Vincent v. Comm'r of Internal Revenue
| Decision Date | 21 May 1952 |
| Docket Number | Docket No. 29741. |
| Citation | 18 T.C. 339 |
| Parties | VIRGINIA HANSEN VINCENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. SECTION 23(a)(2)— SECTION 23(e)(3)— COSTS OF LITIGATION— COLLECTION OF INCOME— ALLOCATION.— Petitioner expended $174,445.58 for attorneys' fees and other litigation costs in connection with a suit to establish her title to stock in a corporation. Judgment was rendered in her favor. She recovered the stock, dividends, and interest. Held: (1) The portion of the litigation expense attributable to the collection of income is deductible under section 23(a)(2), but the portion allocable to the recovery of stock forms part of the cost of the stock; (2) The litigation expense incurred and paid to recover the stock is not a loss under section 23(e)(3).
2. SECTION 22(a)— TAXABLE INCOME— DIVIDENDS.— Held: The petitioner recovered accumulated dividends in the amount of $61,000 which are income under section 22(a). Valentine Brookes, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
The respondent has determined a deficiency in the petitioner's income tax liability for the year 1946 in the amount of $61,757.33. The petitioner concedes the correctness of certain adjustments made by the respondent to her income for 1946. This will be given effect in the computation under Rule 50.
On her return for the taxable year the petitioner deducted the sum of $90,338.04, consisting of attorneys' fees and other expenses of litigation. The respondent allowed a deduction for litigation expense in the amount of $30,662.11, but he disallowed the deduction to the extent of $59,675.93. By amendment to her petition, the petitioner makes a claim for an additional deduction for litigation expense in the amount of $84,107.54, making the total deduction claimed $174,445.58.
The issues are:
(1) Whether all or any part of the total amount of $174,445.58, expended for attorneys' fees and other litigation costs in connection with a suit to recover stock in a corporation is deductible as a nonbusiness expense under section 23(a)(2) of the Code. If it is held that a part of the sum of $174,445.58 is deductible under section 23(a)(2), then a question to be decided is what part of the total litigation expense is deductible. The petitioner contends, further, that the litigation expense of $174,445.58 incurred and paid in connection with the recovery of the stock constitutes a loss arising from theft or embezzlement which is deductible under section 23(e)(3).
(2) Whether the amount of $61,000 received by the petitioner under the decree of a state court constitutes taxable income under section 22(a).
The petitioner filed her return with the collector for the first district of California.
The facts which have been stipulated are found as facts. During the taxable year the petitioner was married and was a resident of Oakland, California. None of the items of income involved in this proceeding are community income. The petitioner filed her returns on the cash basis.
The petitioner was born in October 1916, the daughter of Oscar Hansen, deceased, and Fay Bixby. In 1920, the petitioner's mother and father, who had been living in California, separated. The petitioner went to live with her mother, who had established her residence in Michigan. She continued to reside in Michigan until 1940, when she moved to California. Her father, Oscar Hansen, remained in California after separating from his wife and resided with his mother, Josephine Hansen. In 1922 the petitioner's father and mother were divorced. The decree of divorce became final in 1923.
In 1929, Oscar Hansen died interstate. The petitioner, then 13 years of age, was his sole surviving heir. Other survivors included Oscar's mother, Josephine Hansen, and his brothers Albert Hansen and Charles L. Hansen. Alice Carmody Hansen is Albert Hansen's widow, and Florence J. Hansen and Robert Hansen are his children. Myrtle Hansen was Charles L. Hansen's wife, and Elizabeth Hansen and Carl Hansen are his children.
Until his death, Oscar was the president, manager, and a member of the board of directors of the Bear Film Co., hereinafter referred to as ‘Bear,‘ a California corporation- which was and still is engaged in the business of finishing photographs and processing film. Oscar owned all of the outstanding stock of Bear, i.e., 2,500 shares of preferred stock and 2,500 shares of common stock. Before his death, Oscar established a trust of which he was the beneficiary and his mother, Josephine, was the trustee. The stock in Bear comprised the res of the trust.
