*1756 CAPITAL EXPENDITURE AND/OR ORDINARY AND NECESSARY EXPENSE. - Early in the year 1924 the petitioner procured the organization of an associated corporation expected to furnish additional capital for the benefit of the petitioner and its other associated corporations. During 1924 and 1925 petitioner paid certain sums toward the cost of procuring subscriptions from the investing public to the capital stock of the said associated corporation. The stock-selling campaign produced results from which petitioner derived such good will as the general advertising could furnish. Petitioner also secured the benefit of the use of the capital of the associated corporation. Held, that the good will thus acquired was a benefit to the petitioner over an indeterminate period of time and that the benefit derived from the use or control of the additional capital of the associated corporation was a benefit to the petitioner over a period of time not less than the existence and continued operations of the associated corporation. Held, further, that the payments made by petitioner were of a capital nature and that there is no provision in section 234 of the Revenue Acts of 1924 and 1926 under*1757 which said payments may be amortized or otherwise written off against the annual income of petitioner.
*966 This is a proceeding for the redetermination of deficiencies in income taxes determined by the respondent in the following amounts: for 1924, $10,451.93; for 1925, $9,545.46.
The petitioner claims the right to deductions from income of commissions in the following amounts: for 1924, $31,123.32; for 1925, $78,496.58.
FINDINGS OF FACT.
The petitioner is a Michigan corporation with principal office at Detroit, and is engaged in the general real estate business, including subdividing and developing properties, installing improvements, financing and causing the erection of dwellings for sale to the public, mainly in Detroit. The operations of the petitioner are carried on in part directly and in part through various associated corporations named in the contract quoted below. The Frischkorn Construction Co. acquired the necessary building sites and constructed the dwellings. Petitioner, however, acted as sales agent for the properties, receiving*1758 a commission for its services and in addition it either advanced cash capital as short-time loans or it secured borrowed capital from other sources. The petitioner also acted as agent in disposing at a discount of the deferred payment contracts.
A large amount of working capital is necessary in the business of the petitioner and its associated companies due to the necessity of financing the development and construction operations, and also of carrying the deferred payments, which often extend over a period of several years. After trying in various ways through insurance companies and trust companies to secure the necessary financial backing and having failed to do so satisfactorily, E. F. Frischkorn and his brothers determined to develop a source entirely within their control for the credit arrangements. In 1924 the petitioner procured the organization of a finance company, to be known as the Title & Trust Co., with an authorized capital stock of $2,500,000, divided into shares of a par value $10 each. Subscriptions for this stock were solicited from the general public. Under date of May 8, 1924, the directors of the petitioner passed the following resolution:
Upon motion*1759 duly made and unanimously adopted the President and Secretary of the Corporation were authorized to enter into contract with Walter W. Tait, providing for the employment of the said Walter W. Tait to promote *967 the interests of this corporation and Frischkorn Development Company, Frischkorn Warren Avenue Development Company, Tireman Avenue Development Company, Faunce Realty Company, Frischkorn Construction Company, Frischkorn Land Company, Hellner Realty Company and The Title and Trust Company.
Walter W. Tait, mentioned in the resolution, was a specialist in the sale of corporation stocks in the State of Michigan, and he had been very successful in that field. His operations were not confined to the field of real estate finance companies, however. Upon taking the matter up with Tait it was found by the representatives of the petitioner that the compensation he would expect for placing the stock of the Title & Trust Co. would probably exceed the maximum percentage which the State Securities Commissioner might be expected to approve for the sale of the stock. Under date of May 8, 1924, an agreement in writing was entered into between the petitioner and Tait, providing*1760 as follows:
MEMORANDUM OF AGREEMENT Made this 8 day of May, 1924, at Detroit, Michigan, between the FRISCHKORN REAL ESTATE COMPANY, a corporation existing and doing business under the laws of the State of Michigan, party of the first part, and WALTER W. TAIT, of the city of Detroit, State of Michigan, party of the second part, WITNESSETH:
WHEREAS said first party is engaged in a general real estate business and in the conduct of said business it is necessary and important to develop a good will throughout the State of Michigan, and to make its name and the nature of its business favorably known, and
WHEREAS said first party is directly in some instances and indirectly in other instances, interested in the welfare and success of certain corporations organized under the laws of the State of Michigan, known as associate companies, which companies are as follows: Frischkorn Development Company, Frischkorn Warren Avenue Development Company, Tireman Avenue Development Company, Faunce Realty Company, Frischkorn Construction Company, Frischkorn Land Company, Hellner Realty Company and The Title & Trust Company and it is to the distinct advantage of said first party that said associate*1761 companies prosper, and that the nature of their activities be spread and advertised throughout the State of michigan and
WHEREAS said second party is by profession on Organization Director and has a large corps of employees working throughout the State of Michigan, and is able through said organization to advertise and promote the business interests of said first party and said associate companies, and
WHEREAS said second party is acting as Organization Director of the said The Title & Trust Company, one of said associate companies and is engaged in the sale of stock of said Company.
Now, THEREFORE, IT IS AGREED AS FOLLOWS:
The said second party shall employ his said organization in whatever manner he deems most advantageous to promote the interests of said first party, and said associate companies as hereinabove set forth, for the consideration herein stated.
