Court Opinion

ID: 4606965
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:39:39.598002+00
Date Added: 2024-06-11T07:53:27.817201
License: Public Domain

JAMES E. WEST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.West v. CommissionerDocket No. 101404.United States Board of Tax Appeals44 B.T.A. 1159; 1941 BTA LEXIS 1220; August 5, 1941, Promulgated *1220  Petitioner and his wife owned all of their property in community in the State of Washington until, by a property settlement approved by decree of the Superior Court in the year 1935, such property the separate property of petitioner.  By such decree petitioner was granted an absoluted divorce.  Thereafter, until April 14, 1938, petitioner was unmarried.  In the taxable year 1937 he received income in substantial amounts from investments, loans and personal services.  On April 14, 1938, the court which decreed the divorce evtered a decree vacating the findings of fact, conclusions of law, and the interlocutory and final decrees of divorce "as fully and to the same extent as though the same had never been entered." Petitioner secured an extension of time in which to file his income tax return for the taxable (calendar) year 1937 and on June 15, 1938, filed such return.  He reported the income received during 1937 as community income and computed his tax on the basis of one-half thereof, claiming that such income was community property because of the decree vacating the divorce.  Respondent determined a deficiency in tax on the theory that the income involved was the separate property*1221  of petitioner.  Held, that the income tax act of 1936 imposed income taxes on such income as his separate property and an obligation on petitioner to pay the same, prior to the entry of the vacating decree, and that such decree did not affect the right of the Government to tax the income on such basis.  H. B. Jones, Esq., and George C. Kinnear, Esq., for the petitioner.  B. H. Neblett, Esq., for the respondent.  HILL*1159  Respondent determined a deficiency in petitioner's income tax for 1937 in the amount of $10,527.27.  The primary issue is whether or not petitioner was entitled to file his income tax return for the taxable year on a community property basis.  The second issue concerns a loss deduction.  The final issue is whether or not petitioner was entitled to deduct amounts paid in the taxable year for services of attorneys and accountants.  FINDINGS OF FACT.  The notice of deficiency in this proceeding was sent to petitioner at Bell Street Dock, Seattle, Washington.  Petitioner's income tax return for the taxable year was filed with the collector of internal revenue for the district of Washington.  Petitioner is owner of a*1222  majority of stock of World Importers, Inc., hereinafter referred to as the corporation.  The corporation was organized under the laws of the State of Washington in April 1933, and is engaged in the business of importing and wholesaling distilled spirits.  The corporation's principal place of business is located in *1160 Seattle.  It also operates branches in Portland, Oregon, and San Francisco and Los Angeles, California.  In the year 1937 petitioner was vice president and general manager of the corporation.  In that year he received a salary of $33,512 from the corporation.  In 1937 the corporation paid petitioner interest in the aggregate amount of $6,868.75 on loans which petitioner had made to the corporation.  Petitioner received dividends on his stock of the corporation in 1937 in the sum of $32,400.  Petitioner married Felita M. West on May 19, 1920.  At the time of their marriage petitioner's wife owned no property and petitioner possessed a few hundred dollars in cash.  Since that time neither petitioner nor his wife has received property by gift or inheritance.  In the taxable year petitioner and Felita M. West were the parents of three minor children.  Petitioner*1223  and his wife became involved in domestic difficulties due to excessive drinking of alcohol by the wife.  By summons served on petitioner's wife dated January 2, 1934, and filed in the office of the county clerk of King County, Washington, on February 10, 1934, petitioner instituted divorce proceedings in the Superior Court of the State of Washington for King County.  Under date of February 16, 1935, in contemplation of divorce, petitioner and his wife entered into an agreement entitled "Settlement Agreement." The agreement provided that the petitioner's wife should have certain furniture then in storage and that petitioner should pay storage and transportation charges thereon.  The agreement further provided: That plaintiff [petitioner] is to pay to the defendant the sum of eighty dollars ($80.00) per month as alimony, until such time as the defendant shall remarry, when said payments shall cease.  That plaintiff is to support their said children, James E. West, Jr., John W. West and Felita M. West, and is to keep the said children in private schools so long as he is financially able to do so.  