Howard v. CIR, 30475.

• Decision Date: 21 May 1971
• Docket Number: No. 30475.,30475.
• Citation: 447 F.2d 152
• Parties: Lucille HOWARD, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

447 F.2d 152 (1971)

Lucille HOWARD, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 30475.

United States Court of Appeals, Fifth Circuit.

May 21, 1971.

Robert O. Rogers, Palm Beach, Fla., for petitioner-appellant.

Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Bennett N. Hollanders, and William K. Hogan, Attys., Tax Division, U. S. Dept. of Justice, Martin K. Worthy, Chief Counsel, Daniel J. Boyer, Internal Revenue Service, Washington, D. C., for respondent-appellee.

Before WISDOM, Circuit Judge DAVIS^*, Judge, and GOLDBERG, Circuit Judge.

WISDOM, Circuit Judge.

This case involves the application of Lyeth v. Hoey, 1938, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, and its progeny. The question is whether money received by the taxpayer in a compromise settlement in return for joining in a sale of real estate by her one-time husband is to be treated as payment for dower rights, and thus not taxable, or whether it is to be treated as ordinary income.

In May 1942 Lucille Howard, the taxpayer, married Vince Nelson, a resident of Jupiter, Palm Beach County, Florida. In October 1943 Nelson, then on active duty in the Military Service, filed suit for divorce in Martin County, Florida. He alleged her address to be c/o The 19th Hole, Lake Park, Palm Beach County, Florida. Palm Beach County adjoins Martin County on the south. The Sheriff of Palm Beach personally served Lucille. In her answer in this action, filed in January 1944, the taxpayer admitted that her address as alleged was correct. However, when called as a witness in the May 1969 Tax Court hearing she testified that her permanent place of residence was Juna Plantation, Juno, Palm Beach County, Florida. The parties dismissed the 1943 Martin County divorce proceedings before the court took any action.

Barely two months later, Nelson instituted suit for divorce in St. Lucie County, Florida. St. Lucie County adjoins Martin County on the north. At this time Nelson was in the Army. Rather than seeking personal service, Nelson alleged that after diligent search and inquiry he was unable to discover Lucille's place of residence. Therefore he sought service by mail to Lucille's birthplace in Lockport, New York, and by publication in St. Lucie County. Lucille, who still resided in Palm Beach County, Florida, received no actual notice of the proceedings. On her default, the court awarded Nelson a divorce September 22, 1944.

Lucille received her first notice of the divorce by a form sent to her by the Army notifying her that her family allotment had been discontinued. This notice was addressed to her in Jupiter, Palm Beach County, Florida. She testified that she actually received the notice at the Lake Port, Florida, post office. The reason stated on the form for termination of the allotment was "Soldier Divorced." Lucille thereupon went to the Army camp in an attempt to obtain information about the divorce. She could obtain no information there, but she testified that she believed that the Army would not have discontinued her allotment unless it had investigated the matter and determined that the divorce was valid. From this point on the taxpayer and Nelson travelled different paths for twenty years.

In November 1947 Lucille married Edgar Charles Kingsbury in Folkston, Georgia. Two years later they were divorced. Later, she lived with a Mr. Howard and became pregnant. Howard, an attorney, advised Lucille that they could not marry because she was still married to Nelson. Lucille consulted several attorneys to obtain an opinion on this issue. They advised her that it would be necessary to conduct an extensive investigation since she did not know where the divorce had been granted. Not having the funds to pursue such an investigation, Lucille did nothing further.

On his own path Nelson, who never remarried, acquired several large tracts of land in Florida, some of which was mortgaged. In 1964 Nelson entered into a contract to sell a portion of his property to Bessemer Properties, Inc., for $322,350 in order to settle his debts and to avoid a forced sale of all his property.

At this point the former spouses' paths recrossed. R. C. Alley, the attorney for the purchaser of the property, learned that Nelson had been married and examined the divorce proceedings. He concluded that there was a strong possibility that Nelson's divorce was invalid because the service by publication instead of personal service appeared to have resulted from fraudulent statements by Nelson.¹ Bessemer then requested a release of dower as a condition of closing the sale.

