O'Brien v. Comm'r of Internal Revenue, Docket No. 89659.
| Citation | 38 T.C. 707 |
| Decision Date | 22 August 1962 |
| Docket Number | Docket No. 89659. |
| Parties | WALTER F. O'BRIEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Henry D. O'Connor, Esq., for the petitioner.
Malin Van Antwerp, Esq., for the respondent.
In applying section 1303, I.R.C. 1954, in respect of an award of back pay, pertinent legal expenses are deductible in full in the year the award was received, and may not be prorated over earlier years; section 1303 must be applied to the full amount of the award, undiminished by such legal expenses. Weldon D. Smith, 17 T.C. 135, reversed on another issue 203 F.2d 310 (C.A. 2), followed.
The Commissioner determined a deficiency in petitioner's 1957 income tax in the amount of $2,205.33. The principal issue concerns the correct method of applying section 1303, I.R.C. 1954, in respect of back pay awarded to petitioner in 1957. A subsidiary issue relates to the determination of the amounts of certain itemized deductions for the years 1952-1955 in fixing the limitation on petitioner's 1957 tax liability under section 1303.
Some of the facts have been stipulated and, as stipulated, they are incorporated herein by reference.
Petitioner is a resident of Philadelphia, Pennsylvania. He filed his income tax return for the year 1957, on the cash receipts and disbursements basis, with the district director of internal revenue, Philadelphia, Pennsylvania.
During 1952 and prior years petitioner was employed as a deputy collector of internal revenue. In 1952 he was wrongfully discharged from this position.
On January 19, 1953, petitioner entered into the following agreement with Edwin J. McDermott, a Philadelphia attorney:
Walter F. O'Brien hereby engages Edwin J. McDermott as his Attorney with the right to engage associates to represent him, said Walter F. O'Brien, in his action to recover damages from the United States arising out of his separation from the classified Civil Service of the United States as of January 14, 1952.
It is agreed that for his said service Edwin J. McDermott shall receive 50 percent of any amount of damages or any other sums of money received by way of suit or settlement or otherwise.
On January 2, 1957, petitioner was restored to his office by virtue of an order of the United States District Court for the District of Columbia.
Petitioner filed a proceeding in the United States Court of Claims to recover the salary he would have received during the period between his separation from service and his reinstatement. That court decided that he was entitled to receive the amount of his salary at the rate of $4,455 per annum from January 29, 1952, to December 31, 1956, inclusive, less any sums earned by him through other employment during that period (O'Brien v. United States, 151 F.Supp. 282), and on July 12, 1957, entered an order ‘that judgment be and the same is entered for the plaintiff in the sum of sixteen thousand one hundred seventy-three dollars and five cents ($16,173.05).’
In accordance with the foregoing order petitioner received $16,173.05 in 1957, and paid legal fees, printing costs, and expenses of $8,243.10 out of such recovery pursuant to the written agreement with his attorney, quoted above. The check embodying the $16,173.05 recovery had been mailed to petitioner's attorney; petitioner endorsed the check at the attorney's office, and the attorney gave petitioner his personal check for the difference between the amount recovered and the attorney's fee and expenses.
