Ansorge v. Comm'r of Internal Revenue, Docket No. 109911.

• Decision Date: 26 May 1943
• Docket Number: Docket No. 109911.
• Citation: 1 T.C. 1160
• Parties: MARTIN CHARLES ANSORGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 1160

MARTIN CHARLES ANSORGE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 109911.

Tax Court of the United States.

Promulgated May 26, 1943.

An attorney received a power of attorney providing for a fee for his services of 40 percent of any recovery made upon his client's claim for compensation because of expropriation of certain ships and ship contracts by the United States Shipping Board Emergency Fleet Corporation. The power of attorney assigned such 40 percent interest, in any recovery, as fee, to the petitioner. Recovery was made in the Court of Claims, and paid by the United States. Held, that the attorney's fee is taxable as ordinary income, and not as capital gain upon a capital asset assigned. Alex M. Hamburg, Esq., for the petitioner.

Henry C. Clark, Esq., for the respondent.

OPINION.

DISNEY, Judge:

In this proceeding the petitioner prays for redetermination of a deficiency in income tax, determined in the amount of $44,082.14 for the calendar year 1937. The issue presented is whether the petitioner is taxable upon the entire amount of an attorney's fee received by him, or whether he may report only a percentage thereof as capital gain under section 117 of the Revenue Act of 1936. Other issues set forth in the petition have been agreed upon by the parties and will be reflected by decision under Rule 50. All facts were stipulated, except that the petitioner's income tax return for the taxable year was introduced in evidence. We adopt the stipulation by reference and find the facts therein set forth. All pertinent facts stipulated, and recited in the petitioner's return, or admitted in the pleadings, may be summarized as follows:

The return for the taxable year was filed with the collector for the third district of New York.

The petitioner is an attorney, residing and practicing his profession in the State of New York. On November 18, 1932, one DeLuca by an instrument in writing, retained the petitioner as his attorney in fact and attorney at law to represent him in the matter of recovery because of the expropriation of contracts for construction and delivery of two ships by the United States Shipping Board Emergency Fleet Corporation in 1917. The instrument, inter alia, provided that of any amount collected the attorney might retain 40 percent ‘as full compensation for services, fees, and expenses‘ (including expenses of agents, attorneys, and assistants authorized to be appointed by petitioner), which should be in ‘full compensation for all such services,‘ that no fee should be charged if no collection or settlement be obtained, that the fee of 40 percent is secured by a lien on any amount recovered ‘and I hereby assign to my said attorney, as his fee, 40 per cent (40%) of the amount of any such settlement or recovery.‘ DeLuca had previously been represented by other attorneys. On November 18, 1932, an agreement was made between DeLuca and such former attorneys, providing for their sharing to a certain percent in any recovery made by DeLuca and that their rights under a previous contract were terminated. DeLuca had previously made a settlement of his claims, but had brought a suit in the United States Court of Claims to set aside the settlement. A demurrer had been sustained by the Court of Claims on the ground that the facts stated did not show that the settlement had been brought about by coercion.

Through the efforts of the petitioner and attorney's agents and assistants appointed by the petitioner, pursuant to the power of attorney of November 18, 1932, Congress passed a private act authorizing suit by DeLuca in the United States Court of Claims and decree against the United States for just compensation suffered through the acts of the United States Shipping Board Emergency Fleet Corporation; and the petitioner instituted such action in the Court of Claims. The suit was filed October 20, 1934, and was entitled Carlo DeLuca v. The United States of America. The petition was signed ‘Carlo DeLuca by Martin C. Ansorge, attorney for claimant.‘ Among the allegations of the petition was the following:

Claimant is the sole owner of the claim presented herein; no assignment or transfer of said claim, or any part thereof, or interest therein has been made * * * .

The petitioner verified the petition, the verification including the statement that the petitioner ‘knows the contents of this petition and the same are true. ‘ A decree was secured on December 8, 1936, against the United States in the amount of $1,615,329.32, and that amount was paid by check upon the Treasury of the United States on or about June 15, 1937. The check was endorsed by DeLuca and delivered to a trust company in New York, and disbursements were made therefrom, on DeLuca's order, to the former attorneys, to the petitioner, and to others employed by him. The petitioner received $161,946.41, giving a receipt reciting that the amount received ‘represents payment in full of my claim for services, disbursements, etc., to date in the matter of claim of Carlo DeLuca vs. The United States.‘ The remainder of the 40 percent provided for the petitioner in the instrument from DeLuca of November 18, 1932, was paid to petitioner's assistants, agents, and attorneys, as such instrument authorized.

In his Federal income tax return for the year 1937 the petitioner reported income of $159,828.36 as the net amount received by him, reciting: ‘On November 18, 1932, under a written contract received an assignment of a certain part of the proceeds of two contracts owned by one Carlo DeLuca.‘ Explaining the view that the amount was received as capital gain by virtue of an assignment of a part of DeLuca's contracts, held by petitioner from November 18, 1932, to June 15, 1937, over two years and not over five years, he reported as taxable 60 percent thereof, amounting to $95,897.02. The Commissioner determined that the entire $159,828.36 was taxable as ordinary income and not capital gain.

Upon brief the parties are in agreement that the sole issue here arises out of the closing language of the instrument of November 18, 1932, reading:

I hereby assign to my said attorney as his fee, Forty Percent (40%) of the amount of any such settlement or recovery.

In other words, if by the above sentence the petitioner acquired a capital asset and in 1937 sold or exchanged it, he properly reported in 1937 only 60 percent of the amount received by him under the schedule provided by section 117 of the Revenue Act of 1936, as to taxation, sale, or exchange of capital gains and losses. The petitioner argues that DeLuca had a capital asset, that is, the contracts for construction and delivery of ships; that it was expropriated by the United States Shipping Board Emergency Fleet Corporation; that his claim for compensation was a capital asset; that he assigned 40 percent thereof to the petitioner; and that the petitioner stands in DeLuca's shoes. The respondent's view is that the petitioner had no assignment of a capital asset, and could have none under the prohibition of the statute of the United States against assignment of claims against the United States, that he neither sold nor exchanged a capital asset in 1937, but merely collected an attorney's fee, taxable as ordinary income.

To the view that the Federal s...