Waldheim v. Commissioner , 25 T.C. 839 ( 1956 )

Stanley V. Waldheim, Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen W. Bienenstok, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stanley V. Waldheim and Eleanor R. Waldheim, Petitioners, v. Commissioner of Internal Revenue, Respondent

Waldheim v. Commissioner

Docket Nos. 31181, 36183, 36184, 34551

United States Tax Court

25 T.C. 839; 1956 U.S. Tax Ct. LEXIS 290;

January 23, 1956, Filed

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Decisions will be entered under Rule 50.

1. A corporation having net earnings during the taxable year made cash distributions to its stockholders pro rata. The corporation had a deficit at the beginning of the year and would still have had a deficit at the end of the year even if no distributions to stockholders had been made. The net earnings for the year exceeded the cash distributions. Held, that the distributions were dividends within the meaning of section 115 (a) (2) of the Internal Revenue Code of 1939 and taxable to the stockholders as such.

2. In 1945 Helen Bienenstok surrendered to the corporation stock having a basis to her and a par value of $ 100 per share and a fair market value of at least that amount in satisfaction of indebtedness owing by her to the corporation. The indebtedness was satisfied at the rate of $ 100 for each share of stock surrendered. Held, that she realized no taxable gain by reason of such satisfaction of her indebtedness.

3. In settlement of a dispute between Stanley Waldheim and the other stockholders and officers of the corporation and the corporation itself, Stanley, by agreement of all stockholders and by approving action of the directors and of the stockholders in duly held meetings, was permitted to buy for $ 7,500 stock of the corporation having a fair market value of $ 33,333.33. Held, that to the extent of the earnings of the company for the year not otherwise distributed, the effect of the acquisition of the stock by Stanley in the manner described was the receipt of a taxable dividend.

4. The above dividend was not included in the gross income reported by Stanley in his income tax return for the year of receipt thereof and was in excess of 25 per centum of the gross income he did report. Held, that the period within which the respondent may assess the deficiency for the said year is governed by section 275 (c) of the Internal Revenue Code.

5. Amounts expended by Stanley during the taxable years 1945 and 1946 in operating his personally owned automobile in connection with his employment determined.

6. Held, on the facts, that legal fees paid by Stanley in 1948 were deductible in full, partly under section 23 (a) (1) and partly under section 23 (a) (2).

Eric Wm. Passmore, Esq., and Maurice Weinstein, Esq., for the petitioners.

Paul Levin, Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent determined deficiencies in income tax against petitioners as follows:

Year	Stanley V. Waldheim	Helen W. Bienenstok
1945	$ 3,221.36	$ 3,023.26
1946	1,623.36	968.27
1948	1 205.92

The questions for decision in the proceedings wherein Stanley V. Waldheim is petitioner are (1) whether Stanley received dividends in 1945 and 1946 from Waldheim & Company, Inc., and if so the amounts thereof, (2) whether respondent erred in disallowing deductions claimed in 1945 and 1946 as "auto expense," (3) whether for the year 1945 the statute of limitations had run against the respondent, and (4) whether Stanley was entitled to a deduction of $ 900 representing attorneys' fees paid in 1948.

The questions for decision in the proceedings wherein Helen W. Bienenstok is petitioner are (1) whether she received dividends from Waldheim & Company, Inc., in 1945 and 1946 and (2) whether in 1945 she realized a gain of $ 9,455 on the "cancellation" of indebtedness owing by her to Waldheim & Company, Inc.

An issue relating to the deduction of legal fees by Stanley V. Waldheim for 1946 was abandoned at the trial herein.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

The petitioners, Stanley V. Waldheim, his wife, Eleanor R. Waldheim, and Helen W. Bienenstok reside in Milwaukee, Wisconsin, and for the years herein filed their income tax returns with the collector of internal revenue at Milwaukee.

Stanley V. Waldheim is the son and Helen W. Bienenstok the daughter of Victor Waldheim who died on February 17, 1922. At the time of his death Victor Waldheim owned all the stock of Waldheim & Company, Inc., being 3,000 shares of common stock. Two of these shares were qualifying shares and stood one in the name of Stanley V. Waldheim and the other in the name of Bernard Brietung. The stock had a par value of $ 100 per share and "was appraised at $ 100 a share in the estate of Victor Waldheim."

