Ruoff v. Commissioner

30 T.C. 204, 1958 U.S. Tax Ct. LEXIS 196

• Court: United States Tax Court
• Decided: May 12, 1958
• Docket: Docket No. 59951
• Status: Published

Opinions

Respondent determined a deficiency of $42,443.24 in petitioners’ income tax for 1953. The only remaining issue is whether expenses of litigation in connection with, a suit to recover property “vested” by the Attorney General, under authority of the Trading With the Enemy Act, are deductible in 1953 when paid.

FINDINGS OF FACT.

All the facts are stipulated and they are hereby so found. Madeleine duPont Ruoff, hereafter refererd to as petitioner, and Hermann F. Ruoff, her husband, are citizens of the United States, residing at Mahwah, New Jersey. They filed their joint Federal income tax return for 1953 with the collector of internal revenue for the district of Delaware. They kept their books and made their 1953 tax return on the cash basis.

On September 23,1948, the Attorney General of the United States issued a vesting order under the Trading With the Enemy Act, relating to petitioner’s property. By that order he (a) found petitioner to be a citizen of an enemy country, Germany, (b) determined that the national interest of the United States required that she be treated as a German national, and (c) vested in himself all of petitioner’s property in the United States, as identified on a schedule annexed to the order. He amended the vesting order nunc, fro tuno on October 1, 1948. The Attorney General maintained powers of supervision and control with respect to all of petitioner’s property in the United States, but an order dated December 8,1948, terminated supervision and control of certain property not here in controversy.

On September 23, 1948, petitioner owned various corporate stocks and corporate and municipal bonds of an aggregate value of approximately $2,000,000. Before, at, and after September 23, 1948, those stocks and bonds produced annual dividends and interest income aggregating about $75,000. The property vested in the Attorney General included these stocks and bonds.

On September 23,1948, petitioner was the life beneficiary of the income of a trust established by herself in 1927 for her own benefit and that of her sons as remaindermen. The value of the corpus of the trust approximated $250,000 with an annual income of approximately $10,000. The property vested in the Attorney General included petitioner’s interest in this trust. It also included an interest in a mortgage requiring periodic principal and interest payments amounting to about $240 per year.

On October 7,1948, petitioner retained attorneys to pursue whatever administrative and judicial remedies were available to secure the return of the vested property. On November 10, 1948, the attorneys filed with the Attorney General petitioner’s notice of claim under the Trading With the Enemy Act for the return to her of the vested property. On November 15,1948, they filed a civil action under the Trading With the Enemy Act in the United States District Court for the District of Columbia on petitioner’s behalf against the Attorney General for the return to her of the vested property, alleging that petitioner was at all material times the lawful owner of the vested property. The defendant, the Attorney General, denied the allegation.

On August 12, 1953, petitioner’s attorneys and the Attorney General entered into a stipulation settling these matters. The stipulation provided that the vested property should be returned to petitioner, but that the Attorney General should retain the income increment thereon from the date of vesting to the date of the stipulation. On November 23, 1953, the Attorney General returned the vested property to petitioner in accordance with the stipulation. The property returned to petitioner included State and municipal bonds in the face amount of $88,000. The settlement stipulation also provided for the sale of petitioner’s life interest in the trust to the Attorney General.

Representation of petitioner in these matters required that her attorneys do extensive preparatory work, make numerous appearances and arguments in court, and attend many conferences with departmental officials. Petitioner paid $67,800.72 to her attorneys in 1953, which was reasonable compensation for the services rendered.

Petitioner and her husband deducted $67,800.72 from gross income on their 1953 income tax return as legal expense. Respondent disallowed this deduction, but in recomputing petitioner’s gain realized from the sale to the Attorney General of the life interest in the trust, respondent allocated to the basis of the life interest $8,594.81 of the total legal fees of $67,800.72.

OPINION.

OppeR, Judge:

The enactment of section 23 (a) (2) ¹ was not intended to change the firmly established distinction between current expenses and capital outlay. Trust of Bingham v. Commissioner, 325 U. S. 365. In Bowers v. Lumpkin, (C. A. 4) 140 F. 2d 927, certiorari denied 322 U. S. 755, “the court makes clear that the phrase upon which the petitioner here relies was not intended to abrogate the settled rule relative to expenditures in defense of title to property, and that such expenditures are capital items to be added to the cost of the property.” James C. Coughlin, 3 T. C. 420, 423.

