Opinion
Docket No. 83566.
1961-11-21
HENRY M. ROCKWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wright Matthews, Esq., for the petitioner. George Voss, Esq., for the respondent.
Wright Matthews, Esq., for the petitioner. George Voss, Esq., for the respondent.
Held, payments for a release, attorneys' fees, and other costs arising out of the defense of a suit for breach of promise to marry are personal expenses, deduction of which is barred by section 262 of the 1954 Code.
Respondent has determined a deficiency in the income tax of petitioner for the year 1956 in the amount of $29,317.17. The adjustment giving rise to the deficiency is ‘(a) Legal expenses $34,502.11’ and is explained in the statutory notice as follows:
(a) It has been determined that legal fees and other expenditures in the amount of $34,502.11 deducted on your return as ordinary and necessary expenses for the conservation of property held for the production of income were personal expenses and unallowable deductions under Section 262 of the Internal Revenue Code of 1954.
The question presented is whether petitioner may deduct as ordinary and necessary expenses for the conservation of income-producing property the expenses he incurred in defense and settlement of a suit for breach of promise to marry.
FINDINGS OF FACT.
A stipulation of facts filed by the parties is incorporated herein by this reference.
Petitioner, an individual whose mailing address is Houston, Texas, timely filed a Federal income tax return for the year 1956 with the district director of internal revenue, Austin, Texas.
Petitioner and his family have a reputation of wealth in and around Houston. In fact, petitioner's net worth as of December 31, 1955, and July 31, 1956, was $5,399,409.35 and $5,756,723.82, respectively. This net worth consisted in the main of income-producing stocks and bonds. It also consisted of a one-half interest in Rockwell's, a partnership engaged in the lumber business which additionally owned approximately $3,340,000 in income-producing securities at those dates.
During the calendar year 1955 a lawsuit was filed against petitioner by Gertrude Walters alleging breach of promise to marry and asking damages in the amount of $1 million and in addition, punitive damages in the amount of $500,000.
The attorney for petitioner was of the opinion that this was just a situation in which a woman wanted to obtain money from a wealthy man. Efforts were made to ascertain if the suit could be disposed of by paying the plaintiff a reasonable sum of money.
When initial attempts at settlement failed, extensive preparations were made to defend successfully against the suit at trial. Numerous depositions were taken, an investigation of the plaintiff was made, and various pleadings and motions were filed and prosecuted.
Trial in the suit was had in the District Court of Harris County, Texas (61st Judicial District), commencing on March 19 and ending on March 27, 1956. Transcript of the testimony in the trial covered 1,116 pages. Based upon a jury verdict on certain special issues, that court entered a judgment in favor of petitioner on April 24, 1956. Attorneys for Gertrude Walters filed notice of appeal from the judgment of the trial court. While the appeal was pending, petitioner paid Gertrude Walters and her attorneys the sum of $7,500 in consideration of their agreement to refrain from further litigation, and release from all claims. This agreement provided, among other things, as follows:
WHEREAS, the parties to said suit have agreed upon a compromise and settlement of all matters in controversy therein.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS:
That we, Gertrude Walters, a feme (sic) sole, and her attorneys, George W. Eddy and Bennett Lay, for and in consideration for the sum of $7,500.00 cash to us in hand paid by Henry M. Rockwell, receipt whereof is hereby acknowledged and confessed, have released and discharged and by these presents do release and discharge the said Henry M. Rockwell of and from and all claims, demands, wrongs, injuries, damages, liability and causes of action of every kind and character whatsoever arising or growing out of the facts and allegations contained and set out in plaintiff's petition filed in said above described cause, and said sum of $7,500.00 is hereby accepted by us in full and final settlement and satisfaction of said above described suit.
