Marcello v. CIR

• Decision Date: 29 August 1967
• Docket Number: No. 23152,23153.,23152
• Citation: 380 F.2d 499
• Parties: Carlos and Jacqueline MARCELLO et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Joseph, Jr. and Anastasia MARCELLO, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

380 F.2d 499 (1967)

Carlos and Jacqueline MARCELLO et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Joseph, Jr. and Anastasia MARCELLO, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 23152, 23153.

United States Court of Appeals Fifth Circuit.

June 16, 1967.

Rehearings Denied August 29, 1967.

COPYRIGHT MATERIAL OMITTED

deQuincy V. Sutton, Meridian, Miss., for petitioners.

Mitchell Rogovin, Asst. Atty. Gen., Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Donald W. Williamson, Jr., Attys., Dept. of Justice, Lester Uretz, Chief Counsel, IRS, Glen E. Hardy, Atty., IRS, Washington, D. C., for respondent.

Before RIVES, COLEMAN and GODBOLD, Circuit Judges.

RIVES, Circuit Judge:

The taxpayers seek a review of a Tax Court decision holding each of them liable for deficiencies in income tax and some of them liable for penalties pursuant to Sections 6651 (a) and 6653(a) of the 1954 Internal Revenue Code.¹ There are seven distinct and unrelated issues involved. To facilitate our disposition of this case, we take up each matter separately.

I. Recognition of Gain on the Sale of Carlos and Jacqueline Marcello's Residence.

Carlos Marcello purchased a residence in July 1946 for $42,500 and sold it in December 1958 for $101,963.85. An Act of Sale, dated March 31, 1958, reflects that Louisa Marcello, Carlos' mother, purchased in her name a residence in Metairie, Louisiana, for $110,000. Louisa in a notarized affidavit deposed that the title to this property was placed in her name for convenience only; that the property was bought by and for the account of Carlos Marcello; that Carlos paid the purchase price; that she agreed to bind herself, her heirs, executors and administrators to convey such property to Carlos, his heirs, executors and assigns whenever required to do so; and that, in making such conveyance to Carlos, no consideration is to be paid though one might be stipulated and declared to be paid in the deed of conveyance.

Section 1034(a) of the 1954 Internal Revenue Code, 26 U.S.C.A. § 1034(a), provides that if within a year before or after the sale of a taxpayer's residence, the taxpayer purchases and uses a new residence, the gain on the sale of the old residence to the extent of the cost of purchasing the new residence is not recognized.²

The Tax Court held that Carlos and Jacqueline failed to prove that they purchased the new residence. Though the Tax Court found that Carlos made periodic mortgage payments for the new residence, it did not find that these payments were for his purchase of the new house. Neither was there a finding that Carlos and Jacqueline made an initial down payment, as claimed by the taxpayers. The Commissioner suggests that the mortgage payments could either have been means of paying rent to Louisa or repayments of a loan.³ We do not speculate on the reasons Carlos made these mortgage payments. We do agree, however, with the Tax Court that within the meaning of Section 1034 Carlos was not the purchaser of the new residence.

The aim of Section 1034 is not to ignore the realization of gain but only to postpone recognition thereof and to defer the tax.⁴ A taxpayer is not entitled to the postponement benefit unless he purchases a new residence within the subscribed time period. Congress intended to enable homeowners to use the sales proceeds from a sale of the old residence for buying their own home. The purpose of Section 1034 was not to permit a taxpayer to re-invest the proceeds from the sale of his home in the home of another person without recognizing for federal income tax purposes the gain realized by the sale.⁵ The clear statutory language requires that a new residence be purchased and used by the taxpayer. That the residence must be owned by the taxpayer is made evident by the exception in subsection (g) of Section 1034 permitting either the husband or the wife to hold the residence in his or her name.⁶ If a third party owns the residence, the purchase requirements are not met.⁷

II. Interest Expenses of Carlos and Salvador's Motel.

Carlos Marcello and Salvador Marcello, along with two other persons, operated as partners the Town and Country Motel. The Commissioner disallowed certain deductions taken by the partnership and thereby increased the distributive share to Carlos and Salvador.

