Patrick v. United States

• Decision Date: 23 June 1960
• Docket Number: Civ. A. No. 2648.
• Court: U.S. District Court — District of South Carolina
• Parties: Talbot PATRICK and Commercial Bank of Charlotte, Administrator of the Estate of Alethia M. Patrick, deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

186 F. Supp. 48

Talbot PATRICK and Commercial Bank of Charlotte, Administrator of the Estate of Alethia M. Patrick, deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. No. 2648.

United States District Court W. D. South Carolina, Rock Hill Division.

June 23, 1960.

Robert M. Ward, Rock Hill, S. C., for plaintiffs.

Joseph E. Hines, U. S. Atty., Spartanburg, S. C., Howard A. Heffron, Acting Asst. Atty. Gen., James P. Garland, Myron C. Baum, Robert Livingston and Leon W. Vaseliades, Attys., Dept. of Justice, Washington, D. C., for defendant.

WYCHE, Chief Judge.

This is an action to recover income tax in the amount of $21,673.73 paid by taxpayers for the year 1956, under alleged erroneous and illegal deficiency assessments.

The action is brought in the names of Talbot Patrick, individually, and Commercial Bank of Charlotte, North Carolina, as Administrator of the Estate of Alethia M. Patrick, deceased, since the 1956 return, sued on, was a joint return.

The record in this case includes the pleadings, testimony of Talbot Patrick, depositions of C. W. F. Spencer, Jr., Esq. and John H. Lumpkin, Esq., taxpayers' income tax return for the calendar year 1956, and a stipulation of counsel for both parties which incorporates a property settlement agreement, a trust agreement, and taxpayers' claim for refund of the taxes now sued for.

Taxpayer Talbot Patrick was sued for divorce by his then wife Paula M. Patrick on December 16, 1955. The complaint sought an absolute divorce, court supervision of division of properties, an appropriate property settlement in favor of the wife, custody of the children of the marriage and counsel fees. Talbot Patrick filed an answer which neither admitted nor denied the allegations of adultery, claimed as the ground for divorce. He did not offer testimony at the hearing. While the divorce action was pending, counsel for the parties carried on extended negotiations on the question of property settlement, which ultimately resulted in the agreement which is incorporated in the stipulation by counsel in this case. The Court of Common Pleas for York County issued its final decree of absolute divorce, approving the property settlements theretofore made, and, by reference, requiring the payment by Talbot Patrick of counsel fees. These fees, by agreement of counsel and the parties, were $12,000 for each of the two law firms involved, a total of $24,000, and were allocated $4,000 for the handling of the divorce, $4,000 for the handling of the business real estate, and $16,000 for the rearranging of stock ownership and control of the Herald Publishing Company. Of the $4,000 charged for the handling of the business real estate settlement, $3,200 was charged against Talbot Patrick, who theretofore had owned four-fifths undivided interest in same, and $800 was charged against Paula M. Patrick, who had owned one-fifth thereof. The $800 is not an issue in this case. In April 1958, the Internal Revenue Service disallowed Talbot Patrick's claim of $3,200 shown on his 1956 return as a business expense, which is a part of the tax which taxpayers seek to recover in this action.

Prior to the payment of any of the attorneys' fees, there was an agreement among all the stockholders and officers of Herald Publishing Company that $16,000 of the attorneys' fees would be paid by Herald Publishing Company under a proviso that if this was not allowed as a business expense deduction by the corporation, it then would be repaid to the corporation by Talbot Patrick. In January, 1959, the Internal Revenue Service rejected the deduction of the $16,000 as a business expense by the corporation as not being a proper corporate expense. The corporation paid an additional tax of $8,320. The Internal Revenue Service then designated the $16,000 as a dividend to Talbot Patrick and he was required to pay income tax thereon. This is a part of the tax which taxpayers seek to recover in this action.

In 1959, pursuant to the 1956 commitment, Talbot Patrick paid back to Herald Publishing Company the $16,000 with interest. Taxpayers' claim that this was a 1956 deductible business expense of Talbot Patrick was disallowed. This also is a part of the tax for which taxpayers sue.

There is a further small item of adjustment of allowable medical expense set out in the claim and the complaint.

In May 1959, taxpayers filed with the Internal Revenue Service timely claim for refund of $21,673.73, with interest, which was rejected, and this suit was then instituted.

The $16,000 in attorneys' fees paid by Herald Publishing Company in 1956, and, by prior agreement, repaid to Herald Publishing Company by Talbot Patrick in 1959, in my opinion, was not a dividend to Talbot Patrick.

Talbot Patrick had a legal duty to pay these attorneys' fees. Paragraph 11 of the "Amended Stipulation and Agreement" between the parties to the original action, required Talbot Patrick to pay plaintiff's attorneys' fees, and, he, of course, had a duty to pay his own counsel. This agreement was adopted, confirmed, and made a part of the court's final order in the divorce decree. The $16,000 was charged against the corporation under an agreement that if not allowed as a proper corporate deduction, it would be repaid by Talbot Patrick. This repayment agreement was made prior to payment of the fees by the corporation and the sum was repaid by Talbot Patrick to the corporation.

Where there is an intent to repay an advance by a corporation to pay a stockholder's obligation it is treated as a loan and not as a constructive dividend. Ortmayer v. C.I.R., 7 Cir., 265 F.2d 848.

In this case there is no question of intent to repay. Further, the agreement to repay the corporation was not a retroactive device to minimize taxes, but was made prior to the payment of any part of the funds by the corporation, and Talbot Patrick received no ultimate benefit from the transaction. Rosencrans v. Commissioner, 13 TCM 176.

In my opinion, the $16,000 was a loan and not a dividend.

The $3,200 and the $16,000 paid by Talbot Patrick as attorneys' fees were deductible as expenses incurred for the management, conservation or maintenance of property held for the production of income.

Adultery is a ground for absolute divorce in South Carolina, and Talbot Patrick made no defense. His wife was entitled to a substantial property settlement and all of his property was at risk until settlement was made. Only $4,000 of the attorneys' fees were allocated to the question of...