Reed v. Comm'r of Internal Revenue
| Decision Date | 08 October 1970 |
| Docket Number | 406-68.,Docket Nos. 5485-67 |
| Citation | 55 T.C. 32 |
| Parties | STASS REED AND MARTHA REED, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Benton Alpert and Gerald W. Keil, for the petitioners.
Stanley Goldberg and Patrick Whelan, for the respondent.
The petitioners incurred attorneys' fees and related expenses in pursuance of two causes of action. In the first they sought to have a constructive trust, preliminary to a reconveyance, imposed on a certain partnership interest. In the second cause of action they sought rescission of a partnership agreement which imposed certain restrictions on the free transfer of a partnership interest belonging to the petitioner wife. Held, petitioners are not entitled to deduct their legal fees under either sec. 162(a) or sec. 212, I.R.C. 1954. The expenditures were incurred in acquiring or in defending or perfecting title to property. Sec. 1.212-1(k) and (n), Income Tax Regs.
The respondent determined deficiencies in the petitioners' Federal income tax for the taxable years 1961, 1962, 1963, and 1965 in the amounts of $11,455.53, $7,223.44, $115.85, and $1,312.36, respectively.1 Due to certain concessions by the petitioners, the sole issue for our decision concerns whether the respondent erred in disallowing deductions of legal fees and related expenses under sections 162 and 212 of the Internal Revenue Code of 1954.2
Some of the facts were stipulated. The stipulations and the exhibits attached thereto are incorporated herein by this reference.
Stass and Martha Reed, husband and wife (hereinafter referred to as petitioners or Stass and Martha individually), maintained a residence in New York, N.Y., at the time the petitions herein were filed, but they were legally domiciled in Monte Carlo, Monaco, France. They filed joint Federal income tax returns for the years in question with the district director if internal revenue, Manhattan, New York.
Martha's father, Thomas A. Cuneo (hereinafter Thomas), died testate on September 30, 1958, in Memphis, Tenn. Thomas' last will and testament created two trusts: (1) A marital trust for his wife, Zadie S. Cuneo, (hereinafter Zadie), giving her a life estate with a testamentary general power of appointment over corpus; and (2) a residuary trust for the life of Martha, providing for the payment to her of all of the net income of the trust. The will provided that during Zadie's life this amount was to be at least $400 per month and if insufficient income were generated the testator's trustees were directed to invade corpus. After Zadie's death the monthly payments were to be increased to a maximum of $1,000 per month with any surplus of income to be added to corpus. The testator's trustees were authorized ‘to encroach on the corpus for sickness and other emergencies as is necessary and for the proper support and maintenance of my daughter.’ Thomas' will further provided:
If, at the death of my daughter without issue, my wife and my sisters have predeceased her, my daughter shall have the power in her Last Will and Testament to appoint the corpus of this trust, at its termination, to her estate or to any person or persons that she may designate.
The Union Planters National Bank of Memphis, Tenn., was named in the will as executor and trustee of the above-described trusts.
The principal asset in Thomas' estate was a 30.66-percent interest in a partnership operating in Memphis, Tenn., and elsewhere under the name of Robilio & Cuneo, comprising also the Mid-South Macaroni Co. and Ronco Foods (hereinafter this partnership will be referred to as R&C). Zadie owned a 19.34-percent interest in R&C. The remaining 50 percent of R&C was owned by members of the Robilio family.
Under the terms of his will Thomas authorized his executor to sell his interest in R&C:
on whatever terms and at whatever price it deems to be to the best interests of my estate; provided, however, that this interest shall not be sold without first giving my wife an opportunity either to purchase this interest or to sell her interest on the same terms and conditions that my Executor has agreed to sell my interest.
Zadie having decided not to buy the 30.66-percent interest in R&C, a contract of sale was entered into on March 3, 1960, for its sale by Thomas' estate to the Robilio family for $317,000, $149,000 in cash and the balance payable with 6-percent interest from October 1, 1959, over a period of 12 years. The aforesaid purchase price specifically included ‘all profits, or other sums due the estate by the surviving partners.’
On September 9, 1960, a new partnership agreement was entered into between Zadie and the Robilios, retroactive to October 1, 1959. This partnership agreement provided that Zadie could not transfer her interest without first offering the Robilios an option to purchase. The agreement limited the purchase price to book value plus 10 percent and, further, provided that no value would be assigned to goodwill, trade name, or going-concern value.
