
    422 F. 2d 887
    UNITED STATES FREIGHT COMPANY AND SUBSIDIARIES v. THE UNITED STATES
    [No. 138-66.
    Decided February 20, 1970]
    
      
      Walter D. Haynes, attorney of record, for plaintiff. J. Marvin Haynes, Haynes <§¡ Miller, N. Barr Miller, Joseph H. Sheppard, Jerome D. MeeTcer, and Robert 8. Berseh, of counsel.
    
      Joseph Kovner, with, whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller, and Ira M. Banger, of counsel.
    Before Cowen, Chief Judge, Laramore, Dtjrfee, Davis, Collins, Skelton, and Nichols, Judges.
    
   Laramoee, Judge,

delivered the opinion of the court:

This is an action to recover Federal income taxes paid by the United States Freight Company and its subsidiaries for the year 1960. The issue before us involves the proper characterization for tax purposes of liquidated damages and consultant fees expended by plaintiff during the year under review. The factual context in which this suit arises is detailed below.

The United States Freight Company is a Delaware corporation which maintains its principal office in New York City. It is engaged in the business of furnishing freight transportation services. The company’s business includes within its scope domestic freight forwarding, foreign freight forwarding aboard ships, local cartage, truck rental, and freight warehouse operations. As indicated more fully in the findings of fact, the United States Freight Company conducts its business through subsidiary operating corporations. In 1960, the year that is involved in the present litigation, the company utilized 38 subsidiary operating corporations.

Plaintiff utilizes its trucks to pick up shipments at the premises of shippers. In connection with each such shipment, a bill of lading is issued by plaintiff to the shipper, and plaintiff assumes a common carrier’s responsibility for the delivery of the freight to the consignee designated by the Shipper.

From the premises of the shippers, the shipments are transported by plaintiff’s trucks to freight forwarding terminals operated by plaintiff. At the freight forwarding terminals, less-than-carload or less-than-truckload shipments are consolidated into carloads or truckloads.

A carload or truckload of freight is thereafter transported from plaintiff’s freight forwarding terminal by a long-haul common carrier (or succession of common carriers) selected by plaintiff to a destination terminal operated by plaintiff in the area where the consignees of the freight are located. At the destination terminal, the freight is unloaded and sorted, and it is then delivered to the designated consignees. The deliveries are effected either by plaintiff in its own trucks or by other truck operators selected by plaintiff.

By 1960, the concept of “through lading” had become 'basic to plaintiff’s operations. Through lading is the transportation of a consignment of freight from origin to destination on one bill of lading, regardless of changes from one form of transportation to another in the course of such transportation. In furtherance of this concept, plaintiff in July 1958 initiated the development and promotion of' “containerized” freight and “piggybacking.” Containerized freight is freight which is packed in a container of standard size at the point of origin and is then moved to the destination point in the same container, without being unpacked en route even though there may be a transfer from one form of transportation to another. Piggybacking is the transportation of loaded truck trailers or containerized freight on railroad flatcars. ■¡-"•’■I

Historically, the railroads had charged separate rates for the various products carried, based primarily on the value of the products rather than on the cost of the transportation. As a result, in the 10 years prior to 1958 the long-haul trucking industry had succeeded in diverting from rail transportation to truck transportation a very substantial portion of tbe valuable finished products moving in commerce.

In July 1958, plaintiff’s president, Morris Forgash, succeeded in convincing the railroads to set a single “freight —all kinds” rate for the rail service of transporting two 40-foot truck trailers or containers on a flatcar, regardless of the value of the products being carried inside. This was advantageous to plaintiff in offering its piggyback service to shippers.

In 1960, there was a substantial increase in plaintiff’s containerized shipments to foreign countries. Under this method, goods are loaded in a container unit of standard size at an inland point of origin, and they are subsequently delivered to the overseas consignee in the same container, with no rehandling or platform delays. The shipper receives only one bill of lading. The container is piggybacked by truck, rail, and ship. Transfers from one form of transportation to another are fully mechanized. The costs of export packing are also eliminated. Thus, there is a substantial saving in costs over the conventional method of ocean transportation. There is also a substantial saving in the time consumed during the course of the transportation between the point of origin and the final delivery.

Up to and including the year 1960, steamship companies charged separate rates for the various products carried, based primarily on the value of the products rather than on the cost of the transportation. Thus, even if goods were shipped inside sealed containers of standard size, the steamship companies charged rates based upon the contents of the containers. This was disadvantageous to plaintiff, because in its business of “through lading” freight to foreign countries, it would have been very desirable to be able to charge a single rate for the shipment of a container filled with freight, based upon the cost of the transportation and without regard to the nature of the products inside the container.

For several years prior to 1960, plaintiff had tried unsuccessfully to persuade steamship companies to set a “freight — all kinds” rate, similar to the one which plaintiff had convinced the railroads to set in July 1958. Plaintiff’s officers asked American flag steamship companies, including American Export Lines, Inc., to set such a rate; and plaintiff’s officers traveled to Europe on several occasions to ask foreign flag steamship companies to set such a rate. Plaintiff was turned down by all of the steamship companies which it approached.

Having failed in its efforts to induce the steamship companies to publish a “freight — all kinds” rate, plaintiff decided in 1960 that it would attempt to acquire control of American Export Lines, Inc., for use in its business. American Export Lines was a domestic corporation engaged in the operation of ocean-going vessels for the transportation of freight cargo, mail, and passengers. Plaintiff desired to acquire control over this company in order to establish a “freight — all kinds” rate for water transportation, and in order to introduce a “through lading” service over the routes of American Export Lines to Europe, the Mediterranean Sea, and the Middle East.

Plaintiff had learned informally that it might be possible to purchase from Mrs. Josephine Bay Paul, and from her husband and associates, their stock in American Export Lines. Mrs. Paul owned 236,505 shares of the stock; Mr. Paul owned 5,300 shares of the stock; and a foundation and certain trusts controlled by Mr. and Mrs. Paul severally owned a total of 72,195 shares of the stock. The 314,000 shares of stock referred to in this paragraph constituted approximately 26 percent of the outstanding shares of stock issued by American Export Lines. Plaintiff had ascertained that the ownership of the remainder of the stock was very widespread; that there were no other large outstanding blocks of stock; and that Mr. and Mrs. Paul had nominated the entire Board of Directors of American Export Lines. Plaintiff believed that if it stood in the place of Mr. and Mrs. Paul, it could exercise the same control over American Export Lines which they had been exercising.

Early in February 1960, plaintiff began negotiations in New York City with respect to acquiring the 314,000 shares of stock in American Export Lines referred to in the preceding paragraph. Mr. and Mrs. Paul were represented in the negotiations by Bobert W. Bachelor, who was an officer and director of American Export Lines and who had represented Mrs. Paul and her family in business transactions for many years.

At the first meeting ¡between plaintiff and Mr. Bachelor, plaintiff asked Mr. Bachelor if he could obtain for plaintiff an option on the American Export Lines stock owned by Mr. and Mrs. Paul. Mr. Bachelor replied that the Pauls would never grant plaintiff an option. Mr. Bachelor further stated •that in all the business transactions in which he had represented Mrs. Paul and her family, they had never entered into an option, and he was positive that the Pauls would, not deviate from that practice.

At the outset of the negotiations, Mr. Bachelor made it clear that Mr. and Mrs. Paul were not offering their stock in American Export Lines for sale, and that they would only consider a proposal in the form of an unsolicited offer from plaintiff to buy the stock. In this connection, Mr. Bachelor took the position that Mr. and Mrs. Paul would not consider any offer involving a price of less than $30 a share, and. that it would be a waste of time for plaintiff to offer less than $30 a share. The price of $30 a share reflected some premium above the then-current market price for American Export Lines stock, because the Pauls’ stock was control stock.