Waldheim & Company, Inc., sometimes referred to hereafter as Waldheim & Company, is a Wisconsin corporation, and was, and for many years had been engaged in the retail furniture business in Milwaukee.

Victor Waldheim died testate and under his will the stock of Waldheim & Company was left 2,000 shares in trust for the benefit of his widow and 500 shares each to Stanley and Helen. There was no transfer of the shares, however, until 1940, when the probate proceedings in the estate of Victor Waldheim were concluded. Pursuant to the will and on July 12, 1940, 2,000 shares of the said stock were transferred to Stanley Waldheim, Robert Bienenstok, and Rudolph Hokanson in trust for the widow of Victor, 500 shares to Stanley, and 500 shares to Helen, and immediately thereafter Stanley and Helen each transferred 166 2/3 shares of the stock received by them to Robert Bienenstok as trustee for Muriel Waldheim. Muriel Waldheim was the wife of Melvin Waldheim, another son of Victor. Robert Bienenstok was Helen's husband and had been executor of Victor's will.

Upon termination of the trust for Victor's widow the 2,000 shares of stock left in trust were to be divided 666 2/3 shares to Stanley, 666 2/3 shares to Helen, 333 1/3 shares to Esther Waldheim, and 333 1/3 shares to Jack Waldheim. Esther and Jack were the children of Melvin and Muriel Waldheim and the grandchildren of Victor. Victor Waldheim's widow died on October 11, 1940, and on March 26, 1942, the trustees transferred 666 2/3 shares of the stock held by them to Stanley and a like number of shares to Helen. On April 20, 1943, they transferred the remaining 666 2/3 shares, 333 1/3 to Esther Waldheim and 333 1/3 to Jack.

From the death of Victor through the 1920's the business of Waldheim & Company was operated quite profitably under the management of Stanley and Melvin Waldheim. They proceeded on the theory that the 2,000 shares of stock left in trust were owned by Victor's widow and she purported to vote those shares. Robert Bienenstok's status as executor of Victor's will was ignored and he had no connection with the management of the company until "the depression, sometime in the 1930's."

Melvin Waldheim died and after his death there was constant friction between Stanley and Bienenstok. Rudolph Hokanson, who became one of the trustees under Victor's will, and who had no personal interest in the business of Waldheim & Company, became the third director of the company and continued in that capacity until the trust was closed. After the trust was closed and the stock held in trust was distributed Esther Waldheim, Victor's granddaughter, became the third director of Waldheim & Company.

In the meantime Robert L. Bienenstok had transferred to Muriel Waldheim the 333 1/3 shares of stock held by him as trustee for her and she had sold the said shares to Waldheim & Company for $ 6,500.

On some undisclosed date or dates Stanley Waldheim had become indebted to the Marshall & Ilsley Bank and as collateral had assigned his interest in his father's estate. After the estate was closed and the shares of Waldheim & Company stock had been transferred, his certificate for the 333 1/3 shares of stock standing in his name was substituted as collateral for the indebtedness. He failed to pay the loan and the bank advertised that it would sell the stock on March 20, 1942. The matter was brought to the attention of the board of directors of Waldheim & Company at a special meeting on February 27, 1942, and the officers were "directed to purchase the said stock, if possible," for a sum not to exceed $ 15,000, and on March 30, 1942, Waldheim & Company "redeemed" ² the 333 1/3 shares held by the bank for $ 13,828.18, payable $ 1,500 at the time of purchase, with the balance payable in monthly installments. The $ 13,828.18 represented the principal of the debt plus the interest thereon.

Jack Waldheim worked for Waldheim & Company for a brief period of time, but due to continuing friction in the family he decided to sever his connections with the company by selling his stock. Through an attorney and at a meeting of the board of directors on April 8, 1943, he proposed to sell his 333 1/3 shares of stock to the company at the price it had paid the Marshall & Ilsley Bank for the 333 1/3 shares which had belonged to Stanley Waldheim. The directors responded with an offer to buy the stock for $ 6,500, the price it had paid to Muriel Waldheim for her stock. Thereafter, and on June 4, 1943, Waldheim & Company purchased the 333 1/3 shares of its stock from Jack Waldheim for $ 7,500.

