Matthews v. United States, 105-64.

• Decision Date: 17 April 1970
• Docket Number: No. 105-64.,105-64.
• Citation: 425 F.2d 738
• Parties: Jean Flagler MATTHEWS (formerly Jean Flagler Mook, formerly Jean Flagler Gonzales, formerly Jean Flagler DeFina), individually, and as Executrix of the Estate of Ricardo C. Gonzales, deceased v. The UNITED STATES.
• Court: U.S. Claims Court

425 F.2d 738 (1970)

Jean Flagler MATTHEWS (formerly Jean Flagler Mook, formerly Jean Flagler Gonzales, formerly Jean Flagler DeFina), individually, and as Executrix of the Estate of Ricardo C. Gonzales, deceased v. The UNITED STATES.

No. 105-64.

United States Court of Claims.

April 17, 1970.

William J. Moss, New York City, attorney of record, for plaintiffs. John Karl Bouman and Cadwalader, Wickersham & Taft, New York City, of counsel.

Roger A. Schwarz, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM.

This case was referred to Trial Commissioner Louis Spector with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a) since September 1, 1969, Rule 134(h). The commissioner has done so in an opinion and report filed on August 22, 1969. Exceptions to the commissioner's opinion, findings and recommended conclusion of law were filed by both parties and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court is in agreement with the opinion and recommendation of the commissioner, with modifications, it hereby adopts the same, as modified, as the basis for its judgment in this case as hereinafter set forth.^* Therefore, plaintiff is not entitled to recover with respect to Count I of the petition and to that extent the petition is dismissed. Plaintiff is entitled to recover with respect to Count II of the petition and judgment is entered for plaintiff thereon with the amount of recovery to be determined in further proceedings pursuant to Rule 131(c) (2).

Commissioner Spector's opinion, as modified by the court, is as follows:

Plaintiff-taxpayer¹ brings this action for the recovery of federal income taxes plus deficiency interest heretofore paid by her in the amount of $13,955.49 for calendar year 1957, and in the amount of $954,336.55 for calendar year 1958,² together with statutory interest thereon and costs.

The case presents two separate issues. In Count I, the court is required to determine the proper tax treatment to be accorded the transfer of appreciated stock by plaintiff to a former husband, Joseph G. DeFina, pursuant to a written separation agreement and a related marital and property rights agreement. The transfers involved were of 1,000 shares of the capital stock of Standard Oil Company of New Jersey (hereinafter "Standard Oil") on December 4, 1957, and of 25,500 shares of the same stock on January 6, 1958. It is the position of the Commissioner of Internal Revenue that by reason of these transfers plaintiff realized a long term capital gain of $48,720.91 in 1957, and of $1,216,883.21 in 1958, in accordance with Sections 1001(a) and (b), and 61(a) (3) of the Internal Revenue Code of 1954 as amended.³

Under Count II, plaintiff claims the right to deduct under section 212 of the code, $617,000 of legal fees totaling $650,000 paid by her in 1958. The Commissioner has disallowed $584,000 of the $617,000 sought to be deducted, primarily on the ground that it is a personal expense.

Although the legal issues above summarized are unrelated, the facts underlying them do run parallel to one another at certain points. As a result, maximum understanding is perhaps better served by stating the facts narratively and chronologically rather than seeking to ascribe them separately to each count. This has been done at length in the accompanying findings of fact, and they are summarized here in the same fashion in order to provide background for this opinion.

In 1913, when she was approximately 3 years of age, plaintiff inherited about $1,000,000 worth of Standard Oil from her grandfather Henry Morrison Flagler. The latter was a partner of John D. Rockefeller, Sr., in the original Standard Oil trust and is also remembered as developer of Palm Beach, Florida, and the Florida East Coast Railroad.

During her minority, plaintiff's oil stocks were held by her father and guardian, Henry Harkness Flagler. On July 14, 1931, shortly after she attained her majority, she placed all her securities in a trust which named her father as trustee, and which was revocable only in his discretion. Because of his advancing years, in 1944 her father desired to be relieved of the management of plaintiff's oil stocks. However, since he disapproved of the manner in which she handled her financial affairs, he suggested, and she agreed, that he revoke the 1931 trust and place the corpus thereof in a so-called irrevocable trust (hereinafter the "1944 trust") designating Chemical Bank & Trust Company as trustee. The corpus of that trust consisted, in 1944, of $6,325,000 in oil securities, and $2,800,000 in other securities and cash, for a total of $9,125,000. The securities were those inherited from her grandfather, and those acquired on the investment of accrued income during her minority.

