United States v. Patrick

PETITIONER:United States
RESPONDENT:Talbot Patrick et al.
LOCATION:United States Court of Appeals District of Columbia Circuit

DOCKET NO.: 22
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Fourth Circuit

CITATION: 372 US 53 (1963)
ARGUED: Mar 28, 1962
REARGUED: Dec 06, 1962
DECIDED: Feb 18, 1963

ADVOCATES:
Robert M. Ward – argued and reargued for the respondents
Wayne G. Barnett – argued and reargued for the United States

Facts of the case

Question

Media for United States v. Patrick

Audio Transcription for Oral Argument – March 28, 1962 in United States v. Patrick

Audio Transcription for Oral Reargument – December 06, 1962 in United States v. Patrick

Earl Warren:

Number 22, United States, Petitioner, versus Talbot Patrick et al.

Wayne G. Barnett:

Mr. Chief Justice, the Court.

Earl Warren:

Mr. Barnett.

Wayne G. Barnett:

This case of many respect is quite different from the Gilmore case.

For one thing, the facts disclosed a much more amicable dissolution of the marriage relationship.

The parties were married for a long time, they have three children, one had reached (Inaudible).

In 1952, 19 — I’m sorry, 1955, Mrs. Patrick sued for divorce.

This seems to have been caused by the presence of another woman that Mr. Patrick was expected to — and as I’ve understand it, ultimately did marry.

The grounds for divorce charged was adultery but before an answer was filed, the parties negotiated an amicable or as amicable as these things can be settlement of all of their interest.

Now, at the time of the divorce, Mr. Patrick was the president of the Herald Publishing Company in Rock Hill, South Carolina and the editor of the newspaper that it published which was the largest paper in Rock Hill.

He owned 28% of the stock of the company, his wife owned 28% and the adult son owned 7%, the rest of the stock was in trust for the three children that have been established by Mrs. Patrick’s father who apparently was the founder of the newspaper.

The agreement pending — I’m sorry, in addition to the stock, the parties individually owned the real property that house the newspaper, the building was on the in common.

Mr. Patrick owned 4/5th interest and Mrs. Patrick to 1/5th interest.

And in to the divorce suit, parties that I said negotiated a settlement of all the matters outstanding between them.

The — each party in fact had very substantial other independent income producing assets, stocks and securities.

Each was independently solvent and the agreement, however, dealt this exclusively with their interest in the newspaper apart from the usual provisions for the custody of the children and disposing of the personal residence and a general provision releasing the husband from all further rights and liabilities.

Apart from that, it was confined, the agreement was confined to unscrambling their mixed up interest in the newspaper business.

The character of the negotiation is fully disclosed by the depositions in the record of the attorneys for each side and you will find there’s no disagreement between them as to what happened and at the time seems to have been no real disagreement.

Mrs. Patrick was quite happy to have Mr. Patrick continue as the publisher of the newspaper.

Mr. Patrick wanted to continue, however, his attorney advised him that it would not be wise to continue on notwithstanding the present climate in the face of the divorce subject to being outvoted by his wife and the adult son who seemed to side with the wife and therefore advised Mr. Patrick that he should acquire control of the newspaper if he was going to continue to run it.

The wife thought that was very sensible and he was entitled to that.

She understood perfectly and was quite happy to sell her shares to him for their fair value in exchange of other securities and equal value.

Her only concern was to protect the interest of the children.

One at whom was already in the business and another of whom was readying to go into the business.

Mr. Gilmore was quite agreeable to that since the children were also the objects of his bounty and he was to be able to go to the children.

The result was an agreement that Mr. Gilmore would transfer to Mrs. Gilmore —

Patrick.

Wayne G. Barnett:

What?

Pardon me.

Mr. Patrick would transfer it to Mrs. Patrick, securities of the value equal to her shares in the publishing company which was agreed to be $112,000.

Wayne G. Barnett:

She would transfer to him her shares subject to the condition that they would pass on his death or an earlier sale of the business.

Those shares would pass on equal shares to the three children.

Now, the real estate that housed the publishing company was the parties negotiated a new long-term lease of the real estate with the corporation then they joined in conveying the real estate subject to the lease to a trust to pay the income to Mrs. Patrick for life and then to distribute the remainder in equal shares to the three children.

