Court Opinion

ID: 9448954
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:50:52.884182+00
Date Added: 2024-06-11T17:31:37.566776
License: Public Domain

CAMERON, Circuit Judge
(dissenting).
I.
It seems to me, with deference, that the basic holding of the majority opinion is that the findings of fact of the court below must be set aside as clearly erroneous. The opinion in effect concedes that appellee, T. W. Wheeler, gave testimony in direct support of the finding of the court below “that credit was at all times indispensable to appellee in the operation of the corporations, that appellee believed that the appointment of a receiver would,cut off all credit to the corporations, and that the payment of the money in settlement was made to prevent the appointment of a receiver.” 1
The majority does not, as I understand it, intimate that there was any testimony given by any witness refuting that given by appellee. Nor does it advert to the finding of the trial court that the settlement was made “immediately prior to the hearing on A. G. Ainsworth’s application for a temporary injunction and the appointment of a temporary receiver * * It rests its conclusion rather upon the postulate that the testimony was inconsistent with two writings, appellees’ claim for refund and their complaint filed in this action. These documents do not, in my opinion, constitute a sufficient refutation of the undisputed testimony, supported by the circumstances attending the settlement, to warrant setting aside the findings of the trial court as clearly erroneous.
The claim for refund embraced every theory which the taxpayer desired to present as the basis for allowance of the claim, and was, in reality, largely a legal argument. Paragraph (2) of the claim, as quoted in the majority opinion, shows that the prospect of the placing of the corporations in receivership was an important consideration in the making of the settlement and was one of the bases asserted for appellees’ claim for refund. The inclusion of the other grounds does not, in my opinion, weaken the fact that the appellees were explicitly relying on the threat of receivership, which the court below found to be the basic reason behind the settlement.
The same thing is true of the complaint appellees filed. It is true that, as quoted in the majority opinion, the complaint asserted that the taxpayers made the settlement to “prevent the possibility of losing the case which would force them to complete the contract and cause a tremendous reduction in the value of their property held for the production of income * * But the complaint also asserted the claim which the court below found to be the one which influenced appellees to buy their peace:
“Immediately prior to the hearing on the purchaser’s application for *65the appointment of a receiver, taxpayers settled the ease * * *.
“* * * to prevent the possibility of placing the corporation in receivership * *
It is provided in Rule 8(e) (2), F.R. Civ.P., that a “party may set forth two or more statements of a claim * * * alternately or hypothetically, either in one count * * * or in separate counts * * It is further there provided that a “party may also state as many separate claims or defenses as he has regardless of consistency * * And this Court has held consistently that cases should be decided on the evidence rather than the pleadings.2
The court below heard the evidence and the statements of counsel for the respective parties made to the court during the production of the evidence; 3 and I do not believe that the two writings upon which the majority relies are sufficient to overturn its findings on this issue of fact.
II.
As I understood the’ argument made before us, the appellees thought that the case most directly in point was Levitt & Sons, Inc. v. Nunan, 2 Cir., 1944, 142 F.2d 795, and the appellant seemed to concede that this case did support the position of appellees. In its brief, appellant stated “that the language of the Levitt opinion is sufficiently broad for application here.” In that case, one Edelman made demand upon the taxpayer for an accounting of certain unspecified real property, and proceeds from the sale of real property, then in the taxpayer’s possession. The taxpayer settled the claim for sixty-five thousand dollars and the question on appeal was the same as that before us here; i. e., was the money paid out a deductible expense or a nondeductibie capital expenditure incurred in the defense of title to be added to basis,
Judge Learned Hand gave the opinion of the court, which reads in part:
“The Levitts retained an attorney who examined the facts and reported that the claim was utterly baseless and made in bad faith; in substance, merely blackmail. However, an accountant whom they had long employed and whose judgment they trusted thought that the company could not afford to be subjected to the dangers of such a suit, regardless of its lack of merit. Its affairs were in solution, and precipitation might ruin them; it had on hand many unfinished transactions, sales, building contracts, and the like, and a shock to its credit might prove far more disastrous than a large sum paid in settlement, however unnecessary that was actually to protect its title. This argument prevailed, and Edelman was paid [$] 65,000 for a release by himself and those whom he represented. The Tax Court concluded that the claim had been ‘to recover from petitioner property to ulhich it had no title. And, if the agreement to pay * •* * was to settle a claim of that nature, the payment must be regarded as a payment to get rid of a claim against some of the assets of petitioner.’ Again, that the claim was ‘against petitioner as the recipient of property and proceeds * * * which Edelman believed should have gone to stockholders of Rockville.’ It also held (as an alternative we must suppose), that ‘to incur an expense to avoid such uncertain contingencies as petitioner’s officers believed would re-*66suit if Edelman filed an action * * involving such groundless claims was neither an ordinary or’ (sic) ‘a necessary step for petitioner to take in the conduct of its business.’ * * “The judge did indeed find that Edelman claimed an equitable interest in the taxpayer’s property; and we agree, as we have said. * * * ” [Emphasis supplied.]
With respect to the government’s contention that the payment was made as a cost of defending or protecting a title to property, the Court said:
