Court Opinion

ID: 9637990
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:28:43.957124+00
Date Added: 2024-06-11T18:10:02.623227
License: Public Domain

LEE, Circuit Judge.
I concur in the result reached and the reasons therefor in No. 11275, but dissent from the result reached and the reasons therefor in No. 11285.
The question involved by the appeal of the Commissioner in No. 11285 is whether $27,564.61, incurred by the taxpayer in attorney’s fees and other incidental costs in connection with the settlement of a dispute as to the boundary of certain oil properties operated by it,1 was deductible as ordinary and necessary business expense under Section 23(a) of the Revenue Code of 1936. The facts briefly stated are: In 1933 the taxpayer acquired a mineral lease covering section 16, township 14 south, range 13 west, in Cameron Parish, Louisiana, and drilled nineteen producing oil wells thereon. In 1937 the United States Government instituted proceedings to condemn 139,248.68 acres of land in Cameron Parish, excluding all sixteenth section lands because of state ownership, for the establishment of a game preserve. The taxpayer was made a defendant in the action because, due to a mistake in the survey of the property by the Bureau of Geological Survey of the Department of Agriculture, it was thought that the wells were located in a section east of Section 16. Thereupon the taxpayer employed an attorney to convince the condemner that the true location of Section 16 was at the site of the oil development. The attorney’s efforts were successful, and in December of 1937 a judgment favorable to the taxpayer was entered in the condemnation suit. The expense and attorney’s fees thus incurred were claimed as a deduction in that year. The Commissioner resisted the deduction in the Tax Court and here on the ground that these payments were made in effect to establish or defend the taxpayer’s title to its property, and, as such, were not business expenses but were capital expenditures under the rule established by the Treasury Regulations in 1916 and followed thereafter.2 The soundness of this rule is not questioned, but it has no application here. Whether an item of cost is a business expense is generally a question of fact, determination of which by the Tax Court must be followed if supported by substantial evidence.
The record in this case shows that there was no adverse claim of title ever asserted against the property of the taxpayer. The government did not seek to condemn any sixteenth section lands, nor did it attempt to disturb mineral rights existing in any of the lands taken. The controversy between the taxpayer and the government did not involve title to lands but only the correct boundary of lands covered by recognized titles. The fact that the controversy arose from a condemnation proceeding is significant. Such an action does not per se challenge the validity of or cast a cloud upon the title of any defendant. Its purpose and effect is to purchase the interest condemned from whoever may be the owner, and is accompanied by the constitutional guarantee that in such condemnation just compensation will be paid. The very institution of such a suit is open recognition that the government did not claim title to the condemned lands, and the record in this case shows that no other defendant was asserting any adverse claim to this taxpayer’s property.
An action in boundary under Louisiana law does not involve title. Questions of ownership are not in issue, and titles are referred to only to establish boundaries and not as affecting ownership. Keller v. Shelmire, 42 La.Ann. 323, 7 So. 587. By consent of the parties an action of boundary, if brought by one in possession, may *626be converted into a petitory action by the defendant setting up title in himself to the property, in which event he becomes the plaintiff and must make out his case on the strength of his own title, not on the weakness of his adversary. Blanc v. Cousin, 8 La.Ann. 71. In this respect an action of boundary is similar to a jactitation suit, which is explained by Judge Walker in Bliss v. Commissioner of Internal Revenue, 5 Cir., 57 F.2d 984, a case somewhat analogous to this. The attorney’s fees and incidental expenses paid by the taxpayer were not paid for the purpose of defending title to his leasehold estate but were paid solely to test the validity of the survey made by the Department of Agriculture.
As heretofore pointed out, the taxpayer had nineteen producing oil wells on its leasehold estate, against which no adverse claim of title was being asserted; it is evident, therefore, that the expenditures made by the taxpayer were made to remove a possible obstacle to payment by the pipe line company running the oil, the income, from its lease, an obstacle created by the erroneous survey on the part of the government. In Kornhauser v. United States, 276 U.S. 145, 153, 48 S.Ct. 219, 220, 72 L.Ed. 505, the Supreme Court, in holding that attorney’s fees for defending a suit for an accounting by a former business partner were deductible as a business expense in computing income tax, said: “* * * If the expense had been incurred in an action to recover a fee from a client who refused to pay it, the character of the expenditure as a business expense would not be doubted. In the application of the act we are unable to perceive any real distinction between an expenditure for attorney’s fees made to secure payment of the earnings of the business and a like expenditure to retain such earnings after their receipt. One is as directly connected with the business as the other.”
In Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 252, 88 L.Ed. 171, the Supreme Court, in holding that attorney’s fees and other legal expenses reasonable in amount, incurred by the taxpayer in resisting a “fraud order” by the Postmaster General which would have destroyed his business, were deductible as a business expense, said: “It is plain that respondent’s legal expenses were both ‘ordinary and necessary’ if those words be given their commonly accepted meaning. For respondent to employ a lawyer to defend his business from threatened destruction was ‘normal’; it was the response ordinarily to be expected. Cf. Deputy v. Du Pont, 308 U.S. 488, 495, 60 S.Ct. 363, 467, 84 L.Ed. 416; Welch v. Helvering, 290 U.S. 111, 114, 54 S.Ct. 8, 9, 78 L.Ed. 212; Kornhauser v. United States, supra. Since the record contains no suggestion that the defense was in bad faith or that the attorney’s fees were unreasonable, the expenses incurred in defending the business can also be assumed appropriate and helpful, and therefore ‘necessary.’ Cf. Welch v. Helvering, supra, 290 U.S. at page 113, 54 S.Ct. at page 8, 78 L.Ed. 212; Kornhauser v. United States, supra, 276 U.S. at page 152, 48 S.Ct. at page 220, 72 L.Ed. 505.”
In Bingham’s Trust v. Commissioner of Internal Revenue, 65 S.Ct. 1232, 1241, the Supreme Court, in holding that attorney’s fees paid by a trustee for legal services concerning “(1) litigation in which the trustees unsuccessfully contested a deficiency claim based on taxable gain to the estate, (2) payment of a legacy, and (3) problems arising from the expiration of the trust and the disposition of its assets,” were deductible as a business expense, said: “ * * * Section 23(a) (2) does not ¡restrict deductions to those litigation expenses which alone produce income. On the contrary, by its terms and in analogy with the rule under § 23(a)(1), the business expense section, the trust, a taxable entity like a business, may deduct litigation expenses when they are directly connected with or proximately result from the enterprise — the management of property held for production of income. Kornhauser v. United States, supra, 276 U.S. 152, 153, 48 S.Ct. 220, 72 L.Ed. 505; Commissioner of Internal Revenue v. Heininger, supra, 320 U.S. 470, 471, 64 S.Ct. 252, 88 L.Ed. 171.” See also Welch v. Helvering, 290 U.S. 111, 114, 54 S.Ct. 8, 78 L.Ed. 212; A. Harris & Co. v. Lucas, 5 Cir., 48 F.2d 187; Bliss v. Commissioner of Internal Revenue, 5 Cir., 57 F.2d 984; Commissioner of Internal Revenue v. Chicago Dock & Canal Co., 7 Cir., 84 F.2d 288.
The Tax Court correctly decided that these expenditures were an ordinary and necessary business expense and as such were deductible in the tax year in which such payments were made.

 The services covered a period of about two years and the reasonableness of the charge was conceded.

 Article 24-2 of Treasury Regulations 94; Jones’ Estate v. Commissioner of Internal Revenue, 5 Cir., 127 F.2d 231, and cases cited under footnote 2 thereof.