During the negotiations between plaintiff and Mr. Bachelor, plaintiff retained Elmer G. Gove, a management and financial consultant, to advise plaintiff with respect to certain management and financial aspects of the proposed transaction. Plaintiff paid Mr. Gove $2,003.67 for his services.

The negotiations between plaintiff and Mr. Bachelor continued through the month of February 1960 and into the month of March. Finally, by means of a letter which plaintiff addressed to Mr. and Mrs. Paul under the date of March 14,1960 and which they accepted on the same day, the parties entered into a contract whereby the Pauls agreed to sell their 241,805 shares of American Export Lines stock to plaintiff, and plaintiff agreed to buy the Pauls’ 241,805 shares and up to 72,195 additional shares 'from persons to be designated by the Pauls, all at a price of $30 per share. The letter contract provided that the transaction should be closed at a specified place in New York City not later than April 12, 1960, at which time certificates for the shares of stock were to be delivered to plaintiff in exchange for certified or, bank cashier’s checks covering the unpaid amount of the purchase price. The penultimate paragraph of the letter contract stated as follows:

We enclose our certified check for $500,000.00 payable to Josephine Bay Paul, to be applied on account of the purchase price of stock to be sold by her hereunder, and in case this agreement is accepted by you and we subsequently default in performance of this agreement, the said payment of $500,000.00 is to be retained by Mrs. Paul as liquidated damages; and C. Michael Paul, in consideration of the foregoing, hereby waives any and all rights to damages hereunder in event we subsequently default in performance of this agreement.

The provision of the stock-purchase contract under which plaintiff made a down payment in the amount of $500,000 and agreed that this sum was to be retained by Mrs. Paul as liquidated damages if plaintiff should default in the performance of the contract was insisted upon by Mr. Bachelor when it became apparent that there would be a delay between the date of the signing of the contract by the parties and the closing date. Mr. Bachelor wrote the language used in the particular contract provision, and previously quoted in this opinion. He selected the $500,000 figure for the down payment — and possible liquidated damages — because he wanted to make it as certain as possible that plaintiff would go through with the purchase of the stock.

After the signing of the contract between plaintiff and the Pauls was announced to the public, plaintiff began to receive very severe criticism of the deal from stockholders, investment companies, investment bankers, and investment counselors. This criticism was intensified after the How Jones wire service carried an item on April 6, I960 — or 6 days prior to the final date fixed for the closing of the transaction — to the effect that Admiral John Will, the president of American Export Lines, had issued a statement forecasting unfavorable operations and earnings for 1960 and the immediate future.

At a special meeting of plaintiff’s Board of Directors on April 12, 1960, it was resolved not to proceed with the acquisition of any stock interest in American Export Lines under the contract of March 14, 1960 with Mr. and Mrs. Paul. This decision was made because of the adverse criticism of the contract hy stockholders and other interested parties, and because of Admiral Will’s statement reflecting unfavorable prospects for American Export Lines.

On April 12, 1960, after the action mentioned in the preceding paragraph was taken by the Board of Directors, plaintiff notified Mr. and Mrs. Paul that it was breaching the contract of March 14, 1960. Plaintiff asked the Pauls to return the $500,000 down payment which the plaintiff had made, but they refused to do so.

Pursuant to the terms of the contract dated March 14, 1960, Mrs. Paul retained plaintiff’s initial payment of $500,000 on the purchase price of her stock as liquidated damages. Plaintiff considered instituting a suit to recover the $500,000, but concluded that the liquidated damages of $500,000 approximately equaled the damages which the Pauls could prove, and therefore decided that it would be better not to start a lawsuit.

In plaintiff’s income tax return for the. calendar year 1960, plaintiff claimed as ordinary deductions from gross income the sum of $500,000 which had been paid to and retained by Mrs. Paul in connection with the stock-purchase contract of March 14,1960, :and the sum of $2,003.67 which had been paid to Elmer G. Gove for management and financial advice during the contract negotiations.

In 1963, the Internal Revenue Service assessed a tax deficiency in the amount Of $278,242.63 against plaintiff, on the ground that the amounts of $500,000 and $2,003.67 mentioned in the preceding paragraph represented in each instance “a capital loss and not an ordinary deduction.” The deficiency, together with interest in the sum of $40(848.33, was paid by plaintiff on August 26, 1963.

A claim for refund was filed by plaintiff on November 15, 1963; the claim was disallowed by the Internal Revenue (Service on July 7, 1964. The present action was filed by the plaintiff on May ‘3,1966.

Plaintiff asserts that the expenditures in question are fully deductible either as ordinary losses under section 165(a) of tbe Internal Revenue Code of 1954, or as ordinary and necessary business expenses under section 162. Defendant responds, to tbe contrary, that any deductible loss sustained by plaintiff is a capital loss under section 165(f) or section 1234. We hold that plaintiff is not limited to capital loss treatment by either of tbe sections relied upon by the government and, therefore, plaintiff is entitled to recover.

I

Section 165 (a) provides as a general rule with respect to the deductibility of losses that:

There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 165(f) imparts, however, that the allowance of capital losses is determined, inter alia, by section 1211(a) which provides by way of limitation that :

In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges. [Emphasis supplied.]

Defendant urges that plaintiff’s failure to exercise its stock-purchase contract right and its forfeiture of the down payment as liquidated damages constituted the sale or exchange of a capital asset. We do not agree. Assuming arguendo that the bundle of rights possessed by plaintiff under the executory contract to purchase stock comprised a capital asset, that capital asset was not, in our view, sold or exchanged within the meaning of the statute.

Defendant argues that the same principles which govern the character of a buyer’s loss on an option to purchase property, and on a purchase and resale of property, must also govern the forfeiture of a down payment as liquidated damages upon the breach of a contract to purchase property. The premise from which defendant proceeds is that it “makes no sense” if a buyer’s loss on a breached executory contract to purchase property, which defendant views as lying between an option and a completed purchase, is not a capital loss. Be that as it may, and while we view as questionable the illogic which defendant imputes to such disparate tax treatment, “what makes sense” does not necessarily dictate the definitive answer in the tax area; apparent conceptual niceties often must give way to the hard realities of statutory requirements.

In the instance where property is purchased and then resold, there can be no doubt that a sale in its most basic form has taken place. And in the quite different situation where an option to purchase property expires without having been exercised, a specific statutory provision, section 1234(a) , supplies the necessary sale or exchange upon which capital loss treatment depends. But in the case now before us, where a contract to purchase property is unilaterally breached by the buyer, the right to purchase being thereby relinquished, and the down payment is forfeited as liquidated damages, we perceive no sale or exchange hi the traditional sense, nor do we understand there to be a statutory provision to satisfy the requirement.

Defendant strongly urges that the rationale of the decision in Turzillo v. Commissioner, 346 F. 2d 884 (6th Cir. 1965) necessitates our finding a sale or exchange here. We are not so persuaded; we view Turzillo as clearly distinguishable from tbe instant case. Turzillo, in its simplest form, involved a taxpayer who possessed a right to purchase stock of his employer-corporation. After his dismissal, a settlement agreement was reached whereby the taxpayer released his stock-purchase right and received therefor the sum of $95,000. The court held that the taxpayer was entitled to treat the proceeds as gain resulting from the sale or exchange of a capital asset. We concur in this holding which, as we view it, recognizes that the bilateral transfer there consummated effectively satisfied the statutory sale or exchange requirement. Compare, Commissioner v. Ferrer, 304 F. 2d 125 (2d Cir. 1962); Commissioner v. Golonsky, 200 F. 2d 72 (3d Cir. 1952), cert. denied, 345 U.S. 939 (1953). Eather than advancing defendant’s position in the instant case, however, our concurrence in the Turzillo decision emphasizes, to the contrary, that the unilateral forfeiture here involved does not so satisfy the statute.

