Gunn v. Commissioner ( 1967 )

Fred Wong Gunn, Petitioner v. Commissioner of Internal Revenue, Respondent

Gunn v. Commissioner

Docket No. 5283-64

United States Tax Court

49 T.C. 38; 1967 U.S. Tax Ct. LEXIS 25;

October 26, 1967, Filed

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Decision will be entered under Rule 50.

In 1945, the Pine Street apartment building and realty was acquired by petitioner and his wife, Ann, and Jack and Annie Chow. The Gunns and Chows each owned a one-half interest. Ann Gunn was granted a final divorce from petitioner in 1961. The divorce judgment decreed that all the property of the Gunns was community property, and awarded to Fred and Ann, each, an undivided 25-percent interest in the Pine Street property out of their 50-percent interest. The 50-percent interest of the Chows was recorded in the name of Annie Chow. The Pine Street property was operated as a business through a partnership, C & G Realty Co., in which at one time Annie Chow and Ann Gunn were the sole partners. Upon the divorce of the Gunns the partners were Annie Chow, 50 percent; Ann Gunn, 25 percent; and Fred Gunn, 25 percent, according to their interests in the Pine Street property. Coincident to the Gunn divorce, since physical partition of the Pine Street property was impossible, Ann Gunn instituted legal proceedings, apart from the divorce proceeding, to have the Superior Court order a sale of the property and a division of the proceeds among the owners of the undivided interests therein. The court appointed X as the referee to obtain bids; eventually ordered the sale of the property to the highest bidder; and ordered the distribution of the net proceeds of the sale to Annie Chow, 50 percent less her lawyers fee; Ann Gunn, 25 percent less her lawyer's fee; and Fred Gunn, 25 percent less his lawyer's fee. The court awarded a fee of $ 10,000 to each lawyer, or $ 30,000 to the three lawyers. There also was an appraiser's fee of $ 500, paid by the partnership. Held: (1) That the legal fee of $ 10,000 awarded by the court to petitioner's lawyer, H, was solely for H's services with respect to the sale of the property, and the obtaining of the highest price for it, under the court proceeding. (2) That the legal fee of $ 10,000 was a capital expense, and was not an expense that could be deducted either as a business expense or as a nonbusiness expense under sec. 162(a) or 212, 1954 Code. (3) That the appraiser's fee also was a capital expense related to the sale of the property, and could not be deducted under sec. 162(a) or 212.

Stephen H. Kaufmann, for petitioner.

Sheldon M. Sisson, for respondent.

Harron, Judge.

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HARRON

The respondent determined a deficiency in income tax for 1961 in the amount of $ 7,405.57. The questions for decision are: (1) Whether a fee of $ 10,000 awarded by a court to the lawyer representing petitioner in a court proceeding under which an apartment property was sold was a capital expense, as respondent determined; or was deductible either as a business expense undersection 162(a), 1954 Code, or as a nonbusiness expense under section 212. (2) Whether an appraiser's fee of $ 500, for the appraisal of the same property, was a capital expense, or was either a business or a nonbusiness expense deductible under either section 162(a) or section 212. Respondent has conceded an additional deduction; effect will be given to his concession under Rule 50.

FINDINGS OF FACT

The stipulated facts are so found. The stipulations of facts, together with the related exhibits, are incorporated herein by reference.

The petitioner filed an individual return for 1961 with the district director of internal revenue in San Francisco, Calif. The petitioner is sometimes referred to hereinafter as Fred.

Prior to 1945, Fred was married to Ann (Anna) Wong Gunn. Ann obtained a divorce from Fred, as of December 23, 1959; the interlocutory decree was entered nunc pro tunc on January 15, 1960; the final decree of divorce was entered on March 2, 1961. The divorce proceeding was instituted by Ann in No. 492403, in the Superior Court in the City and County of San Francisco. The divorce action was contested and there was a trial. In that action, Fred's lawyer was Kenneth C. Zwerin. The issues here do not relate to Zwerin's legal services.

