Hughes v. United States
| Decision Date | 26 July 1961 |
| Docket Number | Civ. A. No. 2815. |
| Citation | 196 F. Supp. 37 |
| Parties | W. R. HUGHES and Lilla Long Hughes, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Eastern District of Texas |
Allen E. Pye, E. Taylor Moore, Tyler, Tex., for plaintiffs.
Joe Tunnell, U. S. Atty., Lloyd W. Perkins, Asst. U. S. Atty., Tyler, Tex., William M. Ravkind, Washington, D. C., for defendant.
This is an action for refund of Federal income taxes assessed against and paid by the Plaintiffs, husband and wife, for the years 1954, 1955 and 1956. The Court has jurisdiction under the provisions of 28 U.S.C.A. § 1346(a). The pertinent facts, most of which were stipulated, are as hereinafter stated.
Plaintiffs were married on August 18, 1931, and have never been divorced. Plaintiffs timely filed their joint individual income tax returns for each of the three years involved herein and paid the taxes shown due thereon. The Commissioner of Internal Revenue, hereinafter referred to as Commissioner, determined that additional taxes in the amount of $21,021.90 were due for the year 1954, which amount, together with interest in the amount of $4,774.85, was paid by Plaintiffs on or about January 27, 1959. For the year 1955 the Commissioner determined that additional taxes in the amount of $18,885.54 were due. Said additional taxes, together with interest, were paid by the Plaintiffs as follows: on September 17, 1958, taxes of $1,352.20 plus interest of $197, and on January 27, 1959, taxes of $17,533.34 plus interest of $2,930.47. The Commissioner determined that for the year 1956 additional taxes in the amount of $7,784.22 were due. These additional taxes, with interest, were paid by Plaintiffs as follows: on September 17, 1958, taxes of $7,334.42 plus interest of $628.20, and on January 27, 1959, taxes of $449.80 plus interest of $48.19. Plaintiffs timely filed claims for refunds of the additional taxes and interest paid, and each of said claims was disallowed and thereafter Plaintiffs timely instituted this suit.
The additional taxes assessed against the Plaintiffs were assessed by the Commissioner because he disallowed deductions made by Plaintiffs for attorneys' fees and related expenses paid by W. R. Hughes in connection with two divorce actions instituted by Mrs. Hughes and hereinafter mentioned.
On August 28, 1953, the Plaintiff, Lilla Long Hughes, instituted a suit against the Plaintiff, W. R. Hughes, seeking a divorce. In her petition she alleged that she and W. R. Hughes owned a community estate consisting of real and personal property of a value in excess of a million dollars. In addition to praying for a decree of divorce, Lilla Long Hughes prayed that W. R. Hughes be required to return into the court an inventory and appraisement of all of the property accumulated by him since August 18, 1931; that a writ of injunction issue restraining the said W. R. Hughes from disposing of any part of said property or from contracting for any debts on account thereof; that upon the decree of divorce being granted there be an equitable partition of the community property of W. R. Hughes and herself. On August 28, 1953, the District Court of Gregg County entered in said cause an order ordering W. R. Hughes to file within 20 days a complete inventory, under oath, of all property, real, personal or mixed, within his possession or under his control which had been accumulated since August 18, 1931. In that proceeding Lilla Long Hughes, through her attorneys, contended that practically all of the property, both real and personal, acquired by W. R. Hughes after August 18, 1931, was community property. On April 8, 1954, that action or proceeding, on motion of Lilla Long Hughes, was dismissed.
On August 25, 1954, Lilla Long Hughes instituted another suit in the District Court of Gregg County, Texas, seeking a divorce from W. R. Hughes and a judgment for her one-half of all of the community property of W. R. Hughes and herself. In that action she further prayed for the appointment of an auditor to audit the records of W. R. Hughes and herself and for a restraining order restraining W. R. Hughes from selling, transferring, withdrawing, encumbering or otherwise hypothecating any of the property, real, personal or mixed, in his possession and under his control. On August 25, 1954, the restraining order as prayed for was granted. In the second action Lilla Long Hughes contended as she did in the first divorce action that practically all of the property, real and personal, acquired by W. R. Hughes subsequent to her marriage to W. R. Hughes was community property of W. R. Hughes and herself. On September 14, 1956, the second divorce action was dismissed on motion of Mrs. Hughes.