That the plaintiff agrees to carry a policy of $25,000.00 in the New York Life*1224  Insurance Company and pay the premiums thereon so long as he is financially able so to do, and to provide that in the event of his death, $12,500.00 thereof shall be used for the care, support and education of his children, and $12,500.00 thereof payable to the defendant, which last mentioned provision for the defendant plaintiff may change as he shall see fit in the event that the defendant shall remarry prior to plaintiff's death, but in the event that the defendant shall not remarry prior to the plaintiff's death, then the defendant shall receive eighty dollars ($80.00) per month from the said insurance until the sum of $12,500.00 shall be exhausted; provided that in the event of the death of defendant, the payments shall cease and the same shall go to the surviving children of the plaintiff and defendant.  It is agreed that the plaintiff and the defendant shall have the joint care, control and custody of their said children, subject, however, to the further order of the above Court.  It is understood and agreed that the plaintiff shall have all of the community property of the parties hereto, including the equity in the Broadmoor home and *1161  the Lynn Street property, *1225  which has been deeded to plaintiff, and including all capital stock and financial interest in World Importers, Inc., a corporation, and any other life insurance which the plaintiff is now carrying upon his own life, and all moneys and notes and accounts receivable.  On the same date the Superior Court handed down its findings of fact in the divorce proceeding.  The findings of the court herein material were: IV.  That the plaintiff and the defendant have entered into a written property agreement, which is completely and entirely satisfactory to both of the parties, and that said agreement is dated the 16th day of February, 1935.  * * * VII.  That plaintiff shall pay to the defendant as alimony, until such time as the defendant shall remarry, the sum of eighty dollars ($80.00) per month, and shall, so long as he is financially able so to do, carry life insurance in the New York Life Insurance Company to the extent of $12,500.00, and shall provide in said policy that in the event of the death of the plaintiff, said defendant not having remarried, the defendant shall be entitled to receive eighty dollars per month from the proceeds of said policy of $12,500, until the said*1226  $12,500.00 of insurance shall be exhausted, provided that the defendant shall live, but in the event of her death at any time, the said insurance or any part thereof may be made payable to the surviving children of the parties.  Under date of April 9, 1935, the court handed down the following conclusions of law: III.  That the plaintiff shall pay to the said defendant as alimony, the sum of eighty dollars ($80.000) per month, until the defendant shall remarry, when said payments shall cease.  IV.  That the parties have entered into a written agreement satisfactory to both, disposing of their community property.  On April 9, 1935, the court entered an interlocutory decree of divorce in favor of petitioner.  In its decree the court: * * * ORDERED, ADJUDGED AND DECREED that the plaintiff shall pay to the defendant the sum of Eighty Dollars ($80.00) per month alimony, until the defendant shall remarry, at which time said payments of alimony shall cease, and that the plaintiff shall provide life insurance so long as his financial condition shall permit, as set out in the findings herein.  * * * IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the property settlement and*1227  arrangement made between the parties is satisfactory to both the plaintiff and the defendant, and is hereby confirmed.  Under date of October 16, 1935, upon motion of petitioner, the Superior Court entered a decree of absolute divorce in favor of petitioner.  No appeal was ever taken from either of the divorce decrees.  *1162  Soon after the divorce decree became final petitioner and Felita M. West resumed marital relations, thereafter living together as man and wife.  Felita M. West joined petitioner in Los Angeles late in 1935, where petitioner had an apartment.  In 1936 petitioner caused Felita M. West to be placed first in a hospital for a short time and later in a sanitarium for treatment for alcoholism.  In August 1936, upon complaint of petitioner, the Superior Court for the County of Los Angeles, adjudged Felita M. West an alcoholic and required her to become a patient at the Santa Monica Rest Home, a sanitarium.  The treatment of Felita M. West for alcoholism was successful and in 1937 petitioner informed his attorneys that he and Felita M. West wished the divorce decree to be set aside.  Under date of April 12, 1938, petitioner and Felita M. West filed a joint*1228  petition in the Superior Court of the State of Washington for King County to set aside and vacate the interlocutory and final decrees of divorce.  On April 14, 1938, the court entered its decree stating: * * * it appearing that plaintiff and defendant have entered into an agreement, on file herein, wherein and whereby they have mutually agreed that said final decree of divorce and said interlocutory order or decree of divorce shall be set aside and vacated, and it further appearing that both the said parties to the above entitled action have signed and verified a written petition, which is on file herein, praying that such action be taken by the above entitled court, and it further appearing that it will be for the best interests of both the plaintiff and said defendant and their said children and in the public interest that said interlocutory and final decrees be vacated, and the court being fully advised in the premises; IT IS CONSIDERED, ORDERED, ADJUDGED AND DECREED that the final decree of divorce entered in the above entitled action on or about the 16 day of October, 1935, and the interlocutory order or decree entered in the above entitled action on or about the 9th day of*1229  April, 1935, be and the same are hereby vacated and set aside, as fully and to the same extent as though the same had never been entered in the above entitled action; and IT IS CONSIDERED, ORDERED, ADJUDGED AND DECREED that the findings of fact and conclusions of law heretofore entered in the above entitled action be and the same are set aside and vacated and the above entitled action dismissed without prejudice and without costs to either party.  