Opinion
No. 244, Docket No. 20562.
June 30, 1947.
Appeal from the District of the United States for the Northern District of New York.
Action by Charles B. Mertz against Harry M. Hickey, Collector of Internal Revenue for the Fourteenth District of New York, to recover income taxes allegedly erroneously assessed and paid under protest. From a judgment of the District Court in favor of defendant, 68 F. Supp. 159, plaintiff appeals.
Affirmed.
Appeal by the plaintiff from a judgment of the District Court for the Northern District of New York in a suit to recover an alleged over-payment of income taxes for the taxable year 1941. Affirmed.
A deficiency of $10,373.39 in the income taxes of the plaintiff for 1941 was assessed upon the inclusion in his gross income for that year of $36,736.34 which he then received under the circumstances about to be related. His contention was, and is, that the amount he received was exempt from taxation under Sec. 22(b)(3) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 22(b)(3), because it was a bequest from a former employer.
The relevant circumstances are well stated in the following excerpt from the opinion of the trial judge who filed separate findings in substantial accord with it:
"The facts are not seriously in dispute, and they may be summarized as follows: Plaintiff for several years was employed as the personal secretary of John N. Willys who died on August 26, 1935. At the time of his death Mr. Willys was a resident of the State of Florida and the probate of his will occurred in that jurisdiction.
"Mr. Willys executed a last will and testament dated June 29, 1934, under the terms of which there was devised and bequeathed to plaintiff three per cent of the remainder of his estate after the payment of debts, expenses and certain specific legacies. Plaintiff was nominated as one of the executors and trustees of said will. About May 13, 1935, Mr. Willys executed another last will and testament under the terms of which the major portion of his estate was bequeathed to his widow, Florence Dolan Willys. No provision whatever was made for the plaintiff in said will, and the benefits which his only child, Virginia Willys de Landa, would receive were substantially reduced from that given her under the will of June, 1934. The latter will was offered for probate, and the plaintiff took the necessary procedural steps to contest the validity of that instrument. He consulted with Mrs. de Landa and her representatives, as it was apparent that their interests would be substantially identical in opposing the probate of the 1935 will, and establishing the validity of the will dated June 29, 1934.
"As a result of such conferences an arrangement was made, the terms of which are not clear, but it appears without dispute that on or about September 25, 1935, as a result of the conferences, Mrs. de Landa signed an agreement or retainer whereby she retained Messrs. Goodman and Werner, attorneys of New York City, who were in fact the attorneys for plaintiff, to cooperate and act with her attorney, William M. Sullivan, in the matter of the contest of the will above referred to. The agreement provided in substance that the attorneys should receive as compensation for such services a proportionate share of the amount by which Mrs. de Landa's share in the estate was enhanced by contest, suit or settlement.
"The plaintiff was not a party to the agreement insofar as appears on the face thereof, but it appears without dispute that he actually agreed to consolidate the trial of the objections filed by him to the probate of the 1935 will with the trial of the objections filed by Mrs. de Landa, and that because he was apprehensive as to what might happen to his rights in the event that Mrs. de Landa should decide to withdraw her objections, it was agreed between Goodman and Werner and the plaintiff that he should receive seventy-five per cent of the sum received by Messrs. Goodman and Werner on account of the retainer above mentioned, such percentage to be based upon the net amount after the deduction of expenses, taxes, etc. The plaintiff, on his part, agreed to aid in the preparation of the trial of such objections, it being apparent that by reason of his position he had knowledge of facts and occurrences which could be established by witnesses, and which would be of value in the trial of the issues raised by the objections to the Willys will.
"This rather unusual agreement was not reduced to writing, but evidence thereof is found in the oral testimony of the plaintiff, and in the writings offered and received in evidence. The plaintiff did, in fact, interview witnesses and assist in the preparation of the trial of the will contest. On or about May 20, 1936, a settlement of the will contest was made, and the will of June 29, 1935, was admitted to probate. Under the terms of the settlement, plaintiff received the sum of $10,000, in cash and Mrs. de Landa received certain property located at Palm Beach, Florida, which was valued at about $1,000,000. The record is not complete as to the disposition of the objections filed by the plaintiff, but it may be inferred that said objections were either withdrawn by plaintiff or were dismissed by the Court with the knowledge of the plaintiff.