During the year 1956, petitioner expended the following amounts in defense and settlement of the suit:
+------------------------------------------------------------+ ¦Type of expense ¦Amount ¦ +-------------------------------------------------+----------¦ ¦Attorneys' fees ¦$22,749.69¦ +-------------------------------------------------+----------¦ ¦Reporters' fees for transcripts, depositions, etc¦371.25 ¦ +-------------------------------------------------+----------¦ ¦Investigator's fee ¦3,631.17 ¦ +-------------------------------------------------+----------¦ ¦Expert witness fee ¦250.00 ¦ +-------------------------------------------------+----------¦ ¦Release ¦7,500.00 ¦ +-------------------------------------------------+----------¦ ¦Total ¦34,502.11 ¦ +------------------------------------------------------------+
All of these expenditures constitute reasonable, ordinary, and necessary expenses in connection with the defense of the suit brought by Gertrude Walters against petitioner.
OPINION.
BLACK, Judge:
The sole issue presented is whether petitioner may deduct the expenses, including a payment for settlement and attorneys' fees, in defense of a suit for breach of promise to marry and for damages as ordinary and necessary expenses of the conservation or maintenance of property held for the production of income under section 212(2) of the 1954 Code.
SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—(2) for the management, conservation, or maintenance of property held for the production of income; * * *
Petitioner contends that since he would have had to sell some of his income-producing stocks and bonds in order to satisfy a judgment against him in the suit for breach of promise to marry, the expenses he incurred in defending against and settling it were ordinary and necessary for the conservation of his income-producing property. Respondent, on the other hand, contends that the expenses were personal expenses, deduction of which is barred by section 262 of the 1954 Code
as interpreted by section 1.262-1(b)(6), Income Tax Regs.
SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.
Sec.1.262-1. Personal, Living, and family expenses.(b) Examples of personal, living, and family expenses. Personal, living, and family expenses are illustrated in the following examples:(6) Amounts paid as damages for breach of promise to marry, and attorneys' fees and other costs of suit to recover such damages, are not deductible.
The deduction of personal expenditures has been barred by income tax statutes since 1913.
In section 215(a) of the Revenue Act of 1918 it was provided:
The Tariff Act of October 13, 1913, sec. II(B), 38 Stat. 167; Revenue Act of 1916, title I, part I, sec. 5(a)(1), 39 Stat. 759.
SEC. 215. That in computing net income no deduction shall in any case be allowed in respect of
(a) Personal, living, or family expenses;
The respondent, in interpreting that section of the Revenue Act of 1918, stated in O.D. 546, 2 C.B. 157 (1920):
Amounts paid as damages for breach of promise to marry are considered personal expenses which are not deductible from the gross income of the taxpayer.
The Revenue Acts of 1921, 1924, 1926, 1928, 1932, and 1934 contained the same language as section 215(a) of the Revenue Act of 1918.
Revenue Act of 1921, sec. 215(a)(1), 42 Stat. 242.Revenue Act of 1924, sec. 215(a)(1), 43 Stat. 271.Revenue Act of 1926, sec. 215(a)(1), 44 Stat. 28.Revenue Act of 1928, sec. 24(a)(1), 45 Stat. 802.Revenue Act of 1932, sec. 24(a)(1), 47 Stat. 183.Revenue Act of 1934, sec. 24(a)(1), 48 Stat. 691.
In Article 24-1 of Regulations 86 (relating to the income tax under the Revenue Act of 1934) the language of O.D. 546, supra, was expanded for the first time incorporated in the regulations, as follows:
Amounts paid as damages for breach of promise to marry, attorneys' fees and other costs of suit to recover such damages, attorneys' fees paid in a suit for separation, alimony, and an allowance paid under a separation agreement are not deductible from gross income. * * *
The same language appeared in Regulations 94, art. 24-1, which interpreted the Revenue Act of 1936,
and Regulations 101, art. 24-1, which interpreted the Revenue Act of 1938.
Revenue Act of 1936, sec. 24(a)(1), 49 Stat. 1662.
Similar prohibitions against the deduction of damages and costs arising out of a suit for breach of promise to marry were contained in Regulations 103, sec. 19.24-1 (1940); Regulations 111, sec. 29.24-1 (1942); and Regulations 118, sec. 39.24(a)-1 (1952), all of which interpreted section 24(a)(1) of the 1939 Code.
