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The flaw in the Five Star exception is that it requires
the trier of fact to look to the primary purpose of the
transaction in order to determine if an otherwise
capital expenditure can be treated as an ordinary and
necessary business expense under section 162. While
the Fifth Circuit purported to look to the nature of
the transaction, its ultimate focus was on the purpose
or business reasons for which the stock was purchased.
Petitioner’s argument is permeated by the same flaw that, as
we observed in Frederick Weisman Co., was present in the “Five
Star exception”. According to petitioner, the origin and nature
of Chrysler’s costs of redeeming its common stock arose in the
context of a union demand for compensation on behalf of the
employees. Therefore, petitioner concludes, the costs patently
constitute an ordinary and necessary expenses of doing business,
deductible under section 162(a). We disagree. Although
petitioner’s argument purports to look to the nature of the
redemption transaction, its ultimate focus is on its purpose or
business reasons for which the Chrysler common stock was
redeemed. As we noted in Frederick Weisman Co. v. Commissioner,
supra at 572-573: “The Supreme Court in Woodward and Hilton
Hotels, and more recently in Arkansas Best Corp., has made it
clear that this line of inquiry is inappropriate.” Thus, as our
opinion in Frederick Weisman Co. v. Commissioner, supra, makes
clear, redemption payments such as these simply are not ordinary
and necessary business expenses deductible under section 162(a).
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