Matula v. Comm'r of Internal Revenue, Docket No. 92559.

• Decision Date: 03 September 1963
• Docket Number: Docket No. 92559.
• Citation: 40 T.C. 914
• Parties: FRANK J. MATULA, JR., AND ESTHER MATULA, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

40 T.C. 914

FRANK J. MATULA, JR., AND ESTHER MATULA, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 92559.

Tax Court of the United States.

Filed September 3, 1963.

Turner L. Smith and Joseph Sternbach, for the petitioners.

L. Justin Goldner and Aaron S. Resnik, for the respondent.

Petitioner, Frank J. Matula, Jr., secretary-treasurer of a local labor union, was tried, convicted, and sentenced for committing perjury by giving false testimony before a legislative committee in 1956 in violation of section 118, Cal. Pen. Code, a felony. The local union was not a party to the criminal proceeding but paid the legal fees, expenses, and costs of said petitioner's defense and appeals in 1956 and 1957. Held, that the amounts so paid by the employer in each year constituted taxable income to the petitioners.

OPINION

HOYT, Judge:

Respondent determined deficiencies in the income tax of petitioners for the years 1956 and 1957 in the amounts of $2,669.65 and $8,537.59, respectively. The deficiencies result in each instance from the addition to and inclusion in petitioners' taxable income by respondent of legal fees and costs paid by the employer of petitioner Frank J. Matula, Jr. The only issue presented is whether such payments constitute taxable income to petitioners under section 61 of the Internal Revenue Code.¹

Some of the facts have been agreed to and stipulated by the parties and are found accordingly.

The petitioners, Frank J., Jr., and Esther Matula, were husband and wife and resided in Los Angeles, Calif., during 1956 and 1957. They filed joint income tax returns for those years with the office of the district director of internal revenue at Los Angeles. Esther Matula is a petitioner herein because she filed joint returns with her husband; the term petitioner as used hereinafter will refer only to Frank J. Matula, Jr.

Petitioner was employed as secretary-treasurer of local 396, Package and General Utility Drivers, International Teamsters Union,² in the years in question; he had been so employed for many years and at time of trial was still so employed. In that office he was the operating head and manager of the local with power and authority to hire and fire union employees. He was a member of the union's executive board and presided as chairman at membership meetings.

In September of 1955, the California Assembly Standing Committee on Governmental Efficiency and Economy, hereinafter referred to as the committee, began a series of official legislative hearings in Los Angeles regarding the disposal of rubbish and garbage in that area. The heads of certain organizations were subpoenaed to testify and produce records of their concerns. These included Sam Egigian, president of the State Rubbish Collectors' Association and Fred Ferrier, president of local 396. Various other witnesses were served with subpoenas to appear before the committee including business agents of the local and petitioner, Frank J. Matula, Jr. He was subpoenaed individually and not in his official capacity as secretary-treasurer of the local. In response to his subpoena, Matula appeared, was sworn and testified under oath before the committee on October 3, 1955.

Subsequently on June 7, 1956, Matula was indicted by the Los Angeles grand jury for perjury in violation of section 118, Penal Code of California, a felony. The indictment charged that the testimony he had given before the committee on October 3 of the previous year was knowingly false with respect to material matters.

In due course the petitioner entered a plea of not guilty to the charge in the indictment and he was tried by a jury in the Los Angeles County Superior Court, beginning March 18, 1957. The trial concluded on May 11, 1957, and the jury found the defendant guilty as charged by the indictment. Thereafter, the petitioner appealed his conviction through appropriate California appellate courts and ultimately to the Supreme Court of the State of California, where motion for a new trial was denied and the judgment of conviction was affirmed. The Supreme Court of the United States denied petitioner's petition for certiorari.

On August 19, 1957, petitioner had been sentenced in the Superior Court; he was granted probation for a period of 5 years on condition, inter alia, that he serve the first 6 months thereof in the county jail and pay a fine of $2,500. After his appeals were lost he served approximately 5 months in jail and paid his fine.

Petitioner and the local union anticipated his indictment and the day before action by the grand jury was taken there was a special meeting of the union's executive board at which petitioner ‘explained that he must put up bail at the time of arraignment in his case that will be pending in Superior Court.’

