Opinion
Docket No. 49704.
1955-12-13
F. C. BOWERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
N. A. Cobb, Esq., for the petitioner. Robert J. Fetterman, Esq., for the respondent.
Petitioner's wife brought suit against him for divorce asking, among other things, that the court make ‘such division of their real and personal property that is just and reasonable.’ Petitioner's principal asset was the controlling common stock of R corporation of which petitioner was president and manager. Petitioner's principal source of income was his salary and dividends from R. Petitioner did not object to being divorced from his wife but wanted no property settlement or alimony agreement to jeopardize his controlling stock interest in R. He employed counsel to represent him in the divorce proceeding and a property settlement and alimony agreement were made by the parties calling for the payment of certain sums of money secured by a transfer in escrow of certain securities including stock in R. Thereupon a divorce was granted to the wife without contest. Petitioner paid attorneys' fees to his counsel, part of which was allocated to ‘property settlement.’ Petitioner deducted this payment under section 23(a)(2), Internal Revenue Code of 1939. This deduction was disallowed by respondent.
Held, attorney's fees not deductible. N. A. Cobb, Esq., for the petitioner. Robert J. Fetterman, Esq., for the respondent.
The Commissioner has determined a deficiency of $15,201 in the petitioner's income tax for the year 1950. The issue for determination is the correctness of respondent's action in disallowing as a deduction from gross income the sum of $20,000 paid by petitioner in 1950 as partial payment of an attorney fee incident to a divorce action. Another issue raised by the pleadings has been resolved by agreement of the parties.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
The petitioner's Federal income tax return for 1950 was filed with the collector of internal revenue for the district of Michigan.
Petitioner, F. C. Bowers, was married to Grace Bowers in 1914. Two children were born of the union, one of them being W. Bruce Bowers who is not associated with petitioner in the management of United States Register Company, hereinafter referred to as Register. A decree of divorce was granted Grace Bowers by the Circuit Court for the County of Calhoun, State of Michigan, on the 15th day of July 1950.
In 1915 petitioner became the office manager of Register and through successive promotions the auditor and vice president. At the time he became so associated, one A. O. Jones was president of Register and held that office until his death on December 18, 1934. Jones was the principal stockholder of Register and at his death his stock was inherited by his wife and daughter. On the date of Jones' death petitioner held 250 shares of Register stock. Petitioner had been very close to the Jones family during his employment by the company and this relationship continued after Jones' death so that the voting rights of the stock then held by Mrs. Jones and her daughter, coupled with his own voting stock, insured petitioner's election as president of Register in 1935. He has held that office ever since. Upon the deaths of Mrs. Jones and her daughter, petitioner acquired by bequest from them additional stock so that in 1949 his total stockholdings amounted to 3,312 shares. After the death of Mrs. Jones, on November 1, 1948, 1,700 shares of stock of Register theretofore owned by her were purchased by the company and retired. This action left the capital structure of the company with 7,760 1/2 shares outstanding. Upon Mrs. Jones' death the stock was appraised at $121.75 per share. Petitioner enjoyed a close friendship with Wayne H. Young who, with his wife, was a stockholder of the company and who between them owned 225 shares of the stock of Register. Petitioner's mentioned son also held 357 shares of the same stock. The shares of stock held at various periods by these respective individuals when coupled with the holdings of petitioner have always since his first election as president insured his reelection.
At the death of Jones, Register stock was not returning dividends to the holders. Since petitioner's ascendency to its presidency and management, Register stock has paid dividends each year with the exception of petitioner's first year as its president, 1935, and 1942, the year in which World War II developed. Its sales have grown from about $540,000 in 1935 to about $3,300,000 in 1954. Its net worth has increased during the same period from $940,000 to over $2,000,000.
For the year 1948 petitioner's salary and bonus from Register amounted to about $53,000 and for 1949, $42,000. Petitioner's stock in the company returned about $44,000 in dividends in 1948, $50,000 in 1949 and $66,000 for 1950.