No appeal was ever taken by either party to this decree.  Petitioner and Felita M. West did not petition to vacate the divorce decrees for tax purposes.  In the taxable year petitioner and Felita M. West were residents of the State of Washington.  Throughout the years 1934 to 1938, when not living in the State of Washington, petitioner rented apartments and rooms in Los Angeles and San Francisco, California.  Petitioner dealt in steel drums as a side line, purchasing drums at low prices for resale to oil companies.  In 1937 petitioner had 155 drums located at the Standard Oil Co.'s plant at Point Wells, Washington.  *1163  The drums became rusty and unfit for sale in 1937 and in that year petitioner gave the Standard Oil Co. *1230  orders to destroy them.  The drums were accordingly destroyed and written off as a loss by petitioner.  On his income tax return for the year 1937 petitioner deducted the sum of $1,018 as a loss on drums abandoned in that year.  Respondent disallowed the deduction.  The drums were the separate property of petitioner.  He paid for steel drums, including those here involved, at prices ranging from $3,50 to $4 each, and for haulage of 50 cents to $1 each.  The identical price and haulage for each of the 155 drums is not in evidence.  The cost to petitioner of such drums was not less than $4 each and he sustained a loss in respect thereof in the amount of $620.  In 1937 petitioner paid the firm of Jones & Bronson, attorneys, the sum of $365 for collection of some accounts.  He paid three other attorneys the sums of $60, $15, and $20, respectively, for fees regarding recovery of money.  Petitioner also was charged a fee of $200 for accounting services.  Petitioner paid this fee with five cases of whiskey.  On his 1937 income tax return petitioner deducted $510 for legal fees and accounting services.  Respondent disallowed the deduction.  OPINION.  HILL: This case was submitted upon*1231  testimony, exhibits, and a written deposition offered at the hearing.  Respondent moved to strike a portion of the deposition relating to the divorce proceedings.  We reserved decision on this motion.  We hereby deny the motion and have admitted testimony material to the issues as reflected in our findings of fact.  The first issue is whether or not petitioner was entitled to report income and deductions in the taxable year on the community property basis.  Petitioner contends that the decree of the Superior Court dated April 14, 1938, vacating its former decrees of interlocutory and absolute divorce, had the effect of eradicating completely the divorce decrees so that during the year 1937 petitioner was married and entitled to file on the community property basis.  He maintains that full credit must be given to the later decree and contends that the decree rendered void the property settlement entered into by petitioner and his wife in contemplation of divorce.  Respondent argues that we are bound to recognize the divorce decrees and ignore the vacating decree.  he contends that the Court was without jurisdiction to set aside its former decrees.  He argues further that, even if*1232  we should find that the vacating decree was valid, it could have no effect on petitioner's tax status in 1937, since the decree should not be retroactively applied in a manner detrimental to the rights of the Federal Government.  By amended answer respondent set up the further defense of estoppel.  *1164  The interlocutory and final decrees of divorce entered April 9 and October 16, 1935, respectively, in the case of petitioner as plaintiff and his wife as defendant were valid and effective decrees of a court of competent jurisdiction.  The parties hereto so concede.  By virtue of those decrees petitioner became an unmarried person on October 16, 1935, and continued as such throughout the taxable year 1937.  By virtue of the agreement between petitioner and his wife in settlement of their property rights and the approval thereof by the court in the interlocutory and final decrees of divorce all of their property, except certain household furniture, became the separate property of petitioner.  Such agreement and decrees disposed of all community interest in the property and there was no property owned in common or jointly by petitioner and his former wife after the date of the*1233  final decree of divorce and prior to the end of the taxable year.  All income which came to petitioner during the taxable year 1937 from investments, business transactions, salary, or any other source was his separate property when received and unquestionably continued as such until the court entered its decree on April 14, 1938, vacating the final decree of divorce and all other proceedings in the divorce action.  