Jayne, George W., Estate and Marion P., Individually and Executrix

744

Klein, George T., Estate and Shirley, Individually and Personal

Lennard, Milton S., Estate and Pauline, Individually and Coexecutor---

160

554

REPORTS

OF THE

UNITED STATES TAX COURT

NATHAN CUMMINGS AND JOANNE T. CUMMINGS, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2653-71. Filed October 2, 1973.

P was a director and shareholder of MGM, and in 1962, he made a payment to MGM of $53,870.81 when the SEC indicated that P might be liable to MGM for such amount as an insider's profit within the meaning of sec. 16(b) of the Securities Exchange Act of 1934. Held, under the particular circumstances of this case, the payment is an ordinary and necessary business expense of P; Nathan Cummings, 60 T.C. 91 (1973), reaffirmed.

Anderson A. Owen, Edward W. Rothe, and Glen H. Kanwit, for the petitioners.

Nelson E. Shafer, for the respondent.

OPINION

SIMPSON, Judge: An opinion was filed in this case on April 23, 1973, 60 T.C. 91. In such opinion, we held that in the circumstances of the case, the petitioner was entitled, by virtue of section 162 of the Internal Revenue Code of 1954,1 to deduct as an ordinary and necessary business expense a payment made to MGM. Such payment was made after an indication that the petitioner might be liable for an insider's profit in violation of section 16 (b) of the Securities Exchange Act of 1934, but the Court found that the payment was made to protect the business reputation of the petitioner and to avoid delay in the issuance of the proxy statement. In so holding, we relied on William L. Mitchell, 52 T.C. 170 (1969), revd. 428 F. 2d 259 (C.A. 6, 1970), certiorari denied 401 U.S. 909 (1971), and James E. Anderson, 56 T.C. 1370 (1971), then on appeal to the Seventh Circuit.

1 All statutory references are to the Internal Revenue Code of 1954, except that any reference to sec. 16(b) is to such section of the Securities Exchange Act of 1934.

1

Subsequently, our holding in Anderson was reversed. Anderson v. Commissioner, 480 F. 2d 1304 (C.A. 7, 1973). Based on such reversal, the respondent moved for reconsideration of the opinion and to vacate the decision in the case. On July 9, 1973, the respondent's motion to vacate decision was granted in order to stop the running of the period for appeal, and the parties were directed to submit legal memorandums in support of their positions with respect to reconsideration and revision of our opinion. Such memorandums have been filed.

In James E. Anderson, supra, we found that there was no connection between the two events the taxpayer recognized capital gains in his capacity as a shareholder but paid the alleged insider's profit in his capacity as an officer. The Seventh Circuit found that reasoning unpersuasive. It concluded that at all times relevant, the taxpayer acted in one capacity-that of an insider. The court found that the sale and the subsequent payment were inextricably intertwined. Accordingly, under the doctrine of Arrowsmith v. Commissioner, 344 U.S. 6 (1952), the taxpayer was entitled only to a capital loss. Moreover, the court thought that to allow an ordinary deduction for the payment would frustrate the purpose of section 16(b), and in reliance upon Tank Truck Rentals v. Commissioner, 356 U.S. 30 (1958), it believed that the deduction should also be denied for that

reason.

We have carefully reexamined our position in the light of the views expressed by the Seventh Circuit, but with due respect to that court, we are not convinced that our position should be changed. Since venue for appeal of this case is in the Second Circuit, we are not required to follow the decisions of the circuit courts in Anderson v. Commissioner, supra, and Mitchell v. Commissioner, 428 F. 2d 259 (C.A. 6, 1970). Jack E. Golsen, 54 T.C. 742 (1970), affd. 445 F. 2d 985 (C.A. 10, 1971), certiorari denied 404 U.S. 940 (1971).

Simply stated, the doctrine set forth in Arrowsmith is that, without breaching the principle of the annual accounting period, the tax treatment of a transaction occurring in 1 year may control the tax treatment afforded a second transaction in a subsequent year where both transactions are integrally related. However, for Arrowsmith to apply, there must be a relationship between two transactions which is sufficient to require the conclusion that both transactions are parts of a unified whole. James E. Anderson, 56 T.C. at 1376. In Arrowsmith, the Court found such relationship in part because the payment there at issue would have been offset against the capital gain, had

The petitioners maintained their residence in New York, N.Y., at the time of the filing of their petition in this case.