After the purchase of the above shares from Jack Waldheim the stock of Waldheim & Company was held of record as follows:

	Shares
Treasury stock	1,000
Stanley V. Waldheim	666 2/3
Helen Bienenstok	1,000
Esther Waldheim	333 1/3

At a meeting of the stockholders of Waldheim & Company on March 12, 1943, a resolution was adopted authorizing the board of directors to enter into an agreement with Stanley V. Waldheim for the sale to him of the 333 1/3 shares of stock "formerly issued to him and purchased by the Company from the Marshall & Ilsley Bank for the sum of $ 13,828.18 plus all interest paid by the Company to the Marshall & Ilsley Bank since its purchase of said stock." The resolution also authorized the directors to fix such terms of payment as they might think fair and reasonable.

No agreement for reacquisition of the above shares by Stanley at the price indicated was reached, however, and at a meeting of the board of directors held on October 19, 1943, Stanley proposed that he be permitted to purchase the 333 1/3 shares of stock which had formerly been issued to him and had been acquired by the company from the bank at the average price per share which had been paid by Waldheim & Company for the entire 1,000 shares purchased from Muriel, Jack, and the bank. Such average price was approximately $ 28 per share. Stanley's proposal was objected to by Esther Waldheim for the stated reason that the stock which Stanley desired to acquire had been purchased from the bank for approximately $ 40 per share.

At a special meeting of the board of directors of Waldheim & Company on December 14, 1943, Stanley renewed his request that he be permitted to acquire the 333 1/3 shares of stock formerly held by him at $ 28 per share and further requested that he be given a written contract of employment for a term of years "at an increase over his present compensation of ten thousand dollars ($ 10,000.00) a year and five percent (5%) of the net profits on sales," that the board of directors be increased from 3 to 5, and that the 2 additional members be subject to his approval.

At a special meeting of the board of directors held on December 21, 1943, a counterproposal was made on behalf of Esther Waldheim and Bienenstok that a general increase of 15 per cent in the compensation of the 3 officers and directors be authorized, that there was no necessity for a written contract of employment, that the board of directors be not increased, and that the question of terms under which Stanley might reacquire the stock formerly held by him be given further consideration. Stanley objected to the counterproposal and after Esther Waldheim and Bienenstok had expressed their views that the requests of Stanley "were unreasonable in their present form" the meeting was adjourned.

At a special meeting of the board of directors on Februrary 18, 1944, a resolution was adopted reciting that Stanley had resigned as president, director, and employee of the company effective as of February 1, 1944, and that the company had been unable to enter into an agreement with him for the sale of the stock pursuant to the terms authorized at the annual meeting of the stockholders on March 12, 1943, and providing that the company pay Stanley $ 342.16 in full for all services rendered by him up to and including February 1, 1944, and that "no sale of stock be made to Mr. Waldheim except upon such terms as the board of directors may subsequently authorize by written direction of the officers of the Company."

At the annual meeting of the board of directors held on January 15, 1945, with Esther Waldheim and Bienenstok voting in the affirmative and Stanley voting in the negative, Bienenstok was elected president, Stanley, vice president and Esther secretary-treasurer and their salaries for 1945 were fixed at $ 7,500 for Bienenstok, $ 10,000 for Stanley with no bonus, and $ 3,250 for Esther.

At the adjourned annual meeting of the board of directors held on February 1, 1945, Stanley, through counsel, offered to pay for the 333 1/3 shares of stock formerly held by him the amount of the investment Waldheim & Company had in the stock, payment to be made $ 1,500 in cash with the balance in monthly payments of not less than $ 300, and all dividends to be applied on current installments. After a recess a counterproposal was made by the attorney for Esther Waldheim and Bienenstok to the effect that Stanley join in electing Bienenstok president, Helen vice president, and Esther secretary-treasurer, that he join in a request for increases in the salaries of Bienenstok and Esther, that he be permitted to purchase the said 333 1/3 shares of stock on the terms proposed by him, and that the bonuses theretofore received by him be reinstated. Stanley insisted that action be taken on his proposal to acquire the stock "without consideration of any other matters." His proposal was refused by Esther Waldheim and Bienenstok. After this rejection Stanley, through his attorney, offered to pay in cash for the said 333 1/3 shares of stock "the total amount paid by the Company and the amount still owing by the Company to the Marshall & Ilsley Bank, together with interest paid by the Company to the Marshall & Ilsley Bank." This offer likewise was rejected.

