central to permit the desired inspection. Central contested this proceeding, which was dismissed by stipulation in June 1959, after the conclusion of the contest period.
On January 22, 1958, Gondelman organized an "Independent Stockholders Protective Committee" *13 (hereinafter referred to as the committee) to solicit proxies for his slate of directors in opposition to management's slate and to be voted at the 1958 annual meeting of Central. At his invitation, Nolan, the ex-president of Central, William Maidman (Maidman), the president of a clothes manufacturing concern who was also involved in real estate transactions, Harold D. Farber (Farber), the general agent in Buffalo, N.Y., for the Security Mutual Life Insurance Co., and others joined the committee, and became nominees for the committee's slate. Although the membership of the committee changed from time to time, Gondelman, Maidman, Farber, and Nolan were members of the committee throughout the contest period.
Maidman and Farber had made their initial acquisitions of Central stock in May 1957, and made additional acquisitions thereafter. Gondelman, besides continuing the acquisitions made by him beginning in January 1957, lent money to other individuals from time to time in 1957 to enable them to purchase Central stock. All such loans were repaid. The respective holdings of Central stock of Gondelman, Maidman, and Farber, their immediate families, and the aggregate *238 holdings of the other *14 nominees of the committee at the commencement of each of the periods of solicitation of proxies, as described below, were as follows:
| Stock holdings | |||
| April 1958 | August 1958 | April 1959 | |
| Gondelman | 1 77,500 | 1 79,800 | 1 89,700 |
| Maidman | 21,700 | 27,400 | 34,700 |
| Farber | 10,000 | 10,000 | 2 12,200 |
| Other nominees 3 | 1,200 | 4 7,800 | 4, 5 20,300 |
| Family members 3 | 7,901 | 12,301 | 11,401 |
| Totals | 118,301 | 137,301 | 167,301 |
Section 14 of the Securities Exchange Act of 1934, as in effect during the contest period, prohibited any person from *15 soliciting any proxy in respect of any security registered on any national securities exchange "in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Pursuant to said section 14, the Securities and Exchange Commission (hereinafter called the SEC) had promulgated Regulation X-14 (hereinafter called the proxy rules). Pursuant to the proxy rules, proxy material was required to be submitted to the SEC in preliminary form. The proxy material was reviewed by the SEC staff. The staff would require any relevant supplemental information and would undertake any investigation (employing the SEC's subpoena power) it deemed appropriate to insure that the proxy material as ultimately used embodied full and accurate disclosure. The objective of this process was to insure that the corporate election procedure would be conducted within the prescribed bounds of fairness under the Securities Exchange Act, section 14.
Both the management of Central and the committee began their solicitation of proxies from the stockholders of Central a little more than 1 month before *16 the scheduled date of the annual meeting, May 13, 1958. In its initial letter to stockholders, dated April 4, 1958, the committee set forth two major themes which would be echoed many times during the remainder of the contest period: (1) The committee's proposed directors had a substantial investment in Central, owning collectively about 20 percent of the company's stock, while management's slate owned collectively less than 1 percent of the stock. "We do not believe that persons with such a small interest in a Company *239 are best fitted to serve as its governing board." Again, "This Committee feels that holders of substantial stock interest are best trusted to make decisions which affect all stockholders. In a completely real sense, their interests are identical with yours." (2) The committee's slate would reelect Nolan as president of Central. The committee pointed to Nolan's "long experience" and "proven ability" in his 17 years with Central, in contrast to Central's current president, Paul M. Dollard, who had recently been appointed to that post in December 1957 after being with Central only a short time.
Similarly, management's initial letter to stockholders set the tone for its *17 subsequent communications to stockholders. It charged that the committee was no more than a front for Gondelman in his attempt to obtain control of Central for his own purposes, and charged that those purposes included obtaining a salaried position for himself and his son. Management further attempted to discredit Gondelman, and to impugn his veracity, by pointing out that he had been disbarred twice by the courts of New York State, the first time in 1929 for "ambulance chasing," for giving false testimony and for concealing his true financial affairs, and the second time in 1940, for causing a witness in a trial to testify falsely.
The charges and countercharges and replies and rebuttals which were sent to stockholders during the ensuing month revolved to a substantial extent around the above issues. Various other matters were also dealt with in the communications to the stockholders. In a letter, dated May 3, 1958, sent to the stockholders the committee expressed its disapproval of a proposal then before Central's board of directors to retire all of the company's preferred stock. The committee opposed this course of action on the grounds that such retirement would needlessly place *18 a strain on the company's cash position and would unduly favor preferred stockholders over common stockholders. No action was taken on this proposal, and no mention was made of this issue by either side during the remainder of the contest period. The preferred stock was in fact redeemed shortly after the conclusion of the contest period, when the committee's nominees controlled a majority of Central's board of directors.
