S. B. Brinson and Leota L. Brinson v. Laurie W. Tomlinson, Director of Internal Revenue for the District of Florida , 264 F.2d 30 ( 1959 )

RIVES, Circuit Judge.

This appeal concerns a claimed overpayment of income tax for the year 1952, arising out of the disallowance of a deduction of an attorney’s fee paid by a partnership of which the taxpayer, S. B. Brinson, was a member. The district court adopted as its findings of fact a stipulation entered into between the parties.¹ Upon those facts, the court made conclusions of law adverse to the taxpayer.²

The questions presented on appeal are whether the district court erred in holding that the attorney’s fee was neither deductible by the partnership as an ordinary and necessary expense of its construction business, within the meaning of Section 23(a) (1) (A) of the 1939 Code, nor by the taxpayer as a non-business expense, within the meaning of Section 23(a) (2) of the Code,³ and whether the district court erred in denying the plaintiffs’ motion for leave to offer testimony to supplement the stipulation of facts.

The parties agreed that, “A part of the services performed was in connection with the determination of the civil tax liability of the partnership and the partners,” but the stipulation is silent as to any allocation of the fee to such services. As to such part of the fee, therefore, the taxpayer failed to meet the burden of proving the amount to which he was entitled.⁴

The other part of the lawyers’ work and services was to forestall criminal prosecution of the taxpayer and of Charles M. Parker, his partner. The stipulation was silent as to the nature of the alleged criminal activities and their relationship, if any, to the business of the partnership. The stipulation failed to show that the attorney’s fee was an ordinary and necessary expense of the partnership business within Section 23(a) (1) (A), or a nonbusiness expense of the taxpayer for the production or collection of income or for any other purpose listed in Section 23(a) (2). We do not, therefore, reach the question of whether an attorney’s fee expended to forestall criminal prosecution may, under circumstances not here proved or stipulated, be allowed as a deduction under either of those provisions.⁵

At the time the stipulation was agreed on, February 6, 1957, two other issues were in dispute between the parties. On one of those, the “Debt Issue,” the case was tried before a jury on the same day and the jury returned its verdict in favor of the plaintiffs. Later the Government conceded the other issue, the “Building Sales Issue.” Later still, after the “Attorney’s Fee Issue” had been submitted to the court on the stipulation of facts and a brief filed on behalf of the Director, the plaintiffs proposed a supplemental stipulation to provide as follows: “All of the fraudulent acts of which plaintiff, S. B. Brinson, was accused arose out of the business activities of the partnership.”

The Director refused to enter into the supplemental stipulation. The plaintiffs then, on April 30, 1957, moved the court to permit the taking of testimony to establish that the fraudulent acts of which S. B. Brinson was accused arose out of the business activities of the partnership. The Director opposed said motion “unless the verdict of the jury, returned on February 6, 1957, be set aside and the entire case set down for retrial.” On May 9, 1957, after hearing argument of counsel, the district court denied the motion for leave to take testimony.

The stipulation was entered into at the suggestion of the plaintiffs’ attorney. Most of the terms of the stipulation were suggested by that attorney. Its provisions were carefully considered on each side before agreement was reached. There was no claim that anything had been inadvertently included in the stipulation, or that any overreaching or fraud was involved. One of the issues had then been conceded by the Government and a second issue decided by a jury in favor of the plaintiffs. The plaintiffs were not willing to have the verdict set aside and the entire case set down for re-trial so as to restore both sides to the position they were in before the stipulation was agreed on. Justice sometimes requires that stipulations made under misapprehension or without full knowledge of all the facts, or as the result of mistake, be set aside.⁶ This is not such a case, and the district court did not abuse its discretion in denying the motion to permit the taking of testimony to supplement the stipulation.

The judgment is therefore

Affirmed.

1 . “Early in 1950, the Brinson Construction Partnership, which at one time consisted of Charles Ebersbaeh, Theodore Ebersbaeh, S. B. Brinson and Chalmers M. Parker, came under investigation by the Intelligence Department of the Tampa Office of the Internal Revenue Service. The case was entitled in the file and upon the records of the Treasury Department as ‘Theodore Ebersbaeh, et al.’ There followed numerous conferences with the special agent in charge and other special agents, together with Internal Revenue Agents. These conferences were held in Tampa. From the inception of the investigation until final disposition of the case, the Brinson Construction Partnership and the Plaintiff, S. B. Brinson, were represented by the law office of Mabry, Reaves, Carlton, Anderson, Fields & Ward. During the course of the investigation, amended returns were prepared and filed on behalf of the partnership and the individual partners, and the taxes computed on the individual returns were paid. No penalties, however, were paid at that time.