Said first party DOES HEREBY AGREE to pay to the said second party a sum equal to Four and 50/100 Dollars ($4.50) for every Fifteen Dollars ($15.00) *968 which may become due or payable to the said second party by reason of the sale of the stock of The Title & Trust Company hereinabove referred to.
Said*1762 first party agrees to pay said sum or multiples thereof, to the said second party each week upon the same day as that upon which payments are due to him from said The Title & Trust Company on said sum of Fifteen Dollars ($15.00) or multiples thereof.
This contract shall remain in effect for three (3) years from the date thereof, and in the event that the contract between said Walter W. Tait and The Title & Trust Company is extended for a fourth year, then this contract shall be considered as being extended for an additional year.
Should another contract for the sale of the capital stock of The Title & Trust Company be entered into between that Company and the said Walter W. Tait, after the expiration or cancellation of the contract now existing between them, then this contract shall be extended for an additional period equal to the duration of any such new contract entered into between the said The Title & Trust Company and said Walter W. Tait.
In connection with the activities of Tait in securing subscribers for the stock, the operations and successes of the petitioner in the real estate field were disclosed incidentally, thus effecting an indirect advertising of the business*1763 of the petitioner.
Payments to Tait by the petitioner under the contract amounted as follows: in 1924, $31,123.32; in 1925, $78,496.58.
As planned, nearly all of the contracts for deferred payments on sales were disposed of by the petitioner to the Title & Trust Co. at a discount. The extent of these transactions is reflected in the following summary.
| Number of sales | Total sale price | Total down | Total deferred | |
| contracts | payment | payments | ||
| 1924 | 155 | $726,785.00 | $72,495.63 | $654,289.37 |
| 1925 | 359 | 1,784,543.50 | 179,288.44 | 1,605,255.06 |
| 1926 | 227 | 1,210,830.00 | 115,496.43 | 1,095,333.57 |
| 1927 | 67 | 475,288.00 | 56,466.39 | 418,821.61 |
| 1928 | 53 | 420,722.00 | 58,981.37 | 361,740.63 |
| 1929 | 31 | 268,300.00 | 20,573.49 | 247,726.51 |
The petitioner received commissions on the sales above summarized, amounting as follows:
| Year | Amount |
| 1924 | $47,490.00 |
| 1925 | 105,599.22 |
| 1926 | $61,761.90 |
| 1927 | 19,230.69 |
| 1928 | $9,782.73 |
| 1929 | 5,288.72 |
The petitioner claimed as deductions from income the amounts stated above paid to Tait, and in determining the deficiencies the respondent has disallowed these deductions in their entire amounts.
*1764 *969 OPINION.
TRUSSELL: The amounts of certain expenditures by the petitioner and the year in which incurred or paid are not in dispute. The petitioner contends that the expenditures represent either the cost of (1) advertising or (2) additional compensation, borne by the petitioner, for personal services in securing subscribers to the capital stock of another corporation and that, in either event, they are ordinary and necessary expenses of the business of the petitioner deductible by specific provision of the statute.
So far as pertinent to the issue, the Revenue Acts of 1924 and 1926 provide in like numbered section 234(a)(1) for the deduction of "All the ordinary and necessary expenses * * * including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *." But it does not follow that all expenditures for personal services are deductible. A determining factor is the purpose of any expenditure. It has been held that organization expenditures are not deductible; *1765 ; neither are attorney fees in reorganization, ; or in refinancing, (and cases therein cited); or in a merger, ; or to secure the management of a corporation, , citing ; or for the benefit of an improved credit rating, .
In the instant case we think the facts show clearly that the expenditures under consideration were not advances to the associated company, nor were they arbitrary payments of the expenses of another without consideration. The purpose of the expenditures was the securing from outside sources of much desired capital for the Title & Trust Co. It is probable that some amount of good will was derived by the petitioner as incidental to the activities in interesting prospective subscribers in that the operations of the petitioner were broadcast in a favorable light. It is certain that the use of the*1766 capital thus secured for the associated company resulted in great advantage and benefit to the petitioner.
We have repeatedly held that the cost of benefits which are enjoyable over a definitely determinable period of years should be capitalized and deducted from income, for income tax purposes, upon a pro rata time basis. ; ; ; . If the benefits in the instant case were contractually or economically limited to some definite term we might see our way *970 clear to the allowance of pro rata deductions of the aggregate cost, but we are here confronted with the lack of any element of definition, indeed, the circumstances of organization, control, and operation were such that the benefits are plainly not limited in point of time. There is no evidence to show that the good will which was acquired ceased to remain of value to the petitioner and the benefit of the use of the acquired capital will apparently remain unimpaired over an indeterminate period*1767 no less in duration than the existence and continued operations of the associated company. Under this fact situation there is no provision, under section 234 of the Revenue Acts of 1924 and 1926, for the allowance of deductions to the petitioner of capital expenditures, either as "ordinary and necessary expense" or in the form of amortization allowances to be written off against the annual income. The claimed deductions may not be allowed.
Judgment will be entered pursuant to Rule 50.