Warrick v. Commissioner of Internal Revenue, 13873.
| Decision Date | 21 April 1949 |
| Docket Number | No. 13873.,13873. |
| Citation | 173 F.2d 905 |
| Parties | WARRICK et ux. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Albert F. Hillix and Dupuy G. Warrick, both of Kansas City, Mo. (John E. Park and Gage, Hillix & Phelps, all of Kansas City, Mo., on the brief), for petitioners.
Carlton Fox, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen. and Ellis N. Slack and S. Walter Shine, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before GARDNER, Chief Judge, and WOODROUGH and THOMAS, Circuit Judges.
This matter is before us on petition for review of a decision of the Tax Court assessing a deficiency in the taxpayers' income for the year 1940. The basis for the deficiency is the inclusion of an attorney fee of $125,000 paid to petitioner Dupuy G. Warrick in a lump sum on December 23, 1940. Petitioners are husband and wife and filed a joint income tax return. The income involved was that of Mr. Warrick and we shall refer to him as taxpayer or Warrick.
The question involved is whether in computing taxpayers' income for that year, petitioners are entitled to the benefit of Section 107 of the Internal Revenue Code, 26 U.S.C.A. § 107, with respect to the attorney fee of $125,000 received by taxpayer for legal services rendered by him under a contract of employment entered into in January, 1932. The Tax Court concluded that this fee was paid for services rendered during a period of less than five calendar years and hence could not be prorated in accordance with Section 107 of the Internal Revenue Code. The facts are not in dispute although they are somewhat complicated. Omitting many details not deemed necessary for an understanding of the issues presented, these facts may be stated as follows:
In January, 1932, taxpayer, who is a lawyer, was employed by Frank P. Parish, president of Missouri-Kansas Pipe Line Company, to assist him and a certain group of stockholders and creditors of the company in the prosecution of certain claims against Columbia Gas & Electric Corporation and its subsidiary, Columbia Oil & Gasoline Corporation, for violation of the anti-trust laws. It was agreed that he should be compensated for his services from the fund, if any, recovered as a result of the assertion of these claims. The Missouri-Kansas Pipe Line Company was a holding company, its principal assets consisting of various stocks, bonds and unsecured claims. The Panhandle Corporation, a wholly owned subsidiary of the Missouri-Kansas Pipe Line Company, owned certain notes and one-half of the outstanding capital stock of Panhandle Eastern Pipe Line Company. The Columbia Gas & Electric Corporation and the Columbia Oil & Gasoline Corporation owned the other one-half of Panhandle Eastern's stock. The Missouri-Kansas Pipe Line Company's indirect ownership of Panhandle Eastern represented a $13,000,000 or $14,000,000 investment. Differences had arisen between the Columbia companies and the Missouri-Kansas Pipe Line Company over the policy to be pursued by the management of Panhandle Eastern, which was under control of the Columbia companies. As a result the bonds and notes of Panhandle Eastern were in default and because of these complications, in March, 1932, Missouri-Kansas Pipe Line Company was placed in receivership in a proceeding in the Court of Chancery for Newcastle County, State of Delaware. The taxpayer continued to represent Parish and the same group of stockholders in connection with the claims against the Columbia companies and after prolonged work, negotiations and litigation a settlement of these claims was brought about by the taxpayer and approved by the Chancery Court of Delaware in April, 1936. As a result of the settlement the receivership estate ultimately received assets having a value of $12,000,000 and the stockholders of the Missouri-Kansas Pipe Line Company received stock rights of a value of approximately $2,000,000. One of the terms of the settlement brought about by taxpayer was that Panhandle Eastern Pipe Line Company would issue 160,000 additional shares of common stock, one-half of which the receivers were to distribute to the common and Class B stockholders of the Missouri-Kansas Pipe Line Company. The warrants evidencing the right to subscribe to these 80,000 shares of stock represented a valuable asset to the stockholders of Missouri-Kansas Pipe Line Company because they authorized purchase of this stock at $25 per share, whereas the market value of the stock was $50 to $60 per share. Among stockholders entitled to receive the warrants were taxpayer's clients.
The provisions of the settlement relating to the issuance of these warrants were not immediately complied with and it became necessary for taxpayer to continue his services to compel a compliance with the terms of the settlement. Following the settlement several attempts were made by interests hostile to taxpayer's clients to have the terms of the settlement modified. Thus, during 1937 one McGuire brought suit to modify the terms of the settlement so as to permit Missouri-Kansas Pipe Line Company to distribute the stock rights instead of having them distributed from the receivers to the stockholders. Taxpayer appeared in court and successfully opposed this modification, but later, on ex parte order, the warrants were turned over to the company and its new officers instead of to the stockholders, and in June, 1938, taxpayer, representing his clients, succeeded in getting this ex parte order set aside and the original order relative to the distribution by the receivers restored. This litigation occurred in 1938 and 1939. Thereafter taxpayer performed services in connection with the same matter by assisting in the preparation of a plan for distribution of the warrants which in fact were finally distributed to the stockholders in September or October, 1939, so that the terms of the settlement, although approved by the court in 1936, were in fact not completely carried out until September or October of 1939. On December 18, 1936, the Court of Chancery determined the amount of compensation to be allowed taxpayer, fixing it at $125,000, plus expenses. Between that date and December, 1940, the receiver of the Missouri-Kansas Pipe Line Company withheld payment and the Chancery Court issued an order to show cause why it had not been paid. The matter was carried to the Supreme Court of Delaware and on April 1, 1940, that court affirmed the allowance and ordered the receivers to make payment and the payment was actually made December 23, 1940. This $125,000 received by taxpayer in 1940 was the only compensation received by him for the services rendered to his clients under his employment in January, 1932.
The statute involved reads as follows: ...
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