On May 8, 1958 (5 days before the meeting of the shareholders was to be held), Central's management caused Central to institute an action in the U.S. District Court for the Southern District of New York, alleging that the committee had made certain false and misleading statements in the course of its solicitation of proxies, in violation of rule 14a-9 of the proxy rules promulgated by the SEC. The complaint sought injunctive relief including the voiding of all proxies received by the committee. On May 19, 1958, the SEC instituted a similar action and the two actions were consolidated. The holding of *240 *19 the 1958 annual meeting was adjourned from time to time while hearings in the consolidated actions were in progress and while the court had the matter under advisement.
On August 22, 1958, the court issued a decree invalidating all of the proxies obtained by the committee by means of its solicitation during April and May, 1958. The Court further enjoined the committee from resoliciting proxies until, in its initial soliciting material furnished to stockholders, it had corrected certain misstatements and omissions and made certain disclosures, including the following:
(1) That the resolicitation had become necessary as the result of the Court's determination that the Committee's proxy solicitation violated the Securities Exchange Act of 1934 and the SEC's proxy rules promulgated thereunder, and were, therefore, unlawful;
(2) That certain information contained in a management letter, dated April 10, 1958, to the effect that a referee of a New York court had reported that in his opinion it must be held that newly discovered evidence should absolve Gondelman of blame for the charges upon which he was disbarred in 1940, was included at the insistence of the SEC which in doing so had relied *20 upon false and misleading information given to it by the Committee, in that Gondelman had deliberately failed to inform the SEC that the referee had subsequently rendered a supplemental report in which he stated that he no longer adhered to his original recommendation, and had no recommendation to make to the Court;
(3) That Gondelman individually organized the Committee and was the dominant member thereof, and each member and each of the Committee's nominees became such at Gondelman's invitation;
(4) That although the Committee had represented in its proxy soliciting material that "the members of the committee and the nominees will bear the initial expense of solicitation on a basis to be determined," in fact, as the Court found, all of the expenses of the Committee up to the date and including the period of hearings before it had been personally paid by Gondelman and that there was no understanding or arrangement of any definitive character requiring any other member of the Committee to pay any portion of the expenses, and that Gondelman would continue to bear all the future expenses of the Committee.
The committee appealed the decision to the U.S. Court of Appeals for the Second Circuit*21 on September 12, 1958, but no further steps were taken until after the end of the contest period, when the case was dismissed by stipulation. Meanwhile, however, the committee complied with the decree and made the required corrections and disclosures. Thereafter, the committee and the management of Central once again solicited the proxies of the stockholders of Central for the adjourned 1958 annual meeting, which, pursuant to the court decree of August 22, 1958, had been rescheduled for September 26, 1958. The major issues remained the same as in the April-May solicitations, with management seizing on the results of the trial to cast further aspersions on Gondelman's character, and the committee continuing to chide management for its meager investment in Central and its failure *241 to diversify and expand the company. However, on September 25, 1958, the day before the rescheduled 1958 annual meeting, the SEC commenced an action in the U.S. District Court for the Southern District of New York alleging violations of the proxy rules by both Central and the committee during the August-September 1958 solicitation. This litigation had not been resolved by early 1959. The committee accordingly *22 decided to abandon its efforts with respect to the 1958 annual meeting and to solicit proxies for the 1959 annual meeting.
The 1959 annual meeting of stockholders was scheduled for May 12, 1959, and the new barrage of proxy solicitation material began approximately 1 month prior to this date. As in the two earlier campaigns, the letters of management continued to attack the character and motivations of Gondelman, while the committee (now known as the Nolan-for-President Committee) stressed the abilities and experience of Nolan and the importance of having a board of directors with a large investment in their company. Both sides used current developments to reinforce their major themes. The proxy soliciting materials distributed by the two contending factions, contained, among other things, the following charges, countercharges, statements of policy, and answers thereto:
1. Qualifications of the Candidates for President. -- The committee emphasized the advisability of restoring Nolan as president. It pointed out Nolan's 19-year record of experience with Central, including 5 years as its president, and the record of success achieved by Central under his leadership. It contrasted *23 his record with that of Mr. Dollard, president under the then incumbent-management, who had not joined Central until 1957 and who had a variety of jobs during the preceding 5 years.
Management asserted that Nolan was only a portion of the group "handpicked" by Gondelman. It belittled Nolan's record, pointed to his age (66 years), and attributed to him the primary motive of regaining his employment.
2. Qualifications of the Other Nominees . -- Each of the contending factions emphasized the business background and experience of its nominees. The committee emphasized the large holdings of stock by the committee members and nominees and contrasted these holdings with the relatively nominal holdings of the management nominees. It accused the management directors of "a lack of judgment," "a lack of foresight," and a "lack of vision" for certain positions they had taken. It also accused the incumbent management of poor judgment in considering a proposed merger with another company. Management defended this merger proposal and accused Gondelman of having prevented it from coming about.