In both the interlocutory decree and the final decree of divorce, the court, inter alia, decreed that all of the property of the parties "is community in nature"; and the court ordered and decreed specific awards of the several items of community property to each party, Ann and Fred. Included in their community property was their undivided 50-percent interest in real property located at 1001 Pine Street, San Francisco, which is an apartment house and the realty. It is referred to hereinafter as the Pine Street property. The court ordered and decreed that one-half of the undivided, 50-percent interest in the Pine Street property was awarded to Ann (25 percent), and one-half was awarded to Fred (25 percent).

The Pine Street property had been acquired in 1945 by Fred and Ann Gunn (50 percent), and Jack and Annie Chow (50 percent). The undivided interests therein were recorded in the names of Ann Gunn and Annie Chow, the owners of record.

The apartment building comprised between 35 and 40 apartments. It was operated as a business of renting apartments. The apartment rental business was conducted under the name of C & G Realty Co., a copartnership, with its office at the same address, 1001 Pine Street. The Crocker-Anglo National Bank was the beneficiary under a first deed of trust relating to the Pine Street property, which was collateral security for a promissory note evidencing indebtedness to the bank. According to a court order, dated July 14, 1961, in a proceeding designated No. 500313, in the Superior Court (which was not the divorce proceeding), the sole partners in C & G Realty were Annie Chow and Ann Gunn. The only business of C & G Realty (as far as the record here shows) was the renting of the apartments and the operation of the apartment property.

On May 23, 1960 (after the entry of the interlocutory divorce decree on January 15, 1960), Ann Gunn filed another proceeding in the Superior Court, No. 500313, against the defendants Annie and Jack Chow, Fred Gunn, and the Crocker-Anglo National Bank, which related solely to the Pine Street property. In the complaint, the following matters were recited, inter alia: That Ann Gunn was the owner of record of an undivided one-half interest in the property; that Annie Chow was the owner of record of an undivided interest in the property; that it was alleged that Jack Chow and Fred Gunn, the respective spouses, claimed interests in the property; that the Crocker-Anglo National Bank was the beneficiary of a first deed of trust on the property; that "An apartment house constitutes the improvement on said real property and, therefore, partition in kind is [was] physically impossible"; and that the plaintiff, Ann Gunn, petitioned the Superior Court to --

order a sale of the aforesaid real property, together with improvements, and that the proceeds therefrom be divided between [among] the parties hereto according to their respective rights, for a reasonable sum payable to her attorney as and for attorney's fees incident to the within action, for costs of suit and for such other and further relief as may be proper in the premises.

This proceeding was entitled "Complaint to Partition Real Property."

The above-described proceeding went to trial on July 14, 1961, about 1 year after the filing of the complaint on May 23, 1960. The parties appeared through their respective attorneys; the Crocker-Anglo National Bank gave its consent to the sale of the Pine Street property, subject to its lien; Ann Gunn was represented by her lawyer, R. G. Hearn; Annie and Jack Chow were represented by their lawyer, T. E. Feeney; and Fred Gunn was represented by his lawyer, Irvine Hodes. These lawyers filed the following stipulations:

1. Ownership of the property described in the pleadings on file herein is vested one-half in Annie Kwock Chow, one-fourth in Anna Wong Gunn and one-fourth in Fred Wong Gunn.

2. Annie Kwock Chow, designated as one of the defendants herein, and Anna Wong Gunn, designated as plaintiff herein, are the same persons appearing of record as the vestees of the real property described in the proceedings herein as doing business as C&G Realty Company, a copartnership. Said Annie Kwock Chow and Anna Wong Gunn appear herein in their individual and partnership capacities as aforesaid.

3. Annie Kwock Chow and Anna Wong Gunn are the sole partners of said C&G Realty Company, a copartnership.

4. A physical partition of the property described in the pleadings herein is impossible.

5. A sale of the aforesaid real property is necessary and all interested parties acquiesce therein.

6. The above-entitled court should forthwith appoint a sole referee to accomplish the sale as aforesaid pursuant to such terms and conditions as may be imposed by the above-entitled court.