In petitioner's 1957 income tax return he treated the $16,173.05 received as back pay, entitled to the benefits of section 1303, I.R.C. 1954, and allocated that amount to the years 1952-1955 as follows:
+------------------------------------------------------+
¦Back salary awarded ¦ ¦$16,173.05¦
+---------------------------------+---------+----------¦
¦Allocation of award: ¦ ¦ ¦
+---------------------------------+---------+----------¦
¦1952 ¦$3,676.13¦ ¦
+---------------------------------+---------+----------¦
¦1953 ¦4,095.00 ¦ ¦
+---------------------------------+---------+----------¦
¦1954 ¦4,389.27 ¦ ¦
+---------------------------------+---------+----------¦
¦1955 ¦4,012.65 ¦ ¦
+---------------------------------+---------+----------¦
¦Total carried back to prior years¦ ¦16,173.05 ¦
+------------------------------------------------------+
Together with his 1957 return petitioner filed Forms 1040 for the years 1952-1955, showing the following:
+---------------------------------------------------------------+
¦ ¦1952 ¦1953 ¦1954 ¦1955 ¦
+-------------------+----------+----------+----------+----------¦
¦Salary per original¦ ¦ ¦ ¦ ¦
+-------------------+----------+----------+----------+----------¦
¦returns ¦$424.02 ¦$360.00 ¦$65.73 ¦$87.50 ¦
+-------------------+----------+----------+----------+----------¦
¦Government award of¦ ¦ ¦ ¦ ¦
+-------------------+----------+----------+----------+----------¦
¦back pay ¦3,676.13 ¦4,095.00 ¦4,389.27 ¦4,012.65 ¦
+-------------------+----------+----------+----------+----------¦
¦ ¦4,100.15 ¦4,455.00 ¦4,455.00 ¦4,100.15 ¦
+-------------------+----------+----------+----------+----------¦
¦Less: ¦ ¦ ¦ ¦ ¦
+-------------------+----------+----------+----------+----------¦
¦Itemized deductions¦(797.41) ¦(637.15) ¦(746.62) ¦(671.83) ¦
+-------------------+----------+----------+----------+----------¦
¦Legal costs re back¦ ¦ ¦ ¦ ¦
+-------------------+----------+----------+----------+----------¦
¦pay ¦(1,979.62)¦(2,141.93)¦(2,141.93)¦(1,979.62)¦
+-------------------+----------+----------+----------+----------¦
¦ ¦1,323.12 ¦1,675.92 ¦1,566.45 ¦1,448.70 ¦
+-------------------+----------+----------+----------+----------¦
¦Exemptions ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦
+-------------------+----------+----------+----------+----------¦
¦Subject to tax ¦None ¦None ¦None ¦None ¦
+---------------------------------------------------------------+
As of consequence of the foregoing, petitioner paid no tax whatever in respect of the 1957 recovery.
The petitioner in computing the limitation on his 1957 income tax under the provisions of section 1303 of the Internal Revenue Code of 1954 claimed that he made expenditures for deductible items, other than legal expenses, in each of the years 1952 to 1955, inclusive, in the following amounts:
+---------------------------------------------------------------+
¦ ¦1952 ¦1953 ¦1954 ¦1955 ¦
+-------------------------------+-------+-------+-------+-------¦
¦Charitable contributions ¦$364.00¦$260.00¦$208.00¦$208.00¦
+-------------------------------+-------+-------+-------+-------¦
¦Interest ¦148.33 ¦151.96 ¦155.96 ¦227.71 ¦
+-------------------------------+-------+-------+-------+-------¦
¦Taxes ¦226.09 ¦225.19 ¦147.36 ¦147.32 ¦
+-------------------------------+-------+-------+-------+-------¦
¦Medical and dental expenditures¦264.00 ¦ ¦403.50 ¦254.80 ¦
+---------------------------------------------------------------+
Petitioner actually made the following expenditures during such years for these purposes:
+-----------------------------------------------------------+
¦ ¦1952 ¦1953 ¦1954 ¦1955 ¦
+-------------------------------+------+------+------+------¦
¦Charitable contributions ¦$52.00¦$52.00¦$52.00¦$52.00¦
+-------------------------------+------+------+------+------¦
¦Interest ¦108.97¦95.97 ¦109.30¦234.99¦
+-------------------------------+------+------+------+------¦
¦Taxes ¦178.63¦177.73¦99.83 ¦99.83 ¦
+-------------------------------+------+------+------+------¦
¦Medical and dental expenditures¦264.00¦156.00¦294.00¦252.80¦
+-----------------------------------------------------------+
1. The Commissioner's deficiency notice was based in large part upon his determination that the $16,173.05 awarded to petitioner in 1957 did not qualify as ‘back pay’ within the meaning of section 1303 of the Internal Revenue Code of 1954.1 However, this is no longer in issue, for the Commissioner has since conceded that petitioner is entitled to relief under section 1303. There remains, nevertheless, the question as to the proper method of applying these provisions.
The Commissioner insists that the entire $16,173.05 recovery is to be spread back among the years 1952-1955, as was done in petitioner's returns, but that the $8,243.10 legal expenses must be deducted in full in 1957. Petitioner, on the other hand, argues now that only that portion of his recovery remaining after...
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