We are referred to a well-settled line of decisions which hold that liquidated damages, received by the seller upon the buyer’s breach of a contract of purchase, must be reported as ordinary income. See, A. M. Johnson, 32 B.T.A. 156 (1935); Albert G. Rooks, 12 T.C.M. 96 (1953); Harold S. Smith, 50 T.C. 273 (1968). Perhaps the nexus between this line of decisions and the Turzillo-ty$& case is that a release for a sum by a seller of his contract right to sell certain property (or to have the contract performed), as compared with a sale of the property itself, does not constitute the sale or exchange of a capital asset; while the release for a sum by the buyer of his contract right to purchase certain property does constitute the sale or exchange of a capital asset. Thus, in the case before us, if the Pauls had decided not to sell the subject stock and, instead, paid a sum to plaintiff for the release of his stock-purchase contract right, we would have essentially the Twzillo case and its capital treatment result. But where, as here, the buyer forfeits his down payment (accepted by the seller as liquidated damages in lieu of performance) upon breach and thereby relinquishes, in effect abandoning, his contract right of purchase, there has been no sale or exchange.

Defendant further asserts, in its reply brief, that another well-settled line of decisions typified by Commissioner v. Paulson, 123 F. 2d 255 (8th Cir. 1941), requires that plaintiff be limited to capital loss treatment. In Paulson, the taxpayer contracted in 1923 to purchase a building for $78,000 with an $8,000 down payment, $20,000 payable later in 1923, and $50,000 payable in March 1933 (later extended to March 1936). Upon execution of the contract, the taxpayer “was given possession with an obligation to keep the building in repair, keep it insured, and pay the taxes, and with the privilege of making improvements. * * * While in possession of the building the taxpayer rented it for profit and made valuable improvements.” 123 F. 2d at 256. Pursuant to the terms of the contract, upon the taxpayer’s failure to make the final payment in 1936, the subject property reverted to the seller, who was also entitled to retain prior payments.. The court concluded that the reacquisition of the building by the seller in satisfaction of the purchase-money indebtedness constituted a sale or exchange and, therefore, the taxpayer was not entitled to deduct the prior payments as an ordinary loss. See also, C. L. Gransden & Co. v. Commissioner, 117 F. 2d 80 (6th Cir. 1941).

In the instant case, plaintiff neither acquired the indicia, nor enjoyed the burdens and benefits, of ownership of the American Export stock. We view the embryonic breach of the executory contract here to be distinctly unlike the breach in Paulson of a contract so substantially performed as to have left the seller with little more than a security interest in the subject property. Accordingly, we hold that plaintiff’s relinquishment of its stock-purchase contract right and its forfeiture of the down payment as liquidated damages did not constitute a sale or exchange; thus, plaintiff is not limited to capital treatment of the loss which it sustained.

II

Defendant asserts, in the alternative, that plaintiff’s loss was a capital loss under section 1234. Albeit there is an important distinction between an option and a bilateral contract in many contexts, defendant urges, there can be no such distinction for purposes of section 1234. This is so, defendant continues, because both have the same economic effect. Defendant’s position is not well taken.

Section 1234(a) provides, in pertinent part, that:

* * * [L] oss attributable to failure to exercise a privilege or option to buy or sell property shall be considered * * * loss from the sale or exchange of property * * *. [Emphasis supplied.]

This section, with no apparent ambiguity, supplies the sale or exchange requirement expressly with respect to transactions involving a privilege or an option; the section makes no reference to transactions involving bilateral contract rights. The legislative history of section 1234, moreover, contains no indication that Congress intended bilateral contracts to be included within the operation of the section. See, H. Rep. No. 8300, 83d Cong., 2d Sess., A278-79 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess., 437-38 (1954).

That section 1234 is not applicable to bilateral contract rights is further indicated by Morris R. DeWoskin, 35 T.C. 356 (1960), wherein the Tax (Court stated at page 363 :

* * * [W]e must point out that “privileges or options” in section 117(g) (2) [now section 1234] has reference to rights possessed under a unilateral contract, Lawler v. Commissioner, 78 F. 2d 567 (C. A. 9, 1935); W. A. Drake, Inc., 3 T.C. 33 (1944), aff’d 145 F. 2d 365 (C.A. 10, 1944), and is not applicable to losses that arise from failure to carry out bilateral contracts. Therefore to classify the failure to exercise a right existing under a bilateral contract under section 117(g) (%) [now section 1%S1P[ is incorrect. [Emphasis supplied.]

See also, Rev. Rul. 58-234, 1958-1 C.B. 279, 281.

There can be no doubt that the stock-purchase right possessed by plaintiff was a bilateral contract right, and not an option or privilege. This court has quoted 'with approval the definition in 1 S. Williston, Contracts, § 61A at p. 199 (3d ed. 1957), of an option as “the obligation by which one binds himself to sell and leaves it discretionary with the other party to buy * * Dynamics Corporation of America v. United States, 182 Ct. Cl. 62, 74, 389 F. 2d 424, 431 (1968). The Supreme Court has stated that “[a]n option is a privilege given by the owner of property to another to buy the property at his election.” Western Union Telegraph Co. v. Brown, 253 U.S. 101, 110 (1920).

The agreement of March 14, 1960 between the Pauls and the plaintiff was not an option, as that term is defined in the preceding paragraph, because it was not discretionary with the plaintiff under the agreement as to whether it would or would not elect to purchase the stock. To the contrary, plaintiff unequivocally obligated itself to purchase up to 314,000 shares of stock, in the following language:

2. We hereby agree to purchase from you [the Pauls] * * * the 241,805 shares owned by you * * * and we agree on the Closing Date to purchase up to 72,195 additional shares of said Stock from persons to be designated by you on or before the 'Closing Date. All such * * * purchases shall be at a price of $30.00 per share * * *.

It is also clear that the insertion of a provision for liquidated damages in the event of plaintiff’s breach did not convert the bilateral contract into an option. This principle was early recognized in Thompson v. Exchange Bldg. Co., 157 Tenn. 275, 8 S.W. 2d 489 (1928), wherein it was held:

* * * [T]he mere fact that the contract provides for liquidated damages does not convert the contract of sale into an option, but, in the absence of a provision to the contrary, merely gives the seller the choice of enforcing his full rights against the purchaser, or claiming the amount stipulated as liquidated damages. [Citations omitted.] 8 S.W. 2d at 492.

See also, Western Union Telegraph Co. v. Brown, supra.

More recently, the principle was confirmed by W. A. Drake, Inc. v. Commissioner, 145 F. 2d 365 (10th Cir. 1944), which involved a bilateral buy and sell contract with a liquidated damages forfeiture clause, the court holding that the contract was a binding agreement to purchase and not a “mere option.” 145 F. 2d at 367. See also, A. M. Johnson, supra; Ralph A. Boatman, 32 T.C. 1188 (1959). Similarly, in Binns v. United States, 254 F. Supp. 889 (M.D. Tenn., 1966), aff'd, 385 F. 2d 159 (6th Cir. 1967), though the contract therein did not contain a liquidated damages provision, the court held with respect to forfeiture of the down payment as liquidated damages upon breach that:

* * * [T]he item in controversy [the forfeited down payment] was not the payment for a lapsed option but a forfeiture in lieu of damages ’for failure to consummate a contract of sale. 254 F. Supp. at 891.

