*1326 1. An amount paid upon the purchase of stock, computed at the rate of 6 percent on the agreed price from the time of acceptance by trustees of an offer of the petitioner to buy the stock to the time of judicial approval and consummation of the sale, held not deductible under section 23(b), Revenue Act of 1936, as "interest paid or accrued within the taxable year on indebtedness."
2. Attorneys' fees paid subsequent to the taxable year held deductible upon evidence establishing the accrual of a liability therefor during the taxable year.
*461 The Commissioner determined deficiencies of $28,052.87 in income tax and $14,727.11 in excess profits tax for the year 1936. The issues for determination are (1) whether the sum of $112,564.97 paid by the petitioner under a contract for the purchase of 650 shares of its own capital stock is deductible as "interest paid or accrued within the taxable year on indebtedness"; and (2) whether the sum of $5,000 paid to attorneys in 1937 is deductible as a business expense accrued*1327 during 1936.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation and is engaged in publishing a newspaper, known as "The Milwaukee Journal," in Milwaukee, Wisconsin. During the taxable year it kept its books and made its returns upon the accrual basis.
Lucius W. Nieman died on October 1, 1935, and left a will by the terms of which he bequeathed all of the shares of stock in the petitioner owned by him at the date of his death in trust for the benefit of his wife, Agnes Wahl Nieman, and his niece, Faye McBeath. The will was admitted to probate in the County Court of Milwaukee County, Wisconsin, on October 14, 1935, and, the trustee and executor named therein having predeceased the decedent, the court granted letters of administration c.t.a. to the First Wisconsin Trust Co. and Frederick Sammond, and letters of trust to the First Wisconsin Trust Co. and Edwin S. Mack.
At the date of his death, the decedent owned 1,100 shares of the capital stock of the petitioner, which were thereafter held by his administrators until turned over to the trustees for sale by them, as hereinafter stated. During the life of the decedent's wife, the trustees, under the provisions of*1328 the will, were to pay the net income of the trust to her and to Faye McBeath, the decedent's niece, in stated proportions; and, after the wife's death one-half of the net income was to be paid to Faye McBeath, decedent's niece, and to her heirs, personal representatives, or assigns if she predeceased decedent's wife, and the other one-half to the heirs, personal representatives, or assigns of decedent's wife. The trustees were directed to manage and control the Milwaukee Journal and were given full authority in their *462 personal discretion to vote, control, and dispose of the stock in the petitioner. The will further provided, inter alia, that:
As soon as practicable, but within five (5) years, (1) after the death of my wife, or (2) after my wife and niece may have directed, in writing, the trustee to sell said shares of stock, my said trustee shall sell said shares of stock * * *, and in making such sale not be bound to sell the same to the persons or corporation who may bid or be willing to offer the highest price, but may sell the same to such persons or corporation as in the judgment of such trustee or trustees will carry out the ideals and principles which I have*1329 always attempted to maintain and support during my lifetime in the conduct of The Milwaukee Journal.
The trustees were given the discretion to make the sale for cash or credit, or partly for both, and, if the sale was made during the life of decedent's wife, the entire net proceeds were to be held until her death, and upon her death one-half of the net proceeds was to go to her heirs, personal representatives, or assigns and the other half was to go to decedent's niece, Faye McBeath, or, in case of her death, to her heirs, personal representatives or assigns. If the sale was made after the wife's death, the proceeds were to be distributed in the same manner at the time of sale. Agnes Wahl Nieman, the wife of decedent, died on February 5, 1936.
On February 26, 1936, the petitioner and Faye McBeath made a written offer to the trustees to purchase the 1,100 shares of stock at a price of $3,500 per share, with the understanding that 650 shares should be paid for by and delivered to the petitioner and 450 shares should be paid for by and delivered to Faye McBeath, "but as a single transaction." The offer contained further provisions as follows:
In case of acceptance of this offer, *1330 it is understood:
(a) That payment for the stock to be delivered to The Journal Company shall be made in cash at the time of delivery * * *.
* * *
(d) That due to the necessity of securing the approval by a competent court of the sale of the stock, the delivery thereof and the payment therefor may be considerably delayed after the date of action hereon by you; subsequent to March 1, 1936 and pending such delivery and payment, interest on the purchase price shall be paid by the purchasers at the rate of six per cent. (6%) per annum and the price per share herein offered shall be reduced by the total amount of dividends per share, if any, which may hereafter be declared and paid upon the said stock.
If * * * Harry J. Grant, should by reason of death or incapacity cease to be the directing head of The Journal Company prior to the date of delivery of the said stock, then this offer and any agreement resulting therefrom shall be rescinded.