By a written notice, dated April 6, 1945, signed by Bienenstok as president and Esther Waldheim as secretary, Stanley was advised that he had been discharged for cause as an employee of Waldheim & Company, effective immediately and directing him to remove his personal belongings from the premises of the company by April 15, 1945, to which date his salary had already been paid.

Thereafter on April 15, 1945, Stanley filed a proceeding in the Circuit Court of Milwaukee County naming Waldheim & Company, Robert Bienenstok, and Esther Waldheim as defendants, and on May 3, 1945, in the same court he filed a proceeding naming Robert Bienenstok and Esther Waldheim as defendants. Waldheim & Company was permitted to intervene as party plaintiff in this lawsuit. ³

The first lawsuit was an action praying that the defendants be ordered to deliver to Stanley 333 1/3 shares of Waldheim & Company stock then carried by the company as treasury stock, upon the payment to Waldheim & Company by Stanley of the sum of $ 15,055.45. As a basis for this suit he alleged that he had procured a loan from the Marshall & Ilsley Bank pledging a certificate for the said 333 1/3 shares of stock as security therefor, that Waldheim & Company had agreed with him that it would pay his debt to the bank, take over the debt and receive and hold the stock as security therefor, and upon repayment of the debt by him to Waldheim & Company would surrender the certificate for the 333 1/3 shares, that though it went through the form of a purchase the stock was taken over by Waldheim & Company pursuant to the agreement and though he had tendered to it the amount of the debt plus interest thereon the company, through the actions of the other two defendants, had refused to accept the money and have the 333 1/3 shares of stock returned to him. In their answer, the defendants alleged that it had not been agreed that Waldheim & Company would take over the debt of Stanley to the bank and hold the 333 1/3 shares of stock as security pending payment of the indebtedness plus interest by Stanley, that Stanley had defaulted on the debt to the bank, and that Waldheim & Company, rather than allow the stock to be sold at public auction, had purchased the stock, and that thereafter the stock had been held by Waldheim & Company as treasury stock. It was further alleged that there was no wrongful withholding of the stock from Stanley upon his tender of the amount indicated.

The second lawsuit was an action praying that the defendants be restrained from putting into force and effect the notice of discharge of Stanley as an employee of Waldheim & Company effective April 6, 1945. As a basis for his suit, Stanley alleged his former connections with Waldheim & Company, both as an officer and employee, that Bienenstok and Esther acting "together in concert and by devices, schemes, artifices," and the like, had entered upon a course of conduct designed to oust him from his connections with Waldheim & Company as an employee and officer to his and Waldheim & Company's detriment. He further alleged that the business success of Waldheim & Company was largely due to his work and management, that the defendants were not experienced or capable to manage and operate Waldheim & Company and if permitted to proceed on the course they were following the business would suffer and financial losses would result. In their answer defendants admitted certain of the alleged acts, including the giving of notice to Stanley discharging him as an employee, but denied collusion on their part and that their acts were wrongful. They also denied that the discharge of Stanley would result in damage to him or to the company and alleged that the sooner Stanley left Waldheim & Company's "place of business, the better it will be for the Company." In support of this allegation, it was further alleged that Stanley's conduct in remaining at Waldheim & Company's place of business and attempting to exercise authority over its employees and to perform the duties of the position from which he was discharged was disrupting the orderly and proper management of the company, creating uncertainty and alarm among its employees, and seriously interfering with the daily operation of its business.