That the presence of a liquidated damages provision does not convert a bilateral buy and sell contract into an option is further confirmed by an examination of the dissimilar rights and liabilities incident to each. The holder of an option to buy 'has the truly alternative choice of exercising the option, or allowing it to lapse. See, Fletcher v. United States, 24 AFTR 2d 69-5235 (N.D. Ind. 1969). If the option is not exercised, the amount paid for the option is forfeited and the optionor is entitled to that amount only, as the optionee was not obligated to perform. The purchaser in a bilateral contract with a liquidated damages provision, if he fails to perform, however, is liable for ’full contract damages, the liquidated contract amount being a measure thereof only to the extent that it is reasonably so related. See generally, Thomas v. Foulger, 71 Utah 274, 264 Pac. 975 (1928); Weatherproof Improvement Contracting Corp. v. Kramer, 12 Misc. 2d 100, 172 N.Y.S. 2d 688 (1956). The compared interests do not have, as defendant suggests, the same economic effect.

We again note, in connection with the option argument, that at the outset of the negotiations plaintiff desired, and sought to obtain, an option from Mr. and Mrs. Paul on their American Export Lines stock, but the Pauls (through their representative) flatly refused to grant an option to plaintiff, and stated that they would only consider an offer from plaintiff to buy their stock outright. Such an offer was ultimately made by plaintiff; it was accepted by the Pauls; and the result was a bilateral contract which unequivocally bound the Pauls to sell stock and plaintiff to buy it.

In accordance with the above-drawn conclusions that section 1234 applies to options or privileges only, and not to bilateral contract rights; that plaintiff possessed the latter; and that the presence of a liquidated damages forfeiture clause did not convert plaintiff’s bilateral contract right into an option; we hold that section 1234 is not applicable to the transaction under review. Consequently, plaintiff’s loss is not limited to capital treatment thereby but is, instead, fully deductible under section 165 (a).

III

As previously mentioned, plaintiff paid $2,003.67 for management and financial advice during negotiation of the contract now under review. Defendant takes the position that this payment, “as an expense of a capital asset transaction, is of the same character.” As a result of our holding, however, that there was no sale or exchange of a capital asset in this case, the position urged is without foundation. The consultation fee in question is fully deductible from gross income, therefore, as an ordinary and necessary business expense under section 162(a).

In accordance with the above, plaintiff is entitled to recover in the present action, and judgment is entered for plaintiff with the amount of recovery to be determined in subsequent proceedings under Rule 131(c).

Davis, Judge,

dissenting in part:

My disagreement with Part I of the court’s opinion (on § 165 (f)) — I concur substantially with Part II (on § 1234)— is with the reasoning and not necessarily with the result. The difficulty is that there are two separate lines-of-authority, with divergent tendencies, bearing rather directly on our problem. The one, pressed by the Government, is exemplified by Turzillo v. Commissioner, 346 F. 2d 884 (C.A. 6, 1965), in which the taxpayer-buyer who received money in settlement of an aborted transaction, comparable to the one we have here, was held to have made a “sale or exchange” and tlieref ore entitled to capital gain treatment. Tbe other group of decisions, put forward by plaintiff, hold that the receipt of liquidated damages by a seller for breach of a contract to purchase stock or other property does not result from a “sale or exchange” and must therefore be treated as ordinary income.

The court’s opinion, in opting for the latter rule, distinguishes the Turzillo line by saying that in those cases the two parties to the contract settled it by agreement after the breach, while here the liquidated damage provision was included in the contract itself. This is, for me, most unsatisfactory. I cannot see that it should make any difference, for § 165(f) and § 1211(a) purposes, whether the two sides to an uncompleted transaction compromise it by a separate arrangement after the rupture or whether, having foresight, they do it by including a liquidated damages provision in their original contract. In other words, no tax or other useful purpose is served by declaring that this taxpayer has an ordinary loss because it paid $500,000 in liquidated damages to the Pauls under the original agreement to buy-and-sell, but that it would have had a capital loss if the $500,000 had been paid under a settlement reached after the refusal to go through with the purchase.

No other valid distinction has been suggested or has as yet occurred to me. The Government argues that there can be a “sale or exchange” for the breaching buyer in this type of transaction but not for the seller who receives damages and keeps his property. The court’s opinion leans toward this view, but to me it seems unacceptable. The concept of a “sale or exchange” necessarily requires two-sided participation, and I cannot see how a transaction can be a “sale or exchange” for the one and something else for the other. See Union Bag-Camp Paper Corp. v. United States, 163 Ct. Cl. 525, 537-39, 325 F. 2d 730, 738 (1963); Stoddard v. United States, 49 F. Supp. 641, 644 (D. Mass. 1943). When Congress desires an artificial, possibly one-sided, reading of “sale or exchange”, it so provides as in Section 1234(a) (b) (loss attributable to failure to exercise a privilege or option).

Thus, my view is that a proper resolution of this case requires us to choose 'between the divergent groups of precedents, to find in them a harmony which has not yet 'been discerned, to discover a new but sound principle of “sale or exchange”, or to skirt that concept entirely in disposing of the matter. For me much more digging is called for. I know that I do not have the answer now, and in the circumstances it is better simply to record my disagreement with the approach which commends itself to the majority.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. (a) The plaintiff United States Freight Company is a corporation organized and existing by virtue of the laws of the State of Delaware, having been organized in 1925. Its principal place of business is 711 Third Avenue in the City of New York, New York.

(b) The plaintiff is engaged through subsidiary operating corporations principally in the business of furnishing freight transportation, including domestic freight forwarding, foreign freight forwarding aboard 'ships, local cartage, truck rental, and freight warehouse operations. These operations are described in more detail in findings 2-4.

(c) In 1960, tbe plaintiff carried on its operations through 38 subsidiary operating corporations. The plaintiff supervises and manages the operations of its subsidiaries and finances their operations, including the financing of acquisition, replacement, and rehabilitation of the equipment employed by such subsidiaries in their operations.

(d) The plaintiff’s common stock has been listed on the New York Stock Exchange since 1929.

2. (a) The plaintiff, by means of trucks operated by its cartage subsidiaries, picks up shipments at the premises of shippers, and then delivers the shipments to the plaintiff’s various freight forwarding terminals. When goods are received by one of the plaintiff’s subsidiaries, a bill of lading is issued to the shipper, and the plaintiff’s common carrier subsidiary assumes a common carrier’s responsibility for delivery of the freight to the consignee.

(b)In 1960, the plaintiff had the following wholly owned cartage subsidiaries involved in local trucking:

Company Location
Lashman Cartage Co. Chicago
Cutom Cartage Co. New York
Custom Cartage, Inc. Los Angeles & San Francisco
Colonial Cartage Co. Miami
Detroit Trucking Co. Detroit
Reliable Trucking Co. Cleveland
Robertson Drayage Co. San Francisco
Transport Cartage & Distributing Co. Los Angeles & Chicago
Truck-Rail Terminals, Inc. Chicago
Wescartage Co., Inc. Los Angeles & San Francisco
Western Terminal Co. Chicago

(c) Some of the plaintiff’s cartage subsidiaries are subject to regulation either by the Interstate Commerce Commission or by state public service commissions.

(d) The principal function of the plaintiff’s cartage and terminal subsidiaries is to serve the plaintiff’s freight forwarding business.

3. (a) At the freight forwarding terminals, the plaintiff’s freight forwarding business consists primarily of consolidating less-tban-carlo.ad, or less-than-trucMoad, shipments into carloads or truckloads. From these terminals, the freight is then transported by common carriers to the nest terminal, where the freight is unloaded, sorted, and delivered to the designated consignees, either by the plaintiff’s local cartage subsidiaries or by nonaffiliated operators o.f trucks.

