Mahoning Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Steckel)

• Decision Date: 21 June 1956
• Docket Number: Docket No. 51099.
• Citation: 26 T.C. 600
• Parties: ESTATE OF A. P. STECKEL, DECEASED, MAHONING NATIONAL BANK, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

26 T.C. 600

ESTATE OF A. P. STECKEL, DECEASED, MAHONING NATIONAL BANK, EXECUTOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 51099.

Tax Court of the United States.

Filed June 21, 1956.

Barring Coughlin, Esq., for the petitioner.

James F. Kennedy, Jr., Esq., for the respondent.

Certain attorneys rendered services for decedent prior to 1941, and in 1948 they obtained a judgment against decedent for the value of their services plus expenses. In 1945 decedent had disposed of his stock in a corporation, and in 1949 he became entitled to a partial payment for this stock. The court ordered that $225,000 of the amount to which decedent was entitled be paid to the clerk of the court as security pending decedent's appeal of the judgment for the attorneys. The judgment was affirmed, and in 1951 the sum of $190,355.82 was paid to the attorneys in satisfaction of their judgment and the balance of the $225,000 was paid to the decedent. Held, at least $33,000 of the judgment represented that portion of the cost of the attorneys' services and expenses which was a capital expenditure allocable to the stock for which the $225,000 was paid. Held, further, decedent realized capital gain in 1949 in the amount of $192,000. Held, further, any capital losses on other stock and nonbusiness expense deductions to which decedent was entitled on the payment of the judgment in 1951 cannot be related back to 1949.

Respondent determined a deficiency in the income tax of A. P. Steckel for the year 1949 in the amount of $73,154.72. The disallowance of a deduction for a particular contribution is not contested. The issues for decision are whether the Commissioner correctly determined:

1. That A. P. Steckel realized additional long-term capital gain in 1949 in the approximate amount of $225,000 when said sum, to which Steckel was entitled in payment for common stock, was paid to the clerk of the District Court as security pending the appeal of a judgment against A. P. Steckel; and

2. That deductions to which A. P. Steckel was entitled upon the payment of the judgment in 1951 cannot be related back to 1949.

FINDINGS OF FACT.

The stipulated facts are so found.

Petitioner is the executor of the Estate of A. P. Steckel (hereinafter referred to as Steckel) and has been substituted herein for Steckel, the original petitioner, who died on August 19, 1954. Steckel resided in Youngstown, Ohio, and filed his income tax return for the taxable year 1949 with the collector of internal revenue for the eighteenth district of Ohio.

In 1926 the Cold Metal Process Company (hereinafter referred to as Cold Metal) was formed and Steckel acquired 600 of the 2,000 shares of capital stock issued. Cold Metal was organized to exploit certain inventions of Steckel relating to the hot and cold rolling of metals.

Until 1934 Steckel was the president of Cold Metal. In that year Steckel became involved in sharp and bitter disagreements with a majority of the board of directors of Cold Metal and was involuntarily removed as an officer of that corporation.

In 1935, Steckel employed the law firm of Lurie & Alper to represent him in a case pending in United States District Court for the Northern District of Ohio, Eastern Division, entitled F. du Pont Thompson, et. al. v. The Cold Metal Process Company, et. al., in which Steckel and the other directors of Cold Metal were defendants. At a conference in February 1935, Lurie & Alper first discussed in detail with Steckel the terms of their employment. At that time Steckel explained that his only assets consisted of his stock in Cold Metal. He represented that if he could retain his stock interest by avoiding or deterring money judgments against him and if the assets of Cold Metal were not wasted or diverted by the dominant stockholders of Cold Metal, his stock would be worth in time as much as several million dollars. He employed Lurie & Alper to represent him in any litigation involving Cold Metal and his interest therein, and to render further services directed at preserving and enhancing his stock interest in the company. Steckel informed them that under existing conditions he would be unable to pay for their services, and that their compensation would be contingent upon his ability to retain the stock and the stock becoming valuable.

Lurie & Alper, and another attorney whom they engaged to act as trial counsel, performed various legal services for Steckel from the time of their employment until 1941. They represented him in the above case of Thompson, et al. v. Cold Metal Process Company, et al., which was a suit by minority stockholders of Cold Metal requesting that the directors be required to account for breaches of their duty and that a receiver be appointed for Cold Metal. In that case the court held that the directors, other than Steckel, had been guilty of breaches of duty and ordered those directors to repay Cold Metal the moneys of which it had been wrongfully deprived. While Steckel was technically a defendant in this action, the suit had been brought by nominal plaintiffs, inspired by Steckel, and Steckel's counsel carried the principal trial burden in establishing the plaintiff's case.