“The test accordingly seems to us to be whether prior to the amendment such a deduction as that now in controversy would have been permitted to a taxpayer admittedly engaged in carrying on a trade or business. The application of that test shows that the defense-of-title rule had been repeatedly applied in the trade or business situation, and that such taxpayers were equally required to capitalize the outlay.” Harold K. Hochschild, 7 T. C. 81, 87.² See, e. g., Levitt & Sons v. Nunan, (C. A. 2) 142 F. 2d 795; Murphy Oil Co. v. Burnet, (C. A. 9) 55 F. 2d 17, 26, affd. 287 U. S. 299; Brawner v. Burnet, (C. A., D. C.) 63 F. 2d 129; Moynier v. Welch, (C. A. 9) 97 F. 2d 471; Porter Royalty Pool, Inc., 7 T. C. 685, affd. (C. A. 6) 165 F. 2d 933, certiorari denied, 334 U. S. 833.

Giving petitioner’s claim its broadest scope, and assuming without deciding that the contest with the office of the Alien Property Custodian was one to “recover” petitioner’s property and to safeguard and defend it rather than to acquire property whose ownership she had lost, it is clear that petitioner’s right to the property itself was to some degree involved³ and that her situation thus still falls within the rule. In essence, the litigation between petitioner and the Alien Property Custodian had as its subject only the petitioner’s title to and possession of the seized property. Here there can be no question of a possible business expense since it is apparently conceded that petitioner was not engaged in any business. Cf. Commissioner v. Speyer, (C. A. 2) 77 F. 2d 824, affirming 30 B. T. A. 517, certiorari denied sub nom. Helvering v. Speyer, 296 U. S. 631. Nor is there here any element of attorneys’ services for the recovery of income. The settlement expressly left all the income with the Attorney General.⁴ See Pennroad Corporation, 21 T. C. 1087, affd. (C. A. 3) 228 F. 2d 329. All petitioner did at the most was to maintain successfully her position that she was entitled for an indefinite period into the future to possession and ownership of the property to which the litigation related.

It is not clear to what extent petitioner is here contending that one purpose of the litigation was apart from and beyond the specific matter of possession and title to the property and involved the clearing of petitioner’s status as that of an “enemy.” But even if made, such an argument could not avail her since the objective described would then be purely personal and an expressly forbidden deduction under section 24 (a) (1). See Lykes v. United States, 343 U. S. 118.

Some confusion is no doubt engendered by the words employed to carry into effect the purpose of section 23 (a) (2). The phrase “conservation, or maintenance of property,” severed from its context, may sound as though it were intended to cover a defense of title. But the cases indicate that the maintenance and conservation of capital assets to which the statute refers relates primarily to the protection of the physical property and not to the right or title of the taxpayer with respect to it. And this is as true respecting a claim arising subsequent to acquisition as in the case of one which constituted a previously existing cloud on title. See, e. g., George W. Wetherbee, 20 B. T. A. 35, reversed sub nom. Bliss v. Commissioner, (C. A. 5) 51 F. 2d 984; Agnes Pyne Coke, 17 T. C. 403, affirmed per curiam (C. A. 5) 201 F. 2d 742; Helvering v. Stormfelts, (C. A. 8) 142 F. 2d 982; E. J. Murray, 21 T. C. 1049, affd. (C. A. 9) 232 F. 2d 742, certiorari denied 352 U. S. 872; James C. Coughlin, supra. See also Virginia Hansen Vincent, 18 T. C. 339, reversed on other grounds (C. A. 9) 219 F. 2d 228; Mercantile National Bank at Dallas, 30 T. C. 84. The most recent statement, Lewis v. Commissioner, (C. A. 2) 253 F. 2d 821, affirming 27 T. C. 158, is:

The taxpayer now urges that the expenses incurred by him in defending his title are deductible under Section 23 (a) (2). In support of this argument he urges that a distinction must be drawn between expenditures incurred in perfecting title to property, which taxpayer apparently concedes to be nondeductible; and expenses incurred in defending title. This distinction is untenable under the authorities. Levitt & Sons v. Nunan, * * *; Bowers v. Lumpkin, * * *; Croker v. Burnet, 62 Fed. (2d) 991 (D. C. Cir. 1933). Whether the suit is to perfect or to defend title the expenses are a capital item rather than an income deduction. * * *