Negotiations between the parties and their counsel led to a settlement of the above lawsuits. The agreement of settlement was executed under date of November 13, 1945. It recited that the individual parties were officers and directors of the company; that they were record holders of Waldheim & Company stock, 1 share by Bienenstok, 666 2/3 shares by Stanley, 333 1/3 shares by Esther, and 999 shares by Helen; that differences had arisen between them over the shares to which they might be legally entitled and as to the management of the business; that they believed it was for their best interest and that of the company to adjust their differences and to provide for a continuing management for a period of 10 years by electing officers and directors to serve for such period and to fix the compensation of officers and directors and their successors for such period. The settlement agreement provided that the board of directors be increased from 3 to 5 members, that the 2 additional directors be Benjamin F. Saltzstein, attorney for Stanley, and I. A. Dinerstein, attorney for Robert and Esther. Bienenstok was to be president at a salary of $ 10,000 per year and 2 per cent of the profits, Stanley was to be vice president at a salary of $ 10,000 and 3 per cent of the profits, and Esther was to be secretary-treasurer at a salary of $ 5,250 and 1 per cent of the profits. Muriel was to be employed as a consultant and her compensation was to be $ 100 per month. Saltzstein and Dinerstein were designated as voting trustees to vote all of the stock of record in the names of the respective stockholders for the 10-year period. For their services as directors they were to receive $ 1,000 each per year. They were to resign at any time, however, upon the "unanimous written request of the other three directors."

It was agreed that thereafter Stanley should be the owner of record of the same number of shares of stock as Robert, Helen, and Esther combined. In bringing this about Stanley was permitted to acquire for $ 13,000 in cash the 333 1/3 shares of stock formerly standing in his name and acquired by Waldheim & Company from the Marshall & Ilsley Bank for $ 13,000. He was also permitted to acquire for $ 7,500 the 333 1/3 shares which the company had acquired from Jack Waldheim for that amount. This amount was to be charged to Stanley's personal account, and would thereby bring his indebtedness to Waldheim & Company to $ 15,211.77, which was approximately the same amount owed to the company by Helen. The agreement also provided that Stanley and Helen should each surrender 155 shares of stock to the company in settlement of the amounts owing by them to the company. In such settlement the said shares were to be accepted by the company at their par value of $ 100 per share. Helen and Stanley were to receive in cash from the company the amounts by which the par value of the shares surrendered by them exceeded the amounts of their indebtedness to the company.

Esther Waldheim was to be permitted to draw as advance salary the sum of $ 2,500, such withdrawal to be credited against salary to become due within 12 months after the withdrawal.

The agreement also carried a provision whereby the stock might thereafter be retained within the family. This was to be accomplished by requiring any party desiring to sell a part or all of his or her stock to afford the other stockholders the opportunity to meet any offer received.

The settlement agreement was thereafter carried out. The board of directors was expanded from 3 to 5 members. Dinerstein and Saltzstein were named directors for a 10-year period and were made voting trustees of all of the outstanding stock of Waldheim & Company. Stanley paid $ 13,000 in cash to the company and received a certificate for 333 1/3 shares of the stock. He received an additional 333 1/3 shares for which a charge of $ 7,500 was made to his account. After this charge his personal indebtedness to Waldheim & Company was $ 15,211.77. He surrendered 155 shares of stock in satisfaction of that indebtedness receiving back $ 288.23, being the excess of the amount at which the stock was received over the amount of his indebtedness. Helen's indebtedness to the company was $ 15,445.48. In settlement thereof she surrendered 155 shares of stock receiving back $ 54.52 in cash. The settlement and the steps therein were voted and approved by resolutions adopted at meetings of both the stockholders and directors of Waldheim & Company.

After the above steps were taken under the settlement agreement, the record holding of the outstanding stock of Waldheim & Company was as follows:

	Shares
Stanley Waldheim	1,178 1/3
Helen Bienenstok	845
Esther Waldheim	333 1/3

Waldheim & Company keeps its books of account and files its income tax returns by the installment method of accounting. Pursuant to that method the profits on unpaid installments are carried in what has been termed an "unrealized profits reserve." Including such "unrealized profits reserve" as a surplus item the book value of the 2,000 shares of Waldheim & Company stock outstanding on December 31, 1944, was $ 154.74 per share. Computed by the same method the book value of the $ 2,356 2/3 shares outstanding at December 31, 1945, was $ 127.08 per share. Omitting the "unrealized profits reserve" as a surplus item the book value of the 2,000 shares of stock outstanding at December 31, 1944, was $ 129.30 per share, and that of the 2,356 2/3 shares outstanding at December 31, 1945, was $ 109.09 per share. The fair market value of the said stock acquired by Stanley pursuant to the settlement agreement and of the 310 shares turned in by him and Helen in satisfaction of the indebtedness standing against them was at least $ 100 per share. The basis to Helen of the 155 shares so surrendered to the company was $ 100 per share.

