Waterman, Largen & Co., Inc. v. The United States

419 F.2d 845, 189 Ct. Cl. 364, 24 A.F.T.R.2d (RIA) 5841, 1969 U.S. Ct. Cl. LEXIS 5

Opinions

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57 (a) [since September 1, 1969, Rule 134 (h)]. The commissioner has done so in an opinion and report filed on September 20, 1968. Defendant took no exception to the commissioner’s findings of fact but did except to his recommended conclusion of law that the stock purchased by the taxpayer was an ordinary asset, not a capital asset. Plaintiff took no exception to the commissioner’s findings of fact or to his recommended conclusion of law. The case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case.

Footnotes

•

* Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 131(c).

OPINION OF COMMISSIONER

GAMER, Commissioner:

Plaintiff sues to recover alleged over-payments on its corporate income taxes for its taxable years ending December 31, 1961, and December 31, 1962.

The sole issue is whether the loss on the sale of certain stock which plaintiff owned is, as contended by plaintiff, fully deductible under either section 162(a) ¹ of the Internal Revenue Code of 1954 (26 U.S.C. § 162(a) (1964)) as one growing out of an ordinary and necessary expense incurred in carrying on its business, or section 165(a),² as an uncompensated loss sustained during a taxable year, or instead is, as contended by defendant, to be treated as a loss incurred on the sale of a capital asset under sections 165(f) ³ and 1211(a),⁴ with the limitations on de-ductibility applicable thereto.

Plaintiff sold the stock in question in 1961, and on its income tax return for such calendar year reported the loss, amounting to $75,000, as a capital loss. However, in 1963 it filed timely claims' for refund claiming a deduction as an ordinary loss in 1961 and a net operating loss carryover deduction for 1962. The claim not having been allowed, this suit followed.

In Booth Newspapers, Inc. v. United States, 303 F.2d 916, 157 Ct.Cl. 886 (1962), this court enunciated the basic principles governing cases such as these. It pointed out that although section 1221 of the Code defines the term “capital asset” as “property held by the taxpayer (whether or not connected with his trade or business),” (with certain exclusions, such as inventory) ⁵ and that “[a]s a general proposition * * * capital stock does constitute ‘property’ and, aside from stock sold by dealers in the usual course of their business, does not fall within any of the express exclusions of section 1221,” so that a stock transaction would normally be “encompassed by the literal language of that section,” nevertheless, the Supreme Court in Corn Products Refining Co. v. Commissioner of Internal Revenue, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), established an “elastic concept” of the term which, in certain cases, permitted transactions which would otherwise fall within the literal “capital asset” definition to be considered instead as “ordinary” income or loss. 303 F.2d at 920, 157 Ct.Cl. at 894. In the Corn Products case, the Court held that the buying and selling of corn futures for the purpose of protecting against price increases of corn, the basic raw material of the taxpayer’s business, constituted an integral part of its manufacturing operations and was therefore to be treated as an ordinary business expense, and not as a capital investment or speculation. “Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss.” 350 U.S. at 52, 76 S.Ct. at 24.

After reviewing the various cases of stock transactions by corporate taxpayers which had been decided following Com Products and which had applied the doctrine established thereby, the court in Booth Newspapers formulated the governing principles as follows:

* * * if securities are purchased by a taxpayer as an integral and necessary act in the conduct of his business, and continue to be so held until the time of their sale, any loss incurred as a result thereof may be fully deducted from gross income as a business expense or ordinary loss. If, on the other hand, an investment purpose be found to have motivated the purchase or holding of the securities, any loss realized upon their ultimate disposition must be treated in accord with the capital asset provisions of the Code.

* * * The fact that securities are property,” in the broad sense of that term, is not conclusive. 303 F.2d at 921, 157 Ct.Cl. at 896. a

And, to determine whether the transaction involved thus falls within the “ordinary” or the “investment” category,

* * * the circumstances of the transaction (its factual background, the necessities of the particular business involved at the particular time involved, and the intentions of the taxpayer, both at the time the securities were originally purchased and at the time they were disposed of) are of crucial importance in the resolution of these cases. Ibid.