It would be idle to suggest that all the authorities in this field can be reconciled. See Brookes, “Litigation Expenses and the Income Tax,” 12 Tax L. Rev. 241. But essentially the distinction among the cases permitting or denying deduction can be inferred. It is that where specific income is involved the expense is deductible, whereas where all income for the indefinite future depends upon the result,⁵ this is a part of the bundle of rights of possession and ownership, is essentially capital in nature, and does not engender a deduction properly allocable currently to any limited year or taxing period. Thus in Safety Tube Corporation, 8 T. C. 757, affd. (C. A. 6) 168 F. 2d 787, we denied such a deduction, with this statement (p. 768):

Seaton claimed for himself and associates a participating interest in petitioner’s commercial nse of the patent. This claim and the expenses incurred in resisting it bore no special relation to 1940 or any other year. Seaton demanded part or all of the earnings of the business for all years, a right in or to the income-producing asset that petitioner resisted, not a claim against specific income therefrom.

Similarly, in Louisiana Land & Exploration Co., 7 T. C. 507, affd. (C. A. 5) 161 F. 2d 842, we said (p. 515):

The distinction between capital expenditures and business expenses is generally made by looking to the extent and permanency of the benefit derived from the outlay. The benefit from business expenses is generally realized and exhausted within a year and the expense is therefore said to be of a recurring nature. * * * On the other hand, an item of expense is of a capital nature where it results in the taxpayer’s acquisition or retention of a capital asset, or in the improvement or development of a capital asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation. * * * A capital expenditure is thus nonrecurring, even though many similar expenditures are made by the taxpayer. The one-year period referred to above is not, of course, a touchstone to be arbitrarily applied, but is resorted to in definition as an aid in expressing the distinction.

We conclude tbat the present situation is no different from those in which it has repeatedly been held that expenses incurred in defense of title must be capitalized and are not deductible as current items. On this issue we view respondent’s determination as correct.

Reviewed by the Court.

Decision will be entered under Rule 50.

Withey, J., dissents.

1 SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net Income there shall be allowed as deductions :

(a) Expenses.—

***»••*

(2). Non-trade or non-business expenses. — In the case of an Individual, all the ordinary and necessary expenses paid or Incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of Income.

2 That case, to be sure, was reversed by a divided court (C. A. 2) 161 F. 2d 817, but on the theory that the entire expense was attributable to Hochschild’s business activity resulting from his receipt of current income and, hence, was an ordinary and necessary business expense. See Kornhauser v. United States, 276 U. S. 145.

3 Although petitioner says in her brief that the issue in the litigation was “whether [petitioner] was an ‘enemy’ who could not recover her vested property,” she further describes it as involving:

“whether [petitioner’s] presence in Germany * * * barred her from recovering the vested property * * * [and] ;

“whether * * * she had * * * a residence in the United States, and * * * was * * * thus entitled to recover the vested property * * * and

“whether certain acts * * * deprived her of any right to recover the vested property * * *” (Emphasis added.)

Except for the “recovery” thus in issue the Alien Property Custodian’s right to absolute title and to deal with the property as owner is unmistakably apparent. See, e. g., Trading with the Enemy Act, sec. 12. United States v. Borax Consol., (N. D., Cal.) 62 F. Supp. 220.

4 Respondent has nevertheless conceded that an allocation of the fees should be made so that the amount attributable to income will be deductible. He says: “It is suggested that if the Court indicates the method, the determination of the amount of the fee allocable to the claim for taxable income and related adjustments be left to stipulation by counsel for the parties * * This concession will, of course, be given effect and the only reasonable method apparent to us is to permit deduction of that proportion of the fee which the claim to taxable income, if eventually successful, would have borne to the total claim. This computation may be submitted In the proceeding under Rule 50.

5 That this was the ease here cannot be questioned. “As a practical matter, [petitioner’s] payments to her counsel were certainly made for the collection of Income, In the sense that the outcome of the litigation reached Into the future, and assured her of continuing Income from the date of return [of the property]. * * *” (Petitioner’s brief, p. 18.) Such a statement, incidentally, could be made as to any proceeding to obtain, defend, or protect title.