*242 Management accused certain committee nominees of being motivated by self-interest.
3. Gondelman's Record *24 and Background. -- A principal management contention was that Gondelman was the organizer and dominating figure of the committee and would in effect himself control Central if the committee should win the proxy contest. Management contended that Gondelman's background as a disbarred lawyer and the adverse court decision in the litigation instituted in May 1958 marked him as unworthy of the confidence of the stockholders.
4. The Position of Woodward Iron Co. -- One of Central's major suppliers of pig iron, Woodward Iron Co. (hereinafter called Woodward), acquired 62,030 shares of Central's common stock on the open market during the period December 1958 to March 1959. During the same period, certain management nominees were also purchasing Central's stock under a joint purchasing arrangement with Woodward established to avoid competing bids. Woodward announced that it was supporting management in the 1959 contest.
The committee contended that Woodward intended to take "a dominant position in Central" which it might use for its own benefit as a supplier, to the detriment of Central's own best interest as a separate company. Woodward might oppose any merger or diversification program *25 which might reduce Central's consumption of pig iron supplied by Woodward. The then-incumbent management, with its nominal stockholdings, could not, if reelected, take any steps opposed by Woodward, a large stockholder to whom it would owe its election. The committee contended that the stockholders' interest would be promoted by electing a management, such as the committee nominees, with "no debt to Woodward, with no history of alliance with Woodward" and with the "stock strength" to resist "any pressure Woodward might try to exert."
On April 17, 1959, Woodward announced tentative agreement to merge with a Central competitor, Alabama Pipe Co. According to the committee, the projected merger was "further proof of Woodward's intentions * * * to cement its position as a pig iron seller by taking positions of influence in the management of its major customers," involving an "apparent clear conflict of interests." The committee urged stockholders to "resist at all costs any situation which could result in favored treatment for Woodward."
Management termed these committee charges as a "new Gondelman smoke screen." Woodward's stated reason for supporting management was its "conviction that *26 the present management of Central is highly competent and is administering Central's affairs in an efficient and successful manner." Woodward had affirmed that it was "not interested in assuming managerial functions with respect to Central Foundry or in influencing or dominating its management."
*243 Management accused Nolan of threatening "to bring a law suit under anti-trust laws to prevent Woodward Iron from merging with Alabama Pipe Company, * * * and * * * voting of its stock in Central," but offering "to forget about the law suit if Woodward agreed not to vote its 62,030 shares for the management." Nolan replied that, based on advice of counsel, he had taken the position that Woodward would "violate the federal anti-trust laws if it should vote its Central stock," because, after the Alabama Pipe merger, "Woodward itself, owner of almost 10 percent of Central's stock, will be Central's biggest competitor."
5. Cumulative Voting. -- At the request of Nolan, as required by the proxy rules, management included in its proxy statement a proposal to amend Central's bylaws so as to institute cumulative voing for the election of directors, beginning with the 1959 annual meeting. The committee*27 pointed out that cumulative voting "would give the minority [stockholders] a fair voice in the affairs of the Company." Noting that past efforts to settle the proxy contest had failed "largely through differences as to how many seats on the board each side should have * * *," the committee pointed out that "cumulative voting will let stockholders answer this question." The committee contended that minority representation would be "healthy" for the company because with different points of view represented on the board, fresh ideas could be presented, thorough examination of all questions would be promoted, and a watchdog minority would be on guard protecting stockholders' interests.
Management opposed adoption of the cumulative voting proposal on the grounds that there were legal questions as to the propriety of its adoption at the meeting, which could cause litigation and legal uncertainty if the proposal received a majority of the votes.
6. Committee Operational Proposals. -- The committee detailed a number of specific steps which it proposed to take if a majority of its nominees were elected:
(a) A "complete survey of the entire company, its executive and supervisory personnel, its *28 accounting procedures and reports, its financial, manufacturing and merchandising policies."
(b) Increased emphasis upon the expansion of Central's sales and production of fibre pipe. Noting that "fibre pipe profits are higher per foot than iron pipe" and that "the Company is in a position to expand greatly its fibre production with no additional plant or equipment expense," the Committee advocated institution of a continuous 7-day, around-the-clock workweek for this purpose.
(c) Resumption of "the research and development program inaugurated by Mr. Nolan several years ago but substantially curtailed by the present management." The committee noted that research personnel *244 "were selected for their high engineering and technical knowledge of exotic metals, especially those utilized in the new era of rockets and missiles." It expressed the belief that "tremendous opportunities exist for the Company in rocket and allied products." It noted that Central had made "considerable progress through its talented research technicians but reduction in the technical research staff may have seriously delayed or retarded its progress."