At December 31, 1944, Waldheim & Company had a deficit of $ 21,577.26. Its net earnings for the calendar year 1945 were $ 23,718.93 and the taxes applicable thereto were $ 5,160.89. During 1945 it distributed $ 5,499.93 in cash to its stockholders pro rata. Similarly in 1946 it distributed to its stockholders pro rata $ 8,248.35 in cash.

Stanley's part of the 1945 cash distribution was $ 1,833.30, of which he reported $ 1,778.30 in his 1945 income tax return as a dividend. His part of the 1946 cash distribution was $ 4,124.18, of which he reported $ 348.91 in his income tax return for that year as a dividend.

Helen's part of the 1945 cash distribution was $ 2,749.89, of which she reported $ 2,667.39 in her return for that year as a dividend. Her part of the 1946 cash distribution was $ 2,957.85 of which she reported $ 242.96 in her income tax return as a dividend.

To some extent during 1945 and 1946 Stanley used his personally owned automobile in connection with his employment by Waldheim & Company, and in his income tax return for each of those years he claimed $ 360 as the cost of operating the car in connection with the performance of his duties as an employee of the company. He arrived at this amount by estimating that the total cost of operating his car for a year was approximately $ 1,200 and of that amount it was his further estimate that $ 360 represented the cost of its operation in the course of his employment by Waldheim & Company. The deductions so claimed were disallowed by the respondent in his determination of deficiencies for the said years. Stanley's cost of operating his car in connection with his employment by Waldheim & Company was $ 30 in 1945 and $ 100 in 1946.

For services rendered to him in connection with the above lawsuits Stanley incurred attorneys' fees in excess of $ 12,500 of which $ 900 was paid in 1948. The $ 900 so paid in 1948 was claimed by Stanley as a deduction on his 1945 return but was disallowed by the respondent in his determination of deficiency for the said year.

Stanley V. Waldheim filed his income tax return for 1945 on March 15, 1946, and in that return he reported a gross income of $ 14,398.04.

Helen W. Bienenstok filed her income tax return for 1945 on March 15, 1946, and in that return she reported a gross income of $ 2,792.39. The period of assessment was extended to June 30, 1952, by the execution and filing of a waiver. On October 11, 1951, she filed a claim for the refund of $ 433.28 paid as income tax for 1945, and on the same date also filed a claim for the refund of $ 82.40 paid as income tax for 1946.

OPINION.

One issue which Stanley and Helen have in common is whether the cash distributions made pro rata by Waldheim & Company to its stockholders in 1945 and 1946 were dividends within the meaning of the statute. According to section 115 (a) of the Internal Revenue Code of 1939 a dividend "means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913 or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made." And in section 115 (b) it is provided that for the purposes therein "every distribution is made out of earnings or profits to the extent thereof."

The facts show that at December 31, 1944, Waldheim & Company had a deficit of $ 21,577.26 and though it did have substantial net earnings in 1945, it would still have had a deficit at December 31, 1945, even if no distributions to stockholders had been made. On such facts it is the claim of the petitioners that no part of the distributions could have been dividends. The claim is not well taken. Waldheim & Company did have net earnings for 1945 substantially in excess of the cash distributions made pro rata to its stockholders in that year, and under clause (2) of section 115 (a) quoted above, those distributions were dividends. William G. Maguire, 21 T.C. 853">21 T. C. 853. The cases ⁴ cited and relied on by petitioners either relate to years prior to the enactment of clause (2) above or are otherwise distinguishable.

We are not advised as to the earnings of Waldheim & Company for 1946, but if we understand the parties aright they are agreed that the conclusion just stated likewise disposes of the question relating to the pro rata cash distributions made by Waldheim & Company in 1946, subject only to the adjustments which may result from our conclusions on the questions presented and decided in Waldheim & Co., 25 T.C. 594">25 T. C. 594.

