Helvering v. Stormfeltz

• Decision Date: 30 June 1944
• Docket Number: No. 12797.,12797.
• Citation: 142 F.2d 982
• Parties: HELVERING, Com'r of Internal Revenue, v. STORMFELTZ.
• Court: U.S. Court of Appeals — Eighth Circuit

142 F.2d 982 (1944)

HELVERING, Com'r of Internal Revenue, v. STORMFELTZ.

No. 12797.

Circuit Court of Appeals, Eighth Circuit.

June 3, 1944.

Rehearing Denied June 30, 1944.

Ray A. Brown, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., Robert N. Anderson, Sp. Asst. to Atty. Gen., and L. W. Post, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

E. H. Gamble, of Kansas City, Mo., for respondent.

Before GARDNER, JOHNSEN, and RIDDICK, Circuit Judges.

GARDNER, Circuit Judge.

This matter is before us on petition to review a decision of the United States Tax Court, which on redetermination of a deficiency in respondent's income tax for 1939 found no tax due.

The facts are not in dispute and were stipulated. So far as here material, they are as follows: T. W. Ballew, respondent's grandfather, died intestate in 1911, leaving respondent as one of his four heirs at law. As respondent was then a minor, a guardian of his property was appointed. In 1931, respondent, who in the meantime had reached his majority, commenced an action against his guardian and the surety on his bond, to recover money alleged to be due him from the guardian and which the guardian had embezzled or converted to his own use. The action was removed to the United States District Court for the Western District of Missouri, where it was dismissed on the ground that the complaint did not state facts sufficient to constitute a cause of action. On appeal we reversed the trial court and remanded the case for trial. State ex rel. v. Title Guaranty & Surety Co., 8 Cir., 72 F.2d 595. The action was then tried on its merits, resulting in a judgment in favor of plaintiff, which judgment on appeal to this court was modified and affirmed. Title Guaranty & Surety Co. v. State ex rel., 8 Cir., 105 F.2d 496. Judgment was finally entered in the trial court pursuant to stipulation in the sum of $229,971.56 on July 15, 1939. On that date cashier's check of the First National Bank of Kansas City, Missouri, payable to the order of respondent and his attorneys, for the amount of the judgment was issued and the judgment was thereupon satisfied. On the same date and as a part of the same transaction, by agreement between respondent and his attorneys the cashier's check was placed without endorsement with the trust department of a bank in Kansas City, Missouri.

Respondent had entered into a written contract of employment with his attorneys on February 4, 1931, whereby it was agreed that in the contemplated litigation the attorneys were to have "a fee of forty (40%) per cent of any amount realized in or from or by reason of said claims, but said fee of said attorneys is not to exceed the sum of Eighty Thousand ($80,000.00) Dollars." On October 22, 1936, a supplemental agreement was entered into between respondent and his attorneys, which fixed the proportionate part which each attorney should have in the contingent fee, and which also provided that "the fee of said attorneys is not to exceed the principal sum of $80,000.00; and upon reduction of said claim to judgment 40% of such judgment up to the sum last aforesaid shall vest in them or their estates; but if nothing is realized on said claim or judgment based thereon they shall receive nothing for their services; and no compromise of said claim is to be made without the consent of the party of the first part." On August 5, 1939, respondent and his attorneys endorsed the cashier's check for $229,971.56, and the bank paid the attorneys from the amount of said cashier's check the sum of $86,637.46, comprising the sum of $80,000, the agreed maximum attorney fees, and $6,637.46, interest on that amount from the date of judgment. The attorneys also received at the same time from the bank $13.415.84, which they had advanced as expense of litigation. There remained $129,918.26, which amount was paid by the bank from said cashier's check to the respondent.

In his 1939 income tax return respondent deducted as an expense $100,053.30, being the total of the attorney fees and expenses paid the attorneys. The commissioner determined a deficiency in his 1939 income tax, holding that he had received $93,878.59 principal and $136,092.97 interest in settlement of the judgment; that the $136,092.97 interest was income and that the attorney fees and other litigation expenses were not deductible items. On petition for redetermination the tax court held that these items were deductible as ordinary and necessary expenses paid during the taxable year under the provisions of Section 23(a) (2) of the Internal Revenue Code, as amended by Revenue Act of 1942, § 121(a), 56 Stat. 819, 26 U.S.C.A. Int. Rev.Code, § 23(a) (2).

The commissioner here contends that the tax court erroneously allowed the deductions because they were not expended for the production or collection of income, nor for the management, conservation, or maintenance of property held for the production of income within the purview of the Revenue Act of 1942.

Prior to the enactment of Section 23(a) (2), as amended by the Revenue Act of 1942, deductible expenses were confined to expenditures incurred in carrying on a trade or a business. Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783; City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121, 61 S.Ct. 896, 85 L.Ed. 1227; United States v. Pyne, 313 U.S. 127, 61 S.Ct. 893, 85 L.Ed. 1231. The amendment to the Act of 1938, Sec. 23(d), 26 U.S.C.A. Int.Rev.Code, § 23(d), was designed to effect a change in the tax exemption provision, by virtue of which certain expenses paid for non-business and non-trade purposes were nevertheless deductible. In the instant case, the tax court divided or classified the recovery made by respondent into principal or capital amounting to $93,878.59 and interest recovered, amounting to $136,092.97. This classification of the recovery reflects the basic facts as ultimately established by the judgment and would seem to be the logical method of separation.

Section 23(a) (2), as amended by § 121 (a) of the Revenue Act of 1942, provides for non-trade and non-business deductions as follows:

"In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of...