(d) Reactivation of the former shell plant in which the government *29 had installed equipment worth $ 8 million. Noting that the shell plant had been idle since the prior September, the committee expressed the belief that the plant was adaptable to products for missiles and rockets.
(e) A survey of "Operating costs, manufacturing techniques and available new equipment" to promote "plant modernization for improved production and lowering of costs * * *."
Management minimized the committee's suggestions, terming them "glib talk and rosy promises" and noted certain steps of its own along some of the lines the committee had mentioned.
Except for the cumulative voting proposal and the issue arising out of the position of the Woodward Iron Co., the foregoing charges, countercharges, statements of policy, and answers thereto had also been involved in the 1958 solicitations.
The 1959 annual meeting of Central's stockholders convened on May 12, 1959, in Portland, Maine, as scheduled. 643,615 shares of stock were outstanding as of the close of business on April 20, 1959 (the record date for the meeting), including 973 shares of treasury stock, and an aggregate of 598,240 shares were represented at the meeting in person or by proxy. The committee's nominees for directors *30 received the votes of 315,224 shares, while management's nominees received the votes of 281,428 shares. However, since a majority of the stockholders also voted in favor of the proposal to amend the bylaws of Central to provide for cumulative voting for the election of the directors effective beginning at this 1959 annual meeting, the committee was not able to elect all of its nominees to the board. When the votes for directors were cast on a cumulative basis, four of the committee nominees (Gondelman, Nolan, Maidman, and Farber) and three of the management nominees received the most votes for the seven board seats to be filled.
By notice dated September 10, 1959, a special meeting of Central's shareholders was called by the directors for September 30, 1959. In an attached proxy statement, the new board of directors of Central recommended that stockholders vote for the following proposals:
1. To reduce Central's capital in the amount of the aggregate par value of all of Central's authorized 5-percent cumulative preferred stock in order to reflect the new board's retirement of all such stock.
*245 2. To ratify management's expenditure of Central's funds in the amount of $ 63,542.63 for *31 legal services, services of public relations consultants, services of professional proxy solicitors, printing services, mailing expense, and related incidentals in connection with its solicitation of proxies for use at the 1959 annual meeting.
3. To pay an aggregate of $ 95,726.40 of similar expenses incurred by the committee in connection with its solicitation of proxies for use at the same 1959 annual meeting. A portion of those expenses ($ 45,500) had not yet been paid and the proposal contemplated payment of those expenses directly by Central. The remaining expenses had already been paid by the members of the Committee and the proposal provided for reimbursement of the amounts thus actually expended by them. The proxy statement noted that the committee would not seek reimbursement for any expenses incurred for solicitation in connection with the 1958 annual meeting.
4. To authorize the payment of compensation to Gondelman, who had previously been elected by the new board to the position of chairman of the board of directors. In response to management's charges during the contest period that he wanted control of Central only for his own purposes, including obtaining salaried positions *32 for himself and his son, Gondelman had stated that he would accept no compensation from Central, other than the usual director's fees, "unless and until the Company's employment of me has been approved by the stockholders." His son, Herbert L. Grayson, joined him in making this promise.
5. To authorize the president of Central, in his discretion, to employ Herbert L. Grayson, Gondelman's son, as a regular employee of Central.
The motion to authorize payment or reimbursement by Central of the committee's expenses incurred in connection with the solicitation of proxies for the 1959 annual meeting of stockholders was adopted by a vote of 393,840 shares in favor as against 53,732 opposed. 1*33
*246 The only committee members who became officers of Central at the conclusion of the contest were Gondelman, who became chairman of the board, Farber, who became vice chairman, Nolan, who became president, and Maidman, who became a vice president. Gondelman's salary was $ 30,000 a year. Farber received no salary at all until 1966 or 1967 when he began to get $ 15,000 a year for certain services in connection with another company which Central acquired at that time. Maidman renders nearly full-time services; his salary is presently $ 20,000 a year. With the exception of Nolan, none of these men had ever had any experience with the pipe business. Herbert L. Grayson was engaged as an employee of the company at a salary of $ 10,000 per year, which has recently been raised to $ 20,000; he performs services formerly rendered by two employees whose aggregate salaries were $ 45,000 a year. Nolan died in Ocotober 1959, and was *34 replaced as president in 1960 by Gondelman, whose salary was then increased from $ 30,000 per year to $ 50,000 per year. Upon being elected a salaried officer of Central, Gondelman devoted his full time to the business and affairs of Central and completely gave up his commercial financing business.
Prior to the conclusion of the proxy contest, the principal executive offices of Central had been located at Foot of Pacific Street, Newark, N.J. After the election of the new board of directors, in June 1959, Central moved its offices to 932 Broadway (on the corner of Broadway and 22d Street), New York City. It leased about 12,000 square feet of air-conditioned office space at this location, including furniture, rugs, and other facilities, from the Herbert Lee Corp., Gondelman's wholly owned real estate corporation, at somewhat under $ 24,000 a year. This rental was substantially less than Central would have been required to pay for other comparable office space in the vicinity. Consideration had been given in the past to moving the principal executive office to New York City. The lease was approved by unanimous vote of Central's board of directors, including the three nominees of *35 the previous management.