A second question to be decided in the proceeding of Helen Bienenstok at Docket No. 36183 is whether in 1945 she realized a gain of $ 9,445 on the cancellation of indebtedness owing by her to Waldheim & Company.

The respondent's argument is that section 115 (g)⁵ is applicable and that under that section the stock was canceled or redeemed in such manner as to make the cancellation or redemption essentially equivalent to the distribution of a dividend. A primary difficulty with that contention is that the respondent made no such determination and no such issue has been raised by the pleadings. Accordingly, the question posed by respondent's argument is not properly before us for decision. In any event, however, the respondent does not support his contention convincingly. Helen acquired the shares in question by inheritance from her father and claims that her basis therefor was $ 100 per share since that was their fair market value at the date of her father's death. Respondent not only has voiced no opposition to this claim but has stipulated with petitioners that the stock "was appraised at $ 100 a share in the estate of Victor Waldheim," Helen's father, and on the basis thereof we have concluded and found that Helen's basis for the said shares was $ 100 per share. Furthermore, we have also found as a fact that the stock had a fair market value of at least $ 100 per share when the 155 shares were surrendered in satisfaction of the indebtedness, and not only is it our view that the evidence justifies and supports that finding but such finding was requested by the respondent on brief. Such being the case and taking into account the full import of the settlement agreement under which the shares were surrendered, we fail to note any support for the claim that there was any cancellation of indebtedness or that Helen's stock was redeemed in such manner as to make the redemption "essentially equivalent to the distribution of a taxable dividend."

It was respondent's determination that gain was realized by Helen on the cancellation of her indebtedness to Waldheim & Company and whether she did so realize gain is the question at issue. The facts show no cancellation of indebtedness but a satisfaction thereof at full value by the surrender of stock at $ 100 per share which was also its basis to Helen and which at the time of such surrender had a fair market value equal at least to $ 100 per share. The respondent was accordingly in error in determining that taxable gain resulted from the transaction.

As to Stanley, it is the claim of the respondent that in 1945 he received a distribution from Waldheim & Company greatly in excess of the earnings of the said company for such year and to the extent of the earnings for that year the distribution is taxable as a dividend under section 115. He bases this claim (1) on the proposition that the redemption of the 155 shares of Waldheim & Company stock, pursuant to the settlement agreement of November 13, 1945, resulted in the receipt by Stanley of a taxable dividend under section 115 (g), and (2) on the proposition that the acquisition by Stanley of the 666 2/3 shares of Waldheim & Company stock at a price or prices substantially below the fair market value of the stock acquired effected a distribution of the 1945 earnings of the company and was the payment of a dividend under section 115 (a) (2).

That Stanley was enriched substantially by the settlement is not on the facts an open question. Passing for the moment the surrender of the 155 shares of stock in cancellation of his indebtedness to the company and its relation to other steps in the settlement, the facts show that for $ 20,500 he acquired 666 2/3 shares of stock having a fair market value of at least $ 66,666.67. It is Stanley's claim, however, that 333 1/3 of the said shares rightfully belonged to him at all times subject only to the payment by him of the amounts expended by the company in "taking over" and carrying the indebtedness for which the shares had been put up as collateral. Assuming for the purposes here that his position as to the 333 1/3 shares formerly held by him is well taken, the facts still show that in being permitted to purchase the shares formerly owned by Jack Waldheim for $ 7,500 he was enriched by at least $ 25,833.33, the net effect of which was a distribution to him in that amount by Waldheim & Company. Elizabeth Susan Strake Trust, 1 T. C. 1131, is directly in point and we accordingly conclude and hold that to the extent of the 1945 earnings of the company not otherwise distributed the said distribution was a dividend within the meaning of section 115 (a) (2) and taxable to Stanley as such. It thus becomes unnecessary to pass upon the other claims and contentions of the parties relating to the dividend issue.