“ * * * But it is clearly a mistake to take the face of the claim as a test of whether a payment is a cost of defending a title. If the payment is to be reckoned as such, it must be in fact made for the purpose of relieving the property of some lien or other hostile interests. The mere fact that, if it were sound in law, it would establish such an interest, does not prove that the taxpayer has paid to defend his title; he may be completely confident that this is not peril; yet there may be other sound reasons for ridding himself of the suit. The cost of the mere contest may be more than the claimant is willing to accept; the mere pendency of the suit may disastrously affect the taxpayer’s general credit. When that is the situation, the regulation does not cover, and the payment must be judged by some other measure. In the case at bar, if the Levitts were altogether satisfied with their lawyer’s advice about Edelman’s claim, if they settled with him only because they feared the effect of the publicity upon their credit, and so upon their business ‘generally, the payment was not part of the cost of any of their property * * [Emphasis supplied.]
The case was reversed and remanded for further proceedings in accordance with the opinion expressed by the Court.
The case seems to me precisely in point and appellant was apparently of the same mind, devoting its efforts to the attempt to establish that, insofar as it holds that the taxpayer’s subjective motive is material, Levitt has been overruled by implication by Lewis v. Commissioner, 1958, 2 Cir., 253 F.2d 821. I do not agree.
In Lewis, the taxpayer was an author. He expended eleven thousand nine hundred fifty dollars in defending successfully his wife’s charge in a. New York court that he was dangerously insane and resisting her attempts to have him committed. The taxpayer argued that the expenditures were deductible business expenses rather than personal expenses in that they were paid in protection of his trade or business, since commitment would have been detrimental to the sale of his books.
The Tax Court denied deduction, characterizing them as personal expenses, because it found that the taxpayer’s primary interest was to maintain his freedom rather than to protect his business. The Court of Appeals agreed with the result of the Tax Court’s decision, but followed “a somewhat different path, for we cannot agree that the peculiar personality characteristics of a taxpayer are determinative of his tax liability. That one taxpayer prizes his personal liberty more than his property, while another values property more highly, seems to us irrelevant to the allowance or dis-allowance of a claimed deduction.” Lewis, at pages 824-825.
That decision holds merely that the personal characteristics of the taxpayer are not relevant. It does not overrule Levitt in its holding that “it is clearly a mistake to take the face of the claim [against taxpayer] as a test of whether a payment is a cost of defending a title.” 142 F.2d 795, 797.
The two cases do not involve the same question and are not analogous. Levitt was concerned with whether an expenditure was deductible or should have been capitalized; Lewis was concerned with whether the expense was personal or *67business. I am unable to agree Lewis implicitly overrules Levitt.4
I agree with Judge Learned Hand’s reasoning in Levitt, and find it unanswerable in testing the main question before us. The rule that “substance, not form, controls” works for the taxpayer as well as the government. “The origin and nature, and not the legal form, of the expense sought to be deducted determines the applicability of the words of § 23(a) [now § 212(2)].” Interstate Transit Lines v. Commissioner, 1943, 319 U.S. 590, 594, 63 S.Ct. 1279, 1282, 87 L.Ed. 1607. “The nature of the transaction * * * controls the tax effects.” Cotnam v. C. I. R., 1959, 5 Cir., 263 F.2d 119, 122, 70 A.L.R.2d 1035.
III.
But even if the settlement were made to defeat the specific performance suit rather than to prevent receivership, I do not conceive of this as an expense incurred “in defending or perfecting title to property,” [emphasis added] as contemplated in the Regulation 5 relied upon by appellant. This case strikes me as one in which the government fails to see the forest for the trees. The Regulation on which the government bases its claim must be read in the light of the statutes 6 with which it is in pari materia.
No case has been cited to us in which money spent in defeating a specific performance suit was considered money spent “in defending or perfecting title to property.” Certainly, the title to the property is necessarily involved, but no more so, for instance, than is the title to property attached to secure the payment of the judgment in an ordinary suit for damages. In both cases the plaintiff or complainant depends .on his adversary’s title; he does not attack or deny the title, but desires access to the title. An alleged obligation to transfer title may be involved, but resistance to transfer is not defense of title.
We are here dealing with a Regulation distinguishing two statutes. The statutory authority from which the Regulation, T.R. 1.212(1) (k), is drawn is 26 U.S.C.A. § 263(a) (1): “No deduction shall be allowed for — (1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate,” and 26 U.S.C.A. § 212 (2): “ * * * allowed as a deduction * * * expenses * * * (2) for the management, conservation, or maintenance of property held for the production of income.” [Emphasis added.]
It is not claimed that this title is in any way clouded or that there is any doubt as to who is the true owner of it. It seems to me that everyone agrees that the taxpayer has a perfect title, and that all his opponent desired was to force transfer of that title to him. The expense incurred in combatting this attempted forced transfer did not touch the existing title. It related solely to an effort to protect the taxpayer against his opponent who was trying to enforce a transfer to him.
No “value” was added to the property in compromising the suit as is contemplated in 26 U.S.C.A. § 263(a) (1). In fact, the stock was immediately sold to Cage (the original prospective purchaser) for one million dollars, the same price contracted for in the aborted sale to Ainsworth. This is not, of course, conclusive; but it demonstrates the point that the “title” to the property was in no manner affected — only the obligation to transfer title was involved.
*68Treasury Regulation 1.212(1) (k), i. e., “defending or perfecting title,” must be read in the light of the statutes from which it draws its authority. This manifestly contemplates some “permanent improvement or betterment” to one’s legal claim to title, — not to one’s claim to the right to combat the effort to force transfer of the admittedly perfect title. Title is involved; but the “defen[ce] or perfection]” of title is not.
IV.
The foregoing reasons, it seems to me, whether considered singly or in combination, require that the judgment of the trial court be affirmed. I respectfully dissent, therefore, from its reversal as ruled by the majority.
Rehearing denied; CAMERON, Circuit Judge, dissenting.