The 1944 trust provided, inter alia, that plaintiff and her family reposed special confidence in the stocks of oil companies and related concerns, and that the trustee would not incur liability by reason of its retaining, or reinvesting in, such stocks or securities. The same provision added that the trustee need not retain the oil stocks if it, in its absolute discretion, deemed it unwise to do so.

Plaintiff was settlor of the 1944 trust and entitled to receive all the income therefrom. In addition, plaintiff reserved the right to invade the principal from time to time if that income was insufficient (a) to guaranty her not less than $150,000 per annum for 10 years and $165,000 per annum thereafter; and (b) to pay all of her federal, state and local income, real estate and personal property taxes, regardless of the source of income or property being taxed. She also reserved the right to give up to 25 percent of the principal of the trust to her issue at any time after said issue had attained age 21, and she had a general, unrestricted, testamentary power of appointment of the entire remainder.

Henry Harkness Flagler, plaintiff's father, died in 1952. Prior thereto, plaintiff's income was derived solely from the 1944 trust, and from a trust under her mother's will. During the period 1944 to 1952, plaintiff on occasion found herself short of income, with the result that the trustee of the 1944 trust established a "budget" for her, scheduling payment of some of her bills. At times she was unable to stay within her budget and during the early 1950's, a few of her creditors filed suits against her.

Plaintiff and her former husband, Joseph G. DeFina, were married on February 14, 1953, in San Marino, California, this being her second marriage and his third. She had first met Mr. DeFina socially at Palm Beach, Florida, in 1951. During late 1951 or early 1952 he had offered, at the suggestion of a mutual friend, to assist plaintiff in the management of certain of her financial affairs. Mr. DeFina holds a bachelor's degree in business administration from St. John's University, Brooklyn, New York, and is licensed to teach business practices and business law under an examination given by the City of New York. He testified to having "taken three or four years of post-graduate courses in management engineering and industrial engineering systems, personnel management and all affiliated courses pertaining to management in the engineering profession." He further testified as to his work for the City of New York and as to his Army experience. He characterizes himself as "a management engineer," and as an expert in tax law.

Following her father's death in 1952, plaintiff became the income beneficiary of a trust under his will, and of two additional trusts under her mother's will. These trusts produced annual income of over $330,000 in 1953, increasing to over $700,000 in 1967. During 1945, the first full year of the 1944 trust, the total income of that trust was $357,371 of which $307,961 was from oil securities. As hereinafter described, the 1944 trust was subsequently terminated, and during 1956, the last full year of its existence, it produced income of $1,365,759 of which $1,317,420 was derived from oil securities.

Although the 1944 trust ostensibly provided, as earlier outlined, that all of plaintiff's federal, state and local income, real estate and personal property taxes were to be paid by it, regardless of the source of income or property being taxed, the trustee questioned this following the death of plaintiff's father when larger amounts of income accrued to her from other sources. The trustee advised her that this issue had been discussed with its attorneys, but that the trustee desired to have the trust instrument judicially construed. Plaintiff was understandably displeased with this development because of the historical payment of all taxes from the 1944 trust, and because she thought the construction and accounting proceeding was unnecessary.

Nevertheless, the trustee filed a petition dated October 31, 1955, in the New York Supreme Court, Dutchess County, seeking a construction of this provision of the 1944 trust. By final order dated October 23, 1956, that court concluded that the 1944 trust required the trustee to pay all plaintiff's taxes regardless of the extent to which this would require invasion of the principal. The court also required payment from the trust of $20,000 to a special guardian, $25,000 to the law firm of Cravath, Swaine & Moore, attorneys for the trustee, and $7,500 to the law firm of Cadwalader, Wickersham & Taft (hereinafter "Cadwalader"), attorneys for plaintiff in that construction proceeding.

Between 1944 and 1957, the years of existence of the 1944 trust, the trustee sold trust securities of the value of $6,929,270 and purchased securities totaling $6,186,278, an excess of sales over...