On the same day, July 14, 1961, the court entered an "Order Appointing Sole Referee and Directing Sale of Property." In this order, the court did the following: (1) The court decreed that the title to the Pine Street property was vested in Annie Chow, 50 percent; in Ann Gunn, 25 percent; and in Fred Gunn, 25 percent. (2) The court ordered and decreed that the sole partners in C & G Realty were Annie Chow and Ann Gunn. (3) The court decreed that the physical partition of the Pine Street property was impossible, and that a sale of the property was necessary to protect the interests of the parties. (4) The court appointed Frank Gallagher the sole referee; and directed him to publish notice of intention to sell the real property as required by the Probate Code of California in regard to a private sale of real property in the matter of an estate; which notice should state that the sale would be for cash, that sealed bids with a 10-percent deposit should be deposited with the referee, that the referee reserved the right to reject any bid, that the court could reopen the bidding for higher competitive bids, and that the court reserved the right to reject any bid. (5) The court ordered that the property should be sold, and that the proceeds would be disbursed under a final court order. (6) The court ordered that the highest offer returned to the court by the referee, for confirmation or rejection, would be the highest net offer; and that real estate commissions, if payable, would be deducted from the gross offer in order to determine the highest net offer. (7) The court also ordered that, pursuant to the stipulation on file in the proceeding, upon the completion of the sale and the payment of all charges and claims, counsel fees would be determined by the court, and counsel fees would be paid "directly by the referee to the respective counsel appearing of record."

On September 22, 1961, the report of Gallagher, the referee, was filed in the Superior Court, in which he made his "Return of Sale" to the court, and petitioned the court to consider and confirm the highest bid received for the sale of the Pine Street property, or to render further orders. The highest bid received was $ 402,600 cash, net, submitted by S. Louie; Gallagher reported that he believed this bid was commensurate with the value of the property and was the highest and best price that could be obtained.

There was a court hearing on October 3, 1961, on the referee's report and petition, at which Gallagher testified regarding all matters relating to the contemplated sale and made his report about the highest bid of $ 402,600, net. At this hearing, Fred Gunn's lawyer, Irvine Hodes, objected to acceptance of the above selling price, on behalf of Fred.

The parties in this case have stipulated with respect to the services of Hodes to Fred Gunn, as follows, and nothing more is shown in the record in this case about Hodes' services: That in the Superior Court, in the proceeding No. 500313, Hodes represented Fred Gunn; that in behalf of Fred, Hodes successfully resisted the sale of the Pine Street property at a lower price, namely $ 402,600, than was ultimately confirmed by the Superior Court, which was $ 422,000 in cash, net to the sellers; that the court, in its order of October 19, 1961, accepting the offer of $ 422,000, and confirming the sale at that price, ordered that a legal fee of $ 10,000 should be paid to Hodes, as counsel for Fred Gunn, for his services to Fred in the court proceeding; and that the fee was paid to Hodes.

Following the court's hearing on October 3, 1961, the Superior Court determined that the bidding on the Pine Street property should be reopened, for the best interests of all of the parties; and the court directed the reopening of the bidding "upon the condition that the first bid must exceed the aforesaid bid of $ 402,600 by a minimum amount of $ 12,000," that the sale would be all cash, net to the sellers, that the real estate commissions, if any, must be paid by the buyer, and that the entire purchase price must be paid in escrow to Northern Counties Title Insurance Co. within 30 days after the court order is signed.

Thereafter, in conformity with the court's instructions, increased bids were tendered to the referee, and the highest bid submitted was $ 422,000 net. The court found this bid to be the highest; there evidently were no objections; and on October 19, 1961, the court entered "Order Confirming Sale of Real Property." In this order, inter alia, the court accepted the offer of the highest bidder, $ 422,000 net in cash, and ordered the sale confirmed; the court directed that the costs of the escrow and other costs should be borne one-half by "the sellers" and one-half by the buyer, and that the sellers were not obligated to pay any real estate commission incident to the sale.

The court, Judge Frank McCarty (F. McC.), in the same order ordered that the following compensation and fees should be paid, "incident to the services rendered by the referee, the receiver and attorneys for the parties litigant":

1. Unto Frank Gallagher, referee, the sum of $ 7,500.00. F.McC

2. Unto Frank Argall, receiver, the sum of $ 3,500.00. F.McC

3. Unto Thomas E. Feeney, Esq., counsel for defendant Annie Kwock Chow, the sum of $ 10,000.00 F.McC

4. Unto Irvine Hodes, Esq., counsel for defendant Fred Wong Gunn, the sum of $ 10,000.00 F.McC

5. Unto Reginald G. Hearn, Esq., counsel for plaintiff Anna Wong Gunn, $ 10,000.00. F.McC

It Is Further Ordered, Adjudged and Decreed that the aforesaid awards of compensation and fees are and they are hereby made liens upon the net proceeds of sale available for distribution by the title insurance company to the parties litigant herein.