This offer may be accepted on or before March 7, 1936, * * * which acceptance may be conditioned upon and to become effective only on transfer of such stock to you by the administrators of said estate, and judicial authorization and approval*1331 of such sale, and such other judicial direction as you may *463 deem necessary. In the event of such acceptance, you shall prompty present the matter to the County Court of Milwaukee County for determination and, in the event of a refusal of authorization and approval of such proposed sale, you or either of you may elect (but shall not be bound) to review the same by appeal or otherwise.
The offer was accepted by the trustees by a letter dated March 2, 1936, stating, inter alia, that:
Such acceptance is conditioned on and to become effective only on (a) transfer of such stock to the undersigned, as such trustees, by the administrators * * *; and (b) judicial authorization and approval of such sale; and (c) such other judicial direction as the undersigned may deem necessary.
This acceptance is upon the understanding, as stated in such offer, that the undersigned will promptly present the matter to the County Court of Milwaukee County for determination, and that in the event of a refusal to grant authorization and approval of such proposed sale by the County Court of Milwaukee County, the undersigned, * * * may elect (but shall not be bound) to review the same by*1332 appeal or otherwise.
It is our understanding * * * that the transfer of such 1100 shares of stock * * * to the undersigned as such trustees by the administrators * * * and made a condition of this acceptance, shall be such that the undersigned, as such trustees, shall be in position where they can fully consummate such sale.
On March 27, 1936, the trustees and administrators filed a petition in the County Court of Milwaukee County, Wisconsin, asking for (1) approval of the agreement by the trustees to sell the stock of the Journal Co. to petitioner and Faye McBeath; (2) construction of Lucius W. Nieman's will respecting the trustees' power to make and carry out such agreement; and (3) directions to the administrators to deliver to the trustees the stock covered by the agreement. On a hearing on the petition, after due notice to all interested parties, the court entered an order on December 18, 1936, wherein, after reciting that the price of $3,500 per share was fair and reasonable and that the trustees were authorized by the will to make the sale, the court ratified the trustees' acceptance of the offer and directed them to complete the sale. The court's order also recited*1333 "that M. S. Annenberg filed in open court at the hearing * * * a written offer to purchase" the shares of stock involved at "$4,250 cash per share which offer the trustees in the proper exercise of their discretion * * * did not * * * accept." The order further directed the administrators to transfer the stock to the trustees so that the trustees could consummate the sale and ordered that the proceeds of the sale when rrceived by the trustees be held by them subject to liens for taxes and other obligations of the estate.
Marry J. Grant was employed by the petitioner as its chief managing executive, or directing head, continuously from prior to February 26, 1936, up to the time of the consummation of the sale and for some years thereafter.
*464 On December 28, 1936, petitioner delivered to the trustees its check in the sum of $2,387,564.97 and on that date received delivery of the 650 shares of stock which it had agreed to purchase from the trustees. The voucher covering such payment embrances three items, i.e., "650 shares T J C Stock at $3500 per share amount $2,275,000.00"; "Int. 301 days at 6% amount $112,564.97"; and "Total $2,387,564.97."
The petitioner acquired*1334 150 shares of its capital stock from other stockholders on December 28, 1936, at a price of $3,500 per share. It placed those shares in its treasury, together with the 650 shares purchased by it from the trustees, thereby leaving outstanding a total of 1,200 shares of capital stock. Subsequently and also subsequent to the delivery to petitioner of the 650 shares of stock, but on the same day, the petitioner declared a dividend of $750,000 on the outstanding 1,200 shares, or $625 per share, payable on December 29, 1936, to stockholders of record at the close of business on December 28, 1936. The petitioner did not declare or pay any dividends on its capital stock during the period February 26 to and including December 27, 1936.
The trustees, in their annual account for the year ended December 31, 1936, filed with the County Court of Milwaukee County, Wisconsin, reported, among other items, the receipt from the petitioner on December 29, 1936, of cash in the amount of $112,564.97, describing it as interest at 6 percent per annum on the purchase price of the 650 shares of stock from March 2 to December 28, 1936; and they, in like manner, reported the receipt of the sum of $77,931.91*1335 from Faye McBeath. That annual account was approved by a decree of the County Court of Milwaukee County, Wisconsin, February 5, 1940, under which the trust was terminated, commissions were allowed to the trustees, and final distrubution ordered. The decree recited, inter alia:
And it appearing further that the sum of $190,496.88 received by the trustees in the year 1936 from The Journal Company and Faye McBeath upon the purchase price of 1100 shares of capital stock of The Journal Company sold by the Trustees to The Journal Company and Faye McBeath as stated above, represents interest upon an obligation of $3,850,000 which accrued from March 1,1936, and has been properly treated and accounted by the trustees as income in respect of which they are entitled to commissions, and which after deduction of such commissions was properly distributable as income to the beneficiaries of the trust.
