Commissioner of Internal Revenue v. Multnomah Operating Company

This is an appeal by the Commissioner from a decision of the Tax Court allowing, as reasonable business expenses, deductions for payments made by respondent taxpayer to three of its stockholders for the years 1948 and 1949. The payments were made pursuant to a written contract entered into in 1944 which extended the term of a similar contract that had been made in 1931. These payment contracts arose under circumstances now to be stated.

In 1930 representatives of three theretofore competing hotel operating organizations joined in obtaining a fifteen-year lease of the Multnomah Hotel, Portland, with the intent of assigning such lease to a new corporation to be formed by the three. Negotiations were carried on over a period of months consisting of numerous conferences and trips between Seattle and Portland by S. W. Thurston, representing Maltby-Thurston Company (hereafter Maltby), P. G. Schmidt, representing Pacific Coast Investment Company (hereafter PCI), and one F. A. Dupar. These negotiations were arm’s length with Hauser & Co., owners of the hotel. At the insistence of Hauser a covenant was placed in the lease forbidding assignment of the lease or operation of the hotel except…