Coke v. Comm'r of Internal Revenue
| Decision Date | 24 September 1951 |
| Docket Number | Docket No. 25822. |
| Citation | 17 T.C. 403 |
| Parties | AGNES PYNE COKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Certain legal expenses claimed by petitioner as ordinary and necessary nonbusiness expenses deductible under section 23(a)(2), I.R.C., held, not deductible from gross income but capital expenditures insofar as allocable to recovery of title to property, but, held, deductible from gross income under section 23(a)(2) insofar as paid or incurred for the production or collection of income. John N. Jackson, Esq., for the petitioner.
J. Marvin Kelley, Esq., for the respondent.
Respondent determined a deficiency for the calendar year 1945 in the amount of $20,890.13. Petitioner claims an overpayment. The sole issue is whether petitioner is entitled to deduct, in whole or in part, certain attorneys' fees and costs as ‘non-trade or non-business expenses‘ under section 23(a)(2), Internal Revenue Code. The facts have been stipulated.
Petitioner is an individual with her residence in Texas. Her return for the year here involved was filed with the collector of internal revenue for the second district of Texas, at Dallas. Petitioner kept her books on a calendar year and cash basis.
Petitioner and her former husband, John R. McLean, being separated and contemplating a divorce, entered into a property settlement agreement dated October 18, 1943, by the terms of which he gave her his written agreement to pay her $20,000 and his promissory note for $75,000 and she released her interest in all property he had at the time, be it separate or community. At all times material hereto petitioner and her former husband were domiciled in the State of Texas. Petitioner thereafter sued for a divorce which was granted by the District Court in Dallas County, Texas, on December 24, 1943, and in the decree the property settlement agreement was confirmed.
Petitioner later discovered that 24,570 shares of stock and 8,000 options of Southern Aircraft Corporation standing in John R. McLean's name and acquired during their marriage and which he had at the time of the property settlement, were community property, but that in making such settlement, they had been treated as McLean's separate property. At the time of such discovery petitioner was the wife of Ronald Hudson.
Petitioner by written agreement dated June 22, 1945, employed Hamilton, Hamilton, Turner & Hutchison, attorneys at Dallas, Texas, to institute suit against her former husband to set aside, because of fraudulent inducement, the property settlement and that part of the divorce decree which purported to confirm it and ‘for an accounting as to community property accumulated during the previous marriage between the said Agnes Pyne Hudson and the said J. R. McLean, as well as for an accounting as to any moneys due or owing to the said Agnes Pyne Hudson by the said J. R. McLean.‘ Petitioner agreed with the above attorneys to bear all costs of such suit, to pay them a retained of $15,000 and a contingent fee of 30 per cent of all moneys and properties recovered after payment of costs of suit and retainer. Suit was filed shortly thereafter, the prayer for relief asking, in part, that the property settlement and that part of the divorce decree which purported to confirm it be set aside, and:
* * * that the Court hear and determine the property rights as between Plaintiff and Defendant, that a full accounting as between Plaintiff and Defendant be had, and that Plaintiff recover all properties now in the possession of Defendant, or any other person, firm or corporation, to which she may show herself to be justly entitled, and that she have judgment against the Defendant for all sums of money shown to be due to her hereunder; * * * .
On October 16, 1945, petitioner, after extensive investigation and negotiation respecting her claim, entered into a compromise agreement with John R. McLean, whereby he admitted that the above 24,570 shares of stock and 8,000 options of Southern Aircraft Corporation were community property, of which petitioner owned one-half, and it was therein agreed that the stock certificates and options, which were in McLean's name, be placed in escrow with the Republic National Bank of Dallas, along with various documents mentioned in the agreement, and that all such stock be sold at $16 per share and the options at $12.50 each, and that the proceeds of sale, less transfer stamp taxes, be disbursed by the above bank and the documents delivered, as provided in the agreement. The agreement provided that if the sale was not consummated, the agreement should be void and not constitute any admission by either party. The first paragraph of the agreement was as follows:
There is now pending in the 116th District Court of Dallas County, Texas, Cause No. 92,065-F on the docket of said court in which Second Parties are plaintiffs and First Party is defendant. In said cause there are involved various issues between the Second Parties and the First Party, and included therein are issues between said parties as to the rights and title of First Party and Second Party, respectively in and to the 24,570 shares of Class A Common Stock of Southern Aircraft Corporation, a Texas corporation, standing in the name of First Party, and the options hereinafter referred to held by First Party for the purchase of 8,000 shares of the stock of said company. In addition to the issues between the parties hereto in said cause, there are other issues, claims and demands, as more fully dealt with hereinafter in this agreement.
The contemplated sale was thereupon made pursuant to the terms of the compromise agreement, and on or about October 31, 1945, the above $75,000 note and release of liability executed by petitioner were delivered to McLean and a release of liability executed by McLean was delivered to petitioner, and from the proceeds of the sale petitioner received from the bank for the sale of her half interest in the stock and options the sum of $246,560, less $1,302.80 for stamp taxes. The original total cost to petitioner of the stock and options sold was $61,425, being $5 per share for the stock and no cost for the options. Final judgment was thereupon entered in the pending suit on October 31, 1945, finding that the stock and options in question were community property of petitioner and McLean, that sale thereof had been made and the proceeds distributed.
During the calendar year 1945, petitioner, in connection with the foregoing litigation, paid the following amounts:
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¦Hamilton, Hamilton, Turner & Hutchison and William Jaffe, ¦$92,897.61¦
¦Attorneys ¦ ¦
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¦Davidson & McCarty ¦3,014.05 ¦
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¦Barrow, Wade & Guthrie, Accountants ¦1,605.75 ¦
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¦Court Reporter ¦1,050.00 ¦
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¦Telephone calls ¦67.40 ¦
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¦Miscellaneous expenses ¦2,002.46 ¦
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¦Total ¦100,637.27¦
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These amounts so paid by petitioner in connection with the litigation were reasonable.
Petitioner contends that the amount of $100,637.27 paid by her in 1945 for attorneys' fees and other costs incident to a suit against her former husband, John R. McLean, is deductible in full as an ‘ordinary and necessary‘ expense paid for the ‘production or collection of income,‘ within the meaning of section 23(a)(2), I.R.C. Respondent has determined that such expenditure is not a deductible expense under section 23(a)(2) but has treated it as part of the cost of the stock and options sold under a compromise of the above-mentioned litigation. Petitioner contends in the alternative that the above expenses should be apportioned by adding to the cost of the stock and options sold the portion of the expenses allocable to the recovery of title and by allowing as a deduction from gross income under section 23(a)(2) the portion allocable to the production or collection of...
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