There is nothing in the record of the instant case about the court's having appointed a receiver, Frank Argall, or about the functions and services of Argall.

Finally, in the same order, the court made the following order and decree:

It Is Further Ordered, Adjudged and Decreed that upon payment in full of the lien of CROCKER-ANGLO NATIONAL BANK, a national banking association, incident to its first deed of trust relative to said real property, the payment of the fees herein awarded to the receiver and the referee and the other charges allocable against the entire net purchase price available for distribution to the parties litigant herein, the remaining purchase price be paid and distributed as follows:

1. An undivided one-half thereof unto Annie Kwock Chow less the sum of $ 10,000.00 F.McC representing the award of attorney's fees made herein to Thomas E. Feeney, Esq.

2. An undivided one-fourth thereof to Anna Wong Gunn less the sum of $ 10,000.00 F.McC representing the award of attorney's fees made herein to Reginald G. Hearn, Esq.

3. An undivided one-fourth thereof to Fred Wong Gunn less the sum of $ 10,000.00 F.McC representing the award of attorney's fees made herein to Irvine Hodes, Esq.

[Italic added.]

There is nothing in the record of the instant case explaining the reasons, or the basis on which, the court awarded a fee of $ 10,000, each, to the three different lawyers representing each of the three sellers of the property, which awards totaled $ 30,000.

The court ordered that each legal fee of $ 10,000 should be paid in each instance, out of the proportionate share of each owner (of an undivided interest in the Pine Street property) of the balance of the purchase price remaining after the payments of all costs, charges, and liens. Accordingly, in the instance of Fred Gunn, his 25-percent share of the net proceeds of the sale was to be reduced in the amount of $ 10,000, the fee awarded to his lawyer, Irvine Hodes, and Fred then was to receive the remainder of the net amount of his one-fourth share of the net, cash proceeds of the sale. The same was to be done in the instances of the legal fee awarded to the attorney for Ann Gunn, and for Annie Chow.

An appraisal was made of the Pine Street property. The appraiser's fee was $ 500. The record in this case does not disclose any other facts, except that in its partnership tax return for the period December 31, 1960, to November 21, 1961, the C & G Realty partnership included in its ordinary business expenses, which were deducted from gross income, an expense of $ 500, described as "Appraiser's Fee."

Petitioner reported, in his individual tax return for 1961, the sum of $ 1,978.07 as his 25-percent share of the net distributable income of the C & G Realty Co., the partnership. In the partnership tax return of C & G Realty, there were listed three partners, and the interest of each one in the partnership; Annie Chow, 50 percent; Ann Gunn, 25 percent; and Fred Gunn, 25 percent. Within the period, December 31, 1960, to November 21, 1961, Fred Gunn was recognized as a partner having a 25-percent interest. (The final decree of divorce of Ann from Fred was entered March 2, 1961, under which the court awarded an undivided one-half of the undivided 50-percent interest in the Pine Street property, or a 25-percent interest, to Fred; and the court awarded the same undivided 25-percent interest to Ann.)

In the deficiency notice giving rise to this case, the respondent made adjustments whereby the amount of the taxable income of the C & G Realty partnership was increased and, correspondingly, petitioner's 25-percent share of the partnership income was increased. Respondent, at the trial of this case, receded from one of those adjustments of the partnership income, and he has stipulated that in computing the partnership's taxable income, depreciation in the year (1961) of the sale of the Pine Street property is allowable in the amount of $ 3,840.07, as an ordinary deduction. Therefore, with respect to the partnership income, there remains in issue only the deduction of the appraiser's fee of $ 500 which was deducted from the gross income of the partnership as an ordinary business expense.