Applying these Booth Newspapers legal principles, and “factual background” criteria, including the “necessities” of plaintiff’s business and the “intentions of the taxpayer” at the pertinent times, it is concluded that plaintiff has here carried its burden of establishing entitlement to the deduction in question as an “ordinary” loss.

Plaintiff was incorporated in May 1958 under the name of Waterman, Merrill, Largen & Co., Inc. Its business is the selling, on commission, of various types of yarn produced by its mill accounts. It grew out of the merging of the business interests of three yarn selling companies that had been previously operated by the three principals, Waterman, Merrill, and Largen. Their companies had specialized in the sales, as commission agents, of different types of yarn — Waterman’s, based in Providence, Rhode Island, in cotton yarn, Merrill’s, based in New York City, in worsted yarn, and Lar gen’s, based in North Carolina, in synthetic yarn. The merging of the three companies into the plaintiff resulted in a single sales agency capable of offering a well-rounded line of yarns. The ability to offer such a broad range has many advantages. For instance, a salesman selling one type of yarn can sometimes discover uses by the customer for other types and thereby effect additional sales.

The largest account that Merrill brought to plaintiff upon its incorporation was that of the Elmvale Worsted Company, a Massachusetts corporation that manufactured worsted wool yarn at Pittsfield,’ Massachusetts. This fifty-year-old mill had one of the finest reputations in the country as a quality yarn producer. However,- by 1957 it had become an unprofitable business. The dominant force behind the company was Carey R. Kinney, its president and owner of 83 percent of its stock.⁶ Kinney and Merrill had been longtime personal and business friends and associates.⁷ Elm-vale had its own sales force selling its production of worsted weaving yarn. However, in an effort to stem Elmvale’s unprofitable operation, Kinney, in the summer of 1957, requested Merrill to undertake a pilot experiment whereby Elm-vale would enter the more profitable knitting yarn manufacturing field and Merrill would promote the sales of such yarn upon the usual sales agent’s two percent commission. Merrill agreed and, indeed, succeeded to such an extent as, by May 1958, to warrant plaintiff’s incorporation and the bringing into it of Merrill’s accounts, including Elmvale, as its worsted division. By the latter part of 1958, the account had grown to the point that around thirty percent of Elm-vale’s production consisted of knitting yarn, with Elmvale becoming the third largest account plaintiff had and the principal factor in the worsted division of plaintiff’s business.⁸

However, despite the increasing success Merrill was achieving in transforming Elmvale’s production into the more profitable knitting yarns, the effort still did not result in transforming Elmvale into a profitable mill and, in early December 1958, Elmvale decided to terminate operations. Antiquated machinery and labor problems contributed significantly to its plight, as was then the situation in many New England mills. In addition, 1958 was a poor year in the textile industry.

The loss of this account was a serious blow to plaintiff. Elmvale was the most important segment of its worsted division, constituting its only substantial worsted wool account.⁹ One of the principal reasons for having organized plaintiff just eight months before was to have such a worsted division. The Elm-vale account was a steadily growing one and was, by December 1958, generating commissions at the rate of over $2,000 a month. This amount contributed substantially to defraying the overhead of plaintiff’s New York City office, including the salaries of Merrill and another salesman, Heyman, who spent much of their time on the Elmvale account.¹⁰ Plaintiff’s own financial situation was weak. While it had been in operation only eight months, plaintiff had, as of December 31, 1958, incurred an operating loss during this poor industry year of over $17,000, and was at that time actually insolvent.¹¹ Plaintiff had anticipated that the growing Elmvale account would go far toward eliminating the operating loss it was incurring during these first months.

Faced with this serious threat to its corporate existence, at least in its then form, plaintiff (Merrill) diligently attempted' to obtain another worsted mill account but did not succeed. Such a selling agency account is extremely difficult to secure.

Kinney’s son (whose given name was also Carey, but who is referred to as “Brud”) had been associated with Elm-vale since 1940. He had worked in every phase of the business, including production, management, and financing. It was the father’s hope that his son would ultimately succeed him in becoming the dominant force in the business. In December 1958, he was serving in the capacity of treasurer.