Now, that was sum in substance of the agreement and from what all it appears that was all the negotiations were about.

In conducting these negotiations and well, the fees paid — the husband agreed to pay the wife’s fees, legal fees in connection with all of the proceedings which amounted to $12,000 to wife’s attorneys and $12,000 to his attorney.

He paid them all.

They were allocated by agreement of the parties and the counsel, 4000 — allocated in the whole $24,000 not distinguishing between husband and wives.

They allocated $4000 to the divorce in sundry, personal matters, the custody provisions and so forth.

They allocated $16,000 to the negotiation and execution of the stock purchase agreement and they allocated $4000 to the negotiation and execution of the new lease of the real property and the creation of the trust.

Mr. Patrick claimed deductions for the $16,000 allocable to the stock purchase transaction and for 4/5ths of the $4000 allocable to the lease and trust of the real estate, that 4/5ths presumably representing his 4/5ths interest in the real estate.

So that ended up to $19,200 for which he claimed the deduction.

That was upheld by both the District Court and the Court of Appeals and the case is here on certiorari to the Fourth Circuit.

Now, this case we think is primarily and it’s primarily aspects very different from Gilmore and the other cases in the deal because it doesn’t really involve an assertion by the wife of any rights at all, marital, property or otherwise.

What it namely involved is the husband’s negotiating to buy her stock and a lease by them of real estate to a corporation.

And for that reason, the main reason we contend that most of the fees aren’t deductible because they were capital and not because they were personal as is our argument in Gilmore.

I would take the items one at a time and analyze them in those terms.

I would then come back to consider the extent to which they were latent marital rights involved and what significance that might have on the treatment of the fees.

The first item for which deductions was allowed was the negotiation of the stock transfer agreement, namely, his transfer of $112,000 of securities to her.

Her transfer of her stock in newspaper to him subject to the condition that it pass on his death to the children.

Now, we say that there’s no difference from the negotiation of the purchase of any capital asset.

It’s quite true, it’s quite true that his tenure as president, one which the Court of Appeals relies was always subject to the will of the people who owned the majority of the stock, namely his wife and his adult son.

And he could be certain of keeping his job only if he acquire control by acquiring some of their stock but that’s always true and that doesn’t make at a ordinary business expense for an — a corporate officer to go out and negotiate to buy up a controlling interest of his shares which I grant you, it’s the only way he can ensure his position.

But there’s none in expense of carrying on his trade or business of being an employee to buy a controlling interest in the stock.

The second aspect of a transaction was the new lease, the real estate to the corporations, new long-term lease negotiated before they created a trust.

Now, in fact the — Mr. Gilmore seems who have been acting in two capacities negotiating that lease, one; on behalf of the corporation, the lessee, and one on behalf to himself and his wife as lessor to the extent that the fees for that are properly chargeable to the lessees part of the transaction namely the corporation.

That it were for the corporation’s benefit to get the long-term lease they should’ve been paid by the corporation and Mr. Patrick’s payment of them is simply a contribution of capital to the corporation which would increase his basis in the stock in the corporation but isn’t a current expense of his.

As a matter of fact, even the corporation would have to capitalize them and amortize them over the term of the lease.

With — negotiated a long-term lease, the expenses are capitalized and you amortize them over the period at you have occupancy.

As to the part of the fees that are properly allocable to representation of the lessor’s interest in negotiating that lease, they are simply the cost of obtaining or letting property for a long term which the cases are uniform in holding must be capitalized.

If you expend money to obtain a 20-year lease of property through — for you to own the property you lease it for 20 years, the fees and expenses you incur in doing that you capitalized and amortize over the 20-year period deducting 1/20th for every year.

Wayne G. Barnett:

So those fees are equally capital expenditures that must be capitalized.

They would go to the trust to whom they gave the property that was treated as a gift, for trust would require the right to amortize those deductions.

The final item is the creation of the trust and the transfer to the trust of the real property, this is a trust for the life of the wife income to her — for her life and then to the children.

Now, that is we say unlike the other items I’ve discussed, an entirely crystal item not to the extent that the wife got something by that transaction to the extent that her life estate was worth more than her 1/5th interest in the fee which she gave up.