During the period of negotiations Zadie was suffering from incurable cancer. She died, testate, of cancer on November 1, 1960. Zadie's last will and testament, which was filed with the Probate Court on November 4, 1960, after providing for several specific bequests amounting to $13,500, directed that the residue of her estate go to Martha. In addition Zadie exercised the power of appointment given her by Thomas' will in Martha's favor. By virtue of Zadie's will Martha acquired the 19.34-percent interest in R&C.
Martha and Roane Waring, Jr. (hereinafter referred to as Waring), were named in Zadie's will as coexecutors, and Waring, who was Zadie's attorney, was directed to handle all legal matters pertaining to the administration of the estate.
In accordance with the terms of the trust created in Thomas' will Martha received distributions in the total amount of $78,600 through November 30, 1966.
R&C had taxable ordinary income in the following amounts for the years indicated:
+---------------------------+
¦Taxable year ¦Amount ¦
+---------------+-----------¦
¦1960 ¦$209,730.35¦
+---------------+-----------¦
¦1961 ¦330,043.02 ¦
+---------------+-----------¦
¦1962 ¦161,187.64 ¦
+---------------+-----------¦
¦1963 ¦393,381.02 ¦
+---------------+-----------¦
¦1964 ¦543,254.91 ¦
+---------------+-----------¦
¦1965 ¦563,332.16 ¦
+---------------------------+
In December of 1961 a complaint was filed in the U.S. District Court for the Western District of Tennessee by Chandler, Manire and Chandler of Memphis, and Davis, Polk, Wardwell, Sunderland and Kiendl of New York City, attorneys on behalf of Martha against the Robilios. The executors of Thomas' and Zadie's estate were joined as codefendants.
As a first cause of action the complaint alleged a breach of fiduciary obligation on the part of the Robilios in that the value of the 30.66-percent interest in R&C was more than $750,000, while the Robilios had represented the true value to be not more than $317,000. The complaint further alleged that demand to institute legal action had been made by Martha upon the Union Planters National Bank which had refused to comply. The complaint asked the court to impose a constructive trust on the interest and to order the constructive trustees to reconvey it to Thomas' estate with an accounting for all profits from the purchase.
As a second cause of action the complaint alleged that the partnership agreement of September 9, 1960, ‘was grossly unfair and unjust’ to Zadie. The complaint further alleged that due to poor health at the time of negotiations Zadie ‘was unable to understand or appreciate the nature and the significance of her acts, and was not competent to execute’ the agreement; and that the Robilios were aware of this. The complaint alleges that under these circumstances it was a breach of fiduciary duty for them to enter into the agreement. The complaint sought to have the court rescind the agreement based on the above allegations.
After a lengthy trial the District Court on December 21, 1965, dismissed the case for lack of diversity jurisdiction. The case is reported as Reed v. Robilio, 348 F.Supp. 602 (W.D.Tenn. 1965). On appeal the court was reversed on the question of diversity jurisdiction and the case was remanded for decision on the merits. Reed v. Robilio, 376 F.2d 392 (C.A. 6, 1967).
On remand the District Court entered an opinion and judgment finding for the defendants on September 13, 1967. Reed v. Robilio, 273 F.Supp. 954 (W.D.Tenn. 1967). This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit. Reed v. Robilio, 400 F.2d 730 (C.A. 6, 1968).
Stass acted for and on behalf of his wife in connection with all aspects of the litigation against the Robilios. It was Stass who employed the various attorneys who participated in the case.
The parties stipulated that the petitioners have substantiated the expenditure of the following amounts for attorneys, in New York and Memphis, incident to the prosecution of the case against the Robilios:
+--------------------------------------------+
¦1961 ¦1962 ¦1963 ¦1965 ¦
+-------------+---------+---------+----------¦
¦$33,244.123 ¦$6,275.87¦$6,0504 ¦$10,272.42¦
+--------------------------------------------+
During 1961 Stass was attempting to start an orthopedic shoe factory in France. It was necessary on several occasions for him to journey to Memphis in order to attend to matters arising out of the commencement of litigation there. During that year the petitioners expended $3,643.77 in air fare. A substantial part of the expenditure was occasioned by the cost of Stass' flights from Frances to Memphis. It was stipulated that the petitioners have substantiated the foregoing expenditure.
In addition to the attorney's fees of $6,275.87 expended during 1962 the parties stipulated that the...
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