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A dispute arose under the contract, wherein the manufacturer
sought recovery of certain production costs. The dispute was
ultimately settled by the taxpayer’s transfer of property to the
manufacturer. The taxpayer sought to deduct the value of the
property transferred to settle the dispute, but the Commissioner
argued the amount was not deductible because the taxpayer was not
legally obligated to make the transfer. We rejected the
Commissioner’s argument, stating:
We know of no requirement that there must be an
underlying legal obligation to make an expenditure
before it can qualify as an ‘ordinary and necessary’
business expense under section 23(a)(1), Internal
Revenue Code of 1939. The basic question is whether,
in all the circumstances, the expenditure is ordinary
and appropriate to the conduct of the taxpayer's
business. * * * [Id. at 929.]
Thus, it was immaterial that whatever legal obligation might
exist was the shareholder’s, as opposed to the taxpayer’s.
The facts here are quite similar to those in Waring Prods.
Corp. ACQ was in no position to obtain a loan. Accordingly,
Schneider negotiated a loan commitment and agreed to pay loan
commitment and legal fees on behalf of its to-be-organized
subsidiary ACQ. After ACQ’s creation, petitioner, as the
surviving entity after its merger with ACQ, formally assumed some
of the costs (the legal fees), which it paid directly, and agreed
to (and did) reimburse Schneider for other costs (the commitment
fee) in response to Schneider’s invoice. Thus, the costs at
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