In determining the deficiencies the Commissioner disallowed deductions for proxy contest expenditures in the amounts of $ 175,525.04 and $ 161,928.32 for the years 1958 and 1959, respectively. The amount disallowed for 1958 relates execlusively to expenses incurred by management in that year, but $ 95,726.40 of the amount disallowed for 1959 relates to the 1959 expenses of the committee, which were paid or reimbursed by petitioner. The Commissioner has since conceded that the expenses incurred by the ousted management for both years are deductible, and contests only the deductibility of the $ 95,726.40 1959 expenses incurred by the committee.
*247 OPINION
Central Foundry Co., the petitioner herein, is a publicly held corporation engaged in the business of manufacturing cast-iron soil pipe and fittings. Its stock is listed on the New York Stock Exchange. In May 1959, after a long and bitterly fought contest for the proxies of Central's 4,900 shareholders, a group of stockholders (the "committee") succeeded in ousting incumbent management from control of Central's board of directors. The dominant member of the committee, Gondelman, became chairman of the board, *36 and another committee member, Farber, became vice chairman. Nolan, a former president of Central who was also a committee member, was appointed the new president of Central, and Maidman, a fourth member of the committee, became a vice president. Shortly thereafter a special meeting of stockholders was called at which Central's stockholders were asked by the new management in effect to approve Central's bearing the entire cost of the 1959 proxy fight, including the costs of legal services, services of public relations consultants, services of professional proxy solicitors, printing services, and mailing expenses incurred by both sides in soliciting proxies for the May 1959 annual meeting. The stockholders gave their approval, voting 393,840 shares in favor as against 53,732 shares opposed to a motion to have Central pay the committee's 1959 proxy solicitation expenses. Since old management had used Central's funds to pay its expenses of seeking reelection, the stockholders were asked only to ratify those expenditures, and no reimbursement was necessary. Central claimed both the former management's expenses and new management's expenses as deductions on its 1959 corporate income *37 tax return.
In his notice of deficiency, the Commissioner disallowed, among other expenses not at issue in these proceedings, the entire amount claimed by Central in 1959 by reason of its payment of the proxy-solicitation expenses incurred by old and new management, as well as the deduction taken by Central on its 1958 income tax return for old management's proxy expenses (also paid for out of corporate funds) incurred in connection with the aborted 1958 annual meeting, 2 on the ground that these expenditures by Central were not "ordinary and necessary expenses incurred during the taxable years in carrying on your business." The Commissioner has subsequently conceded that Central's corporate funds expended to procure proxies for incumbent management were properly deducted by Central in both 1958 and *248 1959 under section 162, I.R.C. 1954. Thus, the only question remaining for decision is whether Central's payment of the proxy-solicitation expenses incurred by its new management in successfully deposing the incumbents is similarly deductible. We hold that the payment of these expenses was also ordinary and necessary, proximately related to Central's business, and therefore deductible *38 under section 162.
It is now settled law that costs incurred by a stockholder in a proxy contest may be deducted by him as "ordinary and necessary" expenses under section 212, at least to the extent that they are proximately related to the stockholder's income-producing activities. Graham v. Commissioner, 326 F. 2d 878, 880 (C.A. 4), reversing 40 T.C. 14">40 T.C. 14; Surasky v. United States, 325 F. 2d 191 (C.A. 5). 3 And the Internal Revenue Service has ruled that it will follow the decisions in these cases, if the expenditures "are proximately related to either the production or collection of income or to the management, conservation, or maintenance of property held for the production of income." Rev. Rul. 64-236, 2 C.B. 64">1964-2 C.B. 64. Similarly, the Service has ruled that it will follow the decision in Locke Manufacturing Cos. v. United States, 237 F. Supp. 80">237 F. Supp. 80*39 (D. Conn.), which allowed deductions under section 162 for like expenditures incurred by a corporation in support of existing management in a proxy fight. Rev. Rul. 67-1, 1 C.B. 28">1967-1 C.B. 28.