For more than 20 years prior to their divorce, petitioner and his wife had been estranged. Although they lived in the same house for the sake of appearance and what they believed to be for the best interests of their children, they did not live together or associate with each other as husband and wife. On May 18, 1949, Grace Bowers instituted divorce proceedings against petitioner in the Circuit Court for Calhoun County, State of Michigan. Suit was begun by the filing of a bill of complaint and the issuance of a summons. Upon the filing of the bill of complaint an injunction was issued by the court generally prohibiting the alienation encumbering or secreting of any of petitioner's real or personal property. At the same time an order to show cause why petitioner should not be expelled from the home of the parties was also issued. A copy of the bill of complaint, summons, injunction, order to show cause, and a motion for the fixing by the court of temporary alimony and the wife's expenses incident to the divorce action were forthwith served upon petitioner. The bill of complaint, as did an amended bill subsequently filed, contained a prayer for the equitable division of the property of the parties. Petitioner immediately consulted a firm of attorneys and retained them to represent him in the divorce action. He conferred with the attorneys on many occasions but so far as the record shows never appeared in court. It appears that he moved from the home he had occupied with his wife without being ordered so to do by the court. The injunction was modified by the court without petitioner's personal appearance. The record is not clear as to the court's disposition of the motion for temporary alimony and expenses. Petitioner's counsel prepared and filed an answer to the bill of complaint and a reply to the amended answer.
Petitioner has no memory of the particular subject matter of any conference with his attorneys, although shortly before the final hearing of the divorce case he spent 5 consecutive days and nights in their office while property settlement negotiations were being carried on which ultimately resulted in a property settlement agreement. Upon the execution of the settlement agreement, petitioner waived any further notice of hearing as to the divorce action and consented to the taking of a decree of divorce by his wife.
When petitioner's counsel had been retained, negotiations looking toward a property settlement were begun and continued until the day of the final hearing when agreement was finally effectuated. Petitioner's position with respect to the divorce action remained constant from the institution of the action until entry of the decree. He was willing for his wife to obtain a divorce but opposed any property settlement which involved a permanent transfer from his hands of any Register stock. He was alarmed by being informed that the attorney for his wife had made the statement that he was not fit to manage Register and that a change should be made. The divorce complaint and the amended complaint asked for such a division of petitioner's assets as the court might deem just and equitable. On April 17, 1950, counsel for petitioner's wife wrote to counsel for petitioner the following letter:
In accordance with our understanding, we shall try to set forth a proposition of settlement such as we would be willing to recommend to Mrs. Bowers. This proposition is based upon the list of securities and property and obligations of Mr. Bowers that you furnished Mr. Storkan.
It is our belief that Mr. Bowers has, or should have, cash and securities in sufficient amount to pay off all actual indebtedness or liabilities that existed at the time you rendered such statement to Mr. Storkan. The so-called contingent liabilities cannot seem to offer any real actual liability.
We believe in the first instance that Mrs. Bowers should have the homestead and all household furniture and equipment contained therein.
Because agreement appears most difficult in view of what you gentlemen have indicated to be your conception of the value of the capital stock of United States Register Company, it seems best to approach a proposition from the standpoint of a division of the stock itself. It is your position that this stock falls into two categories— that acquired by purchase and that acquired by so-called inheritance. For the purpose of encouraging settlement, we would make the recommendation on the basis of two categories of the stock. Thus, on the stock actually acquired by purchase we would recommend that Mrs. Bowers accept 586 7/8 shares of United States Register, and in addition thereto, of the stock acquired by so-called inheritance 854 9/10 shares, or, in round numbers, a total of 1,442 shares.
In addition thereto we feel that there should be an adjustment made to Mrs. Bowers on the temporary alimony heretofore granted by the Court and based upon an alleged current income of approximately $12,000.00 per year instead of an average actual income of $95,000.00 per year. This adjustment could be subject to negotiations between us, as could the matter of reasonable attorney fees for Mrs. Bowers' counsel.
We believe Mrs. Bowers would accept the foregoing, or its equivalent, in settlement.
