Bowers v. Commissioner of Internal Revenue

• Decision Date: 26 April 1957
• Docket Number: No. 12844.,12844.
• Citation: 243 F.2d 904
• Parties: F. C. BOWERS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

243 F.2d 904 (1957)

F. C. BOWERS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12844.

United States Court of Appeals Sixth Circuit.

April 26, 1957.

N. A. Cobb, Battle Creek, Mich., Howard E. Wilder, Battle Creek, Mich., on brief, for petitioner.

Helen A. Buckley, Washington, D. C., Charles K. Rice, Lee A. Jackson, John Potts Barnes, and Harry Baum, Washington, D. C., on brief, for respondent.

Before SIMONS, Chief Judge, ALBERT LEE STEPHENS of Ninth Circuit,^* and McALLISTER, Circuit Judges.

McALLISTER, Circuit Judge.

Petitioner seeks the allowance, as a deduction for income tax purposes, of a fee paid to his attorneys in divorce proceedings. He claims that he is entitled to such deduction as an expense incurred to conserve and maintain income-producing property, in accordance with Section 23(a) (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(a) (2),¹ which was in effect at the time the divorce proceedings occurred and the legal fees paid.

The Commissioner determined that the attorney fee represented personal expense in connection with the divorce proceedings, arising out of petitioner's marital obligations; that such expense is not allowable as a deduction under Section 24(a) (1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 24(a) (1);² and the Tax Court sustained the determination of the Commissioner.

The total fee which petitioner paid to his lawyers was $60,000. It is conceded that $15,000 of this fee was a nondeductible personal expense under Section 24(a). No question, therefore, arises as to that amount, but petitioner contends that $45,000 of the total fee was deductible under Section 23(a) (2).

The sole issue in the case is whether the amount of $45,000 is deductible as an expense paid or incurred for the conservation and maintenance of property held for the production of income.

Petitioner and his wife had been estranged for more than twenty years prior to their divorce, although they resided in the same house, for the sake of appearance, and, for what they believed to be the best interests of their children. They did not live together, or associate together, as husband and wife.

Petitioner's principal asset was his stock in the United States Register Company. In 1915 he was office manager of the company, and became through successive promotions, auditor and vice-president. In 1915, Mr. A. O. Jones was president of the company, and held that office until his death in 1934. At the time of Mr. Jones' death, petitioner was the owner of 250 shares of stock in the company; and thereafter, because of the friendship and the confidence of the Jones family in his managerial ability, their votes as stockholders, together with his own, insured his election as president of the company in 1935; and he has held that office ever since. Upon the death of Mrs. Jones and her daughter, petitioner acquired, by bequest from them, additional stock, so that in 1949, his total stock holdings amounted to 3,312 shares. After the death of Mrs. Jones in 1948, 17,000 shares of the stock heretofore owned by her were purchased by the company and retired; and such action left the capital structure of the company with 7,760½ shares outstanding. Petitioner was a close friend of Mr. and Mrs. Wayne H. Young, who were the owners of 225 shares of the stock. Petitioner's son owned 357 shares, which he voted in favor of his father. All of these shares, together with those of petitioner, have always, since his first election as president, insured his reelection.

At the time of the death of Mr. Jones in 1934, the stock was not returning dividends. A year afterward, and under the presidency of petitioner, the stock commenced, and continued to pay dividends up to the present time, with the exception of the year 1942. Sales have grown from $540,000 in 1935 to $3,300,000 in 1954. The net worth of the company has increased from $940,000 to more than $2,000,000. Petitioner's annual salary and bonus have, during these years, been between $42,000 and $53,000; and his annual dividends amounted, in 1948, to $44,000; in 1949, to $50,000; and in 1950 to $66,000.

When petitioner's wife instituted divorce proceedings in May, 1949 in the Circuit Court for Calhoun County, in the State of Michigan, suit was begun by the filing of a bill of complaint, and the issuance by the court of an injunction, generally prohibiting the alienating, encumbering, or secreting of any of petitioner's real or personal property. The bill of complaint contained a prayer for the equitable division of the property of the parties.

At the behest of his attorneys, petitioner did not file a cross-bill, because he was advised that in the event such a pleading were filed, the Circuit Court might proceed to a hearing and issue a divorce, either to petitioner or his wife. While petitioner himself desired a divorce, his attorneys counseled him, and he agreed, that he could not afford to take any chances upon a disposition of his stock in the Register Company by a divorce decree, and that, in order to protect his income-producing property, it would be necessary to proceed to negotiations, looking toward a property settlement with his wife. Such negotiations were accordingly undertaken by his legal counsel, and continued until the day of final hearing, when an agreement was finally effectuated, preserving to petitioner his rights to the stock.

During the proceedings, counsel for petitioner's wife filed an amended complaint asking for a division of his assets; and they wrote petitioner's counsel with regard to a property settlement, in which letter they sought "a division of the stock itself." Moreover, the attorney for petitioner's wife...