With respect to the year 1945 Stanley has pleaded the statute of limitations and the parties are in apparent agreement that the statute has run unless section 275 (c) is controlling. Section 275 (c) applies where a taxpayer in reporting his income omits from gross income an amount properly includible therein which is in excess of 25 per centum of the gross income stated in his return. It follows from our decision on the dividend issue above that Stanley did omit from the gross income reported on his 1945 return an amount properly includible therein which is in excess of 25 per centum of the amount of gross income which he did report. His claim that the respondent is barred from assessing the 1945 deficiency herein is accordingly denied.

For each of the years 1945 and 1946 Stanley deducted $ 360 as the cost to him of operating his personally owned automobile in the course of his employment by Waldheim & Company. These deductions have been disallowed by the respondent. As is true of petitioners in so many cases coming before this Court, we think that Stanley did to some extent use his personally owned automobile in the course of his employment, but as is also true in most such cases, the amounts claimed as cost of such operation were not the amounts actually expended, but estimates thereof. Here the amounts claimed were not only estimated amounts but were estimated portions of estimated amounts. One apparent difficulty with the estimates is that they are identical for the two years even though the record shows that early in 1945 Stanley was discharged from his employment by Waldheim & Company, and his difficulties with the company and the other stockholders and directors were not resolved until November 13, 1945. If he resumed his employment prior to the settlement date that fact is not shown on record. It is thus apparent that whatever the amounts actually expended by Stanley in the two years in operating his automobile in the course of his employment there appears to be no justification for concluding that the amount expended in 1945 was as great as that expended in 1946. Applying the rule in Cohan v. Commissioner, 39 F. 2d 540, we have concluded on the evidence and found as a fact that Stanley's cost of operating his car in connection with his employment by Waldheim & Company was $ 30 in 1945 and $ 100 in 1946. To such extent the claimed deductions are allowed.

For legal services rendered in his behalf in connection with the above-described lawsuits and the settlement thereof Stanley incurred attorneys' fees in excess of $ 12,500, which fees were paid in installments over a number of years. During 1948 he paid one such installment in the amount of $ 900. On his return for 1948 the amount so paid was claimed as a deductible expense and he claims as error the respondent's disallowance thereof. Taking into account the subject matter of the said lawsuits and of the settlement agreement, it is our opinion that the claim of error is well taken and that the amount in question is deductible in full, partly under section 23 (a) (1) and partly under section 23 (a) (2). We so hold.

In the proceeding at Docket No. 36184 Helen W. Bienenstok alleged error on the part of the respondent in the disallowance of a deduction claimed as medical expenses. No proof was offered with respect thereto and no argument appears on brief. Possibly this is a case where the disallowance followed as a matter of course from adjustments in gross income made by the respondent in his determination of deficiency. If so, the parties presumably will make such recomputations as will be necessary with respect to the claimed deductions in their computations under Rule 50. If not, the issue will be regarded as abandoned.

Decisions will be entered under Rule 50.

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Footnotes

• 1. This deficiency relates to the proceeding at Docket No. 34551 wherein the petitioners are Stanley V. Waldheim and Eleanor R. Waldheim.↩

• 2. The word "redeemed" is from the stipulation of the parties. The minutes of the annual meeting of the stockholders of Waldheim & Company held on April 28, 1942, state that the secretary reported that the company "had purchased" the said shares from the bank. Whatever the import of the word "redeemed," however, Stanley argues that the company took over his indebtedness from the bank and held the said shares subject to his payment of the debt and interest whereas the respondent argues that Waldheim & Company purchased the said shares for its own account.

• 3. On June 15, 1945, a third lawsuit naming Helen Bienenstok as defendant was filed by Stanley wherein he made claim to 333 1/3 shares of Helen's Waldheim & Company stock but there is no indication of record that this suit was pressed or that it was seriously regarded by the parties. Helen's ownership of the said shares was later confirmed in the settlement agreement of November 13, 1945, referred to hereafter.

• 4. Willcuts v. Milton Dairy Co., 275 U.S. 215">275 U.S. 215; Foley Securities Corporation v. Commissioner, 106 F. 2d 731; Hadden v. Commissioner, 49 F. 2d 709; Estate of Harold M. Lehman, 4 T. C. 325; Roy J. Kinnear, 36 B. T. A. 153; and Edna C. Gutman, 45 B. T. A. 836↩.

• 5. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

  (g) Redemption of Stock. -- If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.