Appeal of American Textiles, Inc.

2 B.T.A. 186

• Court: United States Board of Tax Appeals
• Decided: June 29, 1925
• Docket: Docket No. 2477
• Status: Published

Opinion

OPINION.

Green:

The execution and. performance of the agreement by the Smiths and Galbraiths was not a service the cost of which is a deductible expense. The expense was not an ordinary and necessary business expense, nor can it be called compensation for personal services. The exchange of stock was, if anything, a capital transaction. It was not in the minds of the parties a permanent exchange. The equivalent of dividends on their previous holdings of preferred stock was paid to the Smiths and Galbraiths. They participated in the earnings of the company as if they still held their preferred stock. In so far as receipts were concerned, they were no better or no worse off than if they held the preferred stock. Their priority as to assets in case of dissolution was temporarily less than that of holders of preferred stock. They were, to all intents and purposes, as they subsequently again became, the holders of preferred stock.