Merrill explored every avenue to save the Elmvale account. Knowing of Kinney’s attachment to the Elmvale name and his desire to insure his son’s business future, Merrill inquired whether Kinney would be interested in continuing in business if a satisfactory mill could be found in some other location. Kinney replied that such a possibility would be given every consideration and Merrill immediately so advised Waterman and Largen.

Very shortly thereafter, still in December 1958, Largen located a mill in Laurens, South Carolina, which produced substantially the same products as Elmvale and which was for sale. Investigation of the prospect then proceeded, including personal visits to the plant by the Kinneys and one of their top production employees, Augeri, as well as by Merrill and Largen. A formal report made after a week-long intensive study by Brud Kinney and Augeri contained favorable findings.

Others with whom Kinney had had business relationships over the years were also interested in the continuation of the Elmvale operation, including Arthur Wellman of the Nichols Fiber Company of Boston, Massachusetts, which was the largest raw material manufacturer for the wool yarn industry, and Harris Bucklin of the Crompton-Rich-mond Company, Inc., of New York City, which was Elmvale’s factor, and some meetings were held in Crompton-Rieh-mond’s offices concerning the prospective purchase of the Laurens mill and its operation. Kinney disclosed his willingness to become the dominant stockholder in a new corporation to be organized to take over the assets of the Laurens plant, the corporation to be named “Elmvale Worsted Company, Inc.” (i. e., the same name as the Pittsfield company, with only “Inc.” added). The new company would be headed by his son as president, who would move south, as would Augeri, who would become head of production. Kinney himself, principally because of his age (70), would not physically move south, but would become chairman of the board of directors. Nichols Fiber Company would continue as the raw material supplier and Cromp-ton-Riehmond as factor. As to plaintiff, since there would be no move south by the Elmvale sales force, the opportunity was open to become sales agent for the mill’s entire production, i. e., the weaving as well as the knitting yarns. This would, of course, not only assure plaintiff’s continued existence, but would open the door to even greater Elmvale commission possibilities.

However, this happy solution to plaintiff’s problem was not to be easily realized. Kinney had always felt (a philosophy that was well known in the trade) that a selling agent for a mill’s entire production should have a substantial financial interest in the mill. This would, he believed, produce a relationship in the nature of a joint venture and would thus constitute an incentive to the agent to do a better and more responsible selling job. He had seen many examples of “poor selling” by commission agents, such as effecting sales to financially weak customers, which had in turn resulted in disaster to the mill. Accordingly, at one of the meetings in Crompton-Richmond’s offices, Kinney conditioned plaintiff’s becoming the new Elmvale corporation’s exclusive sales agent upon its putting $100,000 into the corporation’s stock.

Plaintiff’s three principals then immediately held meetings to consider plaintiff’s future course. Plaintiff’s finances did not permit such an expenditure. As shown, it was instead insolvent. Nor did the principals themselves have such an amount. They had already made personal loans to plaintiff to keep it going. They concluded, however, that, because of plaintiff’s dire need for commissions, they would, in order to continue to exist at all, or at least to exist with a worsted wool division, have to raise the $100,000 somehow to regain the Elmvale account. The Laurens plant was then producing around 25,000 pounds of yarn weekly. Financially, it was just about breaking even. The Kinneys planned to move some of their newer equipment at Pitts-field to Laurens and increase the output to around 30,000 pounds a week or 1,500,000 pounds annually, which, at the then current market average of around two dollars per pound, would result in gross annual sales of about $3,000,000. At the customary two percent commission, this would produce around $60,000 in commission for plaintiff, which, even after deducting the substantial selling expenses involved, would still permit the liquidation of the $100,000 indebtedness in two-to-three years. Although the prospects for the mill’s becoming a substantial moneymaker were not bright, conditions in the industry and the times not being favorable (1959 was also a poor year, and the industry was, in addition, suffering from foreign import competition), the principals nevertheless felt that it would be able to continue producing for many years on at least a break-even basis, which would permit the generation of commissions in such prospective amount. Although the father Kinney would not move south and actively participate in the running of the plant, the son had been well trained to take over the running of such a mill. Furthermore, the father, as chairman of the board, would be available for guidance and advice. Augeri was a well-regarded production man. The excellent Elmvale name was to be retained, as well as, it was hoped, the old customers, since the plant would produce the same type of yarns.