There was a net transfer to her to the extent that that was — we don’t have the values in the record so I don’t know, to the extent that there was a net transfer to her.

That presumably was in recognition of her marital rights, her rights to maintenance and support.

And for the reasons I argued in Gilmore and we’ll argue later here, that’s purely personal.

The transfer of the remainder to the children in the real estate was either a gift by Mr. Patrick to the children or as we view it as being coerced by Mrs. Patrick a transfer to her and a gift by her to the children.

But anyway you view it, it is still simply a purely personal intra-family rearrangement of property interest.

I might say that that is equally true of the remainder interest in the corporate stock which on his death was to go to the children.

That element, the corporate stock transaction is also tainted with personal aspect.

But either way, all of these expenses were either capital.

Most of them I think were capital or personal.

Now, the difference where the capital or personal, the capital would then be added in the basis and recovered later against sales proceeds or amortized, if the person only not recoverable at all.

For that problem doesn’t need to concern us here.

Our only question whether currently deductible and either way they’re not.

Well, that’s analyzing the transaction in terms of the specific items of the agreement.

It’s also a suggestion however in the lower courts that while the wife didn’t actually assert any general marital rights to a large property settlement of his property, she had those rights and they were latent and in the background, and Mr. Patrick’s own property was not really safe until they got the agreement and so a part of the fees ultimately also served the purpose of forestalling the assertion by Mrs. Patrick of her rights to support and maintenance or a fair share of his property.

Potter Stewart:

Up to this point you’ve been arguing as though this were just — these people were just Mr. Jones and Mr. Smith —

Wayne G. Barnett:

Based — yes.

Yes, and basically I think that’s true, that’s true.

If two people have common in — both own stock in a corporation and they have a falling out over a poker game, there’s a good reason for one to buy out the other and the fact that the falling out here was over marriage rather than a poker game, it doesn’t really change the basic character of the transactions so far as simply — it is simply buying by him of her stock.

Potter Stewart:

Well, and unlike the Gilmore case there wasn’t much (Inaudible) — real fight about the property, wasn’t it?

Wayne G. Barnett:

That’s right.

His attorney said that Mrs. Patrick didn’t want anything for herself.

She was only concern to protect the interest of their children so they ultimately got the newspaper which was her father’s newspaper.

And his attorney said that he understood she didn’t want anything for herself.

Rather — there was really no assertion by her of marital right and in fact his attorney said that he didn’t want to resist whatever she wanted.

He wanted to do what was right by her so that is really a very amicable arrangement.

Arthur J. Goldberg:

(Inaudible)

Wayne G. Barnett:

Well, her marriage to the extent that they were antagonistic on the interest on which they worked.

I — at least his attorney testified that he was quite happy because he wanted the property to go to the children too.

She just want to make sure it was going to go and not go to the other woman he was going to marry.

She want — make it — get it tied up which — which really (Inaudible) anticipatory estate plan.

But they don’t really have been antagonistic to the extent that you analyze it in terms of her coercion and his making this transfer under her coercion.

It is equivalent to — of it — transfer to her and to that extent, I would agree a recognition of her marital rights because that is her leverage.

It is the existence of her marital rights.

So, to the — to that extent, marital rights are involved and I’m willing to accept further the suggestion of the courts below that their presence in the background was felt and heart of the attorney’s fee should be allocated to the indirect purpose of forestalling an overt assertion of the marital rights.

They had arrived at a satisfactory agreement because if they didn’t, she could thread out for a much larger demands.

And so to that extent you can say that part of the fee should be attributed to forestalling an assertion of those rights.

Now, we’re quite happy to view it that way.

How it helps —

Arthur J. Goldberg:

But who (Inaudible)

Wayne G. Barnett:

Yes, that is purely personal.

Now, how it helps the taxpayer to view it that way, I don’t know.

But the lower courts relied almost exclusively on that element that she had these personal rights so she could’ve assert it and that made it a business expense which for the reasons that we said are equally applicable to Gilmore would not in our view be deductible.

I’d like if I may reserve the rest of my time.

Earl Warren:

You may.

Mr. Ward.

Robert M. Ward:

Mr. Chief Justice, may it please the Court.

I hope that there is no confusion in the minds of the Court that what we’re trying now is Mr. Patrick’s case and I represent Mr. Patrick.