The decree of February 5, 1940, was prepared by the trustees and their attorneys and was presented to and acted upon by the court without objection by any party in interest, all parties in interest having been duly notified of the hearing.
The petitioner claimed a deduction in its return*1336 for interest paid in the amount of $112,564.97. The Commissioner disallowed the *465 claimed deduction upon the ground that the payment constituted part of the purchase price of the stock.
A firm of attorneys rendered legal services to the petitioner during the last one-half of 1936 and all of 1937. The petitioner paid that firm the sum of $10,019.38 on June 3, 1937. That firm addressed a letter to the petitioner on August 3, 1937, reading as follows:
This will define the retainer arrangement recently entered into. Your company has retained the services of this firm for a term of three years beginning July 1, 1936, for compensation at the rate of $10,000 per year payable annually in advance. The sum of $10,000 paid on June 3, 1937 is to be applied in payment of the retainer for the first year of the term. The retainer is to include such legal services as you may require of us from time to time in connection with all matters except litigation.
If the terms of the agreement have been correctly stated above, please note your acceptance at the foot of one copy of this letter and return it to us to evidence the arrangement.
The petitioner endorsed its acceptance*1337 on the letter on August 4, 1937.
In its income and excess profits tax return for the year 1936 the petitioner made no claim for a deduction on account of legal services rendered by the above mentioned firm of attorneys. It filed a claim for refund in October 1938, in which it claimed an overpayment of income and excess profits taxes for the year 1936 due to failure to deduct on its return the sum of $5,000, or one-half of the $10,000 retainer fee paid on June 3, 1937. The Commissioner has taken no action upon the said claim because of the fact that the petitioner had filed this petition with this Board on January 9, 1939, for the redetermination of its tax liability for that year.
OPINION.
TYSON: The first issue is whether the petitioner in computing its net income for the year 1936 may deduct the amount of $112,564.97 claimed by petitioner to have accrued against and have been paid by it as "interest * * * on indebtedness." That amount was paid together with the amount of $3,500 per share upon delivery to petitioner of the 650 shares of stock here involved on December 28, 1936, and is denominated in the offer of February 26, 1936, by petitioner to purchase such stock (which*1338 offer was accepted by the trustees on March 2, 1936) as interest at the rate of 6 percent per annum on the purchase price of the stock, for the period beginning March 2, 1936, and pending delivery of and payment for the stock. The deduction is claimed by petitioner under section 23(b) of the Revenue Act of 1936 as "interest paid or accrued within the taxable year on indebtedness" of petitioner. The respondent denied the claimed deduction.
*466 The Commissioner defends his denial of the claimed deduction of $112,564.97 on the ground that the petitioner was not indebted to the trustees prior to delivery of the stock on December 28, 1936. On the other hand, the petitioner contends (1) that on March 2, 1936, when the trustees accepted the offer to purchase the stock, it became so indebted because on that date, it further contends, it entered into an obligation to pay for the stock and that such obligation was an indebtedness unaffected by the conditions stated in the contract; and (2) that the determination of a court of competent jurisdiction of Wisconsin to the effect that the payment by petitioner of the $112,564.97 represented interest is an authoritative adjudication*1339 of that issue and, as such, is binding upon the Board.
The words "interest * * * on indebtedness" are understood in the business world to mean "compensation for the use or forbearance of money", and that is the meaning which is to be attributed to them in applying the statute here involved. . The word "indebtedness" does not necessarily include every obligation. The term "interest" is limited in meaning to compensation for money borrowed or the forbearance of money legally owed and the obligation to pay upon which the interest is based must be unconditional and legally enforceable. ;; ; ; , affirming .
As was said by this Board in , "A debt is understood to be an unconditional promise to pay a fixed sum, at some specific time, and is quite different from a contract to*1340 be performed in the future, depending upon a condition precedent which may never be performed." The Circuit Court, on appeal of the Gilman case, , in its consideration of what constituted a debt, cited many authorities as establishing the principle which the court quoted with approval from the text of 17 C.J. 1377, as follows: "Every debt must be solvendum in praesenti, or solvendum in futuro - must be certain and in all events payable; whenever it is uncertain whether anything will ever be demandable by virtue of the contract, it cannot be called a 'debt'. While the sum of money may be payable upon a contingency, yet in such case it becomes a debt only when the contingency has happened, the term 'debt' being opposed to 'liability' when used in the sense of an inchoate or contingent debt."