On the above considerations, plaintiff’s principals decided to attempt to borrow the $100,000. - At one of the previous meetings in Crompton-Rich-mond’s offices, Bucklin had offered to lend Kinney $100,000 to effectuate the purchase of the Laurens mill, but Kinney had declined the offer. Plaintiff’s principals decided to ask Bucklin if Crompton-Richmond would lend such a sum to plaintiff. After reviewing the pertinent figures and the prospects for plaintiff’s being able to repay the loan out of the prospective commissions, Buck-lin agreed to make the loan.

Such loan was thereafter made by Crompton-Richmond to plaintiff, a note evidencing the loan executed by plaintiff (and personally endorsed by the three principals), the new Elmvale corporation formed (sometimes referred to as “Elm-vale-Laurens”) with Brud Kinney as president, 1,000 shares of the stock of the corporation issued to plaintiff for $100,000 ¹² (the stock being pledged to Crompton-Richmond as collateral for the loan), and plaintiff became Elmvale- Laurens’ exclusive sales representative.¹³ The new corporation commenced operations on June 8, 1959.¹⁴

For various reasons, Elmvale-Laurens, from the outset, suffered heavy operating losses. The sales plaintiff was able to effect for it, and plaintiff’s commissions, fell far below expectations.¹⁵ Adjustments were required in the schedule of payments on plaintiff’s note to Crompton-Richmond. Friction developed between the mill personnel and plaintiff’s sales force handling the account, i. e., Merrill and Heyman.¹⁶

By February 1961, friction between Brud Kinney on the one hand and Merrill and Heyman on the other had developed to the point that it was concluded Merrill and Heyman could no longer feasibly sell Elmvale-Laurens yarns for plaintiff. An agreement was reached redeeming their stock interests in plaintiff, they resigned as plaintiff’s employees, and plaintiff’s name was changed to its present form. New arrangements were then made by plaintiff for selling the Elmvale-Laurens yarns. However, the sales situation did not improve, and Elmvale-Laurens’ financial condition continued to deteriorate.

Finally, and in good part at .the instance of the Nichols Fiber Company, without whose liberal extension of credit Elmvale-Laurens would not be able to exist, Brud Kinney, on June 22, 1961, addressed a letter to plaintiff terminating its agency effective June 30, 1961.¹⁷

Thereupon, plaintiff, considering that the purpose of its being a stockholder no longer existed, promptly sought to dispose of its 1,000 shares of stock in Elm-vale-Laurens.¹⁸ It approached several persons who were considered as possible purchasers, but the only offer it received was one for $25,000 (approximately book value) from one Clifford Brown of Providence, Rhode Island. On July 21, 1961, one month after the termination of its agency, the stock was sold to Brown at such price, resulting in a $75,000 loss. It is the proper treatment of this loss¹⁹ as “ordinary” or “capital” which is the subject of the dispute herein.

The above-recited facts leave little doubt that the circumstances underlying the purchase and sale of the Elmvale-Laurens stock qualify the loss as an “ordinary” one. This was the only way plaintiff could regain the lost Elmvale account, its only substantial wool worsted account and one of the mainstays of its worsted division, and, at the time, avoid liquidation or, at least, the dissolution of its worsted division, the establishment of which was the prime purpose of its having been organized in the first place. It seems plain that the situation falls within the Booth Newspapers prin ciple as “securities * * * purchased by a taxpayer as an integral and necessary act in the conduct of his business” and that plaintiff was not “motivated” by “an investment purpose” in the “purchase or holding of the securities,” at least in the sense in which the term “investment” is used in these cases.

