Owens v. CIR

• Decision Date: 29 December 1959
• Docket Number: No. 17524.,17524.
• Citation: 273 F.2d 251
• Parties: Shelby OWENS and Dorothy H. Owens, Husband and Wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

273 F.2d 251 (1959)

Shelby OWENS and Dorothy H. Owens, Husband and Wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17524.

United States Court of Appeals Fifth Circuit.

December 29, 1959.

Wentworth T. Durant, Robert J. Hobby, Dallas, Tex., for petitioners.

Arthur I. Gould, Atty., Robert N. Anderson, Lee. A. Jackson, Dept. of Justice, Washington, D. C., Rollin H. Transue, Sp. Atty., Arch M. Cantrall, Chief Counsel, I. R. S., Washington, D. C., Charles K. Rice, Asst. Atty. Gen., for respondent.

Before CAMERON, JONES and BROWN, Circuit Judges.

CAMERON, Circuit Judge.

This petition for review of a decision of the Tax Court presents this question: Whether the Tax Court correctly held that the taxpayer¹ was not entitled to deduct, under § 23(a) (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(a) (2), an amount paid to an attorney with respect to legal services rendered in connection with a divorce proceeding which included a property settlement, when it is undisputed that the entire amount was paid for the protection of income or income-producing property and no part was paid in connection with the personal matters involved in the divorce proceedings.

The Commissioner determined a deficiency in taxpayer's income tax for the year 1953 resulting from his disallowance of the deduction of a $7,500.00 attorney's fee paid during the year. The Tax Court² rendered its decision in favor of the Commissioner, which, under the taxpayer's petition, we are called upon to review.

We adopt the findings of fact made by the Tax Court:

"Petitioners are husband and wife and are residents of Arlington, Texas. They filed a joint return for the calendar year 1953 with the district director of internal revenue at Dallas, Texas, on September 15, 1954.

"From 1922 to December 10, 1948, petitioner Shelby Owens (hereinafter called petitioner) was married to Margaret Stuckert Owens (hereinafter called Margaret). In 1946 they became estranged, and they separated during the year. At that time petitioner had various business interests but his chief business and source of income was a lumber business known as Stuckert-Owens Lumber Company, which was carried on as a partnership between petitioner and J. Lamar Stuckert, a nephew of Margaret. Each partner owned a 50 per cent interest in the business.

"During all of their married life, petitioner and Margaret were residents of Texas, a community property state, and all of the property and business interests which were owned by them at the time of the separation were owned in community.

"Due to the circumstances leading up to their separation, Margaret became very embittered and generally let it be known that she was going to get everything she could from petitioner by virtue of the divorce proceedings. To this end she contacted J. Lamar Stuckert, her nephew and petitioner\'s partner, and attempted to negotiate a new partnership arrangement of the lumber business with him, contingent upon her being able to wrest this from petitioner in the divorce proceeding. J. Lamar Stuckert declined any such arrangement for reasons of his own and so advised petitioner. He told petitioner that he would dissolve their partnership, regardless of cost, if Margaret were to obtain any active interest in the business.

"J. E. Foster, with whom petitioner was similarly associated in another business, became alarmed at these events, forced a dissolution of their partnership, and bought out petitioner\'s interest. This left petitioner dependent on the Stuckert-Owens Lumber Company as his primary source of income.

"During 1946, Margaret retained Hal Lattimore, a Fort Worth Attorney who was a lifelong friend of both parties, as her counsel and paid him $2,500 in cash in advance for representing her in the divorce proceedings. Petitioner was represented by his brother Richard, also a Fort Worth Attorney, who customarily handled his legal affairs.

"Petitioner did not plan to, and made no effort to, contest the divorce proceedings, but was anxious only to save his interest in Stuckert-Owens Lumber Company as his source of income. Richard told him that he did not believe he could handle any of the property settlement negotiations because of the family relationship and his personal acquaintance with Margaret. Richard, who had his place of business in the same building with Lattimore, Margaret\'s attorney, met with Lattimore often but did not discuss the property settlement with him. Margaret informed Lattimore of her desire to obtain petitioner\'s interest in the lumber company, $100,000 in cash, the home, and automobile as her settlement.