Of course, like any other "ordinary and necessary" expense, proxy solicitation expenses must be incurred for business (sec. 162) or profit-oriented (sec. 212) purposes, and such expenditures will not be deductible if they are made primarily to satisfy the personal desires or needs of those seeking the proxies. See Dyer v. Commissioner, 352 F.2d 948">352 F.2d 948 (C.A. 8), affirming a Memorandum Opinion of this Court; Rev. Rul. 67-1, supra. It is on this ground that the Commissioner defends his present position, for he contends that the proxy fight expenses of the committee were incurred primarily for the benefit of the interests of the stockholder-members of the committee who became Central's new management, and that Central's payment of their expenses was tantamount to the distribution of a preferential dividend, much as any corporation's payment of the personal expenses of its stockholders would be. See Challenge Manufacturing Company, 37 T.C. 650">37 T.C. 650. In substance, it is *40 his position that the payment of the proxy expenses here in issue was not proximately related to the business of Central and therefore cannot qualify as an ordinary and necessary business expense of the corporation. We hold otherwise. We think that the proxy fight expenses incurred by incoming management which petitioner paid or reimbursed were just as proximately related to its business as those of ousted management which the Government concedes to be deductible.
*249 Without doubt, Gondelman and his associates were inspired to a substantial extent by personal or selfish motives. To conclude otherwise would be to assume a purity of purpose that is contrary to human experience and to exhibit a naivete that is not required of any court. But their campaign was nevertheless as much in the interest of the corporation itself as was the counter-offensive mounted by existing management, which was also obviously motivated by personal or selfish considerations in seeking to perpetuate its control over the corporation. Any assumption that management is never motivated by personal considerations and that the insurgents' motivations are always personal -- a view suggested if not explicitly so *41 stated in the Government's brief -- bears little relation to the real world. A whole complex of factors, both business and personal, may prompt a group of stockholders to start a proxy fight with management, and management's defense of the status quo may be partly the result of a good faith belief that it is acting in the best interests of the corporation, but almost certainly also the result of its selfish desire to remain in control. In short, we see no more evidence of a predominance of purely personal rather than business considerations motivating the committee's expenditures in its attempt to gain control of Central than could be found in management's desire to see itself reelected in Locke, or in this very case.
The proxy rules promulgated by the SEC were plainly intended to promote corporate democracy, and we cannot say that the proxy fight in this case involved matters of corporate policy that were more directly related to Central's business from the point of view of existing management than from that of the insurgents. A careful examination of the voluminous proxy materials in this record discloses sharp differences respecting corporate policy -- some broad and some of a *42 more limited character -- and we are satisfied that, notwithstanding the personal interests of both sides, the expenses incurred by each of them were directly related to the business of the corporation. And if the payment of the costs of incumbent management qualifies for deduction as an ordinary and necessary expense under the Locke case, as conceded by the Government, Central's payment of the insurgents' expenses is entitled to no less favorable treatment. It must be remembered that the insurgents were successful and that the corporation thereby became the beneficiary of whatever changes in policy their victory might entail. In the circumstances, its payment of their expenses was no less proximately related to the corporate enterprise than the payment of ousted management's expenses.
Nor do we accept the Government's oversimplified argument that what was involved here was merely a contest over control rather than over corporate policy. In Steinberg v. Adams, 90 F. Supp. 604">90 F. Supp. 604 (S.D.N.Y.), involving the propriety of payments made by a corporation *250 to defray proxy fight expenses of both sides, Judge Rifkind, after noting (p. 607) that his "own choice is to draw no distinction between *43 the 'ins' and the successful 'outs,'" stated that (p. 608) "general policy and personnel do not exist in separate compartments. A change in personnel is sometimes indispensable to a change of policy." Cf. Rosenfeld v. Fairchild Engine and Airplane Corp., 309 N.Y. 168">309 N.Y. 168, 128 N.E.2d 291">128 N.E. 2d 291.
We do not intend to suggest that reimbursement of insurgents' expenses would be deductible in every case. Rev. Rul. 67-1, supra, after stating the intention of the Service to follow the Locke case, indicated a contrary approach where the expenditures "are made primarily for the benefit of the interests of individuals rather than in connection with corporate policy"; and it stated explicitly that corporate deductions would be disallowed if the expenditures "are in the nature of preferential dividends to stockholders or excessive compensation to officer-stockholders." But in the present case, the Commissioner in his reply brief explicitly disavows any attempt to characterize the payments as excessive compensation, and we think there is no sound basis upon which to hold that they were preferential dividends. Nor can we find on this record that Gondelman and his associates were corporate "raiders," concerned *44 primarily with milking the corporation for their own benefit. Rather, we think, as did obviously the voters of a majority of Central's stock, that they performed a useful service for the corporation. 4 The salaries received by Gondelman and his associates do not appear to be out of line, and the rental paid by Central to one of Gondelman's corporations for its New York office space was substantially less than it would have been required to pay for comparable quarters. Although there is some aura of self-aggrandizement on the part of Gondelman, we think that, on the whole, the evidence supports the conclusion that the committee's activities were proximately related to the business of the corporation and the interests of stockholders generally and that the payment of its expenses by Central fairly qualifies as an ordinary and necessary business expense of the corporation.