The Plaintiff, W. R. Hughes, did not oppose either of the above mentioned divorce actions insofar as Mrs. Hughes sought a divorce, but he did oppose most strenuously Mrs. Hughes' claims and contentions that most or all of the property acquired by W. R. Hughes subsequent to his marriage to Mrs. Hughes was community property.
As a direct result of the two divorce actions instituted against him by Mrs. Hughes, W. R. Hughes incurred and paid attorneys' fees and related expenses during the year 1954 in the amount of $33,877.50, during the year 1955 in the amount of $26,200 and during the year 1956 in the amount of $10,010.50. Of said attorneys' fees and related expenses incurred and paid by W. R. Hughes the following amounts were allocated to the property rights issue that was presented in the two cases: for the year 1954 the sum of $33,067; for the year 1955 the sum of $23,580 and for the year 1956 for the sum of $9,009.45. The parties stipulated that these amounts so allocated to the property rights issue were reasonable and proper. In the income tax returns filed by the Plaintiffs for the years in question the Plaintiffs claimed as deductions said attorneys' fees and related expenses allocated to the property rights issue. The Commissioner disallowed these deductions, and it is because of such disallowances that the additional income taxes, with interest, were paid by the Plaintiffs for those years, and it is those additional taxes and interest that Plaintiffs seek to recover herein.
The Plaintiffs contend that said attorneys' fees and related expenses paid by Mr. Hughes were ordinary and necessary expenses incurred for the production or collection of income or for the management or conservation of property held for the production of income within the meaning of Section 212 of the Internal Revenue Code of 1954 (26 U.S.C.A. § 212). The Defendant, on the other hand, contends that said fees were either nondeductible personal expenditures or nondeductible capital expenditures.
During the pendency of the divorce actions there was standing in the name of W. R. Hughes a vast amount of properties which had been acquired after his marriage to Mrs. Hughes. Among these properties were some corporate stocks, a number of saving and loan certificates and a rather substantial amount of municipal bonds, but the bulk of the property standing in the name of Mr. Hughes were royalty interests in oil and gas mineral estates. Most of these properties were income producing. At the time of his marriage to Mrs. Hughes, Mr. Hughes owned certain properties, including royalty interests in oil and gas mineral estates, which properties during the period from August 18, 1931, to June 30, 1956, produced income to W. R. Hughes in excess of $1,500,000. The major portion of the properties standing in the name of W. R. Hughes at the time of the divorce actions and that was acquired by him after his marriage to Mrs. Hughes was the separate properties of Mr. Hughes. The income on that separate property from August 18, 1931, to June 30, 1956, exceeded the sum of $3,800,000. During the same period of time the income from properties which constituted the community property of Mr. and Mrs. Hughes was only the sum of $456,489.82.
Under the provisions of Articles 4613 and 4614, Vernon's Texas Civil Statutes, Annotated, all property of a spouse, both real and personal, owned or claimed by him or her before marriage and acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired, is the separate property of the spouse. All property acquired by either husband or wife during marriage, except that which is the separate property of either, is the community property of the husband and wife. Article 4619, Vernon's Texas Civil Statutes, Annotated. As to community property the rights of husband and wife are equal, i. e., title to such property is one-half in the husband and one-half in the wife, and that is so even though the legal title may be vested in either the husband or the wife.1
It is a well established rule of law in Texas that all property acquired after and during marriage, whether in the name of both spouses or in the name of one spouse is presumed to be...
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Gilmore v. United States
...of capital assets", Spangler v. C.I.R., supra; and thus they could be designated as capital expenditures. Accord, Hughes v. United States, 196 F.Supp. 37 (E.D. Texas, 1961). Of course, there are the usual problems of fact in ascertaining that attorneys' fees were primarily expended to prote......