The Tax Court, applying the so-called Cohan⁸ rule, found that the partnership was entitled to deductions for interest expenses in the amount of $5,000 for each taxable year ending January 31, 1956, 1957, 1958 and 1959.⁹ Specifically, the Tax Court found that the taxpayers did not support their claim for the full amount deducted:

"While there are a number of loans made by the partnership which actually relate to its business, there is a failure of proof in establishing a connection between a particular interest payment, the loan on which it is being made, and whether or not that loan is connected with the business of the motel. Even as to those loans which were shown to be related to the motel\'s business, we are unable to ascertain the exact amounts of interest paid during the years involved."

We find that the Tax Court made a correct estimate of what interest was attributable to partnership borrowings.¹⁰

III. The Section 6651(a) Penalty Assessed Against Carlos and Jacqueline Marcello.

Carlos and Jacqueline Marcello filed their 1959 joint tax return late, thereby incurring a penalty pursuant to Section 6651(a) of the 1954 Internal Revenue Code. That section provides for a 5% penalty of the tax owed for each month or fraction thereof that the return is filed late. The Commissioner determined that the return was one month and three days late, so that the penalty is 10%. The taxpayers contend that the return was less than one month late, so that the penalty should be 5%. We agree with the Commissioner that the procrastination cost the taxpayers a two-month penalty.

As a result of a properly granted extension, Carlos and Jacqueline had until September 15, 1960, to file their 1959 joint return. They desired even more time to prepare their return. In a letter dated September 23, 1960, their local district director refused the request for a further extension, but did advise the taxpayers that the return would be considered timely filed if it were received by his office within ten days of the date of the letter. The return was not filed until October 18, 1960, one month and three days after the September 15 filing date.

The taxpayers contend that the ten-day grace period extended their filing date to October 3. They assume that the district director's letter was an extension of time for filing a return within the meaning of Section 6081(a). Their assumption is wrong. The director expressly refused to grant an extension beyond September 15. Exercising his discretion, he, in effect, said that he would not invoke the sanctions of § 6651(a) if the return was filed within ten days. The taxpayers, though not adhering to the conditions of that offer, still wish to reap its benefits. This we do not permit. The logical extension of the taxpayers' argument leads to an unacceptable result. Under their theory, the filing became overdue as of October 3. They thereby would obtain an eighteen-day extension.¹¹ Surely the district director did not intend or contemplate such a result. We find no such extension to be warranted by the facts. In short, the taxpayers have not shown that their failure to file was due to reasonable cause.¹²

IV. Carlos Marcello's Attorney Fees.

Carlos and Jacqueline deducted certain attorney fees as expenses within the meaning of Sections 162(a) and 212 of the 1954 Internal Revenue Act. The Commissioner disallowed the deductions on the grounds that the expenditures were neither business expenses nor incurred in the production or collection of income.

The involved fees were paid by Carlos in 1957 and 1958 in resisting deportation. The taxpayers claim that these fees were directly related to Carlos's numerous and rather intricate business ventures in Louisiana. In their brief, the taxpayers insinuate that the deportation proceedings were motivated by alleged illegal activities committed by Carlos as a partner in one of his sundry businesses. There is no evidence in the record, however, that the deportation action originated out of any business or income-producing transactions.¹³ When a taxpayer claims a Section 162(a) deduction, he has the burden to prove that the expense in question has a business origin.¹⁴ If the expenses are of a personal nature, there may be no deduction pursuant to Section 162(a).¹⁵

There is a further contention that deportation was vigorously resisted not because Carlos enjoyed the comforts and sanctity of the United States, but so that he could personally operate his businesses and conserve his income-producing property. The taxpayer's argument has no merit. In Commissioner of Internal Revenue v. Tellier, 1966, 383 U.S. 687, 689, 86 S.Ct. 1118, 16 L.Ed.2d 185, the Supreme Court, quoting from Gilmore v. United States, 1962, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570, noted that "origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer is the controlling basic test of whether the expense was `business' or `personal' within the meaning of § 162 (a)." (Emphasis added.) If the taxpayers were correct, then even expense incurred in resisting a murder charge could be a business expense on the theory that incarceration would take the defendant away from his business location. We refuse to travel to such a destination.¹⁶

V. Carlos and Jacqueline Marcello's Personal Expenses.

The Commissioner disallowed as deductions numerous expenses incurred by Carlos and Jacqueline Marcello on the ground that they were not business expenses. We agree with the Tax Court's conclusion that "There is nothing upon which...