. When asked “Specifically why did you pay the money?” appellee T. W. Wheeler responded:
“A. Well, the attorney told me that I could win that specific performance thing hands down. But when they go to placing by business in the hands of the receiver, I am bankrupt — my creditors — I am cut off, because at that time I needed all the bank credit I could get. I was borrowing money every day. Every day we were borrowing money on our accounts receivable to keep going the next day. It meant — you put that receiver up there— I am cut off at both ends. I am out of business.”

. See, e. g., Des Isles v. Evans et al., 5 Cir., 1952, 200 F.2d 614, 616:
“Under tlie Rules of Civil Procedure a case consists not in the pleadings, but the evidence, for which the pleadings furnish the basis. Cases are generally to be tried on the proofs rather than the pleadings.”

. Including the statement of appellees’ attorney: “* * * our position is that Mr. Wheeler didn’t pay the money to get out from under this specific performance, but he paid it to prevent the receivership, which he has just testified to.”

. In fact, Lewis cites Levitt as authority on another point at page 827. See also Rassenfoss v. Commissioner, 1946, 2 Cir., 158 F.2d 764; and Hochschild v. Commissioner, 1947, 2 Cir., 161 F.2d 817, in which claims to title were incidentally involved and deductions were allowed. Cf. Brown v. Commissioner, 1954, 5 Cir., 215 F.2d 697, in which this Court recognized that the purpose in making the payment was controlling, but held that proof of a purpose other than the defense or perfection of title was not made.

. Treas.Reg. § 1.212(1) (k). See note 6, majority opinion.

. 26 U.S.C.A. §§ 263(a) (1) and 212(2). See notes 4 and 5, majority opinion.