After Oscar's death, Josephine Hansen and Oscar Uhle were appointed coadministrators of his estate by the Probate Division of the Superior Court of California. They filed reports appraising the assets of the estate as follows:
+-------------------------------------------+
¦Money ¦$1,378.86 ¦
+--------------------------------+----------¦
¦Accounts Receivable ¦4,202.88 ¦
+--------------------------------+----------¦
¦Parcel of real estate in Oakland¦6,000.00 ¦
+--------------------------------+----------¦
¦Furniture and equipment ¦150.00 ¦
+--------------------------------+----------¦
¦ ¦$11,731.74¦
+-------------------------------------------+
No mention was made of the stock of Bear, or of the fact that Oscar owned or had an equitable interest in the stock of Bear, or in the stock of any other corporation at the time of his death. The coadministrators did not report that Bear owed Oscar $18,950, which was unpaid at his death. In 1930, the probate court decreed that the assets of Oscar's estate, less the expenses of administration, be distributed to the petitioner. The value of the property so distributed to the petitioner was about $10,000.
Relatives of the petitioner advised her that the Bear stock was owned by her grandmother, Josephine Hansen. No trust with respect to the Bear stock was ever created for the petitioner's benefit by her relatives or by anyone.
The management and control of the business of Bear, after Oscar's death, were exercised by his mother, Josephine, and his brother Albert. Albert had been a member of the faculty of Purdue University, but he relinquished that position to manage Bear. In 1930, Josephine transferred the title to the Bear stock to Albert. Josephine died in 1932. Albert continued to operate the business of Bear in a very successful way until his death in 1940.
After Oscar Hansen's death in 1929, Bear declared dividends on its stock in the aggregate amount of $95,000, of which amount $61,000 was paid to its shareholders of record, namely, Albert Hansen and his estate, as follows:
+-----------------------+
¦Date ¦Amount ¦
+--------------+--------¦
¦ ¦ ¦
+--------------+--------¦
¦Dec. 31, 1937 ¦$25,000 ¦
+--------------+--------¦
¦Oct. 31, 1938 ¦10,000 ¦
+--------------+--------¦
¦Apr. 20, 1940 ¦1,000 ¦
+--------------+--------¦
¦Aug. 22, 1940 ¦20,000 ¦
+--------------+--------¦
¦Aug. 13, 1941 ¦5,000 ¦
+--------------+--------¦
¦Total ¦$61,000 ¦
+-----------------------+
None of the above dividends were paid to the petitioner.
At some time, Albert established an inter vivos trust for the benefit of his son, Robert Hansen, to which he conveyed 1,000 shares of Bear stock. Albert died testate in 1940. Under the terms of his will the remaining 4,000 shares of Bear stock were to be held in trust for the benefit of his widow, Alice Carmody Hansen, his daughter, Florence J. Hansen, and his son, Robert Hansen. Albert made no provision in his will for his brother, Charles L. Hansen, or for his niece, the petitioner.
Thereafter, Charles claimed that Albert had agreed during his lifetime to make certain bequests under his will in Charles' favor. A dispute arose between Charles and Albert's estate, in the course of which Charles' attorney advised the petitioner that there had been some questionable circumstances surrounding the administration of her father's estate. She went to San Francisco in 1940 to consult Charles' attorney. Information was given her then which led her to believe that she was the rightful owner of the Bear stock. The petitioner filed a timely claim with Alice Carmody Hansen, the executrix of Albert's estate, for the recovery of the stock. The claim was rejected.
On August 16, 1940, the petitioner instituted a suit in the superior Court of California in and for the City and County of San Francisco for the recovery of the Bear stock and for other relief. The defendants named in the action were: Bear; Alice Carmody Hansen, Albert's widow; Alice Carmody Hansen, as executrix of Albert's estate; Harold L. Levin, an attorney who represented Oscar, Josephine, and Albert Hansen, and Bear; Loren Vail, a member of the board of directors of Bear; Oscar Uhle, coadministrator of Oscar's estate and a director of Bear; Neita Zweifel, a director of Bear; Robert Hansen and Florence Hansen, children of Albert; and others. The petitioner retained the services of attorneys Richard S. Goldman and Gorman R. Silen to represent her in the litigation.
Charles L. Hansen and his wife, Myrtle, at one time had in their possession certain documents which were vital to the petitioner's case. They had made a gift of these documents to their children, Elizabeth and Carl Hansen. They also had assigned to their children all their rights in any causes of action which they might have against Albert's estate and Bear. In order to obtain these documents, the testimony of Charles and his wife, and the services of her attorneys, the petitioner, on February 13, 1941, entered into a written agreement with Elizabeth and Carl Hansen and her attorneys. This agreement was modified on January 7, 1946. Both agreements are described hereinafter.
In the case of Virginia J. Hansen1 v. Bear Film Co., et al., No....
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