The name Gilmore has been used several times both in the argument and the footnotes in the brief in this case and I know it’s inadvertence but I want the Court to be very clear that I’m representing Mr. Patrick.

Now, at the outset, let me make two or three quick preliminary observations.

One, that counsel for the Government twice made the statement that this newspaper was founded by Mrs. Patrick’s father and that it was her father’s paper which is not in the record and happens not to be true.

And that’s not material, I’m quite sure here but it is –since it’s been repeated twice for whatever work it has, I want to indicate that that is not correct nor does it appear at any point in the record.

Now, may it please the Court.

I’d like to take what may appear to be a very elementary position but one which I think this Court should consider.

We think we’re here on a question of fact.

We think we’ve been brought to this Court on what amounts to a question fact and we don’t believe that the courts below can be reversed without actually changing the findings of fact in this case.

The learned district judge sitting without a jury heard all of the testimony in this case and passed upon the credibility of the witnesses and came to certain conclusions of fact.

Robert M. Ward:

The most important of which was his ultimate conclusion that the fees expended in this Patrick case were based upon the testimony in the facts directly and proximately related to the management and conservation of income producing property.

Now, that was the conclusion of fact which the trial judge sitting without a jury reached.

The case then went to the Circuit Court of Appeals, the Fourth Circuit and the Fourth Circuit Court of Appeals agreed with the finding of fact and that page 67 of the record sets out that in view of the findings of fact by the District Court and the undisputed testimony in favor of the taxpayer that it found that the $19,200 claimed as deductible were in truth spent for the protection and the conservation of income producing property and that therefore these fees were deductible.

Arthur J. Goldberg:

Mr. Ward, (Inaudible)

Robert M. Ward:

That they were deductible perhaps but that they are directly and approximately related to the production to the conservation and management of income producing property we submit was a conclusion of fact based upon the testimony.

If I may pursue that point one step further Mr. Justice Goldberg, the Lykes case to which reference has been made, quotes quite extensively from the House Committee Reports that had to do with this section of the statute.

And the House Committee Report makes clear that the only test foreseen by the Congress was the question of whether or not the expenditures were directly and proximately related to the management and conservation of income producing property.

That Committee Report makes clear that expenditures for sports, hobbies and recreations and so on clearly are not deductible.

But it does say that where they are directly and proximately related to the conservation and management of income producing property that those expenses are deductible.

That we think was the intent of the Congress.

Now, in the Trust of Bingham, the language is used again there and the point is made that ordinarily the question of reasonableness and proximity is for the trier of the facts.

Now, it’s our position as elementary as it seems that the trier of the facts who heard the testimony, who saw the witnesses, who judged their credibility, who in every way considered and judged the facts in the case concluded that as a matter of fact these expenses in this case and this is the Patrick case were reasonably and proximately related to the management and conservation of income producing property and hence deductible under that statute.

(Inaudible)

Robert M. Ward:

I beg your pardon?

Isn’t the Government accepting those findings, they’re not attacking them?

Robert M. Ward:

They are saying that the result is wrong.

Now?

Robert M. Ward:

Yes sir.

Now, may it please the Court in the District Court and then the Court of Appeals, the argument of the Government against the deduction of these expenditures by Mr. Patrick was based upon an argument that these expenses were personal in nature.

A reading of the opinion of the District Court and of the Circuit Court of Appeals would indicate that the — what the Government was arguing in the courts below was that these expenses were personal in nature.

Now, the idea that they might be capital in nature was mentioned but so little weight was given to that argument that neither of the opinions below mentioned, they simply reached the conclusion that the expenses were non-business expenses and deductible and by inference they say they were not capital.

But so little emphasis was put on that argument and neither the trial court or the Court of Appeals that it is not even mentioned in the opinions of the courts below.

Now, the position of the Government here before this Court is that the expenditures were in the main capital expenditure and that that is one way in which the Government says this case differs from Gilmore.

In the opinions of the courts below, it can be read that in the arguments before the Government has taken the position that the divorce was all important and that what these expenditures were, were expenditures in a divorce litigation.

Now, the argument of the Government is that the divorce had nothing whatever to do with it, that the divorce is completely unimportant.

Now, we think that that is not quite correct because it’s our view that the Court must of course consider that the activities of the taxpayer which is subject to scrutiny here did occur against the background of marital discord in a divorce action.

