Income Tax- Corporations-Legal Expenses Incurred in Sale of Assets Pursuant to a Section 337 Liquidation Are Deductible-United States v. Mountain States Mixed Feed Co.
In 1961, the stockholders of the Mountain States Mixed Feed Co. voted to liquidate the corporation in such a way as to comply with the requirements of section 337 of the Internal Revenue Code of 1954 (Code). That section provides that if a corporation adopts a plan of complete liquidation, and then within twelve months distributes all its assets, it will not recognize a gain or loss for income tax purposes from the sale or exchange of certain types of property. The corporation sold all of its assets and qualified for non-recognition treatment under section 337. It then claimed a net operating loss of $7,319.15 on its income tax return. The Commissioner of Internal Revenue, however, determined that the corporation had earned a taxable income of $29,080.30, and accordingly he assessed additional income taxes. Part of the difference between the two calculations was the result of the Commissioner’s disallowance of a claimed deduction of $4,000 for legal expenses relating to the sale of the corporation’s assets in liquidation. The Commissioner reasoned that since the expenses were incurred in connection with a sale of assets in liquidation, they were not properly deductible as ordinary and necessary business expenses under section 162 of the Code. The corporation paid the additional assessment, and then sued for a refund. The district court ruled in favor of the corporation. On appeal to the Tenth Circuit, held, affirmed. Legal expenses for services rendered in connection with the sale of assets in liquidation are expenses of carrying out the liquidation, and as such may be deducted from income as ordinary and necessary business expenses.