Although not squarely in point, a helpful analogy may be found in the cases permitting a corporation to deduct amounts *45 paid to a stockholder to reimburse him for expenses incurred in a successful derivative action brought by him against the corporation and its officers or directors for malfeasance, breach of fiduciary duty, or other illegal acts. Larchfield Corporation v. United States, 373 F. 2d 159 (C.A. 2), 5 modifying and affirming 243 F. Supp. 926">243 F. Supp. 926 (D. Conn.) and 203 F. Supp. *251 821 (D. Conn.); Shoe Corporation of America, 29 T.C. 297">29 T.C. 297, acq. 1 C.B. 6">1958-1 C.B. 6; B. T. Harris Corporation, 30 T.C. 635">30 T.C. 635, acq. 2 C.B. 5">1958-2 C.B. 5. Cf. Charles Kay Bishop, 25 T.C. 969">25 T.C. 969, 973, acq. 1 C.B. 3">1956-1 C.B. 3. In such stockholder suits the corporation is generally a party defendant and the expenses incurred are those of the plaintiff-stockholder, but the corporation's reimbursement thereof is treated as its own deductible expense on the theory that the matter is proximately related to the corporation, and the results achieved in the litigation are thought to be beneficial to it. 6 Thus, even though the expense might have been deductible by the stockholder if it had not been reimbursed, it nevertheless becomes an allowable deduction to the corporation when paid by it. Shoe Corporation of America, supra, 29 T.C. at 307. Similarly *46 here, had the committee members borne the ultimate burden of the proxy fight costs they would have been entitled to deductions therefor (as has been recognized in Graham, Surasky, and Rev. Rul. 64-236, supra at 248), but payment thereof by the corporation in the present circumstances calls for allowance of the deduction to it.
To be sure, a stockholder suit is not the *47 same as a proxy fight. But both often involve an attempt by minority stockholders either to vindicate corporate rights or to effect a change in management in order to vindicate such rights or to bring about a change in corporate policy. And if the proxy fight is concerned in substantial part with an effort to change corporate policy for the benefit of the corporation, as we think was the case here notwithstanding other possible motives, it would seem that the payment of the minority stockholders' expenses should similarly be deductible. Certainly, in cases where the stockholder has a choice of remedies, either to bring a derivative action or to engage in a proxy contest, deductibility should not turn upon which remedy was selected. In the present situation, of course, it seems unlikely that the derivative suit would have been available as an effective remedy, since the issues revolved largely around matters of alleged poor judgment in management rather than specific acts of malfeasance. 7*48 The problem of proximate relationship to the corporate enterprise, however, remains the same.
Decision will be entered under Rule 50.
*252 Drennen, J., dissenting: As a result of respondent's concession of the right of the corporate petitioner to deduct the costs incurred by it or its management in its unsuccessful proxy fight, and the conclusion of the majority of this Court that the corporate petitioner may also deduct the amount it reimbursed the insurgent stockholders for their costs incurred in their successful proxy fight, the corporation is allowed to deduct the total cost of the proxy fight to both sides. It seems to me that it would be in only very unusual circumstances, which I do not find in this case, that the expenses incurred by both sides of the proxy fight could be said to be ordinary and necessary business expenses, and proximately related to the business, of the corporation.
The majority opinion says, "It is now settled *49 law that costs incurred by a stockholder in a proxy contest may be deducted by him as 'ordinary and necessary' expenses under section 212, at least to the extent that they are proximately related to the stockholder's income-producing activities," citing Graham v. Commissioner, 326 F.2d 878">326 F. 2d 878, and Surasky v. United States, 325 F.2d 191">325 F. 2d 191. The opinion also points out that the Internal Revenue Service has ruled that it will follow the decisions in those cases if the expenditures "are proximately related to either the production or collection of income or to the management, conservation, or maintenance of property held for the production of income." See Rev. Rul. 64-236, 2 C.B. 64">1964-2 C.B. 64. It may be "settled law" that such costs are deductible in the sense that the Commissioner's statement in the above revenue ruling that he will follow the Graham and Surasky cases, and his statement in Rev. Rul. 67-1, 1 C.B. 28">1967-1 C.B. 28, that he will follow Locke Manufacturing Cos. v. United States, 237 F. Supp. 80">237 F. Supp. 80, will encourage revenue agents to allow insurgent stockholders to deduct such costs, and will allow the corporation to deduct the costs incurred by existing management in proxy fights. But, even so, *50 I do not believe it follows that the corporation should be allowed to deduct the costs incurred by the successful insurgent stockholders in a proxy fight as an ordinary and necessary business expense of the corporation.
