The opinion of the court was delivered by: RYAN
Plaintiff moves for summary judgment in both of these actions. Jurisdiction and venue are not questioned. I find no factual issue present.
The actions were filed under Title 28 U.S.C. Section 1346(a)(1) for recovery of federal corporate income taxes. No. 65 Civil 3258 seeks a refund of taxes paid by plaintiff for the year 1960; No. 66 Civil 1207 for the year 1961. Three separate claims are alleged: one in No. 65 Civil 3258 and two in No. 66 Civil 1207. The refund claims were timely filed and followed audits of plaintiff's returns and payment of additional taxes with interest after disallowance of legal fees as a business expense and the payment of a fine as compensation or indemnification deduction.
It is of Court record that plaintiff, CENTRAL COAT, and its then President, Sam Spatt, were among the sixteen named in an indictment returned in this District on January 31, 1957, charging violations of Sections 1 and 2 of the Sherman Act, as amended, Title 15 U.S.C. Sections 1 and 2. After pleas of not guilty and a trial to the Court, all of the defendants were found guilty and sentenced on June 16, 1958. CENTRAL was fined $50,000.00 and Sam Spatt, its President, was fined $10,000.00 and sentenced to 3 months in jail. Appeals were duly filed and, while pending, defendants on November 20, 1959, moved before the Trial Court for a new trial. The motion was based primarily on the discovery after trial of 43 unnumbered documents which, through inadvertence, had not been made available to defendants; upon denial of this motion, a further appeal was taken. The two appeals were heard together; the judgments of conviction reversed and the indictment remanded for retrial (291 F.2d 563 - May 31, 1961) and a rehearing denied. Later on November 30, 1961, all the defendants entered nolo contendere pleas and a fine of $50,000 was imposed on CENTRAL and of $10,000 on its president, Sam Spatt.
It is not in dispute that plaintiff CENTRAL on December 28, 1961 paid these fines and made no deduction in its 1961 corporate income tax return for these payments. On audit of this return, the District Director treated the payment of Spatt's $10,000 fine by CENTRAL as a constructive dividend taxable to Spatt in 1961 as additional personal income and not deductible by CENTRAL. This treatment was upheld on appellate review. The refund claim which plaintiff CENTRAL filed for overpayment of corporate income taxes for the year 1961 included a claim that plaintiff's payment of Spatt's $10,000 fine was not a constructive dividend to Spatt but additional executive compensation paid by plaintiff for the benefit of Spatt, and that as such compensation it should have been deducted on plaintiff's 1961 corporate return. This part of plaintiff's 1961 refund claim asked for return of income taxes overpaid in the amount of $5,200 with interest. Count Two of 66 Civil 1207 seeks recovery of this part of plaintiff's 1961 alleged overpayment.
The refund of $10,780.76 sought in No. 65 Civil 3258 arises from two payments made in 1960 by plaintiff CENTRAL to the law firm of Rosenman, Goldmark, Colin & Kaye, Esqs., for services rendered and disbursements made in prosecuting the motion made on behalf of plaintiff and Spatt for a new trial. These payments, totaling $17,795.69, were made on April 11, 1960, on April 28, 1960 and on August 12, 1960, and were deducted as a business expense by plaintiff on its 1960 federal corporate income tax return. Upon disallowance by the District Director, this resulted in an assessment of additional taxes and interest totaling $10,780.76.
On January 16, 1961, plaintiff paid the same attorneys $1,500 and $25,000 on September 15, 1961, a total of $26,500 on bills rendered by them to plaintiff for services rendered in prosecuting the two appeals. Plaintiff deducted these payments as a business expense in its corporate tax return for 1961 and on audit this deduction was disallowed. Additional taxes of $13,780 and interest of $2,406 were assessed and paid by plaintiff. Recovery of this payment of $16,186 is sought in the first count of No. 66 Civil 1207.
No claim is made that the attorneys' bills were unreasonable or that they covered any services other than those rendered in defending CENTRAL and Spatt from the antitrust prosecution.
The only issues raised by plaintiff's motion are:
1. Whether the taxpayer under the circumstances here present may deduct payment of all legal fees incurred for defense of the corporation and of its president in a criminal prosecution for violation of the Sherman Anti-Trust Act as an ordinary and necessary business expense of the corporation.
2. Whether taxpayer, which has paid a fine imposed on its president as a result of a conviction under the Sherman Anti-Trust Act, may deduct the fine by calling it "compensation".
In Commissioner v. Tellier, 383 U.S. 687, 16 L. Ed. 2d 185, 86 S. Ct. 1118 (1966), the Court held that legal expenses incurred by the taxpayer for the unsuccessful defense of a business-related criminal prosecution were deductible as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code.
Shortly after Tellier, the Internal Revenue Service in Revenue Ruling 66-330 stated that it would allow as deductions attorneys' fees and related legal expenses paid or incurred in the unsuccessful defense of a prosecution for violation of the Sherman Anti-Trust Act, if those expenses were otherwise deductible as ordinary and necessary business expenses (1962-2 Cum. Bull. 44).
In keeping with Tellier and this ruling, the Government on this motion does not dispute that a portion of the fees paid by CENTRAL to the Rosenman firm is deductible by it as CENTRAL's share of those fees. Nor does the Government dispute that legal fees of Spatt in defense of his own liability under the Sherman Anti-Trust Act are deductible on his individual tax return if paid by him, as long as they are incurred in defending activities related to the business of the corporation and ...