While, as Booth, Newspapers points out, the result, in cases involving this problem, normally depends upon the particular facts of the individual case showing the purpose of the purchase and holding of the securities,²⁰ the facts in the instant case are similar to those in which purchases of securities were made to effectuate the continued supply of vital materials or inventory upon which a business depends, and in which the losses involved were held to have been incurred in the ordinary course of business and not as stock investments. Booth, Newspapers, Inc., supra (purchase by newspaper during a shortage period of stock in paper mill to insure supply of newsprint) ;²¹ Electrical Fittings Corp.,33 T.C. 1026 (1960) (purchase by electrical conduit fittings manufacturer of stock in ductile iron foundry to obtain, during shortage period, a supply of required castings); Helen M. Lives-ley, 19 T.C.M. 133 (1960) (purchase by potato wholesale dealer of stock in potato shipping company to obtain a dependable potato source); Arlington Bowling Corp., 18 T.C.M. 896 (1959) (purchase by operator of bowling alleys of stock in bowling pin manufacturing corporation to insure, during a shortage period, a source of supply of pins); Smith & Welton v. United States, 164 F. Supp. 605 (E.D.Va.1958) (purchase by department store of shares of manufacturer of ladies’ suits to maintain continued supply of the line); Tulane Hardware Lumber Co., 24 T.C. 1146 (1955) (purchase by a lumber dealer of debentures of a plywood manufacturer to insure a source of plywood); ²² Western Wine & Liquor Co., 18 T.C. 1090 (1952) (purchase by wholesale liquor dealer, during a whiskey shortage, of shares of distiller to obtain whiskey inventory).²³

Even closer to the instant case on the facts is Southeastern Aviation Underwriters, Inc., 25 T.C.M. 412 (1966), where the loss on the purchase by an aviation insurance manager, of shares in an insurance company, made to replace a lost management contract on which the taxpayer had earned substantial commissions, was held to constitute an ordinary business expense, as well as Hagan v. United States, 221 F.Supp. 248 (W.D. Ark.1963), where such a deduction was also allowed on the loss incurred by a salesman on stock purchased in a customer’s business to insure that the customer would continue to make its exclusive purchases through him and on which he earned substantial commissions.

Defendant contends that plaintiff purchased the Elmvale-Laurens stock not, as a temporary expedient, to maintain its existing business, as was true in some of the “source of supply” cases, but, instead, for the purpose of expanding its business on a permanent basis. It points out that when Elmvale-Pitts-field decided to cease operations plaintiff was earning commissions from it at the rate of around $25,000 a year while plaintiff hoped to realize commissions from Elmvale-Laurens of around $60,000 a year. It argues that expenditures for expansion, exceeding those necessary to the conduct of an existing business, are recognized as capital investments.

It is true that when expansion is the underlying basis of ,the stock purchase, without any showing of business necessity relating to the perpetuation of the life of the existing business, the expenditure has been regarded to be in the nature of a capital investment rather than an ordinary and necessary business expense. Chase Candy Co. v. United States, 126 F.Supp. 521, 130 Ct.Cl. 102 (1954); Duffey v. Lethert, 11 A.F.T.R. 2d 1317 (D.Minn.1963). And in Smith & Welton, supra, the court, in sustaining the loss .there involved as an ordinary and necessary business expense, drew a distinction between cases in which securities are acquired to obtain an advantage which did not previously exist as against situations where securities are purchased to protect what is presently existing but threatened.²⁴

However, accepting these principles,²⁵ it seems plain they should not be so rigidly applied as to encompass a situation such as the instant one where the increase in business is so intimately linked to continued existence and such existence is the basic reason for the purchase. Increased business may well flow from continued life, but an expenditure basically designed .to insure continued life should not be denied its status as an ordinary and necessary business expense simply because it may also possibly result in business enlargement. In Booth Newspapers, this court did not hesitate to place the stock loss resulting from the newspapers’ attempt to obtain a full supply of newsprint in the “ordinary and necessary” category even though, as the findings show, the tonnage of newsprint replaced substantially exceeded the tonnage lost during the shortage. Similarly, in Southeastern Aviation Underwriters, Inc., supra, the loss on the stock purchase, made for the purpose of replacing the lost management contract on which the taxpayer had earned substantial commissions, was held to constitute an ordinary business expense although the facts showed a very substantial in crease in commissions under the new contract. It was the attempt to replace the loss of an important commission account which .threatened the taxpayer’s survival that was determinative. The record shows that the same economic necessity motivated plaintiff in the instant case.

