Court Opinion

ID: 9450244
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:39:37.44592+00
Date Added: 2024-06-11T17:32:12.865020
License: Public Domain

HAYS, Circuit Judge
(dissenting);
The majority opinion rests on the language of the statute. “ ‘Collection of income’ would seem to have been the precise purpose for which the fees were paid.” But the attitude of assurance conveyed by this resort to literalism is considerably shaken when we examine the authorities. The majority opinion itself concedes that “income” “is not to be given a wholly literal reading,” citing cases in which § 212(1) was not applied to expenditures for the “collection of income.” Davis v. C. I. R., 151 F.2d 441 (8th Cir. 1945), cert. denied, 327 U.S. 783, 66 S.Ct. 682 (1946) ; Spreckels v. C. I. R., 315 U.S. 626, 62 S.Ct. 777 (1942); Isaac G. Johnson & Co. v. United States, 149 F.2d 851 (2d Cir. *7431945). One might also refer to United States v. Gilmore, 372 U.S. 39, 44-46, 82 S.Ct. 623, 9 L.Ed.2d 570 (1963); Lewis v. C. I. R., 253 F.2d 821, 825 (2d Cir. 1958); General Bancshares Corp. v. C. I. R., 326 F.2d 712 (8th Cir. 1964).
In fact the only authority cited for the majority’s position is Naylor v. C. I. R., 203 F.2d 346 (5th Cir. 1953), a decision, the soundness of which is questioned in Spangler v. C. I. R., 323 F.2d 913, 919-20 n. 15 (9th Cir. 1963), which is characterized by Mertens as “questionable” (4 Mertens, Law of Federal Income Taxation § 25A.12 fn. 40 (1960 revision)), and about which the majority itself leaves open the question as to whether this court would follow it on its facts.
The majority is sure that the transaction here in question must be characterized for the purpose of § 212(1) as the collection of income because the amount collected would have been income if Argosy had not been liquidated and its assets distributed. But Argosy was liquidated and the payment to the taxpayer was in fact a part of the distribution of its assets. As the government says in its Brief “not only was the capital transaction open when the contested expenses were incurred, but they also had their origin in the liquidation exchange and were an essential incident to that transaction.”
The conclusion that the legal expenses must be capitalized is vividly emphasized by the hypothetical situation set forth by Judge Raum’s dissent in the Tax Court:
“If, for example, the expenses herein were $70,000, we would have the strange result that at most only $54,000 would be reportable as income (one-half of the $108,000 proceeds, by reason of the capital gains provisions) whereas a deduction of $70,000 would be allowable under the Court’s decision. Thus, a transaction actually producing a net profit would appear on the return as a net loss.”
Surely we are not compelled to read the statute in a way that will produce so bizarre a result.
If it were well established by judicial construction of Section 212(1) that an ordinary deduction could be taken for legal expenses incurred in factual circumstances such as those before this court, we should of course hesitate to introduce uncertainty into the tax law by reaching a contrary result. But the court is presented here with a unique situation and prior decisions dealing with similar circumstances are sharply in conflict. See, e. g., Naylor v. C. I. R., supra; Munson v. McGinnes, 283 F.2d 333 (3d Cir.), cert. denied, 364 U.S. 880, 81 S.Ct. 171 (1960); Spangler v. C. I. R., supra; United States v. Pate, 254 F.2d 480 (10th Cir. 1958); Towanda Textiles, Inc. v. United States, 180 F.Supp. 373 (Ct.Cl. 1960) (3-1).
The decision of this circuit that is closest in point is Isaac G. Johnson & Co. v. United States, 149 F.2d 851 (2d Cir. 1945), which held that legal expenses in a condemnation proceeding must be capitalized. Accord, Williams v. Burnet, 61 App.D.C. 181, 59 F.2d 357 (1932). Under state law title vested in the state upon the initiation of the condemnation proceedings; the subsequent litigation was concerned only with determining the amount of compensation required under the standard of fair market value.1 This decision is patently antithetical to Naylor v. C. I. R., supra. In both the “sale” had been consummated and all that remained was to settle a dispute concerning the “sales” price — “book value” in one case, *744“fair market value” in the other. That is also the situation in the present case, the dispute being over what constitutes the “profits” of Republic in which Argosy was to share.
The controlling principle in this case is that stated in Towanda Textiles, Inc. v. United States, supra:
“For many years it has been recognized that fees incurred in realizing a capital gain must be deducted from the gross amount received to arrive at the net gain for tax purposes.”
180 F.Supp. at 377. That principle, which was the foundation of this court’s decision in Isaac G. Johnson & Co. v. United States, supra, requires us to rule for the Commissioner in this case.
I would reverse the decision of the Tax Court.

. The taxpayer was also required to prove its prior title in order to be entitled to compensation. But, as the district court opinion pointed out,
“Production of the recorded deed proved title prima facie and that required no lawyer and the litigation could not bave proceeded without such initial proof; so the expenses cannot be said to have gone to defend or fortify title * *
Isaac G. Johnson & Co. v. United States, 55 F.Supp. 764, 765 (S.D.N.Y.1944).