The respondent determined that the appraiser's fee of $ 500 was an expense connected with the sale of the Pine Street property; that it was not an ordinary expense and therefore was not deductible; and that it represented a capital expenditure. That determination served to increase by $ 125 (25 percent of $ 500), petitioner's 25-percent share of the taxable income of the partnership.

The partnership return of C & G Realty Co. for the period December 31, 1960-November 21, 1961, was stated to be (on the return) the final return, and it is stated therein that the partnership dissolved on November 21, 1961. In this return, the gross and net income of the partnership for this taxable period was reported as $ 37,435.87, gross income; total deductions, including property taxes, depreciation, and fees, $ 29,523.07; net income, $ 7,912.80. Also, the sale of the Pine Street property was reported as having been made on November 21, 1961, at a capital gain of $ 331,397.02. The details are as follows, as shown by the return:

Gross income		$ 37,435.87
Expenses:		29,523.07
Interest	$ 1,981.06
Insurance	1,214.07
Property taxes	6,424.85
General expenses	12,063.02
Depreciation	3,840.07
Appraisal fee	500.00
F. Argall, receiver	3,500.00
	29,523.07
Net income		7,912.80

Upon his audit of the partnership return, and upon his agreeing that the claimed deduction for depreciation of the apartment building and fixtures is allowable, the respondent allowed all of the deductions except the appraiser's fee of $ 500. That is to say; the respondent allowed the deduction of the fee of $ 3,500 which the Superior Court awarded the court-appointed receiver, Frank Argall; and respondent allowed the deduction of that fee as an ordinary business expense of the partnership. The deductibility of the receiver's fee as an ordinary expense of the partnership is not in issue here.

In the partnership return, the capital gain from the sale of the Pine Street property was computed and reported as set forth below. The respondent's determination that the appraiser's fee of $ 500 was a capital expense in connection with the sale of a capital asset served to increase the expenses of the sale from $ 7,977 to $ 8,477, and to reduce the amount of the capital gain by $ 500, as is also shown below:

Gross selling price		$ 422,000.00
Less expenses of sale		7,977.00
Net proceeds		414,023.00
Basis:
Land	$ 69,750.00
Depreciable assets	85,655.08
	155,405.08
Depreciation	72,779.10
		82,625.98
Long-term capital gain		331,397.02

The above expenses of sale were for recording fees, $ 477, and the fee to the referee, $ 7,500.

The determination that the appraiser's fee was a capital expense reduces capital gain by $ 500 to $ 330,897.02.

In his individual return for 1961, petitioner reported as his share of the above capital gain, 25 percent of $ 331,397.02, or $ 82,849.26, and included 50 percent thereof in his taxable income, $ 41,424.63. The respondent's determination that the appraiser's fee of $ 500 was a capital expense serves to reduce petitioner's share of the capital gain to $ 82,724.26, and the taxable amount to $ 41,362.13.

In his individual return, petitioner deducted (in itemized deductions) the fee awarded to Irvine Hodes by the Superior Court, $ 10,000, described as "Attorney fee, partition of partnership, C & G Realty Co." Respondent disallowed the deduction. It is his position that the court-awarded legal fee was a capital expense which must be offset against petitioner's share of the capital gain. Under respondent's determinations, the net amount of petitioner's share of the long-term capital gain would be $ 72,724.26, and the taxable amount thereof would be $ 36,362.13.

OPINION

The parties have treated the two determinations in issue as constituting one issue, appraiser's fee of $ 500, and the court-awarded legal fee of $ 10,000. The question is whether these expenses are capital expenses to be offset against the long-term capital gain resulting from the sale in 1961 of the Pine Street property; or whether each expense is deductible either under section 162(a), as an ordinary business expense, or under section 212 as an ordinary nonbusiness expense in connection with income-producing property or the collection of income.

The petitioner had the burden of proof with respect to both items in issue. It is advisable to note at the outset the matter of the evidence in this case. This case was calendared and called for trial, but the parties elected not to call any witnesses; there was no testimony. The evidence consists of several exhibits and a very brief stipulation of facts. Rule 31(b) of this Court's Rules of Practice indicates that the parties may, and should, "stipulate the evidence" to which they can agree. The written stipulation of facts submitted by the parties does not supply some details about the general facts which might serve to clarify the general issue. The parties appear to place considerable reliance upon several exhibits. The exhibits have been carefully and fully considered, but they, too, do not provide other factual details which also might serve to clarify the dispute between the parties regarding the question of Federal tax law presented, as the later discussion will demonstrate.

