Cotnam v. Comm'r of Internal Revenue, Docket No. 55797.

• Decision Date: 31 July 1957
• Docket Number: Docket No. 55797.
• Citation: 28 T.C. 947
• Parties: ETHEL WEST COTNAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 947

ETHEL WEST COTNAM, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 55797.

Tax Court of the United States.

Filed July 31, 1957.

Winston B. McCall, Esq., for the petitioner.

Frederick T. Carney, Esq., for the respondent.

In June 1940, petitioner entered into a verbal agreement with Hunter, under which she agreed to quit her employment and to move into an apartment or residence in Mobile, Alabama, and thereafter render services and attention to Hunter during his remaining lifetime as an attendant or friend, in consideration of which he agreed to make a will by the terms of which she would at his death be bequeathed by him, or receive from his estate thereunder, a sum equal to one-fifth of the value of his estate at the time of his death. The agreement and services were performed on petitioner's part, but Hunter died intestate on January 5, 1945. She filed a claim against the estate and it was denied in Probate Court, but on a jury trial in Circuit Court she obtained a judgment for $120,000, the agreed value of one-fifth of the estate. In 1948, after the judgment was affirmed by the Supreme Court of Alabama, the administrator issued a check in the amount of the judgment, plus accrued interest, made payable to petitioner and her attorneys, with whom she had entered into an agreement on a contingency basis to represent her in the prosecution of her claim against the estate. After endorsement by the payees, the check was deposited in the attorneys' bank account and after retaining their fees of $50,365.83, they gave petitioner a check for the balance. In computing income tax liability, respondent allocated the $120,000 over a period of 4 1/2 years, 1940 through 1944, and allowed petitioner a deduction in 1948 for legal and trust fees in the amount of $50,462.76, which in effect was a deduction to the extent of petitioner's other income in the amount of $6,912.07. Held:

1. The amount of the judgment recovered by petitioner was income, and not a bequest.

2. The amount paid as attorneys' fees was an expense incurred by petitioner in the recovery of income, and not an exclusion from income.

3. The legal fees so paid were deductible for 1948, the year paid, and were not allocable over the long-term compensation period.

4. Respondent was not estopped from assessing and collecting the income tax deficiency against petitioner because of his prior administrative disposition of a claim for refund of estate tax filed by the Hunter estate after its payment to petitioner of the judgment she had obtained against the estate.

Respondent determined a deficiency in income tax against petitioner for the year 1948 in the amount of $36,985.02. The issues to be decided are (1) whether the sum of $120,000, received by petitioner from an estate as a result of a judgment, is taxable or nontaxable income; (2) whether respondent, in apportioning the $120,000 under section 107 of the Internal Revenue Code of 1939 in computing tax liability, erred in not apportioning over the same period the attorneys' fees incurred in the recovery of the $120,000 judgment; and (3) whether respondent is estopped from assessing and collecting the deficiency in question.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

The petitioner is an individual residing in Fairhope, Alabama. She filed her individual income tax return for the year 1948 with the collector of internal revenue for the district of Alabama.

During the month of June 1940, petitioner entered into a verbal agreement with Thomas Shannon Hunter, deceased, under which she agreed to give up her position and cease working at the Saenger Theatre in Mobile, Alabama, where she was then and there gainfully employed, and to move from her home at Springhill, Alabama, to an apartment or residence in Mobile and thereafter to render services and attention to Hunter during his remaining lifetime as an attendant or friend, in consideration of which he agreed to make a will by the terms of which she would at his death be bequeathed by him, or receive from his estate thereunder, a sum equal to one-fifth of the value of his estate at the time of his death. The agreement and services were performed on petitioner's part, but they were not performed on the part of Hunter, as he died intestate on January 5, 1945.

Petitioner entered into a verbal agreement with Sam Johnston, the senior member of the law firm of Johnston, McCall & Johnston, of Mobile, to represent her in prosecuting her claim against the Hunter estate. It was agreed that the attorneys would receive one-third of any amount recovered from the estate. About a year later the agreement was reduced to writing, but after protracted litigation the contract was changed by oral agreement to provide for the contingent fee to be 40 per cent of the amount recovered.