The above counsel also represented Steckel in another action brought by the Stanford Slag Company to force Steckel to sell 160 shares of his Cold Metal stock in return for the sum of $56,000. In 1938 while the appeal of a decree against Steckel was pending in this action, Steckel decided to accept the Standard Slag Company's offer, and he delivered the 160 shares in return for $56,000.

At the time of the employment of Lurie & Alper, Cold Metal had obtained a money judgment against Steckel in the amount of $18,364.15 in the Common Pleas Court. Lurie & Alper, appealed this case for Steckel as it was desirable in the protection of Steckel's interest that, if possible, this judgment be reversed and in any event that no levy of execution should be made to enforce it against Steckel's stock interest in Cold Metal. The judgment was finally affirmed by the Supreme Court of Ohio in 1938.

The above attorneys also performed additional services for Steckel by attending directors' meetings and studying financial statements of Cold Metal, by attempting to obtain financing for Steckel and for Cold Metal, and by attempting to settle the controversy between Steckel and the other directors.

On October 23, 1936, Steckel had transferred 420 shares of Cold Metal stock to the Peoples-Pittsburgh Trust Company, which later became the Peoples First National Bank of Pittsburgh (hereinafter referred to as the Pittsburgh Bank), under an escrow depository agreement. The agreement provided that the stock would stand in Steckel's name on the books of the corporation and Steckel would retain the right to all dividends. However, under the agreement he could transfer the beneficial interest in any of the shares, and if all of the stock was sold by Steckel the proceeds would be distributed among the beneficial owners. At that time Steckel had transferred to others the beneficial interest in 21 shares.

In 1940 Cold Metal paid a dividend of $1,325 per share. Additional dividends in the aggregate amount of $1,126 per share were paid in the years 1941 to 1944.

On December 28, 1945, the Pittsburgh Bank held 300 shares of stock of Cold Metal under the above escrow agreement. Steckel was the beneficial owner of 185 of the shares and was entitled to one-half of the profit on 18 additional shares. On said date one of the stockholders of Cold Metal, the Union National Bank of Youngstown, Ohio, trustee of the Leon A. Beeghly Fund (hereinafter referred to as the trustee), entered into a separate contract with each of the other stockholders of Cold Metal, including Steckel. Under the contracts the trustee acquired the shares of all of the other stockholders. It acquired the 300 shares standing in Steckel's name and held in escrow by the Pittsburgh Bank for $5,000 per share. The contract provided that the trustee would pay $200 per share upon delivery of the stock certificates. It further provided that Cold Metal would be dissolved and that the balance of $4,800 per share would be paid if and when certain funds were received by the trustee upon the recission or modification of certain court and administrative orders. The contract stated that when the funds became available they would be applied first to the payment of an additional $1,800 per share to the stockholders receiving less than $6,000 per share (such as Steckel), and said stockholders would be paid the balance of the stipulated purchase price ($3,000 per share in the case of Steckel) after an additional $800 per share had been paid to those stockholders who were selling their stock for more than $6,000 per share.

During 1948 Steckel gave away his right to the proceeds from the deposition of 24 of the 185 shares of Cold Metal stock of which he had been the sole beneficial owner at the time he had entered into the contract of December 28, 1945.

In 1946 Lurie & Alper had not been paid for the legal services they had rendered Steckel. On November 14, 1946, they filed suit against Steckel in the District Court alleging that the reasonable value of their services was $300,000 and that they had incurred expenses on Steckel's behalf in the amount of $7,225.80. They prayed that they receive judgment against Steckel in the amount of $307,225.80, together with interest thereon at the rate of 6 per cent per annum from the 15th day of January 1941, and for the costs of the action. In his answer to the complaint Steckel denied that he was indebted to Lurie & Alper and alleged that their services were of no benefit to him. The District Court in its opinion, dated May 28, 1948, found that the complainants had spent a total of 1,539 1/4 days on Steckel's behalf, that ‘a fair per diem allowance for an average of all the days would be $100,‘ and that the complainants were entitled to...