"Petitioner consulted Lattimore, who was familiar with his business affairs, and told him that it was essential that he retain his full interest in the lumber business, if possible. He told Lattimore that he would pay the $100,000, his home and the property out at the lake, and the other things mentioned in the property settlement if he could keep the lumber business. He promised to pay Lattimore $7,500 and not to contest the divorce if Lattimore could get Margaret to agree to let him keep the lumber business. Lattimore agreed that it would be for the best interest of petitioner to keep the lumber business and, as Margaret\'s attorney, would recommend that she accept petitioner\'s offer. Lattimore informed Margaret of the conversation he had with petitioner and advised her to accept petitioner\'s offer.

"The property settlement was arranged whereby petitioner would retain his interest in the lumber company, as he had desired. Richard Owens reviewed the final settlement for petitioner and recommended that he accept it because it was in his best interests. On September 28, 1948, Shelby Owens executed the property settlement. Richard Owens delivered the settlement to Margaret\'s attorney, who then secured Margaret\'s acceptance of it as so constituted.

"It was agreed that the $7,500 which petitioner was to pay Lattimore for his efforts in securing the property settlement as petitioner desired would be incorporated in the divorce decree as the attorney\'s fees. The property settlement and the attorney\'s fees were incorporated in the divorce decree entered December 10, 1948.³

"After the divorce decree and property settlement, Lattimore prepared a note for $7,500 as payment from petitioner, which petitioner signed and returned to him.

"Petitioner did not pay Richard Owens any monies for his efforts on behalf of petitioner in the divorce proceedings or property settlement. He did, however, do some work for Richard.

"In 1953, a tax deficiency was assessed against Lattimore. This deficiency was satisfied by payment of the $7,500 note which was applied to the tax deficiency. Petitioner deducted the $7,500 attorney\'s fees in his 1953 tax return. Respondent disallowed this deduction."

The facts being undisputed, the Tax Court had before it only a question of law, which is now presented to us. The Tax Court stuck to its practice of disallowing deductions connected with divorce proceedings under its opinion that such proceedings involve primarily an essentially personal relationship and that every payment made by a husband in the course of such a proceeding takes its character solely from that relationship.⁴ Such a course, we think, is not consonant with established legal principles and would, as applied here, tend to frustrate congressional intent as expressed in the Revenue Law.

We are of the opinion that the facts as the Tax Court found them compel a decision in favor of the taxpayer. His brother was representing him in connection with the personal relationships present in the divorce action brought by his wife, and they agreed that he had no defense, and taxpayer never planned to defend the divorce action. His dealings with his wife's attorney in connection with which the $7,500 fee was paid had their inception solely in his purpose to protect, from the determined designs of his wife, the lumber business which undisputedly was his main hope for a livelihood and was an unfailing producer of income. It is evident that the two years elapsing between their separation and the filing of the divorce action were largely devoted to the effort of the wife's attorney, mutual friend of both husband and wife, to dissuade her from her expressed intention of holding on to her interest in the Stuckert-Owens Lumber Company, — a course which would inevitably have resulted in disaster to that company. Since Texas was, and is, a community property State, her declared determination was more than an idle threat.⁵ The clear language of § 23(a) (2) of the Internal Revenue Code of 1939, under the undisputed facts accepted by the Tax Court, required that taxpayer be allowed a deduction for this attorney's fee:

"(2) Non-trade or non-business expenses. — In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."⁶

The parties seem to concur in the idea that there is conflict in the decisions of the courts on the question before us, but a close study of the cases leads us to the conclusion that the conflict is more apparent than real, resting on differences in the several factual situations rather than disagreement as to the meaning of the statute.⁷

The cases nearest this one on the facts are Baer and Bowers supra. The facts of Baer differ from those here only in that the attorney's fee in controversy was paid to the husband's attorney instead of to the wife's. The Tax Court had held there, as here, "that this payment involved personal relationships as distinguished from business relationships, and hence, was not deductible under the provisions of § 23(a) (2) * * *." The Court of Appeals disagreed with this conclusion, holding that "The services of these attorneys were certainly appropriate,...