Before BIGGS, Chief Judge, and GOODRICH and KALODNER, Circuit Judges.
Is a payment in compromise settlement of the federal estate tax deductible as an "ordinary and necessary expense" under Sec. 23(a) (1) (A) of the Internal Revenue Code of 1939?*fn1
That issue is presented by this appeal from the judgment of the District Court for the Western District of Pennsylvania in favor of the defendant.
The undisputed facts may be summarized as follows:
The L. B. Foster Company ("taxpayer") is a corporation organized under the laws of Pennsylvania. Its business is buying, selling, renting and dealing in rails and other railroad equipment, steel piling, pipe and allied materials.
In 1944, and prior thereto, all of taxpayer's capital stock was owned or controlled in equal shares by four brothers, L. B. Foster, Sydney A. Foster, Reuben A. Foster and Byron L. Foster.
In 1937 the four brothers entered into an agreement which provided that the taxpayer was to carry life insurance on their lives; the taxpayer was to pay the premiums and be the beneficiary under the policies. Upon the death of any of the brothers his estate was obligated to sell, and the taxpayer was obligated to buy, his stock at a price determined by a formula which excluded the insurance proceeds as an asset of the taxpayer. The amount of the insurance, however, was to represent the minimum amount to be paid for the stock; it specifically provided that the insurance proceeds should not enter into the calculations of the price to be paid for the stock.
Sydney A. Foster died on December 24, 1944. Upon his death the taxpayer received the proceeds of the insurance on his life, taken out pursuant to the agreement, in the amount of $344,422.00.
On audit of the estate tax return of Sydney A. Foster (November, 1946), the Commissioner of Internal Revenue proposed to include the life insurance proceeds received by the taxpayer in the gross estate of decedent and to collect an estate tax thereon. The Commissioner also proposed an increase in the value of decedent's stock in taxpayer by boosting the value of its good will, from the $125,000 provided by the formula contained in the above stockholders agreement, to approximately $235,000.
The executors of the estate of decedent immediately notified taxpayer of the Commissioner's position and advised it that under the applicable provisions of the Internal Revenue Code, in particular § 826(c),*fn2 a decision that the life insurance proceeds were a part of the gross taxable estate of decedent would give rise to a secondary liability of taxpayer for the amount of federal estate tax which would be attributable to such proceeds; further that the taxpayer was duty bound to aid the estate in sustaining the amount reported as the value of its stock as of the date of decedent's death.
Because of the asserted contingent liability, taxpayer entered into an agreement with the executors of the estate to contest the Commissioner's proposed deficiency assessment in federal estate tax. Accordingly, its attorney, cooperating with the executors, filed a protest with the Commissioner and, after negotiations, reached an agreement by which the Commissioner withdrew his contention that the insurance proceeds were to be included in decedent's estate and taxpayer agreed to add such proceeds to its assets for purposes of evaluating decedent's stock.
As a result of that agreement, reached in compromise and settlement, the proposed deficiency in federal estate tax was reduced from approximately $93,000 to approximately $15,500. Earlier it was orally agreed between taxpayer and the executors of decedent's estate that if taxpayer was relieved of its contingent liability for such tax and the expense of contesting such liability, it would contribute toward the payment of any deficiency finally paid as the result of any settlement with the Commissioner.
The amount of taxpayer's contribution was later fixed at $12,758.80. Subsequently, pursuant to a petition filed by the executors of the estate with the Surrogate's Court of New York County, New York, which had probate jurisdiction of decedent's estate, praying an apportionment of the estate taxes, that Court entered a decree on January 4, ...