"About June, 1940, this plaintiff, together with Messrs. Goodman and Werner, commenced an action in the Supreme Court of the State of New York to recover from Mrs. de Landa a sum equal to the amount which she had agreed to pay Messrs. Goodman and Werner under the retainer of September 25, 1935. Motion was made for a summary judgment dismissing the complaint, which motion was denied and the denial was affirmed in the Appellate Division of the Supreme Court of the State of New York. 268 App. Div. 1034, 24 N.Y.S.2d 386. The complaint in the Supreme Court action was based upon a breach of the retainer contract of September 25, 1925, (sic) and the following allegation of said complaint describes the status of this plaintiff in that action:
"`Sixteenth. — That at the time of the execution of said agreement aforementioned, it was contemplated and understood by and between the plaintiffs, Goodman and Werner, and the defendant, that the plaintiff, Charles B. Mertz, was to cooperate with, and to render services to, the said Goodman and Werner and William M. Sullivan, Esq., in procuring data, records, information and witnesses to enable the defendant to prosecute said contest, and it was expressly agreed by and between the said plaintiffs, Goodman and Werner, and this defendant, that the compensation to be paid to the plaintiff, Charles B. Mertz, should be paid out of the moneys payable under said agreement, in such manner as these plaintiffs should agree amongst themselves.'
"The action was settled during trial, about June 9, 1941, by which settlement Mrs. de Landa paid the sum of $75,000 and after there was deducted therefrom attorneys' fees, expenses and taxes, plaintiff received the sum of $36,739.34, which represented the amount due him under the terms of the agreement above referred to.
The plaintiff did not include the above item in his income tax return for the year 1941, taking the position that such sum was received as a gift, bequest or devise from the Willys estate, and, therefore, excluded from his gross income. The defendant thereafter imposed an assessment of $10,373.39 upon the plaintiff, treating the item as income and rejecting the plaintiff's contention that it was acquired by gift, bequest or devise. The amount of the assessment, together with interest, was paid under protest, and this action followed."
George F. Thompson and Warner F. Thompson, both of New York City, for appellant.
Sewall Key, Acting Asst. Atty. Gen., Lee A. Jackson and Frederic G. Rita, Sp. Assts. to Atty. Gen., and Irving J. Higbee, U.S. Atty., of Syracuse, N.Y., for appellee.
Before L. HAND, CHASE and CLARK, Circuit Judges.
It is apparent from the above that when the appellant was paid the $36,739.34 as his share of the proceeds of the settlement of the suit he and the attorneys brought against Mrs. de Landa he received some part of it as payment for the services he performed in aid of the contest of the will. Had he proved that some part of it was in satisfaction of his claim as a legatee in the settlement of the controversy over the will that much would not have been taxable, Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410, but he did not do that.
Under the heading "Conclusions of Law" which the trial judge added to findings of fact which he made and designated as such he wrote as follows: "The amount received by the plaintiff as his share of the $75,000, paid by Mrs. de Landa in settlement of the action brought by the plaintiff and Goodman and Werner was not a gift, legacy, devise or inheritance to the plaintiff, but was paid to the plaintiff as compensation for services rendered." This finding of fact that the payment was compensation for his services is well supported by substantial evidence in the record and we, accordingly, accept it to show that the amount thus received by the appellant was his taxable income no part of which was exempt under the section of the Internal Revenue Code above mentioned. Consequently he failed to carry his burden to show that the government had money in its possession justly belonging to him. Arthur C. Harvey Co. v. Malley, 1 Cir., 60 F.2d 97.
Judgment affirmed.
I concur upon the first ground stated in Judge CHASE'S opinion.