The following discussion relates to the question of the deductibility of the court-awarded legal fee received by Hodes. In general, the deductibility of legal expense depends upon the purpose for which the expense was incurred. Lykes v. United States, 343 U.S. 118">343 U.S. 118. In some instances, it may be difficult to find and determine the purpose of the legal service for which the fee was paid.

We need to know, in this case, the purpose of Hodes' legal services. That problem underlies the dispute here. We do not know, in fact, all about the legal services Hodes rendered. He was not called to testify about them. But the petitioner and the respondent appear to be satisfied and agreed that the only relevant fact is that Hodes represented Fred in the legal action to have the property sold pursuant to a petition to partition the undivided interests in the realty.

We do know that Ann Gunn first obtained an interlocutory decree of divorce from Fred on January 15, 1960, and that her next step was to obtain distribution to herself of her 25-percent interest in the multiple unit apartment property. She had a right to do so. That property could not be physically partitioned and physically distributed to the coowners, but could be sold, and the sale proceeds then could be distributed to the respective coowners according to their respective interests therein. The appropriate procedure was followed by Ann, and the other coowners did not object. She instituted a court action, separate and apart from her divorce suit, for the sale of the Pine Street property through a court proceeding and a court-appointed referee. The legal proceeding is called an action to partition real property, and the court procedure in such action is to bring about a sale of the property with respect to which the coowner bringing the action desires to sever his interest from the interests of the other coowners. In her complaint, filed in the Superior Court, Ann petitioned the court to order a sale of the property; to make distribution of the proceeds among and to the coowners according to their respective interests; and to fix and award a reasonable fee to her attorney. That was the sum and substance of Ann's action in the Superior Court. The evidence relating to that court action consists of four exhibits, Ann's complaint, the return of the first proposed sale of the referee, and two court orders.

We know that Hodes represented Fred in this action; and that in this legal proceeding he made objection, for Fred, to the sale of the property at first proposed by the referee, namely, a proposed sale to Sinclair Louie for $ 402,600. Strictly speaking, as far as the evidence here shows, the legal services of Hodes were limited to the above matter. We know nothing about other legal services of Hodes, if any. There is no evidence to the effect that Hodes rendered any legal services to Fred in connection with the winding up of the affairs of the C & G Realty partnership, if any such services were required. As far as we know, no legal services of Hodes were required in ending the partnership that operated the apartment property.

In the matter of bringing about the eventual sale of the realty to a higher bidder, Feigenbaum, for $ 422,000, or $ 19,400 more than the first highest bid, the court took the necessary steps of reopening the bidding, and Gallagher, the court-appointed referee, handled the arrangements for receiving new bids and presenting the highest one to the court for approval. The evidence does not show or indicate that Hodes did anything on Fred's behalf with respect to the above matters. Respondent does not contend that Hodes did so, or that Hodes located the eventual buyer, or that Hodes' services were directly involved in the actual sale of the property. Respondent and petitioner both agree that the referee of the court handled the actual sale procedures.

Petitioner agrees that the court-awarded fee of the referee, $ 7,500, plus the recording fees and revenue stamps totaling $ 477, or $ 7,977, were expenses of the sale, which properly are to be offset, and were offset, against the capital gain realized from the sale.

Petitioner and respondent agree that the purpose of the legal action in which Hodes rendered services was to bring about the sale of the property and the distribution of the net proceeds among the coowners, including Fred. Upon the evidence here, we must and do conclude that the above purpose was the primary purpose of the legal proceeding in the Superior Court.

The Pine Street property, a business property, was operated by a partnership. Those owning recorded interests therein were the members of the partnership. Prior to Ann's interlocutory decree of divorce, the only recorded owners of the property were Ann Gunn and Annie Chow, each being the recorded owner of a 50-percent interest. When the Superior Court, on January 15, 1960, adjudged and decreed that Ann's 50-percent interest was awarded one-half to her and one-half to Fred, each then owning a 25-percent interest, it appears that Fred became a member of the partnership; he shared in the earnings.