The stock here involved, which was the subject matter of the contract, was not available for sale or delivery when the offer and acceptance were executed, and both parties then contemplated that to make it so available steps would necessarily have to be taken to secure authorization by the court for the release of the stock by the administrators*1341 *467 to the trustees and approval of the sale of the stock by the trustees. The acceptance was expressly 'conditioned on and to become effective only on * * * transfer of such stock to * * * the trustees by the administrators * * * and * * * judicial authorization and approval of such sale" and the offer stipulated that acceptance might be predicated upon such conditions. It is to be noted also that the contract to sell the stock to petitioner and Faye MeBeath embraced the further condition that, if Harry J. Grant should by reason of death or incapacity not remain as directing head of the Journal Co. on the date of the delivery of the stock, the contract should be rescinded.
Although the offer and acceptance resulted in a contract obligation, there arose on the date of the acceptance of the offer no present definite, unconditional, and legally enforceable obligation for the payment by petitioner of money as the purchase price of the stock. The present definite obligation to pay such purchase price arose only upon the consummation of the sale by delivery of the stock. The fixing of a future date for the actual consummation of the sale precludes any tenable contention that*1342 there was, prior to that date, an existing indebtedness fixed by the offer and acceptance to pay a purchase price upon which interest could accrue in the interim.
The parties described the payments as interest on the agreed purchase price of $3,500 per share from the time of the acceptance of the offer until the approval of the sale by the court, but that fact can be of no controlling significance here, where, at the time of the acceptance of the offer, no debt became presently and definitely payable to the seller upon which interest could accrue. As the court said in , "The fact that these payments are described by the parties as interest and are fixed at six per cent per annum * * * cannot render them deductible for income tax purposes when it is clear that they have not been paid on an indebtedness within the meaning of the revenue acts."
The evidence herein discloses that in their accounts rendered to the County Court of Milwaukee County, Wisconsin, the trustees treated the $112,564.97 as interest received rather than as corpus of the trust and that the decree of that court approving the account and discharging the trustees*1343 recites that the trustees properly treated it as interest on an "obligation" and as income for the purpose of computing commissions of the trustees and the income distributable to the beneficiaries.
The petitioner contends that the above mentioned decree is an authoritative adjudication by the state court of the right of the beneficiaries under the state law to the money as interest on an "obligation" and is controlling here in determining whether or not it was "interest * * * on indebtedness" under section 23(b), supra.
*468 In our opinion the decree of the County Court of Milwaukee County, Wisconsin, in deciding that by the law of that state the amount here in question was income distributable to the beneficiaries as interest on an "obligation" and was income for the purpose of computing commissions for the trustees in no sense controls the determination of whether or not such amount is interest on indebtedness within the scope of section 23(b), supra. Cf. ; *1344 ; ; ; ; and . What here constitutes interest on indebtedness under the Federal statute, section 23(b), supra, is no more to be controlled by the characterization of a state court of Wisconsin than is the characterization by state courts of what constitutes a partnership as distinguished from an "association" under section 1, Revenue Act of 1918, ; or what constitutes an "inheritance" under section 22(b)(3), Revenue Act of 1932, ; or of what constitutes "interest upon * * * the obligations of a State * * * or any political subdivision thereof" under section 22(b)(4), Revenue Act of 1932;
But even if the decree of the County Court of Milwaukee County approving the account of the trustees would otherwise be controlling as to the $112,564.97 being*1345 interest accrued on indebtedness within the provisions of section 23(b), supra, it nevertheless does not have that effect, for the reason that the decree was entered in uncontested proceedings. ; affd., , and authorities cited in both. There was no occasion for a contest in the county court between the beneficiaries of the trust as to what would constitute corpus as distinguished from income, since the income, embracing the interest here in controversy, was to be distributed to the beneficiaries in the identical proportions in which the corpus was to be distributed.
Petitioner, in support of its contention that the decree of the County Court of Milwaukee County approving the account of the trustees is controlling here as to the $112,564.97 being interest on indebtedness under section 23(b), supra, relies upon . We do not think that case is controlling here. There, the facts show that a state court decided contested litigation involving the rights of remaindermen in the corpus as distinguished from*1346 the rights of beneficiaries in the income and, in so deciding, "*469 heard the merits and on that basis determined and settled property rights. * * * The state court considered and thereupon determined what was corpus and what was distributable as income." .