At this meeting the board passed motions that ‘we‘ pay the premium on the bail bond and hire lawyers to defend the officers and business agents of the local union. Several officers and agents of the local had testified before the committee and Philip Watler, a business agent of the local, was also indicted about the same time as the petitioner.

Grant B. Cooper, a practicing lawyer in the Los Angeles area, was contacted through another lawyer who had offices in the same building, and he was initially seen by the petitioner and the local's regular lawyer, John C. Stevenson. He was retained by the local to defend petitioner and Watler. Later Grant B. Cooper's wife, Phyllis N. Cooper, also a practicing lawyer, was retained to assist her husband with the cases. After the petitioner's conviction, Cooper and another lawyer, named Selvin, were retained by the local to prosecute the various appeals that were undertaken. All of these actions were taken with the full knowledge, as is demonstrated by the minutes of various board meetings. Right after the petitioner's indictment, at a meeting of the board on June 21, 1956, petitioner reported to the board on the case. The minutes of the meeting read, in part, as follows:

The Secretary made a report regarding the case in court against himself and Business Agent, Philip Watler. The Board was pleased to know that he had obtained the finest attorney in the city to represent the officers of this Local union. A motion was made and seconded that the Secretary be impowered to do everything humanly possible and leave no stone unturned, in order to defend himself and Business Agent, Philip Watler. Motion carried unanimously. The Secretary explained to the Board about the cost of the attorneys for their defense, and they were more than pleased with the effort the Secretary has made so far in figuring out ways and means to bring our case to a successful conclusion.

From time to time after the union had first voted to hire lawyers to defend their officers and agents, the petitioner reported to the executive board and to the general membership on developments in, and the condition and progress of, his case. The board met regularly toward the end of each month and there was a general membership meeting each month except during the 3 summertime months. Both the board and the membership voted to pay the legal fees, expenses, and costs incurred in connection with the petitioner's defense of the criminal charge of perjury and of the subsequent appeals, and bills for such charges were approved for payment. These fees and expenses were paid by local 396 out of its general operating funds as follows:

$7,897.39 in 1956

$20,201.18 in 1957

None of the payments in question were made to or through the petitioner; the local paid the respective lawyers for their fees and expenses directly by its checks.

Local 396 was not a party defendant in the criminal proceeding against the petitioner; it was not named as a defendant in the indictment, nor was it separately charged with any criminal offense.

After the indictment and before the petitioner's trial, the local voted unanimously to reelect Matula as its secretary-treasurer. Since then and even after conviction and loss of petitioner's appeals, Matula has been reelected to the same position on several occasions, the last being on December 9, 1962. The union paid petitioner his full salary during the entire period including the period he spent in jail.

Prior to the time the petitioner testified before the committee, he and another union agent subpoenaed to testify were advised by the local's regular attorney, John C. Stevenson, to tell the truth. Local 396 never authorized petitioner to give false testimony before the committee and had no knowledge prior to his appearance before the committee on October 3, 1955, as to what his testimony would be. The local never ratified or confirmed the commission of perjury by petitioner.

Petitioner did not report any of the amounts paid by local 396 to his lawyers as income in his income tax return for any year.

The crucial facts in this case are:

Petitioner, secretary-treasurer and manager of local 396, gave false testimony before a California legislative committee.

He was indicted for perjury, was tried, and convicted.

He lost his appeals, was sentenced, and paid his debt to society.

The local, acting through its executive board, retained lawyers to defend petitioner and to prosecute his appeals, and paid their fees and expenses from its general funds. The membership of the local approved these actions and expenditures.

The union was not indicted and no part of the payment of fees and expenses were paid for its own defense. All amounts involved were paid for the defense of the charges against petitioner and for the appeals taken by him following his conviction.

On these facts, the sole question is whether the payments constitute taxable income to petitioner in the years in which they were made under section 61, I.R.C. 1954.

We have held in a long line of cases, beginning with Sarah Backer, 1 B.T.A. 214 (1924), that payments of legal expenses incurred in the unsuccessful defense of criminal charges are not...