There was a divorce action in progress and pending.

The — as was said in the Owens case, the divorce however furnished the occasion and not the motive for the particular expenditures that we’re discussing here.

Now, in this case, the fee is charged by counsel were clearly allocated at the time they were charged.

When the attorneys had finished their services they brought the fees down with relation to the services which they had rendered and that was agreed too by the parties.

Robert M. Ward:

The fees were allocated in this fashion of the total of $24,000.

$4000 clearly was charged or allocated to and paid for the obtaining of the divorce.

The divorce was for all intents and purposes uncontested.

The $4000 fee as acknowledged by the Government involved the divorce and the incidents of the divorce so that the divorce fee, the litigation fee for the divorce here is completely set apart and has been from the beginning and was never claimed as deductible by this taxpayer.

$16,000 of the fees were charged for, allocated to and paid for.

The negotiations of counsel which led in the ultimate, to the agreement under which the taxpayer Mr. Patrick was able to transfer and to trade certain blue chip stocks of his for a certain newspaper stock of his wife’s.

Potter Stewart:

Is — there’s no issue here about the allocation of that part of the fee that was attributable in getting the divorce?

Robert M. Ward:

No sir, that is clear in the stipulation in the record and has never been questioned.

This allocation was made at the time the fees were incurred and it was not an afterthought.

It was not devised in any way for a tax benefit but that’s the way the fees were charged in the beginning and there’s never been in question.

Potter Stewart:

There was no arguing about the bona fides of that or (Voice Overlap) —

Robert M. Ward:

No sir.

The $16,000 which was allocated for the negotiation of the stock arrangement and that incidentally is clearly established.

Now, that was not paid for the purchase of the stock or by way of a commission or anything of that sort but it was allocated to the negotiations involved in what amounted to an ultimate arrangement.

Now, I’ll go step further on that in a moment.

But at this point, what I want to say, is that the Government asked the Court to ignore the facts of life when it suggest that because this record reflects a final agreement between the parties, a final harmonious agreement at least on its face.

It is wrong to suggest that this Court conclude that everything was amicable in this matter.

It is wrong for the Court to — it concluded at this point that the wife was quite happy to sell her stock as the Government says.

And that there really was no controversy, no problem, no need for negotiation and no need for attorneys.

If that had been the case, there wouldn’t have been these $24,000 worth of fees which is a lot of money down their way.

And would not — they would not have been incurred and we would not have been here.

So it’s not correct for the Government to think that or to say that because this problem was solved that it was solved without difficulty or that it could’ve been solved without the careful service of competent counsel involved.

Now, then may it please the Court.

I do not take for granted that the Court accepts my argument that this is been settled on question of facts so I go now in response to the questions raised specifically by the Government.

First, the allegation is that the fees or the portion of the fees allocated to the stock of rearrangement were capital in nature and should’ve been added to the base that they became capital cost of acquisition.

We say not because to say that they were part of the cost of acquiring the stock, again ignores the facts and the testimony in the record which indicate that there were long and complicated negotiations going on between the parties which simply ultimately resulted in the acquisition of the stock in the fashion in which it was require.

Had the lawyers in this case started out to buy stock from Mrs. Patrick or acquired from Mrs. Patrick, again that would’ve been too simple.

There certainly wouldn’t have been $16,000 of attorney’s fees involved in that sort of a transaction.

It’s not unreasonable.

Now, these fees were not in the nature of brokerage fees or commissions.

Robert M. Ward:

If they had been, of course, I think they should’ve been added back to base.

That’s pretty well settled but they were not.

The taxpayer, Mr. Patrick did not acquire as the record shows the full ownership of the stock, the fee simple in the stock.

He acquired only the right to use this 28% of the stock which is (Inaudible).

He acquired the right to use it during his lifetime, he could never sell it.

If he died owning it, it pass to his children.

If during the course of his lifetime, there were to be a sale of the total assets of this corporation which the stock represented then under the agreement he must first give the stock to his children who then would affect the sale and realize any benefits from the sale, all of the proceeds of the sale.

Now, that doesn’t suggest on its face that these fees were an incident of the capital cost of acquisition, the nature of the right that he occurred although it might be capital.

