Cummings v. Commissioner

506 F.2d 449 (2nd Cir. 1974)

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Nature of the Case

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Facts

P was offered a large block of stock in Metro-Goldwyn-Mayer. P purchased 51,500 shares of MGM stock for something more than $1,030,000 and was elected to the board. The price of the stock rose, and on April 17, 1961, Cummings sold 3400 shares for a total of $227,648.28. His profit was properly reported as a long-term capital gain on the 1961 tax return which he and his wife jointly filed. Between September 18 and October 2, 1961, P bought back 3000 shares for $146,960.89. This purchase, within six months after the sale, brought him within the purview of § 16(b) of the Securities Exchange Act, making the difference between the sale price and the purchase price, $53,870.81, recoverable by MGM. On January 16, 1962, the Division of Corporate Finance of the SEC informed Joseph A. Macchia, secretary of MGM, that if P had realized profits from his sale and purchase, that fact would have to be noted in the proxy statement. P decided to remit the $53,870.81 to MGM. Cummings testified that the purpose of the payment was to prevent any delay in the issuance of MGM's proxy statement and also to protect his business reputation, which might be injured by a disclosure of his potential liability because of an alleged securities laws violation. Ps treated this repayment as a deduction against ordinary income on their 1962 income tax return. D assessed a deficiency of $45,790.18, maintaining that long-term capital loss treatment was appropriate. The Tax Court held that the payment was properly characterized as an ordinary and necessary business expense, incurred to protect P's business reputation. D appealed.