Defendant further says .that plaintiff’s purchase of the Elmvale-Laurens shares should be regarded as capital in nature because (a) the stock “at the time of its purchase appeared to be a particularly attractive investment”; ²⁶ and (b) plaintiff had no assurance it would continue to earn commissions since its agency was terminable at the will of the mill, so that the purchase should therefore be considered separately as an investment, disassociated from the commission problem.

The record does not support these contentions. First, the evidence does not fairly support any conclusion to the effect that plaintiff’s motivation was the opportunity of making “a particularly attractive investment.” The Laurens' mill at the time of plaintiff’s stock purchase therein was only breaking even. The times were not propitious for dynamic growth by woolen mills. The years 1958 and 1959 were poor ones in the industry. Competitive imports presented a serious problem. The evidence is plain that plaintiff was not seeking an attractive stock investment in the sense of capital appreciation or a source of dividends. It was primarily interested only in a source of commissions to replace the lost Elmvale-Pittsfield account, to save its woolen division, and to avoid liquidation. Plaintiff was hardly in a position to be seeking stock investments. This was not a situation of an investor seeking an outlet for surplus funds. Plaintiff was, instead, insolvent.. To make this purchase it had .to borrow the entire sum. The record makes plain that the purchase was not its idea or desire at all but that it felt obliged to make it because that was the condition imposed upon it by Kinney for plaintiff’s becom-

ing the mill’s commission agent. As the court said in Booth Newspapers, “The difficulty with defendant’s position is simply that the record will not support a conclusion that plaintiffs were investment-minded when they purchased the stock.” 303 F.2d at 921, 157 Ct.Cl. at 896. Plaintiff had never before nor has it ever since owned stock in any other corporation, a fact which, in cases such as these, has been given important weight. Arlington Bowling Corp., supra; Electrical Fittings Corp., supra; Hagan v. United States, supra; Tulane Hardware Lumber Co., supra; Western Wine & Liquor Co., supra. However, the fact that an expenditure is of a once-in-a-lifetime type does not prevent it from falling within the category of an “ordinary” business expense. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Planters Exchange, Inc. v. United States, 57-1 USTC ¶ 9565 (N.D. Fla.1957); Western Wine & Liquor Co., supra.

It is true that plaintiff did not expect the Laurens mill to flounder as it did. With a continuation of the Elmvale name, as well as the Kinneys’ dominant financial interest and management, and a top Elmvale-Pittsfield production official heading up the production at Laur-ens, plaintiff reasonably expected Laur-ens to continue for many years on at least a break-even basis. But this was all that was necessary for plaintiff to earn substantial commissions over such years.

On the terminability question, plaintiff denies that Elmvale-Laurens had the legal right to terminate its agency agreement, contending that its $100,000 stock purchase differentiates its situation from that of the usual commission agent in this industry, wherein agency arrangements are normally terminable at the will of the mill. It is, however, not necessary to decide this disputed legal issue since it would not, in any event, affect the outcome. Plaintiff had every assurance that it would if it met the stock-purchase condition imposed, be Elmvale-Laurens’ exclusive commission agent and there was no reason to doubt the bona fides or the permanency of the arrangement. Plaintiff had previously and successfully acted as Elmvale-Pitts-field's knitting yarn sales agent, and Merrill and Kinney had had a long and cordial business and social relationship. The legal right of Elmvale-Laurens ,to terminate the agency, even assuming there was such a right, would not affect the conclusion that the reasonably expected continued receipt of Elmvale commissions was the underlying reason for effecting the stock purchase.