“Chalmers M. Parker, one of the two remaining partners, appeared before the special agent in charge on two occasions, and the Plaintiff, S. B. Brinson, upon one occasion. Additional conferences were held with the Intelligence Unit where questions were propounded of the partnership’s bookkeeper and one of the partnership’s foremen.

“On October 6, 1950, the local Intelligence Unit of the Internal Revenue Service advised the partners that criminal prosecution had been recommended for the year 1944. A conference was granted by the Penal Division of the Treasury Department in Atlanta which was attended by the partners, S. B. Brinson and Chalmers M. Parker, with their attorneys. Following this conference in November, 1950, the partners were notified that the Penal Division had recommended criminal prosecution. During the month of November, 1950, amended returns were filed on behalf of the Brinson Construction Partnership, S. B. Brinson, and Chalmers M. Parker, and the tax computed thereon was paid.

“Subsequent conferences were held with Treasury Department Officials in Washington, and on December 12, 1950, the case was forwarded to the Justice Department recommending criminal prosecution.

“After the case was forwarded to the Department of Justice, additional conferences were held and the partners were notified that criminal prosecution had been authorized against S. B. Brinson. On January 12, 1951, charges were filed and warrant issued against S. B. Brinson by U. S. Commissioner for the Southern District of Florida.

“During April of 1951, it was suggested by Counsel for Plaintiff S. B. Brinson, that he was not in sufficiently good health to stand trial. This was supported by a letter from Taxpayer’s physician stating that he was suffering from high blood pressure and a heart condition.

“On April 27, 1951, Taxpayer suffered a heart attack which required his hospitalization. Due to Taxpayer’s ill health, and in conformance with Justice Department policy to decline prosecution in a ease in which the health of the Taxpayer would be endangered by standing trial, it was decided on September 5, 1951 to decline prosecution and, on October 3, 1951, the charges were withdrawn. No indictment was returned against the partnership nor against either partner.

“After the criminal features of the case were concluded, a determination was made as to Plaintiff’s civil liability for the years 1943 through 1947 inclusive, and a final settlement was made on the basis of the deficiency determined by the Government, interest, and the 50% fraud penalty.

“A part of the work done and services rendered by the law firm of Mabry, Reaves, Carlton, Anderson, Fields & Ward throughout the period covered by this Stipulation was devoted to presentation to the Government of the reasons and arguments which, in the opinion of the Taxpayer, would justify the Government’s declining to commence criminal proceedings against Chalmers M. Parker and the Plaintiff, S. B. Brinson. A part of the services performed was in connection with the determination of the civil tax liability of the partnership and the partners. The law firm charged a fee of $22,500.00 which was paid by the partnership and deducted on its 1951 income tax return. This deduction was disallowed by the Commissioner which resulted in an increase of $22,500.00 in the partnership’s taxable income, and an increase of $11,250.00 in Plaintiffs’ taxable income.”

2 . “The Court concludes that the payment of $22,920.10 by Brinson Construction Company, a partnership, as attorney fees was not an ordinary and necessary business expense of the partnership and was not deductible from gross income on the partnership’s return of income; the Court further concludes that such payment of attorney fees was not an ordinary and necessary non-business expense of the individual partners and was not deductible from gross income by each partner individually and that therefore defendant is entitled to judgment on this issue.”

3 . Internal Revenue Code of 1839:

“I 23. Depletions from gross income.

“In computing net income there shall be allowed as deductions:

“(a) [As amended by See. 121(a), Revenue Act of 1942, c. 619, 56 Stat. 798] Expenses.—

“(1) Trade or business expenses.—

“(A) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *

* *

“(2) Non-trade or non-business expenses. — In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. * * 26 U.S.C.A., 1952 ed., See. 23.

4 . Burnet v. Houston, 1931, 283 U.S. 223, 227, 51 S.Ct. 413, 75 L.Ed. 991; New Colonial Ice Co. v. Helvering, 1934, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348; Helvering v. Taylor, 1935, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623.

5 . See Commissioner v. Heininger, 1943, 320 U.S. 467, 471, 64 S.Ct. 249, 88 L.Ed. 171; Commissioner v. People’s Pittsburgh Trust Co., 3 Cir., 1932, 60 F.2d 187, 189; Commissioner of Internal Revenue v. Schwartz, 5 Cir., 1956, 232 F.2d 94.

6 . Carnegie Steel Co. v. Cambria Iron Co., 1902, 185 U.S. 403, 414, 22 S.Ct. 698, 46 L.Ed. 968; Aronstam v. All-Russian Central Union of Consumers’ Societies, 2 Cir., 1920, 270 F. 460, 464; Russell-Miller Milling Co. v. Todd, 5 Cir., 1952, 198 F.2d 166. 169.