Revenue Act of 1938, sec. 24(a)(1), 52 Stat. 464.
The Supreme Court has said in Helvering v. Winmill, 305 u.s. 79, 83 (1938), that in the interpretation of tax statutes:
Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.
We believe the legislative and regulatory history which we have outlined above brings the section of the regulations upon which respondent relies clearly within the class to which the Supreme Court referred in the Winmill case.
Petitioner contends that the regulation is inconsistent with section 212(2) of the 1954 Code which was first enacted in 1942 as section 23(a)(2) of the 1939 Code. In so contending, petitioner urges that it was the intent of Congress to permit deduction of such expenses by the enactment of the section relating to deduction of nontrade or nonbusiness expenses. In Lykes v. United States, 343 U.S. 118, 121-124 (1952), the Supreme Court explained that prior to the 1942 enactment, section 23 of the 1939 Code
made no mention of nontrade or nonbusiness expenses. Accordingly, in Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783, when this Court held that expenses incurred by an individual taxpayer in looking after his own income-producing securities were not expenses ‘incurred * * * in carrying on any trade or business,‘ it also held that they were not deductible.
To change that result, Congress, in 1942, added the present Sec. 23(a)(2). That provision as demonstrated in its legislative history, permits the deduction of some, but not all, of the nontrade and nonbusiness expenses of an individual taxpayer. It specifies those paid or incurred (1) ‘for the production or collection of income’ or (2) ‘for the management, conservation, or maintenance of property held for the production of income.’ See H.R. Rep. No. 2333, 77th Cong., 2d Sess. Congress might have gone further. However, neither the decision that occasioned the amendment, the Committee Reports on it, nor the language adopted in it indicate that Congress sought to make such a change of policy as would authorize widespread deductibility of personal, living or family expenditures in the fact of Sec. 24(a)(1). Bingham's Trust v. Commissioner, 325 U.S. 365, 374, 65 S.Ct. 1232,1237, 89 L.Ed. 1670; McDonald v. Commissioner, 325 U.S. 57, 61-63, 65 S.Ct. 96, 97-98, 89 L.Ed. 68.
Petitioner relies on Baer v. Commissioner, 196 F.2d 646 (C.A. 8, 1952), and other cases
which have followed that precedent, to support the deductions here sought. Those cases involved the deductibility of expenses incurred in connection with separations or divorces in which most of the expenses were concerned with the arrangements of property settlements. The Court of Appeals for the Eighth Circuit in the Baer case said at page 651:
E.g. Owens v. Commissioner, 273 F.2d 251 (C.A. 5, 1959); Bowers v. Commissioner, 243 F.2d 904 (C.A. 6, 1957).
Here the services, to the extent found by the Tax Court, were not to prevent the payment of the liability due Mrs. Baer but to adjust the method of satisfying that liability as not unnecessarily to reduce petitioner's income from the property he confessedly owned. * * *
As was pointed out in McMurtry v. United States, 132 F.Supp. 114, 116 (Ct. Cl. 1955), the Baer case stands for the proposition that
When the controversy between the spouses goes not to the question of liability but to the manner in which it might be met and, at the same time the wife demands a part of the husband's income-producing property, the control over which affects the husband's general income-earning capacity, legal fees incurred by the husband are deductible.
We think that the Baer case upon which petitioner so strongly relies is entirely inapplicable to a decision of the instant case. The facts of the two cases are entirely different.
As was said by the Supreme Court in Lykes v. United States, supra:
Legal expenses do not become deductible merely because they are paid for services which relieve a taxpayer of liability. That argument would carry us too far. It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-producing property he might have. * * *
The Supreme Court in the Lykes case was speaking of section 23(a)(2) of the 1939 Code which has its counterpart in section 212(2) of the Revenue Act of 1954. As to section 23(a)(2), the Supreme Court went on to say in the Lykes case:
It has been applied to expenses on the basis of their immediate purposes rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-producing assets by reducing his general liabilities. * *
We hold, therefore, that petitioner is not entitled to deduct the expenses arising from the breach of promise suit in the amount of $34,502.11.