Cobb v. Commissioner of Internal Revenue, 10759.

• Citation: 173 F.2d 711
• Decision Date: 04 April 1949
• Docket Number: No. 10759.,10759.
• Parties: COBB v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

173 F.2d 711 (1949)

COBB v. COMMISSIONER OF INTERNAL REVENUE.

No. 10759.

United States Court of Appeals Sixth Circuit.

April 4, 1949.

W. Dean Hopkins, of Cleveland, Ohio, and John Y. Merrell, of Washington, D. C. (Robert Ash and W. T. Durant, both of Washington, D. C., on the brief), for petitioner.

Howard P. Locke, of Washington, D. C. (Theron Lamar Caudle, Ellis N. Slack and

Helen Goodner, all of Washington, D. C., on the brief), for respondent.

Before HICKS, Chief Judge, and SIMONS and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

The question presented by this petition for review is whether, in the circumstances of the case, the petitioner may deduct from his gross income attorneys' fees paid by him in the taxable year for professional services and advice in relation to a controversy concerning the amount of his liability for gift taxes. The Tax Court of the United States, three judges dissenting, held that such attorneys' fees are not deductible by petitioner under section 23(a) (2) of the Internal Revenue Code, 26 U.S.C.A. § 23 (a) (2). No appellate court of the United States has yet decided this clear-cut issue of law.

The case was tried on stipulation of fact and the testimony of the petitioner, Frank M. Cobb, a lawyer employed by a Cleveland corporation as general counsel, who received $10,416 for his professional services during 1944, the taxable year involved. His additional net income for that year was $16,380.32 from real estate rentals, and $10,790.25 from dividends and interest. Owning at the time an undivided one-half interest in improved income-producing real estate at 234-236 Euclid Avenue, Cleveland, he conveyed on or about December 1, 1941, by fee simple deed of gift to each of his four daughters an undivided one-twelfth interest in the property. He made to his wife a gift of securities, which he considered of approximately the same value as the gifts to his daughters. All four of his daughters were married. Two of the husbands were hospital internes, one a young lawyer, and the fourth a young man of promise without much income. Petitioner testified that his motive in making the gifts to his daughters was to aid them in the "maintenance of their homes," and to help himself by effecting reductions in his income taxes by "getting into lower brackets." During 1941, the gross rental of the real estate, in which he conveyed a one-twelfth undivided interest to each of his daughters in December of that year, amounted to $33,500.

Petitioner stated on the witness stand that, before he made the gifts to his daughters, his niece, who owned a one-eighteenth interest in the Euclid Avenue property, died, bringing into question the value of the fractional interests in the property. A law firm representing the administrator of his niece's estate held numerous conferences with a representative of the Commissioner of Internal Revenue. Realizing that the value of the undivided interests in the property would be important in relation to his gift taxes, petitioner consulted the same law firm for advice as to what value he should place on the interests conveyed to his daughters. In his gift tax return he listed the gifts to his daughters and other gifts, and paid a gift tax amounting to $18,943.65.

On July 29, 1942, the Internal Revenue Agent in charge at Cleveland proposed by letter to petitioner an adjustment of his gift tax liability for 1941 which would result in a gift tax deficiency of $13,840.52. In early August, the taxpayer employed the same attorneys to advise him as to whether he should accept or reject the proposed adjustment, and to protect his interest in the gift tax matter. These lawyers prepared and filed a protest against the proposed adjustment.

On November 23, 1942, the Commissioner of Internal Revenue formally notified petitioner that a determination of his gift tax liability for 1941 disclosed a deficiency of $13,840.52. At petitioner's request, his attorneys prepared and filed in the Tax Court of the United States a petition for redetermination of such deficiency. After petitioner's attorneys had prepared for trial before the Tax Court, a compromise settlement was reached; and, on December 14, 1943, the Tax Court, pursuant to stipulation of the parties, found a deficiency in petitioner's gift tax in the amount of $6,000, which, together with interest, was promptly paid.

The Tax Court found that petitioner paid his attorneys $2,260 as fees for their professional services in connection with the gift tax dispute, and that such amount was reasonable for the services rendered. The Court found further that, in order to pay the 1941 gift tax deficiency of $6,000, the petitioner sold at a loss income-producing securities; and that if petitioner had been required to pay the original deficiency of $13,840.52 determined by the Commissioner it would have been necessary for the taxpayer to sell additional income-producing securities.

The decision of the Tax Court was based upon literal interpretation of the language of the statute applying to allowable deductions from gross income in the computation of net income. Section 23(a) (2) of the Internal Revenue Code provides: "Deductions from gross income. In computing net income there shall be allowed as deductions: * * * (2) Non-trade or non-business expenses. In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income." There is no statute allowing deductions from gross income of attorneys' fees and services rendered in relation to advice or litigation in respect of gift taxes. If petitioner is entitled to his claimed allowance for such attorneys' fees, concededly he must establish his right under the above quoted section.

The Tax Court held that the law is correctly stated in Treasury Regulation 111, section 29.23(a)-15(b), as amended by T.D. 5513, which provides: "Expenses paid or incurred by an individual in the determination of liability for taxes upon his income are deductible. If property is held by an individual for the production of income, amounts expended in determining a property tax imposed with respect to such property during the period when so held are deductible. Expenses paid or incurred by an individual in determining or contesting any liability asserted against him do not become deductible, however, by reason of the fact that property held by him for the production of income may be required to be used or sold for the purpose of satisfying such liability. Thus, expenses paid or incurred by an individual in the determination of gift tax liability, except to the extent that such expenses are allocable to interest on a refund of gift taxes, are not deductible, even though property held by him for the production of income must be sold to satisfy an assessment for such tax liability or even though, in event of a claim for refund, the amount received will be held by him for the production of income." Italics supplied.

The petitioner contends that the attorneys' fees in question are deductible under section 23(a) (2), because (1) such expenditure was made to conserve his income-producing property by defending it against the claim and lien of the gift tax deficiency, and (2) the expenditure was a proximate result of his action in making...