On July 27, 1945, the petitioner filed a claim in the Probate Court of Mobile County, Alabama, against the administrator of the Estate of T. Shannon Hunter, which claim reads as follows:

Estate of T. Shannon Hunter, deceased, In account with Ethel W. Cotnam Amount owing and due to Ethel W. Cotnam under an agreement between T. Shannon Hunter and Ethel W. Cotnam, by which she was to receive and be paid a sum equal to one-fifth (1/5) of the value of his estate, which agreement has been fully performed on her part, and for services rendered $175,000.00.

On November 8, 1945, the Probate Court entered an order denying the claim.

Petitioner duly appealed the order of the Probate Court to the Circuit Court of Mobile County, in a case styled Ethel West Cotnam, Plaintiff, v. Merchants National Bank of Mobile as administrator of the Estate of Thomas Shannon Hunter, Deceased, Defendant, No. 4234. This proceeding was filed for the purpose of testing the validity of petitioner's claim, as amended. The amended claim upon which the Circuit Court proceeding was had, reads (with verification omitted) as follows:

Comes Ethel W. Cotnam and amends the claim heretofore filed in this Court against the Estate of T. Shannon Hunter, deceased, so that the same shall read as follows:

Amount owing and due by the Estate of T. Shannon Hunter to Ethel W. Cotnam, under a verbal agreement between her and T. Shannon Hunter made during the month of June, 1940, by which she agreed to give up her position and cease working at the Saenger Theatre in the City of Mobile, where she was then and there gainfully employed, and to move from Springhill, Alabama, into an apartment or residence in the City of Mobile, and thereafter to render services and attention to the said T. Shannon Hunter during his remaining lifetime as an attendant or friend, in consideration of which the said T. Shannon Hunter agreed to make a will by the terms of which she would at his death, be bequeathed by him or receive from his Estate thereunder a sum equal to one-fifth (1/5) of the value of the Estate of the said T. Shannon Hunter Deceased, at the time of his death, which agreement and services were duly performed on her part, and which agreement was not performed on the part of the said T. Shannon Hunter $175,000.00.

The parties agreed, for the purposes of the trial, that the value of Hunter's net estate was $600,000, or that one-fifth of the value of the estate was $120,000.

Two questions of fact were submitted to the jury: (1) whether such a contract as claimed was in fact made; and (2) whether any part of the consideration of such contract was illicit sexual relations between the parties, either prior to the contract or thereafter. The jury answered the first question ‘Yes' and the second question ‘No.’

The legal proceedings were instituted under the provisions of the Code of Alabama, 1940, title 61, section 216, as amended. A proceeding under the foregoing section is not intended to lead t a personal judgment, but is only for the purpose of declaring a status. It is in the nature of a declaratory judgment to determine the validity of a claim filed against an estate. In addition to the statutory proceeding, the petitioner had as alternative remedies a claim for damages for breach of contract and an account for services rendered on a quantum meruit.

In the trial of the proceeding in the Circuit Court, the parties and the court tried the case as if it were a common law action begun as such. To this extent it did not conform to section 216 of title 61 of the Alabama Code. The Supreme Court of Alabama, in affirming the judgment of the Circuit Court on January 22, 1948, stated that there was no apparent reason why the parties with the consent of the court, could not convert the proceeding into a common law action and have a personal judgment rendered.

After the Supreme Court of Alabama had rendered its decision, the sum of $120,000, together with interest of $5,620, was paid by the administrator upon judgment entered on the jury's verdict.

The value of the Hunter estate was $596,223.17, after payment of State and Federal taxes and all claims other than that of petitioner.

On March 23, 1948, the administrator issued a bank draft on the Trust Department of the Merchants National Bank of Mobile in the amount of $125,620. The draft provided:

Pay to the order of: Ethel West Cotnam and Johnston, McCall & Johnston, her attorneys.

In full payment of: Judgment recovered by Ethel West Cotnam against the Merchants National Bank of Mobile as Administrator of the Estate of Thomas Shannon Hunter, Deceased.

The draft was endorsed by the petitioner and Johnston, McCall & Johnston, Attorneys-at-Law, and deposited to the attorneys' bank account. Thereupon they paid over to petitioner their check in the amount of $75,254.17, which was the remainder of the $125,620 judgment, including interest, after the deduction of attorneys' fees in the amount of $50,365.83, which amount was retained by the attorneys in accordance with the terms of their contract with petitioner.

Respondent computed petitioner's...