For the reasons stated we hold that the amount of $112,564.97 here involved was not paid or accrued as interest on indebtedness of petitioner and that it is consequently not deductible under section 23(b), supra.
The second and final issue is whether the petitioner in computing its net income for the year 1936 may deduct $5,000 of the amount of $10,000 paid to attorneys as a retainer fee on June 3, 1937. The retainer fee covered general legal advice and services in connection with the petitioner's publishing business and no question is raised as to the propriety of the deduction as an ordinary and necessary business expense. Cf. .
The Commissioner contests allowance of the deduction on the ground that there is no proof that any liability was incurred by petitioner for*1347 such attorneys' fees during the year 1936.
It appears from the terms of the agreement that the contract covered a three-year period beginning July 1, 1936, and that the payment on June 3, 1937, of $10,000 covered the retainer fee for the first year of that term, the first half of which first year lay within the taxable year. The anual retainer agreed to be paid included such legal services as might be required in regard to all matters except litigation. The then office manager of the petitioner testified, without contradiction, that the petitioner required legal advice and services during the latter half of 1936 and we understand this to mean that services were actually required of and rendered by the firm of attorneys during the period July 1 to December 31, 1936, at the request of the petitioner. All the events which determined the liability of petitioner to pay for such services thus occurred in 1936 and only the amount thereof remained undetermined. ; , certiorari denied, *1348 ; and . Cf. .
The agreement of August 4, 1937, was nothing more than a determination of the amount of the value of the services rendered by the attorneys on an annual basis. Since the retainer of $10,000 for the year beginning July 1, 1936, was to embrace services rendered during that annual period and services were rendered by the firm of attorneys during the one-half of that period lying within the taxable *470 year, and the amount of the retainer fee bore no special relation to the amount of services actually rendered, provided some services were rendered, we think that $5,000 of the $10,000 paid by petitioner to the firm of attorneys on June 3, 1937, should be allocated to the taxable year 1936 as a liability incurred by and accrued against petitioner during that year.
We hold that the petitioner is entitled to the claimed deduction of $5,000 in computing its net income for the year 1936.
Reviewed by the Board.
Decision will be entered under Rule 50.
DISNEY, dissenting: I dissent. The contract of*1349 February 26, 1936, provided in effect that the petitioner was obligated to take and pay for the corporate stock provided the vendors on their part complied with the contract. The vendee became from February 26, 1936, entitled to benefit of the dividends upon the stock, for if any were paid prior to delivery of the stock the purchase price was to be reduced, and if none were paid prior to delivery of the stock the petitioner would, of course, thereafter receive the dividends. The petitioner thus appears as the equitable owner of the stock from the date of the contract and the only condition, it seems to me, was that the vendors should comply with their agreement to deliver. The petitioner was not obligated to pay the purchase price until delivery, but was obligated to do so upon delivery of the stock. It agreed to pay interest upon the purchase price from the date of the contract and I think that payment of interest so made properly comes within section 23(b) of the Revenue Act of 1936 as made for delay in the payment of a purchase price, the benefits of which petitioner had from the date of the contract. The condition seems to me to be essentially not different from the usual*1350 condition implied in a contract, that is, compliance with the contract by the other contracting party. I do not think this is such a contingency as to negative the existence of a debt from the date of the contract, where the petitioner was obligated from that date and had the benefits of ownership of the stock from that date, subject only to fulfillment of the contract by the vendors, who upon such compliance could have compelled performance of the contract by the petitioner.
OPPER, dissenting: What seems to me to be the significant factor here is that whatever condition may have attached to the transaction in the beginning had disappeared before the taxable year came to an *471 end. Without suggesting that it would necessarily be otherwise if the significant events had been attributable to various years, on this record it can not be disputed that the entire transaction from inception to termination occurred between February 5 and December 28, all in the tax year 1936; so that when the sums were paid which petitioner seeks to have treated as interest, they were unconditionally interest and everybody concerned knew and recognized them to be such. It is difficult to understand*1351 why the Commissioner and the Board must disregard as inconsequential what every participant must have realized was of the essence: The fact, as my Brother Disney demonstrates, that when the transaction with which we are concerned was closed, petitioners had received income in the form of dividends and had paid out something which was nothing if it was not interest - a sum paid for the forbearance of money due. When it was paid, even the most scrupulous regard for the legal niceties could not conceal that there was an "indebtedness." At least when this is so clear, and while the tax liability for the very year under consideration remains in a fluid state, there seems less than an impelling urgency for so flagrant a disregard of actuality, .