The nature of it doesn’t suggest that the fees involved in acquiring an agreement under which he could get this limited use of the stock were capital and should be added back to base.

Incidentally, under this arrangement by which he acquired the stock there is no apparent tax benefit to him and that in adding — if it were added back to base because he can never sell the stock and it already belongs to his children simply subject to — excuse me, his life estate or he’s giving it to them to sell.

They could never incur any tax benefit of any sort because they would take it at the value at which he gave it to them.

The fees we say were for the negotiations and not a capital cost of acquisition and one of the best reasons or one of the best points we think in making that clear that these are not in the nature of commissions or brokerage fees is that it is obvious to us all from the record that had Mr. Patrick not been able to secure agreement for this trade or stock, had he not been able to secure the use of the stock, he still would’ve owed the attorney’s fees.

Now, I can’t say —

Earl Warren:

He still what?

Robert M. Ward:

He still would have owed these attorney’s fees.

Earl Warren:

Well, (Voice Overlap) —

Robert M. Ward:

They still would’ve been due to counsel because the record shows that they were expanded for a long period of no — negotiations which simply ultimately resulted in it — in a stock trade.

Now, is that an incident of capital cost of acquisition?

That, if a man buys a stock and he encourage brokerage fees or commissions, he encourage them only if he acquires the item that he’s buying.

This point alone we think makes clear that the fees were not capital because he would’ve owed the fees regardless of whether he got the stock.

I can’t say —

Potter Stewart:

Is that —

Robert M. Ward:

Excuse me sir.

Potter Stewart:

Is that entirely clear, I suppose if — they might have been lower in amount but —

Robert M. Ward:

Yes sir.

Potter Stewart:

(Inaudible)

Robert M. Ward:

I was hastening to say that I can’t say that they would’ve been in the amount of $16,000 because presumably there would — might have been some slight fee for actually drafting the papers of transfer, there might have been some fee added for the result accomplished which was pleasant to the taxpayer, something of that sort.

But certainly the bulk of the fees under the testimony had been earned by counsel and would have been due by the taxpayer of whether he acquired this property or not.

That being in the case, we say that’s the best argument, they could not be capital in nature.

Now, the Government wants this Court to attempt to change the allocation of these fees.

Robert M. Ward:

The (Inaudible) — the first element of fees was the $4000 for the divorce, the second element was the $16,000 for the stock matters.

Then there is an item of $3200 which was charged for allocated to and paid by the taxpayer for the total effort on the part of counsel in negotiating and understanding under which this real property which was occupied by the physical plan of this newspaper under which that real property was conveyed into a trust and a long term lease assured to the newspaper.

Now, the taxpayer owned 4/5ths of that building, that property, the taxpayer’s wife owned 1/5th.

They were tenants in common and they owned undivided interest in this building.

In addition to which the wife had a dower in his portion of the property.

Now, as an incident of management and as an incident of conserving property if you please, the parties conveyed their undivided interest in this real property into a trust which had several effects.

It guaranteed that there would be no division of the property.

As tenants in common of course the property could’ve been partitioned and sold and divided.

Could’ve been sold out from under the newspaper, could’ve been acquired by someone else.

But it had the effect of assuring that there would be no division of the property.

It had the effect which we think is significant of assuring an income to the wife and the children of the taxpayer and in assuring an income to the wife from this she got no more — perhaps she got less than she already had by way of her fifth interest and her dollar interest.

So, he was doing those things at the same time because Mr. Patrick’s life interest was this newspaper.

He was assuring that his newspaper could continue to occupy this building which he no longer owned 80% of and that it would ensure a long-term lease and his long-term occupancy of the building.

Now, the $3200 was paid for the total effort of counsel in obtaining those results.

The Government says you should reallocate and break that down and you should take some portion of the fees and some unknown amount and allocate them to the corporation for any benefit it acquired by the long-term lease that you should allocate some unknown sum to the — to Mr. — to the trust, to Mr. and Mrs. Patrick for any benefit that they may have required in getting the lease from the newspaper.

And that you should then treat some of the — and that those matters should be amortized, this capital additions to base and that you should take some other unknown quantity and regard that as a purely personal expenditure by the taxpayer in connection with the setting up of this trust.

We don’t see it that way, may it please the Court.