The only property of the partnership was the apartment realty, building, and a small amount of furnishings and fixtures in that property. The partnership was the beneficial owner of the property, and it filed partnership returns in which the income of the property was reported, and the depreciation and expenses were deducted. When the Pine Street property was sold in 1961, the remaining assets of the partnership (according to its final tax return) consisted only of about $ 1,980, in cash, and such accumulation of earnings as was on hand, but we do not know about those other details. There was not any dispute among the partners about the partnership or its dissolution. The final steps relating to the partnership were routine, simple matters.

Ann Gunn instituted the action to have a partition sale of the realty as an owner of record of "an undivided one-half interest," on May 23, 1960. At that time, the final decree of divorce from Fred had not been entered. The final decree was entered on March 2, 1961. It was not until July 14, 1961, that the Superior Court, in docket No. 500313, the partition proceeding, entered its order appointing the sole referee, Gallagher, and ordered the referee "to accomplish the sale." In that order, the court adjudged and decreed that the respective interests in the realty were vested in Annie Chow, 50 percent; Ann Gunn, 25 percent; and Fred Gunn, 25 percent. The court stated in this order that Annie Chow and Ann Gunn were the recorded coowners of the property; that they were the partners in C & G Realty Co.; and that they appeared in the proceeding in both their individual and partnership capacities. The court did not state that Fred Gunn was a copartner or that he appeared in that capacity. In this order the court also ordered that "upon the completion of the sale of the property and the payment of all proper charges and claims, counsel fees shall be determined by the * * * court and paid directly by the referee to the respective counsel appearing of record herein." The evident meaning of the above is that the referee was to pay the court-determined counsel fees out of the proceeds of the sale. In this order, the court did not mention a receiver for the partnership.

The court in its order of October 19, 1961 (which as far as we know was its final order), accepting the highest bid of $ 422,000, of Feigenbaum, and confirming the sale, fixed the fees to be paid by the referee, and ordered that the fees awarded were made liens upon the net proceeds of sale. The fees so awarded were 5 fees only, and for the first time, the court's orders (as far as we know) mentioned a "receiver," Argall. Apparently, at some prior time the court had appointed a receiver, and no doubt Argall served as the receiver of the Pine Street property during the partition-sale proceedings. The court-awarded fees were $ 7,500 to the referee, $ 3,500 to the receiver, and $ 10,000, each to the attorneys representing each of the three coowners ($ 30,000). The total fees were $ 41,000. We do not know what formula the court applied in fixing the fees, but they represented a little less than 10 percent of the gross sale price. The court ordered the referee to pay each legal fee out of each coowner's share of the net sale proceeds.

The court orders in evidence in this case do not refer to a dissolution of the C & G Realty partnership, and there are a minimum of references in them to the partnership. Upon the evidence here, we cannot conclude that the primary purpose of the partition and sale proceeding in the Superior Court was the dissolution of the partnership. The fact that the partnership was dissolved upon and after the sale of the Pine Street property seems to have been merely the result of the sale of its chief and only asset, the Pine Street property, and, therefore, such dissolution was merely ancillary and incidental to the sale. The partition and sale complaint filed by Ann did not petition the court to dissolve the partnership. Petitioner's argument relating to this matter is in the nature of mainly an effort toward an interpretation and construction of the partition-sale, court proceeding. That argument has been considered but it is entitled to receive little weight and it is of little relevance.

We turn now to the chief cases cited by the parties, namely, Dwight A. Ward, 20 T.C. 332">20 T.C. 332, affd. 224 F. 2d 547 (C.A. 9, 1955); and Munson v. McGinnes, 283 F. 2d 333 (C.A. 3, 1960), certiorari denied 364 U.S. 880">364 U.S. 880. Petitioner has cited additional authorities. All have been considered.