Finally, defendant argues that, “even if the stock was non-capital when acquired, the taxpayer changed the character of the securities by holding the stock for over three years since it could have sold it (except to another sales agent) without jeopardizing its exclusive agency with Elmvale Laurens.”²⁷

The record also fails to support this contention. The stock-purchase condition imposed on plaintiff by Kinney was based upon the theory that an agent having a financial interest in the mill would perform better. A sale of the stock while plaintiff was still acting as agent would frustrate the entire purpose of the arrangement. Defendant’s assertion that plaintiff was free to sell the stock (except to another commission agent) at any time after its purchase is based on Brud Kinney’s testimony to such effect. However, he was not present at the particular meeting at which his father had imposed the requirement, and the understanding of all of plaintiff’s principals, which was the only rational one under the circumstances, was that plaintiff was obligated not only to purchase the stock but to retain it during the period it was acting as commission agent. As soon as plaintiff’s agency was terminated, plaintiff disposed of the stock to the only person from whom it obtained an offer.

As the cases upon which defendant relies show, Gulftex Drug Co., 29 T.C. 118 (1957), aff’d per curiam, 261 F.2d 238 (5th Cir. 1958); Missisquoi Corp., 37 T.C. 791 (1962), it is true that securities originally acquired as an “integral and necessary act in the conduct of [a] business,” (Booth Newspapers, supra, 303 F.2d at 921, 157 Ct.Cl. at 896 and therefore noncapital at such time, may assume the nature of a capital investment if held substantially beyond the time when the acquisition of the stock has served its purpose. As shown, however, the facts herein do not fall within the ambit of this rule.

For all the reasons stated above, plaintiff is entitled to recover. The amount of the recovery should be determined pursuant to Rule 131(c).

The dissenting opinions of DAVIS, Judge, and NICHOLS, Judge, follow the opinion of the trial commissioner which has been adopted by the court.

1

. “Sec. 162. Trade or Business Expenses.

“(a) Tn General — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * *

2

. “Sec. 165. Losses.

“(a) General Rule. — There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.”

3

. “(f) Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212.”

4

. “Sec. 1211. Limitation on Capital Losses.

“(a) Corporations — In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.”

5

. “Sec. 1221. Capital Asset Defined.

“For purposes of this subtitle, the term ‘capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include—

“(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

“(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; * * 26 U.S. O. § 1221 (1964).

6

. Kinney also had other related interests. The Kinney Worsted Yarn Company was a one hundred percent owned subsidiary of Elmvale’s. There was also a separate dye plant at Pittsfield.

7

. Prior to organizing his own business in 1950, Merrill had been vice president in charge of sales first for the Whitman Yarn Company, one of the largest spinners of worsted yarns in the country, and then for the Abbott Worsted Company in Massachusetts until it went out of business in 1956. He was considered as one of the most experienced and knowledgeable worsted yarn salesmen in the country. Both Waterman and Largen had given him financial assistance to organize his own company in 1950 with the thought that sometime in the future the three might join forces.

8

. Plaintiff’s largest account was Carlton Yarn Mills of Salisbury and Clierryville, North Carolina, which operated through various divisions, its second largest being the Firestone Textile Division of Gas-tonia, North Carolina.

9

. Because of a conflict of interest, Merrill had dropped another account when he acquired Elmvale.

10

. A third salesman in the office, John Buslier, was principally engaged in selling worsted yarns spun from synthetic fiber by the Turbo Orion Division of Carlton Yarn Mills. Merrill and Heyman were stockholders of plaintiff and Busher had a one-year contract to May 1959.

11

. Its assets were approximately $31,000 and its current liabilities over $47,000.

12

. Kinney’s capital contribution was $135,-000, of which $35,000 consisted of the value of equipment moved from the Pittsfield mill, for which 1,350 shares were issued (to the Kinney Worsted Yarn Company). The Nichols Fiber Company received 500 shares for $50,000, and 150 shares were issued to stockholders with minority stock interests in the Laurens corporation in exchange for such stock.

13

. To represent plaintiff’s interests, Lar-gen became a member of the board of directors.

14

. Elmvale-Pittsfield had terminated oper-tions at the end of February 1959.