When Lucille was asked to sign a release of dower, she agreed to join in the deed of sale in return for $30,000 cash and real estate worth $10,000. The agreement was carried out by all parties. Bessemer paid the $322,350 in return for the lots deeded by Nelson and Lucille. She received the agreed upon value. And Nelson, after paying off his indebtedness retained a net of about $63,000. He died in 1968 and his testimony was not available at the Tax Court hearing.

Lucille did not include the $40,000 in her income for 1965. The Commissioner of Internal Revenue determined a deficiency in her income tax on the ground that the amount should have been included in her income. Lucille petitioned the Tax Court for a redetermination of the deficiency. The Tax Court upheld the position of the Commissioner and Lucille Howard appealed to this Court.

The Tax Court based its decision on alternative reasoning. 54 T.C. 855 (1970). First, it concluded that Lucille had no dower rights under Florida law because there was no fraud and because she waited so long to raise the issue of her rights. Second, it held that even if Lyeth v. Hoey applies to this case there was no bona fide compromise because there was no color of merit to Lucille's claim, no litigation was threatened, and the only reason that Nelson agreed to pay her $40,000 was that he was forced by the threat of a mortgage foreclosure to sell his property quickly.

We reverse.

I

The Tax Court concluded, first, that the proceeds were taxable to Lucille because as a matter of state law she had no dower rights to release. The court found her claim for a redetermination without merit because, she "has not established to our satisfaction that she would be successful in her contention that she was the wife of Nelson in April 1965 under Florida law." In relying on a finding as to whether Lucille had a successful claim for dower under Florida law, the Tax Court necessarily rejected the applicability of Lyeth v. Hoey.

In Lyeth v. Hoey, heirs attacked the decedent's will, which gave the bulk of her estate to a trust for religious purposes, on the ground of the decedent's testamentary capacity. If the will had been voided by the courts, the heirs would have taken the entire estate by intestacy. The heirs and those named in the will reached a compromise. The Commissioner of Internal Revenue asserted that the proceeds received by the heirs was not within the exception from income for proceeds received by bequest. The Court ruled that the proceeds were not taxable as income to the heirs because they did fall within this exception. The Court said

Petitioner was concededly an heir of his grandmother under the Massachusetts statute. * * *

There is no question that petitioner obtained that portion, upon the value of which he is sought to be taxed, because of his standing as an heir and of his claim in that capacity.

305 U.S. at 195-196, 59 S.Ct. at 159, 83 L.Ed. 125.

The Tax Court and the Commissioner on appeal find Lyeth inapplicable because there the taxpayers' standing as heirs was not challenged while here petitioner's status as wife has been contested. With deference, we think that such reasoning misses the point of Lyeth. In Lyeth the Court established the doctrine that in tax matters the characterization of proceeds received in compromise should be determined according to the nature of the claims in settlement of which the proceeds were received. It is artificial to say that any particular aspect of the basis for the claim (e. g. status) must be conceded. Thus in Ridge Realization Corp. v. C.I.R., 1966, 45 T.C. 508 what was compromised was a claim by stockholders against former corporate officers alleging wrongful injury to the corporation. There was no talismanic "status" involved in that case, yet the Tax Court held that the rule of Lyeth v. Hoey applied so that "the character of the amount recovered is determined by the nature of the claims actually pressed and settled in the litigation." See Raytheon Production Corp. v. C.I.R., 1 Cir. 1944, 144 F.2d 110.

We conclude that this case is controlled by Lyeth v. Hoey and its progeny. The question that determines whether the proceeds received by Lucille are to be treated for tax purposes as property received for release of dower rights is not whether in fact Florida would recognize dower rights in Lucille but rather whether there was a good faith compromise concerning her claim to dower rights.

II

The next question is whether the Tax Court erred in holding that there was no bona fide compromise of claims regarding dower rights. The court came to this conclusion after determining that there was no color of merit to Lucille's claim, that no litigation was threatened in support of the claim, and that Lucille received payment only because Nelson was in financial distress and had no time to pursue any other course of action.

We think the Tax Court erred in two respects: (a) there was color of merit to Lucille's claim; and (b) the proper standard for judging the bona fides of a compromise for tax purposes is not whether the court might decide that the claim is meritorious but whether the the taxpayer in good faith thinks that the claim is meritorious.

As to the merit of the claim, there were two issues as to the validity of Lucille's claim. The first was whether Nelson had obtained the divorce by...