(b) The plaintiff’s domestic freight forwarding subsidiaries operate in the principal cities in all 50 States.

(c) In 1960, the plaintiff had the following wholly owned subsidiaries involved in the freight forwarding business:

Universal Carloading & Distributing Co., Inc.
Pioneer Carloading Co.
International Forwarding Co.
Western Carloading Co.
Merchant-Shippers Association
Stor-Dor Forwarding Association
Pacific Forwarding Association
Empire Freight Co.
Texas Freight Co., Inc.
Westland Forwarding Co.
Lone Star Package Car Co.
Universal Transcontinental Corp., Ltd.
Universal Transcontinental Corp.
Copex America, Inc.
International Expediters, Inc.

(d) The plaintiff’s domestic freight forwarding subsidiaries are subject to regulation by the Interstate Commerce Commission.

4. (a) In 1960, the plaintiff’s various subsidiaries had branch offices in 128 cities in the United States and in 16 cities in foreign countries, including various European countries, Japan, and South Africa.

(b) In 1960, four of the plaintiff’s freight forwarding subsidiaries were engaged in foreign freight forwarding, namely:

Universal Transcontinental Corp.
Universal Transcontinental Corp., Ltd.
International Expediters, Inc.
Copex America, Inc.

The services rendered by these subsidiaries include the delivery of shipments to and from the docks at seaports or overseas air terminals. These subsidiaries also act as export and import agents and brokers; they arrange for transportation of shipments to and from foreign countries; and they complete and handle entry and export documents, customs clearances, and other details incident to the export and import business.

(c)In addition to the branch offices in the United States and in foreign countries previously mentioned, agents and representatives of the plaintiff’s subsidiaries are located in principal foreign ports.

(d) Pursuant to the Merchant Marine Act, the plaintiff’s foreign freight forwarding business is subject to regulation by the Federal Maritime Board.

(e) In 1960, the foreign freight forwarding business produced approximately 15 percent of the plaintiff’s consolidated gross revenue.

5. (a) In 1960, Morris Forgash (now deceased) was president of the plaintiff and served as chief executive of each of tire plaintiff’s subsidiary companies. F. N. Melius was vice president of the plaintiff and served as secretary of the subsidiary companies. In addition, some of the other; top executives o«f the plaintiff served as officers and directors of the subsidiaries.

(b) Each subsidiary otherwise had its own personnel, and such personnel was responsible for the day-to-day operations of the subsidiary.

(c) In 1960, as in other years, the plaintiff filed a consolidated income tax return with all of its subsidiaries.

6. By 1!96,0, the concept of “through lading” had become basic to the plaintiff’s operations. “Through lading” is the transportation of freight from origin to destination on one bill of lading, regardless of changes from one form of transportation to another in the course of such transportation. The plaintiff looked forward to the day when shippers almost anywhere in the world would be able to load a standard container and send it to any other point in the world. The plaintiff would perform this service on a single bill of lading, with the shipper neither knowing nor caring how the freight was transported as long as it arrived on time, undamaged, for the lowest possible price. In furtherance of this concept, the plaintiff initiated the development and promotion of “piggybacking” and “containerized” freight in July 1958.

7. (a) “Piggybacking” is the transportation of truck trailers or “containerized” freight (i.e., freight prepacked in containers of standard size) on railroad flatcars.

(b) Historically, railroads had charged separate rates for each product carried, based primarily on the value of the product rather than on the cost of the transportation. As a result, in the 10 years prior to 1958 the long-haul trucking industry had succeeded in diverting a very substantial portion of the high valued finished products from rail to truck transportation.

(c) In 1958, the plaintiff’s president, Morris Forgash, succeeded in convincing the railroads to set a single rate for the pure rail service of transporting two 460-foot trailers or containers on a flatcar, regardless of the product being carried inside.

(d) The plaintiff offered its “piggyback” service under “Plan III” and “Plan IV” rail rates. Under “Plan III,” the plaintiff owned the trailers or containers and the railroad owned the flatcar. Under “Plan IV,” the plaintiff furnished the trailers or containers and also the flatcar.

(e) The plaintiff’s subsidiary, Custom Equipment Rentals, Inc., owned trailers and containers, which it leased to affiliated freight forwarding companies for use in “piggyback” service throughout the United States.

8. A uniform container is essential for integrated transportation, and such container must ibe interchangeable for carrier use on land by rail and truck lines, on water by inland barge and ocean-going ships, and in the air by freight cargo planes. Prospects for a privately owned, giant pool of such standardized freight container equipment became much brighter in 1959 as a committee composed of representatives of the Department of Defense, of equipment suppliers, and of major carriers ended almost a year of study with a recommendation for a uniform container size adaptable to the use of all in coordinated service. The plaintiff’s president, Morris Forgash, was chairman of that committee. The recommended “universal container” was of 20 and 40-foot lengths, with height and width restricted to 8 by 8 feet. By the end of 1959, the plaintiff had such containers in service. Two of the 20-foot units could be looked together for transportation by flatcar, highway trucks, barges, and oceangoing ships. The two units could be separated for city deliveries as two 20-foot trucks.

9. (a) In 1960, there was a substantial increase in the plaintiff’s “containerized” shipments to foreign countries.

(b) Under the container method, cargoes are loaded in the standardized unit at an inland point-of-origin, and delivered to the overseas consignee with no rehandling or platform delays. The container is “piggybacked” 'by truck, rail, and ship; and the shipper receives only one bill of lading. Transfers from one to the other form of transportation are fully mechanized. The costs of export packing are also eliminated. Thus, there is a substantial saving in costs over the conventional method of ocean transportation. There is also a substantial saving in the time consumed between the point-of-origin and final delivery. In a 6-month experiment in 1960, transit time for container shipments from Japan to Chicago was cut 2 to 8 weeks. This speed achieved by piggyback shipments in standardized containers substantially reduced the amount of inventory of the plaintiff’s customers which would otherwise be tied up in transportation.

10. (a) The plaintiff initiated its intercontinental containerized freight service between points in the United States and points in Japan and Hong Kong in 1960, and expected to inaugurate the same sort of program in the Western Hemisphere during 1961. In the fall of 1961, the plaintiff did inaugurate “fishyback” service between Florida and Central America. This operation was conducted by Coordinated Caribbean Transport, Inc., a wholly owned subsidiary. Two freighters were purchased in 1961 and were outfitted during that year exclusively for “fishyback” service. Regular sailings began in September.

(b) At the plaintiff’s request, the Strick Trailer Co. designed and manufactured a convertible refrigerated container. These convertible refrigerated containers are loaded with manufactured products in the United States and are piggybacked by truck, railroad, and the plaintiff’s ships to ports in Central America, where they are unloaded and transported on the plaintiff’s trucks or local nonaffiliated trucks along the Pan American Highway to their ultimate destination. On the way back, the convertible containers are loaded with frozen foodstuffs for delivery in a corresponding manner in the United States.

(c) This same type of convertible container is used in the plaintiff’s domestic operations for the shipment of manufactured products to the West Coast, and the shipment on the return trip of agricultural products to the East Coast.

11. The rate structure in the steamship industry was similar to the rate structure in the railroad industry, in that, historically, steamship companies had charged separate rates for the various products carried, based primarily on the value of the products rather than on the cost of the transportation. Thus, even if goods were shipped inside a sealed uniform container, the steamship companies charged rates based upon the contents of the container. In the plaintiff’s business of “through lading” freight, it was very desirable to be able to charge a single rate for the shipment of the container based upon transportation costs and regardless of the nature of the products inside.

