Dolese v. U.S.

• Decision Date: 10 October 1979
• Docket Number: Nos. 77-1511,s. 77-1511
• Citation: 605 F.2d 1146
• Parties: 79-2 USTC P 9540, 80-2 USTC P 9731 CA 79-3136 Roger DOLESE and the Dolese Company, Transferees of Dolese Bros. Co., a dissolved corporation, Appellants, v. UNITED STATES of America, Appellee. The DOLESE COMPANY and Dolese Concrete Company (wholly-owned subsidiary of TheDolese Company), Appellants, v. UNITED STATES of America, Appellee. Roger DOLESE, Appellant, v. UNITED STATES of America, Appellee. to 77-1513.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1146

605 F.2d 1146

79-2 USTC P 9540, 80-2 USTC P 9731

CA 79-3136 Roger DOLESE and the Dolese Company, Transferees

of Dolese Bros. Co., a dissolved corporation, Appellants, v. UNITED STATES of America, Appellee.

The DOLESE COMPANY and Dolese Concrete Company (wholly-owned

subsidiary of TheDolese Company), Appellants, v. UNITED STATES of America, Appellee.

Roger DOLESE, Appellant, v. UNITED STATES of America, Appellee.

Nos. 77-1511 to 77-1513.

United States Court of Appeals, Tenth Circuit.

Argued Nov. 15, 1978.

Decided Aug. 20, 1979.

Rehearing and Rehearing En Banc Denied Oct. 10, 1979.

On Rehearing

Donald P. Moyers and John H. Conway, Jr., Tulsa, Okl., for appellants.

Murray S. Horwitz, Atty., Tax Div., Dept. of Justice, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews and Grant W. Wiprud, Attys., Tax Div., Dept. of Justice, Washington, D. C., and John E. Green, U. S. Atty., Oklahoma City, Okl., with him, on brief), for appellee.

Before SETH, Chief Judge, and BREITENSTEIN and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

These appeals arise out of suits brought by Roger Dolese, The Dolese Company, and Dolese Concrete Company, for refunds of federal income taxes and interest totaling altogether $1,533,755.38. The cases have been before this Court once previously. Dolese v. United States, 541 F.2d 853 (10th Cir. 1976). After remand the trial court entered summary judgment in favor of the United States in each case on the issues under consideration here.

The issues on appeal are whether summary judgment was properly granted 1) denying the corporations' income tax deductions for amounts paid for litigation expenses pursuant to a state court order; 2) taxing Roger Dolese (Roger) on such payments as constructive dividends from the corporations; and 3) treating advances by the corporations for payment of Roger's personal living expenses as dividends rather than loans.

Most of the facts giving rise to these suits and the rulings appealed from commenced with a separate maintenance action filed in 1959 by Roger's wife, Ardith, later changed to a suit for divorce. That action was pending more than nine years and finally terminated in 1968 with a divorce decree on Roger's cross-petition. Large sums of money were involved, much acrimony, and many charges and countercharges. Approximately $1.3 million in fees and expenses were paid by Roger and the companies in connection with the litigation.

An unusual feature of the divorce petition was that it named three corporations, The Dolese Company, Dolese Concrete Company and Dolese Bros. Co., as party defendants in the original action. The Dolese Company was and is 100% Owned by Roger Dolese, and it in turn owns 100% Of the Dolese Concrete Company. (Until January 17, 1969, Ardith owned 16% Of Dolese Concrete Co., and Roger and Ardith owned 4% As trustees for four children; these shares were redeemed pursuant to the divorce settlement order.) Dolese Bros. Co. was wholly owned by Roger Dolese and The Dolese Company; it was liquidated in 1970 and is now operated as a partnership between Roger and The Dolese Company.

