Opinion
Docket Nos. 3318 3319.
1945-11-5
HERBERT MARSHALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ELIZABETH R. MARSHALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George F. Meitner, C.P.A., for the petitioners. Bryon M. Coon, Esq., for the respondent.
Petitioners, residents of California, claimed deductions on their returns computed on community property basis, for legal fees and expenses paid during the taxable years for services rendered in connection with litigation over income taxes for prior years of petitioner Herbert Marshall and his former wife. Held, under section 23(a)(2) of the Internal Revenue Code, that petitioner Herbert Marshall is entitled to deduction for the legal expenses claimed by him. Bingham Trust v. Commissioner, 325 U.S. 365; held, further, that petitioner Elizabeth Marshall is not entitled to the deduction claimed by her, as the legal fees and expenses were not paid to conserve her community income, but were related to the community of her husband and his former wife. George F. Meitner, C.P.A., for the petitioners. Bryon M. Coon, Esq., for the respondent.
The respondent has determined income tax deficiencies against petitioners for the calendar years 1940 and 1941, as follows:
+---------------------------------+ ¦ ¦Year ¦Deficiency¦ +---------------+------+----------¦ ¦Docket No. 3318¦( 1940¦$269.52 ¦ +---------------+------+----------¦ ¦ ¦( 1941¦1,229.75 ¦ +---------------+------+----------¦ ¦Docket No. 3319¦( 1940¦161.89 ¦ +---------------+------+----------¦ ¦ ¦( 1941¦1,216.77 ¦ +---------------------------------+
The only issue is whether petitioners are entitled to deductions taken in their 1940 and 1941 returns for attorney fees and expenses paid during those years in connection with the successful defense of income tax litigation involving prior years, under the provisions of section 23 of the Internal Revenue Code, as amended by section 121(a)(2) of the Revenue Act of 1942.
FINDINGS OF FACT.
Some of the facts have been stipulated and those facts are found as stipulated.
Petitioners, who were married in February 1940, are residents of Beverly Hills, California. They filed separate returns, under the community property laws of California, for the years 1940 and 1941 with the collector of internal revenue for the sixth district of California, the income from salary of Herbert Marshall being divided between himself and his wife.
Petitioner Herbert Marshall was born in England, and is and always has been a subject of England. He is an actor, and was previously married to an English actress, Edna Best Marshall. They went to California in the latter part of 1933, where he was under contract to making a moving picture. He and his wife filed separate returns, under the community property laws of California, for the years 1933, 1934, 1935, 1936, 1937, 1938, and 1939. For the years 1933, 1934, and 1935 deficiencies in income tax were determined by respondent in the aggregate amount of $86,938.22, and for the years 1936 and 1937 in the aggregate amount of $110,147.66, on the basis that petitioner Herbert Marshall was not entitled to report his income on the community property basis under the laws of California.
After protests were made and conferences were held, litigation was had in the United States Board of Tax Appeals, which upheld petitioner as to the years 1934 and 1935, but not as to 1933. Petitioner's liability for the years 1936, 1937, 1938, and 1939 was thereafter settled in accordance with the decision of the Board.
Legal fees and expenses in connection with the above litigation were paid during the years 1940 and 1941 to petitioner's counsel on the dates and in the amounts as follows:
+------------------------+ ¦Feb. 8, 1940 ¦$62.75 ¦ +---------------+--------¦ ¦Sept. 19, 1940 ¦450.00 ¦ +---------------+--------¦ ¦July 24, 1941 ¦1,250.00¦ +---------------+--------¦ ¦Dec. 31, 1941 ¦2,507.82¦ +------------------------+
On March 31, 1940, the filing fee of $10 was paid to the United States Board of Tax Appeals in connection with the appeal taken for the years 1936 and 1937.
Petitioner Herbert Marshall kept a regular set of books on the cash basis. His assets and liabilities as of December 31, 1940, and 1941, were as follows:
+-------------------------------------------------------------------------+ ¦ ¦1940 ¦1941 ¦ +---------------------------------------------------+----------+----------¦ ¦Assets : ¦ ¦ ¦ +---------------------------------------------------+----------+----------¦ ¦Cash on hand and in banks: ¦ ¦ ¦ +---------------------------------------------------+----------+----------¦ ¦Commercial accounts ¦$12,410.37¦$41,725.59¦ +---------------------------------------------------+----------+----------¦ ¦Cash in savings accounts with banks and post office¦35,061.16 ¦34,453.82 ¦ +---------------------------------------------------+----------+----------¦ ¦Loans and advances receivable ¦2,851.36 ¦3,501.36 ¦ +---------------------------------------------------+----------+----------¦ ¦Rent deposit ¦366.00 ¦451.00 ¦ +---------------------------------------------------+----------+----------¦ ¦Investments in stocks and bonds ¦16,853.80 ¦18,353.80 ¦ +---------------------------------------------------+----------+----------¦ ¦Life insurance and annuities ¦42,048.99 ¦47,048.99 ¦ +---------------------------------------------------+----------+----------¦ ¦Furniture, furnishings, and automobiles, less ¦ ¦ ¦ +---------------------------------------------------+----------+----------¦ ¦reserve for ¦ ¦ ¦ +---------------------------------------------------+----------+----------¦ ¦depreciation (net value) ¦4,906.59 ¦10,031.04 ¦ +---------------------------------------------------+----------+----------¦ ¦Federal old age annuity tax paid ¦380.39 ¦602.89 ¦ +---------------------------------------------------+----------+----------¦ ¦Total ¦114,878.66¦156,168.49¦ +---------------------------------------------------+----------+----------¦ ¦Liabilities and net worth: ¦ ¦ ¦ +---------------------------------------------------+----------+----------¦ ¦Accrued taxes ¦6.81 ¦5.40 ¦ +---------------------------------------------------+----------+----------¦ ¦Net worth-Herbert Marshall ¦114,871.85¦156,163.09¦ +---------------------------------------------------+----------+----------¦ ¦Total ¦114,878.66¦156,168.49¦ +-------------------------------------------------------------------------+
OPINION.
TURNER, Judge:
Petitioners contend that the payments for legal fees and expenses were ordinary and necessary for the conservation of property held for the production of income. Respondent's contention is that the expenditures were nothing more than personal.
Since the briefs have been. filed in this case, the United States Supreme Court rendered its opinion in Bingham Trust v. Commissioner, 325 U.S. 365, in which it held that the taxpayer trustees were entitled to deduct as nonbusiness expenses, under section 23(a)(2) of the Internal Revenue Code, counsel fees and expenses paid in contesting unsuccessfully an income tax deficiency and fees paid for legal advice in connection with the payment of a cash legacy and in connection with tax and other problems arising upon expiration of the trust and relating to the final distribution of a trust fund among three residuary legatees. On July 19, 1945, this Court, in Howard E. Cammack, 5 T.C. 467, followed the Supreme Court's decision in the Bingham case, and held that legal fees incurred in connection with litigation for refund of income taxes that were paid as a result of disallowance of a deduction were deductible under section 23(a)(2), supra.
The rationale of these cases is applicable to petitioner Herbert Marshall, and the deductions claimed by him for legal fees and expenses paid during the taxable years shall be allowed.
The deductions claimed by petitioner Elizabeth R. Marshall for the legal fees and expenses paid during the taxable years are disallowed, for the reason that such expenditures were for services rendered to someone other than this petitioner to conserve community income in which she had no interest. The liability was related to the community of Herbert Marshall and his former wife. It had no connection with the community of petitioners.
Decisions will be entered under Rule 50.