12. For several years prior to 1960, the plaintiff had tried unsuccessfully to persuade steamship companies to set such a “freight — all kinds” rate as it had convinced the railroads to set in July 1958. The plaintiff’s officers asked American flag steamship companies, including American Export Lines, Inc., to set such a rate; and then traveled to Europe on several occasions to ask the foreign flag companies to set such a rate. The plaintiff was turned down by all of the steamship companies which it approached.

13. It was in the context of the plaintiff’s unsuccessful efforts to induce steamship companies to fix a “freight — all kinds” rate that the plaintiff in 1960 entered into a transaction described in detail hereinafter to acquire control of American Export Lines, Inc., for use in its business. American Export Lines, Inc., was a domestic corporation engaged in the operation of ocean-going vessels for the transportation of freight cargo, mail, and passengers. In the years immediately preceding 1960, approximately two-thirds of its revenues were derived from freight cargoes. In 1959 and 1960, its outstanding capital stock consisted of 1,200,000 shares of common stock, all of which were listed on the New York Stock Exchange.

14. Having failed in its efforts to get the steamship companies to publish a “freight — all kinds” rate, the plaintiff proposed to acquire control of American Export Lines in order to establish such a rate and to introduce a “through lading” service over its routes to Europe, the Baltic Sea, the Mediterranean Sea, and the Middle East. The plaintiff had learned informally that it might be possible to purchase from Mrs. Josephine Bay Paul and her associates their stock in American Export Lines, Inc., which stock constituted approximately 26 percent of the outstanding shares. Mrs. Paul was Chairman of the Board of American Export Lines, Inc., and her husband, C. Michael Paul, was Chairman of the Executive Committee. The plaintiff had ascertained that ownership of the remainder of the American Export Lines stock was very widespread, that there were no other large outstanding blocks, and that the Pauls had nominated the entire Board of Directors of American Export Lines. The plaintiff believed that if it stood in the place of the Pauls, it could exercise the same control which they had been exercising.

15. Early in February 1960, the plaintiff began negotiations in New York City with respect to acquiring the Pauls’ stock in American Export Lines. The plaintiff was represented in those negotiations by Mr. Forgash, its then president, and Mr. Melius, then vice president and president now. The Pauls were represented by Robert W. Bachelor. Mr. Bachelor was vice president and secretary-treasurer of American Export Lines and a member of its Board of Directors. Mr. Bachelor had represented Mrs. Paul and her family in business transactions for many years. He had represented and worked for Ambassador Charles Ulrich Bay, who was Mrs. Bay’s previous husband, until Ambassador Bay’s death. He then continued to represent Mrs. Bay until she married Mr. Paul, whereupon he continued to represent them both in many of their business transactions. Throughout the entire negotiations with the plaintiff, Mr. Bachelor handled the transaction on behalf of the Pauls, who never personally participated in the negotiations.

16. Ait the first meeting between the plaintiff’s representatives and Mr. Bachelor, the plaintiff’s representatives expressed an interest in the Pauls’ American Export Lines Stock and stated that they would like to know more about the company. In order to provide them time to investigate the company further, the plaintiff’s representatives asked Mr. Bachelor if he could get them an option on the Pauls’ stock. Mr. Bachelor replied that the Pauls would never grant the plaintiff an option. Mr. Bachelor said that in all of the transactions in which he had represented Mrs. Paul’s deceased husband and in her business transactions, they had never entered into an option, and that he was positive that the Pauls would not deviate from that practice. Thereafter, during the rest of February, the plaintiff had Mr. Bachelor supply considerable data about American Export Lines.

17. During the discussions in February, Mr. Bachelor took the position that the minimum price for the stock would be $30 per share; and that if the plaintiff’s representatives proposed to offer anything less, they were wasting their time and his time. The price of $30 per share reflected some premium above the then-current market price for the American Export Lines stock, because the Pauls’ stock was control stock. Mr. Bachelor also made it clear that the Pauls were not offering the stock for sale, and that they would only consider a proposal in the form of an unsolicited offer from the plaintiff to buy the stock on the terms they had been discussing, because the Pauls did not want it to be thought that they were in any way trying to sell their stock.

18. (a) Finally, Mr. Bachelor told the plaintiff’s representatives that if they were really serious about wishing to acquire the stock, then they should write a letter to the Pauls outlining the conditions, terms, and price, so that the Pauls could accept or reject the offer.

(b) At a special meeting on February 26,1960, the plaintiff’s Executive Committee formally authorized President Forgash to open negotiations for the purchase of all of Mrs. Paul’s stock.

(c) By March 1, 1960, the plaintiff had decided that it wanted to purchase Mrs. Paul’s stock; and on that date, Mr. Forgash, on behalf of the plaintiff, wrote a letter to Mrs. Paul offering to purchase her stock for $30 a share. The March 1 letter stated in pertinent part as follows:

I am writing this letter on a subject which I am initiating on my own account concerning a matter that is without doubt very dear to your heart — THE AMERICAN EXPORT LINES, INC.
The United States Freight Company would be interested in acquiring your interest in the property. In taking the liberty of approaching you in this unorthodox manner I do so with the understanding that you have not offered your shares for sale. We thought, however, that you might conceivably consider such action if you found it to be both to your best personal interest as well as the best interests of the property, if it would be acquired by an interest which would p'ass muster from the standpoint of financial qualifications and integrity, standing in the transportation world, as well as standing with the banking and financial fraternity.
We understand from the record that you and your associates control 24.8% of the outstanding stock. In behalf of my company I respectfully offer a price of $30.00 per share net.

19. Between March 1, 1960, when the letter mentioned in finding 18 was sent, and March 14, when the final contract was signed, it became apparent that the plaintiff would need approximately 30 days between the signing of the contract and the closing date in order to finalize the financial arrangements and to submit certain information to the Federal Maritime Board. Prior to March 14, Mr. Melius had been informed orally that Federal Maritime Board approval of the acquisition of control of American Export Lines would not be required if the plaintiff would submit proof of United States citizenship of all of its officers, directors, and principal stockholders holding over 5 percent of its stock. This detail work required some time to complete.

20. (a) When it became apparent between March 1 and March 14,1960 that there would be a delay between the signing of the contract and the closing date, Mr. Bachelor insisted that the plaintiff pay $500,000 as a down payment, which would be retained by Mrs. Paul as liquidated damages if the plaintiff broke the contract. Mr. Bachelor insisted on the payment of the $500,000 to make it as certain as possible that the plaintiff would go through with the agreement; and he set the amount so high that he felt the plaintiff simply could not afford to back out of the contract.

(b) The language in the March 14,1960 contract with respect to the retention of the $500,000 by Mrs. Paul as liquidated damages was supplied to the plaintiff by Mr. Bachelor.

21. (a) On March 14,1960, the plaintiff’s Board of Directors approved the contract to purchase the Paul’s stock presented by President Forgash, and authorized him to sign and send it to the Pauls for acceptance. On that date, both parties signed the contract in New York City.