Prior to the entry of the vacating decree the (Federal) income tax act of 1936 imposed a normal tax and surtax on such income as the separate property of petitioner and created an obligation on him to pay the same on such amount as should be ascertained by computation in accordance with the provisions of the taxing act.  The tax was due March 15, 1938, but petitioner secured an extension of time in which to report his income and pay the tax.  The return of his income for the taxable year 1937 was filed June 15, 1938 - subsequent to the entry of the vacating decree.  Respondent contends that the vacating decree was void for want of jurisdiction of the court to enter it and cites Washington statutes and decisions of the Supreme Court of that state which he claims support*1234  his contention.  The statutes and cases cited do not, in our opinion, negative the jurisdiction of the court to vacate the decree of divorce on such state of facts as it acted upon in the proceeding between petitioner and his former spouse.  We recognize, therefore, the validity of the vacating decree as between petitioner and Felita M. West.  It was effective as between them to the full extent of its provisions and as between them it expunged entirely the divorce proceedings and property settlement.  It did not and could not affect the Government's ritht to the tax imposed by Federal statute on the income in question as the separate property of petitioner.  This tax was imposed and the right of the Government thereto was vested on the basis of the ownership of such income in the taxable year and prior to the entry of the vacating decree.  The separate ownership of such income by petitioner at the time of the vesting of the Government's right to tax it as such *1165  resulted directly from the property settlement between petitioner and his wife and the interlocutory and final decrees of divorce entered by the court in 1935.  The validity and effectiveness of the decrees to that*1235  end are conceded by the parties hereto.  The petitioner contends that the effect of the vacating decree entered April 14, 1938, was to wipe out completely all prior proceedings and decrees in the divorce action between petitioner and Felita M. West and to effectuate retroactively the uninterrupted marital and property status that would have obtained had the divorce proceedings not been instituted; also, that the vacating decree retroactively annulled the right of the Government to tax as the separate property of petitioner the income which he received as such in the taxable year.  A number of cases are cited and relied upon by petitioner in support of such contention, but in none of the cases cited is it held that the intervening rights of a third party in respect to the subject matter of a valid decree can be adversely affected by its vacation.  On the other hand many of the cases cited specifically state that such right can not be so affected.  Among the cases cited by petitioner in support of his contention are , and *1236 ; . In the Githings case the court vacated a decree of divorce after a lapse of 14 years from the date of such decree on the joint request of both parties to the divorce action.  In that case the court said: No rights of third parties are involved.  While we have no statute upon the subject - at least our attention is not called to any - the court had inherent jurisdiction at any time after the decree was rendered, and where only the rights of the parties themselves are concerned, to set aside and annul this decree of divorce, when the parties as here, joined in the written request therefor.  The case of Dane v. Daniels involved the validity of a vacating decree.  The decree vacated in that case was a void decree for want of jurisdiction over the community because of lack of service on one of the spouses.  The proceeding to vacate the decree in that case was an adverse proceeding.  In support of its action in entering the vacating decree the court said in part: It is not shown that any one has obtained rights or interests by reason of any act or neglect on her (plaintiff's) part, but the subject-matter*1237  in litigation is in the same condition with respect to all parties before the court as it was when she commenced this action.  * * * It is our opinion that respondent properly determined that for purposes of the Federal income tax for the taxable year 1937 the income involved herein was the separate property of petitioner.  We so hold.  The second issue is whether or not respondent erred in denying petitioner's claimed deduction for a loss on drums purchased for resale but abandoned in the taxable year as unfit for sale.  The amount of the *1166  claimed loss for which petitioner took a decuction was $1,018.  We have found that he sustained a loss in the taxable year in respect of such drums in the amount of $620.  It follows that petitioner is entitled to a deduction for such loss in that amount and that respondent is sustained in disallowing the deduction for the remainder of the claimed loss.  The final question is whether or not petitioner is entitled to a deduction from gross income of the taxable year for expenditures for legal fees and accounting services.  Petitioner has not shown that these items were ordinary and necessary expenses paid or incurred in carrying*1238  on a trade or business.  The proof, in fact, indicates that the expenditures were personal in nature and hence denied deductibility by section 24(a)(1) of the Revenue Act of 1936.  Reviewed by the Board.  Decision will be entered under Rule 50.