15

. Brud Kinney too participated in selling, calling on Elmvale-Pittsfield’s old weaving yarn customers. In so doing he acted in the capacity of an employee of plaintiff paying him $10,000 a year for such services.

16

. Elmvale-Laurens felt plaintiff was not obtaining the best possible prices for the mill’s products, but plaintiff considered the mill to be unrealistic and that sales were being lost as a result. In addition, plaintiff complained about the poor quality of yarn being produced. Large quantities of yarn which plaintiff sold were rejected and returned by customers.

17

. By letter of May 12, 1961, to John L. Stickley & Co., one of plaintiff’s competitors (with copies to plaintiff and Brud Kinney), Wellman suggested Stickley’s taking over certain of the Elmvale-Laur-ens accounts and such accounts were thereupon transferred to Stickley by Elm-vale.

18

. Plaintiff did not believe its agency was so terminable at the will of the mill, and considered instituting a suit. However, the mill was in such poor financial condition that plaintiff concluded a suit would not be worth the expense involved. As of March 31, 1961, Elmvale-Laurens was running a deficit in working capital of around $160,000.

19

. Plaintiff ultimately liquidated the $100,000 indebtedness to Crompton-Itieh-mond in 1964.

20

. “Whether an expenditure is directly related to a business and whether it is ordinary and necessary are doubtless pure questions of fact in most instances.” Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 475, 64 S.Ct. 249, 254, 88 L.Ed. 171 (1943).

21

. Journal Co. v. United States, 195 F. Supp. 434 (E.D.Wis. 1961), similarly held as ordinary a loss on paper mill shares bought by a newspaper publisher to obtain newsprint inventory during a shortage period.

22

. In Logan & Kanawha Coal Co., 5 T.C. 1298 (1945), a wholesale coal dealer which sold for its own account, as well as on commission, purchased stock in several of tlie coal companies which supplied it with coal for the primary purpose of maintaining favorable relations with such companies and thereby enabling it to acquire and maintain sources of supply. The Tax Court held that losses on the sales of such stock constituted capital losses since shares of stock, being “property,” were capital assets as defined by the Code and that, under the circumstances, the shares in question did not fall within any of the statutory exceptions (inventory, etc.). Thereafter, in Commissioner of Internal Revenue v. Bagley & Sewall Co., 221 F.2d 944 (2d Cir. 1955), the Second Circuit held that a loss incurred as a result of the required posting of Government bonds as security for the performance of a contract was an ordinary loss since it was incurred only as an incident of carrying on the business of the taxpayer. It rejected the theory that simply because a security constitutes a “capital asset” under the Code, a loss incurred on the purchase and sale thereof necessarily constitutes a capital loss and instead held that it was not possible to “wrench” the purchase and sale from “its setting,” (at 947) all the facts and circumstances relating thereto being required to be examined. In Tulane Hardware, the Tax Court held that in view of Commissioner v. Bagley & Sewall Co., its previous decision in Logan & Kanawha Coal Co. would no longer be considered as authoritative.

23

. Charles A. Clark, 19 T.C. 48 (1952); Edwards v. Hogg, 214 F.2d 640 (5tli Cir. 1954); and Hogg v. Allen, 105 F.Supp. 12 (M.D.Ga.1952), are similar whiskey supply cases.

24

. Cf. Weather-Seal, Inc., 22 T.C.M. 471 (1963), where, in holding losses on the purchase by a manufacturer of stock in retail outlets to be fully deductible as a business expense since the stock “was acquired for reasons of business necessity and not for investment purposes” (at 474), the court emphasized that the stock purchase plan was not aimed at acquiring new business but only to retain existing business.

25

. In Helen M. Livesley, supra,, the court felt' that, in order for a stock purchase to constitute a reasonable and necessary act in the conduct of a business, the taxpayer is not required to go so far as to prove that, absent the purchase, his business would have been crippled or would have failed. “Responsible businessmen make legitimate expenditures every day, which would not measure up to such a ‘survival’ test.” 19 T.C.M. at 140.

26

. Def.’s Brief, p. 15.

27

. Def.’s brief, p. 15.