(b)' The contract of March 14, 1960 stated in pertinent part as follows í

March 14,1960
Dear Mr. and Mrs. Paul:
Supplementing our letter of March 1, 1960 and later conversations with you, we are writing this to confirm our understanding of our agreement to purchase 314,000 Shares of Common Stock, of the par value of 400 per share (the “Stock”) of American Export Lines, Inc., a New York corporation (the “Corporation”).
1. You severally represent and warrant to us that you are the owners of Stock of the Corporation as follows:
C. Michael Paul 5,300 shares
Josephine Bay Paul 236,505 shares
and that you have full power and authority to sell said shares to us on the terms herein provided. You have advised us that Continental Galleries, Inc., a corporation controlled by C. Michael Paul, is the owner of an additional 42000 shares, and that other persons, including a foundation and trusts, whom you believe would wish to sell their Stock with yours, own together an additional 72,195 shares of the Stock.
2. We 'hereby agree to purchase from you and you severally hereby agree to sell to us the 241,805 shares owned by you as stated above and we agree on the Closing Date to purchase up to 72,195 additional shares of said Stock from persons to be designated by yon on or before the Closing Date. All such sales and purchases shall be at a price of $30.00 per share, net to the sellers except as specifically herein.provided. The price of $30.00 per share, stated herein, is a price ex the 500 per share dividend declared on March 4, 1960, payable on April 5,1960, to stockholders of record on March 15,1960 and, if necessary, we will deliver to the sellers appropriate due bills covering said dividend.
* * * * *
4. On the Closing Date, the certificates for the shares of Stock to be sold to us hereunder, endorsed or with stock powers in blank and in form for good delivery, accompanied by United States and New York State stock transfer tax stamps (or funds to cover the same) in proper amount shall be delivered to us against certified or bank cashier’s checks payable to the respective sellers in New York Clearing House funds in the amount of the purchase price at the rate of $30.00 per share.
$ Hi * ❖
7. The closing shall take place at the offices of Messrs. Beekman & Bogue, 15 Broad Street, New York 5, N.Y., on or before April 12, 1960 as may be agreed upon between you and the undersigned.
8. Your obligations hereunder shall be conditioned upon delivery to you, at or prior to the Closing Date, of a certified copy of resolutions of the Board of Directors of United States Freight Company authorizing the performance by us of our obligations under this agreement, and of an opinion of R. J. Leibenderfer, our counsel, to the effect that this agreement is a valid and binding agreement of ours enf orcible in accordance with its terms, said resolutions and opinion to 'be in form and substance satisfactory to your counsel, Messrs. Beekman & Bogue.
9. In connection with our purchase of the Stock, we hereby confirm our agreement with you that we are purchasing the Stock for our own account for investment and not with a view to, or any present intention of, its distribution or resale. We are familiar with the Securities Act of 1933? as amended, and more particularly with the exemptions from registration thereunder afforded by Section 4 thereof. We understand that you may be deemed to control the Corporation within the meaning of said Act, and consequently, unless we are purchasing such shares for investment, such shares would have to be registered under said Act before they could be sold to us. We are familiar with the financial condition and operations of the Corporation.
We enclose onr certified check for $500,000.00 payable to Josephine Bay Paul, to be applied on account of the purchase price of stock to be sold by her hereunder, and in case this agreement is accepted by you and we subsequently default in performance of this agreement, the said payment of $500,000.00 is to be retained by Mrs. Paul as liquidated damages; and C. Michael Paul, in consideration of the foregoing, hereby waives any and all rights to damages hereunder in event we subsequently default in performance of this agreement.
If this conforms to your understanding of our agreement, please confirm by signing at the places indicated below.
Very truly yours,
United States Feeight Company
By /s/ M. Fobgash President
Accepted March 14th, 1960.
/s/ Josephine Bay Paul Josep'hine Bay Paul
/s/ C. Michael Paul C. Michael Paul
March 14,1960
United States Freight Company
345 Hudson Street
New York 14, New York
Attention: Mr. M. Forgash
Dear Sirs:
In accepting the letter agreement between us of even date herewith, we have been assured by you that in addition to the purchase price of the Common Stock of American Export Lines, Inc. you are to pay interest thereon at the rate of 5% per annum from March 14, 1960 to the Closing Date. Please confirm this by signing below.
Very truly yours,
/s/ Josephine Bay Pall Josephine Bay Paul
i/s/ C. Michael Pall C. Michael Paul
Confirmed:
United States Feeight Company
By /s/ M. Foegash President

(c) The representation in paragraph 9 of the March 14 letter that the plaintiff was purchasing the stock “for investment and not with a view to * * * its distribution or resale” was insisted upon by the Pauls in order to relieve them from having to register the stock with the Securities and Exchange Commission as stock which would be offered for resale to the public.

22. (a) At the time when the letter agreement of March 14, 1960 was signed, the plaintiff intended to complete the contract.

(b) At the same meeting of the plaintiff’s Board of Directors on March 14 at which the contract with the Pauls was approved, the Board approved the arrangements to borrow the necessary funds with which to purchase the Pauls’ stock, and authorized the appropriate officers to finalize the loan.

(c) Following March 14, Mr. Melius assembled and supplied to the Federal Maritime Board the requisite evidence of United States citizenship of the plaintiff’s officers, directors, and principal stockholders. Thereupon, by an exchange of letters between the plaintiff and the Federal Maritime Board on April 6 and April 7, 1960, the Board advised the plaintiff that consent by the Board to the transaction was not required.

23. (a) After the signing of the contract with the Pauls was announced to the public, the plaintiff began to receive very severe criticism of the deal from stockholders, investment companies, investment bankers, and investment counselors.

(b) On April 6,1960, or 6 days prior to the closing date, this criticism was fueled and heightened by a story carried by the Dow Jones wire service, containing a statement by Admiral John Will, the president of American Export Lines. The news story quoted Admiral Will as forecasting unfavorable operations and earnings for 1960 and the immediate future.

(c) Prior to the increased criticism resulting from the issuance of Admiral Will’s statement on April 6, the plaintiff fully intended to go ahead with the contract; and it was not until after that statement that Mr. Bachelor had any indication that the plaintiff might break the contract.

24. By a letter dated April 11,1960, the Pauls advised the plaintiff that they would be ready to perform their part of the contract on April 12, 1960. On the same date, their counsel, Beekman & Bogue, advised the plaintiff of the names of the persons designated by the Pauls as the sellers of the 72,195 additional shares of American Export Lines, Inc.’s common stock and the number of shares held by each person.

25. (a) At a special meeting of the plaintiff’s Board of Directors on April 12, 1960, it was resolved not to proceed with the acquisition of any stock interest in American Export Lines, Inc., as provided in the March 14, 1960 agreement with the Pauls, because of the adverse criticism of stockholders and other interested parties, and the statement by Admiral Will described in finding 23. On that same day, the Pauls were notified in New York City that the plaintiff would not proceed with the acquisition.

(b) Pursuant to the terms of the contract, Mrs. Paul retained the plaintiff’s initial payment of $500,000 on the purchase price as liquidated damages.

26. (a) On April 12, 1960, when Mr. Forgash and Mr. Melius advised the Pauls that the plaintiff was breaking the contract, they asked the Pauls to return the $500,000, but the Pauls refused. Thereafter, the plaintiff considered instituting a suit against the Pauls to recover the $500,000, but decided that the liquidated damages of $500,000 approximately equaled the damages which the Pauls could prove, so that it would be better not to start a lawsuit.

(b)' The prices at which American Export Lines, Inc.’s common stock was traded on the New York Stock Exchange on March 14 and April 12, 1960, were as follows:

Date Open High Low Close Average of high-low
March 14,1960. 28H 30 28^ 30K 29^
April 12,1960. 27 27^ 27 2727%

27. On their joint 1960 Federal income tax return, the Pauls reported the $500,000 as ordinary income, as follows:

Schedule H Other Income or Losses
* * * * *
3. Other Sources (state nature)
Liquidated damages — U.S. Freight Co. — $500,000.

28. During the negotiations with, the Pauls and in connection with the contract to purchase the common stock of American Export Lines, Inc., Elmer G. Gove, a management and financial consultant, advised the plaintiff with respect to the advantages of the transaction. For these services, the plaintiff paid Mr. Gove $2,003.67 on August 22, 1960.

29. (a) Prior to signing the contract with the Pauls on March 14, 1960, the plaintiff did not obtain any tax advice as to the tax consequences if the contract was broken, because at that time the plaintiff was convinced that it would go through with the contract.