We see every aspect of this fee as it was allocated and paid as being incidents of management and we submit management is a broad word.

Incidents of management, incidents of conserving of real property, of conserving of income producing property, it seems to me that all of those results indicated that and that alone.

Now, the trial court and as the Court of Appeals found those facts to be correct and came up with the result we mentioned.

I hasten now to two other points.

One, that the Government suggest in its point 3 that in the alternative, that in the alternative if there is any part of these fees which are not capital and not personal under some other theory that they are personal as being the time that — as being fees used for the resisting of liability.

I think that nothing could be farther from the truth that there was no resistance of liability at any point that the taxpayer never resisted liability.

He never resisted the assertion of her right.

He did one thing.

He employed counsel to determine how he could meet reasonable and proper claims and still not drastically affect his financial structure, his income producing property.

Still retain control of the newspaper publication which was his life work and which he has retained by reason of the marital relationship.

He expended these fees to retain occupancy of the building and none of those things, may it please the Court, appeared to me to be personal in nature or to be anything other than business or as this section says, non-business expenses.

Arthur J. Goldberg:

Mr. Ward, was it all (Inaudible)

Robert M. Ward:

Yes sir, it was sir.

Arthur J. Goldberg:

He said that?

Robert M. Ward:

And that — that we think are — who doesn’t make these fees personal because the personal element was taken cared off in the payment of the $4000 which covered all of the incidents of the divorce.

It just happened that this was the occasion and not the motive for the expenditures.

Now, as to the point raised by the Government with respect to the wife’s attorney’s fees, we say again that the Government asked for a new allocation.

They want to take the allocation made by counsel and approved by the courts below and make a new one, as this Court to make a new one.

This taxpayer contracted and agreed with his wife to pay all attorneys’ fees.

He entered into that contract and agreement because it was necessary for him to do that in order to obtain the agreement.

It was a part of the cost, the expense to him of obtaining the agreement, not of acquiring property or disposing the property but its part of the — or what he had to pay in order to get the agreement that he paid these fees and he contracted to pay them all and agreed.

And the trial court in South Carolina ordered him to comply with the terms of that contract and to pay all of these fees which he did.

William J. Brennan, Jr.:

Well, am I correct, the Government’s position is that no part of any (Inaudible)

Robert M. Ward:

That’s right sir.

William J. Brennan, Jr.:

That something about allocation (Inaudible)

Robert M. Ward:

Well, I’m using that in the term that they’re asking that the $16,000 and the $3200 be broken down and divided as between his fees and the wife’s fees.

But the Government is taking the position are not deductible.

We say that that he had an obligation to pay them that they were his fees.

Now, the Owens case which is mentioned in this record I think is bad law.

There were unique circumstances there and you’d think there’d never be another case like it.

But there is in this case, uniquely in element of that nature because the testimony of one of the very able counsel in this case, Mr. Lumpkin indicates that the attorney has had a joint pain in this case.

Byron R. White:

Oh, yes but then Owen has one lawyer, here there were two.

Robert M. Ward:

Yes sir, that’s correct.

Byron R. White:

Why were there two lawyers?

Robert M. Ward:

Sir?

Byron R. White:

Why were there two lawyers?

Robert M. Ward:

Well, they represented the parties their separate parties and I —

Byron R. White:

With separate interest?

Robert M. Ward:

Yes sir.

And I certainly say there was no impropriety in the fact that the testimony Mr. Lumpkin indicates that they had to join forces and if they had to work things out which accomplished in the ultimate if it’s reviewed carefully, matters which were definitely in this taxpayer’s interest.

Now, they wanted — they did it in a way that was acceptable to the wife.

Byron R. White:

There’s a little mettle, a matter of price though, to be arrived at, wasn’t it?

Robert M. Ward:

Yes sir.

Robert M. Ward:

Now, in the Davis case which was scheduled with this in March and has since been decided by this Court, there apparently was no question that the attorney’s fees went to a tax consultant who considered only her tax interest and her tax benefits and so on.

A reading of this case will indicate that these benefits in your — to this taxpayer and that he paid the fees under his contract to pay.

Thank you.

Earl Warren:

Mr. Barnett.

Wayne G. Barnett:

I have nothing more.

Earl Warren:

Very well.