On July 11, 1950, a property settlement was executed by petitioner and his wife. By its terms, which were incorporated in the divorce decree entered July 15, 1950, Mrs. Bowers received title to the home of the parties and its furnishings, $50,000 in cash payable $20,000 on the date of entry of the decree, $20,000 within 90 days thereafter and $10,000 within 6 months following entry of the decree, the payment of bills in a total amount not to exceed $350, $10,000 attorney fees and $158,340 as permanent alimony payable $1,015 per month for a period of 13 years, all to be secured by the transfer in escrow by petitioner of 1,000 shares of Register stock, 602 shares of Michigan National Bank stock, and 650 shares of United Steel and Wire Company stock. So long as there was no default in the payments agreed to, petitioner was entitled to vote the stock in escrow and receive dividends thereon. The total value of property thus transferred by petitioner to his wife, exclusive of the value of their residence and its furnishings, was in excess of $218,000. The following is a balance sheet of petitioner's assets and liabilities for the year 1949, exclusive of the mentioned house and lot which was the home of the parties:
+-----------------------------------------+ ¦Cash in bank ¦¦$5,130.92¦ +------------------------------++---------¦ ¦U.S. Government Series E Bonds¦¦1,530.00 ¦ +-----------------------------------------+
Stocks: 650 sh. United Steel & Wire Co. acquired by purchase 7,800.00 over a period of years preceding 1949, market value 28 sh. Cities Service Co. acquired by purchase approx. 1,680.00 1929, market value 692 sh. Michigan Nat'l Bank, acquired by purchase over 17,300.00 a period of several years preceding 1949, market value 1500 sh. Music Broadcasting Co. acquired by purchase 1947--no market value 810 sh. U.S. Reg., by purchase 1921 to 1949 98,617.50 363 3/4 sh. U.S. Reg. Co. acquired from G.R. Jones 44,286.56 estate Jan. 24, 1949 2084 3/4 sh. U.S. Reg. Co. acquired by bequest from $253,818.31 estate of F.M. Lloyd Sept. 8, 1943, par value 52 1/2 sh. U.S. Reg. Co. received by bequest from 6,391.88 1 estate of G.M. Renn on July 3, 1944, par value 260,210.19 $436,555.17
+-----------------------------------+ ¦Current Liabilities: ¦¦ ¦¦ +------------------------++--------+¦ ¦Current Accounts payable¦¦1,294.18¦¦ +-----------------------------------+
Notes payable: Michigan Nat'l Bank, Jan. 20, 1949 20,000.00 U.S. Reg. Co., Jan. 20, 1949 32,944.91 Accrued interest 686.74 53,631.65 Unpaid taxes 26,000.00 $80,925.83 $436,555.17 -80,925.83 $355,629.34
+-----------------------------------------------------------------------------+ ¦Contingent Liabilities: ¦ ¦ ¦ +--------------------------------------------------------------+------+-------¦ ¦As endorser on the following notes at Michigan Nat'l Bank, ¦ ¦ ¦ ¦last renewals Jan. 1949: ¦ ¦ ¦ +--------------------------------------------------------------+------+-------¦ ¦G.T. Phillips ¦25,000¦ ¦ +--------------------------------------------------------------+------+-------¦ ¦David C. Bowers ¦25,000¦ ¦ +--------------------------------------------------------------+------+-------¦ ¦W. Bruce Bowers ¦17,000¦ ¦ +--------------------------------------------------------------+------+-------¦ ¦Midwest Enterprises ¦75,000¦142,000¦ +-----------------------------------------------------------------------------+
The total fee charged to petitioner by his attorneys for all services rendered incident to the divorce action was $60,000, $45,000 of which was variously designated on their books of account as ‘Alimony’ and ‘Property Settlement, etc.‘ and $15,000 of which was designated as ‘Divorce’ and later as ‘Divorce & Alimony.’ On August 20, 1950, petitioner paid his attorneys $20,000, deduction of which in petitioner's income tax return for 1950 as a sum expended for ‘protection’ or conservation of property held for the production of income has been disallowed by respondent in arriving at a determination of deficiency herein. Upon the advice of his attorneys that the $45,000 charge would be deductible from his taxable income, petitioner instructed that the payment be applied to that item of the attorney fee. The books of cash receipts of the attorneys contain the following entries:
+------------------------------------+ ¦ ¦Credit ¦Balance ¦ +-----------------+--------+---------¦ ¦August 29, 1950 ¦$20,000 ¦$40,000 ¦ +-----------------+--------+---------¦ ¦December 29, 1951¦10,000 ¦ ¦ +-----------------+--------+---------¦ ¦January 28, 1955 ¦5,000 ¦ ¦ +------------------------------------+
OPINION.
KERN, Judge:
Assuming that the facts found herein bring this proceeding within the ambit of Arthur B. Baer, 16 T.C. 1418, revd. 196 F.2d 646, we continue to be of the opinion, with due deference to the Court of Appeals for the Eighth Circuit, that that case was correctly decided in this Court and that our opinion therein correctly stated the applicable principles of law. Furthermore, we share the view expressed by Judge Woodrough, who filed a dissenting opinion in that case (Baer v. Commissioner, supra, p. 653) to the effect that the rationale of Lykes v. United States, 343 U.S. 118, ‘clearly admonishes against sanctioning deduction under section 23(a)(2) in this case.’
In spite of the variations in fact we think that the expenses sought to be deducted here were incurred in a situation which primarily and essentially involved personal relationships and personal considerations, and therefore constituted personal expenses which have been held to be nondeductible in cases such as Lindsay C. Howard, 16 T.C. 157, and Thorne Donnelley, 16 T.C. 1196.
Reviewed by the Court.
Decision will be entered for respondent.