(b) Within the time provided by law, the plaintiff filed a consolidated income tax return for the calendar year 1960, and paid the taxes therein reported on or before the statutory due dates.

(c) In such return, the plaintiff claimed as an ordinary deduction from gross income the sum of $500,000 paid to and retained by Mrs. Paul in connection with the stock purchase contract described in previous findings. The deduction was designated in the return as “Liquidated damages for default in performance of stock purchase agreement.”

(d) The plaintiff likewise claimed as an ordinary deduction the $2,003.67 paid to Elmer G. Gove for management and financial advice during the contract negotiations (see finding 28). This deduction was designated in the return as “Legal and Professional Services.”

30. (a) In a Revenue Agent’s report, which was submitted to the plaintiff by the District Director of Internal Revenue by means of a letter dated June 25, 1963, a deficiency in tax of $278,242.63 was proposed. The report stated in part that:

The principal cause of the deficiency is the disallowance of the deduction for down payment in connection with the acquisition of capital stock.

(b) In the report, the Revenue Agent disallowed the deduction of the $500,000 and $2,003.67 referred to in paragraph 30 with the following explanation:

Payment in connection with acquisition of American Export Lines Capital Stock which taxpayer subsequently decided not to acquire represents a capital loss and not an ordinary deduction.
Payment to Elmer G. Gove for management and financial advice in connection with acquisition of American Export Lines Capital Stock represents a capital loss and not an ordinary deduction.

(c)' The proposed deficiency asserted in the report, in amount of $278,242.63, together with interest in the amount of $40,848.33, was paid by the plaintiff to the District Director on August 26,1963.

31. (a) Under the date of November 15,1963, the plaintiff filed with the appropriate District Director of Internal Revenue a claim for refund for the year 1960 in the amount of $306,217.97, plus interest thereon, asserting the same grounds as those relied upon by the plaintiff in this case.

(b) Such claim was disallowed by the Commissioner of Internal Revenue under the date of July 7,1964.

32. The plaintiff is the sole and absolute owner of the claim herein asserted, and has not assigned such claim or any part thereof or interest therein.

33. No action has been had on the claiim herein asserted in either House of Congress or in any of the executive departments, except as herein stated.

Conclusion of Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, together with interest as provided by law, and judgment is entered to that effect. The amount of the recovery will be determined in accordance with Rule 131(c). 
      
      We are Indebted to Trial Commissioner Mastín G. White for bis findings of fact, which have been adopted in their entirety, and for his recommended opinion, which has been incorporated herein.
     
      
       For convenience, the term “plaintiff” includes the United States Freight Company and its subsidiaries.
     
      
       All citations to Code sections hereinafter are, unless otherwise indicated, in reference to the Internal Revenue Code of 1954.
     
      
       We consider the substance of our assumption for purposes of argument, that a contract right to purchase what would be a capital asset in the purchaser’s hands is itself a capital asset, to be not only reasonable, but also the subject of authoritative support. See, Commissioner v. Ferrer, 304 F. 2d 125 (2d Cir. 1962). See also footnote 8, infra.
      
     
      
       In this regard, defendant contends that the character of plaintiff’s loss is determined by the nature of the loss which would have resulted had the contract been consummated and the stock resold. This contention is without merit. We will not assume to have occurred that which the statute requires in fact, prerequisite to capital loss treatment. This is not to say, however, that where on other facts a contract right is sold or exchanged, the nature of the property underlying the contract and the context in which it exists should not be considered in determining whether the contract right constitutes a capital asset.
      
     
      
       The applicability of section 1234(a) to the case at hand is discussed in detail in the immediately succeeding part of this opinion.
     
      
       Other examples of particular code sections which supply the necessary sale or exchange prerequisite to capital loss treatment include, inter alia, the following: § 166(d) with regard to a loss of a noncorporate taxpayer from the worthlessness of a nonbusiness debt; § 1232 with regard to a loss realized upon the retirement of certain evidences of corporate indebtedness; 5 1235 with regard to a loss from a particular transfer of a patent right by the “holder” thereof.
     
      
       The other cases cited by defendant as belonging to the Paulson line of decisions are: Kaufman v. Commissioner, 119 F. 2d 901 (9th Cir. 1941) ; C. L. Gransden & Co. v. Commissioner, 117 F. 2d 80 (6th Cir. 1941) ; Warren v. Commissioner, 117 F. 2d 82 (6th Cir. 1941) ; Fred A. Bihlmaier, 17 T.C. 620 (1951) ; Harold R. Smith, 89 B.T.A. 892 (1939).
     
      
       In view of our holding that the forfeiture loss sustained by plaintiff is deductible under section 165(a), we need not decide whether it is deductible, in the alternative, as an ordinary and necessary business expense under section 162. We note in passing, however, that although plaintiff’s expenditure was prompted, at least in part, by its desire to implement certain rate policies, there is substantial evidence indicating that the expenditure was also investment-motivated.
     
      
       Other cases cited by the defendant in this connection are: Commissioner v. Ferrer, 304 F. 2d 125 (C.A. 2, 1962) ; Commissioner v. Golonsky, 200 F. 2d 72 (C.A. 3, 1952), cert. denied, 345 U.S. 939 (1953) ; Commissioner v. McCue Bros. & Drummond, Inc., 210 F. 2d 752 (C.A. 2, 1954), cert. denied, 348 U.S. 829; Commissioner v. Ray, 210 F. 2d 390 (C.A. 5, 1954), cert. denied, 348 U.S. 829; Metropolitan Bldg. Co. v. Commissioner, 282 F. 2d 592 (C.A. 9, 1960) ; Bisbee-Baldwin Corp. v. Tomlinson, 320 F. 2d 929, 935-36 (C.A. 5, 1963) ; Dorman v. United States, 296 F. 2d 27 (C.A. 9, 1961). Defendant also puts in this same general category such capital-loss cases as Commissioner v. Paulson, 123 F. 2d 255 (C.A. 8, 1941) ; Kaufman v. Commissioner, 119 F. 2d 901 (C.A. 9, 1941) ; C. L. Gransden & Co. v. Commissioner, 117 F. 2d 80 (C.A. 6, 1941) ; Warren v. Commissioner, 117 F. 2d 82 (C.A. 6, 1941) ; Bihlmaier v. Commissioner, 17 T.C. 620 (1951) ; and Smith v. Commissioner, 39 B.T.A. 892 (1939).
     
      
       Taxpayer cites Johnson v. Commissioner, 32 B.T.A. 156 (1935) ; Rooks v. Commissioner, 12 T.C.M. 96 (1953). Knapp v. Commissioner, P-H B.T.A. Memo ¶ 35,427 (1935) ; Greenleaf v. Commissioner, 9 T.C.M. 1024 (1950) ; Dexter Sulphite Pulp & Paper Co. v. Commissioner, 23 B.T.A. 227 (1931) ; Mechanic v. Commissioner, 19 T.C.M. 667 (1960) ; Boatman v. Commissioner, 32 T.C. 1188 (1959) ; Estate of Myers v. Commissioner, 18 T.C.M. 1116 (1959), aff'd 287 F. 2d 400 (C.A. 6), cert. denied, 368 U.S. 828 (1961) ; United States v. Nat'l City Bank, 21 F. Supp. 791, 795 (S.D.N.Y. 1937) ; Melone v. Commissioner, 45 T.C. 501 (1966) ; Binns v. United States, 254 F. Supp. 889 (M.D. Tenn., 1966), aff’d 385 F. 2d 159 (C.A. 6, 1967) ; and Smith v. Commissioner, 50 T.C. 273 (1968).
     