The majority opinion finds that "the proxy fight expenses incurred by incoming management which petitioner paid or reimbursed were just as proximately related to its business as those of ousted management which the Government concedes to be deductible." I would disagree with this except in quite unusual circumstances. When the insurgent stockholders incurred these expenses they were not "incoming management." They had no authority to act for the corporation and were acting either to protect their own income-producing property or to promote their own interests. If we accept the statement of the majority that it is "settled law" that the stockholders may deduct their costs in a proxy fight under section 212, and also the conclusion of *253 the majority in this case that the corporation may deduct the amounts it reimburses the insurgent stockholders under section 162, the question of whether the costs incurred by the insurgent stockholders were proximately related to the *51 business of the corporation or were proximately related to the production of income for the stockholders would seem to turn on whether the insurgents are successful in the proxy fight. I doubt that this is a proper criterion.
Every group of insurgent stockholders engaged in a proxy fight for control of a corporation will give reasons why their management of the corporation would be better for the corporation than the management of the incumbents. Of course the incumbents will give reasons to the contrary. It would seem to follow from the conclusion reached by the majority herein and from the cases relied upon that in the usual proxy fight if the insurgents are successful they will have the corporation reimburse them for their expenditures and the corporation will be allowed to deduct the amounts reimbursed as well as the costs it incurred in support of its existing management, while if the insurgents are unsuccessful the corporation will deduct its own costs and the insurgents will be allowed to deduct their unreimbursed expenses under section 212. This should encourage proxy fights, which might become rather expensive not only to the Government through its loss of revenue, but to *52 the corporate stockholders as well.
In my opinion, in order to be deductible as ordinary and necessary business expenses by the corporation, the expenditures here involved must be shown to have been considerably more directly related to the business (and for the benefit) of the corporation than has been shown here. I would not allow the deduction.
Footnotes
1. Gondelman's holdings as shown include 10,700 shares in April 1958, 11,200 shares in August 1958, and 20,600 shares in April 1959, which were held of record by Herbert Lee Corp., a corporation of which Gondelman owned all of the outstanding stock.↩
2. Farber's holdings as shown include 2,200 shares held by Lake Ledge Park, Inc., a corporation all of whose stock was owned by Farber.↩
3. Different persons were included in these groups at each of the times mentioned.↩
4. Of these shares, 2,900 in August 1958 and 3,400 in April 1959 were held by one of the nominees, Morris H. Lipsky, as a joint tenant.↩
5. These holdings include 5,800 shares held by a corporation all of whose stock was owned by one of the nominees, Lazarus S. Heyman.↩
1. The resolution presented to the shareholders disclosed that the $ 95,726.40 would be used by the corporation in the following manner:
Reimbursement for sums actually expended: Mr. Sidney Gondelman $ 37,924.96 Mr. John J. Nolan, Jr 260.00 Mr. Harold D. Farber 2,042.23 Mr. William Maidman 8,198.53 Mr. Edward J. Tobin 1,000.00 Mr. Morris H. Lipsky 809.68 Payment of obligations for legal fees and expenses incurred but unpaid: Royall, Koegel, Harris & Caskey $ 42,500.00 Underhill & Rubinger 3,000.00 Total $ 95,726.40 (There appears to be either a slight error in addition, or perhaps a typographical error in the above figures, but they are set forth as they appear in the printed resolution attached to the proxy statement which was presented to the Court by stipulation of the parties.)
2. The committee neither sought nor received from Central reimbursement for similar expenses incurred in soliciting proxies for use at the 1958 annual meeting (both the meeting originally scheduled for May 13, 1958, and the one rescheduled for Sept. 26, 1958). Consequently, those expenses were of course not deducted by Central and are not at issue in these proceedings.↩
3. Cf. Alleghany Corporation, 298">28 T.C. 298↩.
4. The motion to approve payment of the committee's expenses was adopted by a vote of nearly 8 to 1 including the votes of members of the committee and 4 to 1 without taking such votes into account.↩
5. Of course, as was made clear in Larchfield↩, to the extent that the expenses might be capital in nature -- e.g., in a suit to recover specific property --, no deduction would be available for that reason.
6. In many, if not all, of such stockholder suits, reimbursement of the successful stockholder-plaintiff may be provided for in the decree in such litigation. However, to be deductible as an ordinary and necessary business expense, it is sufficient that the expenditure be proximately related to or appropriate and helpful to the conduct of the taxpayer's business; it need not be required. See Commissioner v. Pacific Mills, 207 F.2d 177">207 F. 2d 177, 180-181 (C.A. 1), affirming 17 T.C. 705">17 T.C. 705; Waring Products Corporation, 27 T.C. 921">27 T.C. 921, 929; Blackmer v. Commissioner, 70 F. 2d 255↩ (C.A. 2); 4 Mertens, Law of Federal Taxation, sec. 25.09.
7. The Government's suggestion that if the stockholders were dissatisfied with the manner in which the corporation was being managed they could sell their stock appears to be entirely too cynical a view. The stockholders were entitled to stand their ground, or even increase their holdings, and to seek such relief as might be afforded either through a derivative suit or through a proxy contest. Cf. Graham v. Commissioner, 326 F. 2d at 880↩.