- 12 -
the origin and character of the claim with respect to
which an expense was incurred, rather than its
potential consequences upon the fortunes of the
taxpayer, is the controlling basic test of whether the
expense was “business” or “personal” and hence whether
it is deductible or not * * * [Id. at 49.]
A few years later, a corporation’s right to deduct amounts
paid to redeem its stock reached its zenith in Five Star
Manufacturing Co. v. Commissioner, 355 F.2d 724 (5th Cir. 1966),
revg. 40 T.C. 379 (1963). There, the Court of Appeals for the
Fifth Circuit permitted a corporation to deduct as an ordinary
and necessary expense the cost of redeeming its stock from a
50-percent shareholder, Mr. Smith. Mr. Smith had become deeply
indebted to the corporation, and the corporation obtained a
judgment for the amount of the debt. The corporation later
redeemed Mr. Smith’s shares at a judicial sale and credited those
proceeds against his debt. The Court of Appeals for the Fifth
Circuit held that the corporation could deduct the amount that it
paid to redeem those shares because the redemption was essential
to its survival. The court explained: “It can scarcely be held
that the payment to Smith was for the acquisition of a capital
asset, but rather one which would permit Five Star again to use
assets for income production by freeing its management from
unwanted fetters.” Id. at 727. In reaching its holding, the
court made no reference to United States v. Gilmore, supra.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011