The divorce petition accused Roger of threatening to deplete and dissipate the assets of the companies in order to deprive Ardith of her rights as wife. She sought an order restraining Roger and the corporations from any activities, "EXCEPT as will permit the defendants to conduct their business activities in a manner which is customary, usual, and ordinary in businesses of like nature." By court order entered early in the state litigation the corporations were prohibited from paying investigative expenses. By mid-1967 Roger had incurred approximately $600,000 of legal fees and legal expenses, at least $350,000 of which was spent to investigate the marital history and infidelities of his wife and the paternity of the children. On August 28, 1967, Judge Geo. Howard Wilson was assigned to take over the state court litigation. Shortly thereafter, on September 7, 1967, Ardith filed a motion to oust Roger from the management of the companies and install herself in his place, making various allegations of his incompetency based upon behavior set out in the motion. This was taken under advisement by the court and finally ruled upon, in Roger's favor, in the final settlement of the divorce proceedings on December 19, 1968. Commencing November 16, 1967, the state court issued a series of orders requiring legal fees and expenses to be paid one-fourth by each of the three corporations and Roger. The ruling was ultimately extended to all litigation expenses, including reimbursement of Roger for the more than $600,000 he paid prior to the first such order. These orders were Sua sponte, apparently without request from or consultation with Roger's attorneys, and were not resisted by Ardith's counsel. According to the proffered affidavit of the state court judge the rulings were based upon his conviction that this "was not just a divorce action but that it included a conspiracy to take over control of these Dolese companies," and the companies "were deeply involved and were fighting for their corporate lives."

It is the one-fourth share of the legal and other expenses of this litigation paid by each of the companies that they seek to deduct as "ordinary and necessary" under Internal Rev. Code of 1954 (IRC) § 162. The United States claims they are not deductible expenses and their payment constituted constructive dividends to Roger.

The other issue in the case concerns the practice, commenced after 1948 according to the deposition of Roger, of having The Dolese Company or the Dolese Concrete Company pay most of his personal living expenses, treating the advances as loans to Roger and accounts receivable on the corporations' books. The charges were offset by payments made by Roger from time to time. Through 1964 no interest was paid on the balances owed. Thereafter notes were given by Roger once each year, carrying 4% Interest and a specified due date one year ahead. When due the interest was paid and a new note executed for the balance then owing, including new advances. The sums involved were very substantial; net advances after offsets were $187,436 in 1966, $151,761 in 1967, and $150,066 in 1968. The total balances owed to the companies were $1,817,133 as of March 31, 1968. The advances, summarized in exhibits in the record, include support money for Ardith, children's educational expenses, expenses and improvements on the home, professional fees, cars, personal taxes, insurance, travel and many miscellaneous expenses. While the evidence indicates that Roger had only about $125,000 per year gross personal income in these years the books of the corporations show substantial credits given him from time to time against the loans. These credits allegedly totaled $2.2 million since 1949. What the sources of these repayments were is unclear in the record, although approximately $450,000 came as a result of the court order requiring the three companies to reimburse Roger for expenses incurred in the litigation. The sum of $599,900 was credited to the account one day in 1970, but withdrawn again on the same day. Apparently an interest in a rock quarry owned by Roger was transferred to a company and utilized as an offset on one other occasion. It appears to be undisputed that the net worth of Roger Dolese was at least $10 million during these years, and that he did not have sufficient assets outside the stock interests in the three companies to liquidate his debts. But he did have personal borrowing power sufficient to procure a loan from a bank to pay off the entire balance of these debts. Allegedly Dolese Bros. Co. was liquidated to provide assets with which Roger intends, when this tax litigation is finished, to liquidate his accounts payable to the companies.

The United States contends the advances treated as accounts receivable by the companies are in fact constructive dividends to Roger, and are not properly characterized as loans. At all times the corporations have had earnings and profits sufficient to support the government's position if it is legally correct.

In resolving the questions on appeal we must keep in mind that summary judgment was granted by the trial court. Therefore, we must reverse unless the government's position is unassailable on any view of the facts.

I

On the issue of deductibility to the corporations of these litigation costs as ordinary and necessary business expenses, the government relies principally upon the "origin of the claim" test set forth in United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963). It asserts that the litigation expenses were obviously incurred in connection with the divorce of Roger and Ardith Dolese and do not arise out of the corporations' profit-seeking activities. Gilmore involved a divorce action in which the husband's assets were almost entirely in the stock of three essentially wholly-owned corporations, and nearly all of his income was derived from salaries and dividends paid by them. He successfully fought to retain his ownership and control. In most respects it is factually close to the instant case, except in Gilmore the corporate owner attempted to deduct divorce fees and expenses on his personal tax return. The Supreme Court rejected the contention that these expenses were ordinary and necessary in the conservation of property held for income, stating that the deductibility of litigation costs depends upon whether the claim "Arises in connection with the taxpayer's profit-seeking activities," not upon the "Consequences that might result to a taxpayer's income-producing property from a failure to defeat the claim . . .." 372 U.S. at 48, 83 S.Ct. at 629 (emphasis in original).

In dictum the Court rejected deductibility to the business entity itself.

Had this respondent taxpayer conducted his automobile-dealer business as a sole proprietorship, rather than...