In Dwight A. Ward, the taxpayer, Ward, had been for many years a partner with his two brothers in a partnership, "Ward Refrigerator & Mfg. Co." Disputes arose between Ward and his brothers about the management of the business. Because of the disputes, the brothers filed a petition in the Superior Court of Los Angeles County for the dissolution of the partnership and the appointment of a receiver. The court appointed a receiver, ordered him to operate the business, and to sell the business upon application to the court. The sale was accomplished. Ward engaged the services of a lawyer, Parks, after the filing of the suit to dissolve the partnership. In this Court, 20 T.C. 332">20 T.C. 332, 341, we noted that Parks advised and represented Ward in respect to his interest in the partnership. Parks' services to Ward were extensive, varied, and not limited to legal matters. Ward wanted to purchase the two-thirds interests of his brothers, but if that were not possible, he wanted to sell his interest at a price approaching the value thereof, at the best price. Parks' efforts, and those of Seeley, caused W. C. Graham to make bids for the business at the receiver's sale, and enabled Ward to sell his interest in the property at a greater profit. Ward paid Parks $ 10,000 for all of his services.

In this Court, Dwight A. Ward, supra at 340-342, the taxpayer claimed that the entire fee paid to Ward, $ 10,000, was deductible as either a business expense under section 23(a)(1)(A), or as a nonbusiness expense under section 23(a)(2), 1939 Code. This Court found and concluded that Parks had rendered two types of services, and that it was proper to allocate the fee of $ 10,000 between them on a 60-40 basis, $ 6,000 for general services and $ 4,000 for services directly related to the sale of property; and we held that $ 6,000 was deductible as a business expense under section 23(a)(1)(A), but $ 4,000 was an expense of the sale and, therefore, was a capital expense to be offset against the amount received from the sale of a capital asset. The taxpayer appealed from this Court's conclusion that $ 4,000 of Parks' fee was a nondeductible capital expense, as well as from this Court's determination under a different issue. On appeal, this Court's determination was affirmed, in respect of the allocation of $ 4,000 of the fee (of $ 10,000) to the sale of a capital asset. Ward v. Commissioner, 224 F.2d 547">224 F. 2d 547, 554-555. The Court of Appeals agreed that the $ 4,000 paid to Parks for part of his services "were, in effect, a capital expenditure to help the sale," citing Shipp v. Commissioner, 217 F. 2d 401 (C.A. 9, 1954); Cobb v. Commissioner, 173 F. 2d 711, 714 (C.A. 6, 1949); and Lykes v. United States, supra.

The petitioner cites this Court's part of the determination in Dwight A. Ward, 20 T.C. 332">20 T.C. 332, 340, allowing a deduction of $ 6,000, part of Parks' fee, as authority for his claim that the court-awarded fee of Hodes, of $ 10,000, is deductible. Respondent cites the Ward case, also, as authority for his determination that the fee awarded to Hodes was a capital expense incurred in connection with the sale of a capital asset, which properly must be offset against the selling price. Respondent relies on the part of this Court's determination that $ 4,000 of Parks' fee was a capital expense, which determination was affirmed by the Court of Appeals for the Ninth Circuit. Petitioner's reliance upon part of this Court's determination in Ward brings into focus a question of fact in this case to which we again refer, as well as to some well-established general principles. The conflict between the petitioner's and respondent's contentions here, about both the fee received by Hodes and the appraiser's fee, arises out of their different, respective views of the real nature of these fees.

In Dwight A. Ward, supra at 341, this Court said: "The proper tax treatment to be accorded a payment to an attorney cannot be determined merely from the fact that the payment was for legal services rendered. We need to know the purpose for the legal services." See Lykes v. United States, supra, where the Supreme Court said: "their deductibility [legal fees] turns wholly upon the nature of the activities to which they relate." It is well established that fees paid in connection with the acquisition or disposition of real or personal property (such as legal, accounting, and brokerage fees) ordinarily are capital expenditures which are either to be added to cost or offset against selling price in determining the gain or loss upon the ultimate disposition of the property. 4 A Mertens, Law of Federal Income Taxation, sec. 25.26, p. 134; Earl M. Palmer, 3 B.T.A. 403">3 B.T.A. 403; Newark Milk & Cream Co., 10 B.T.A. 683">10 B.T.A. 683, 690; Morgan Jones Estate, 43 B.T.A. 691">43 B.T.A. 691, affd. 127 F. 2d 231; and Laemmle v. Eisner, 275 F. 504">275 F. 504. It is provided in section 1.212-1(n), Income Tax Regs., that "Capital expenditures are not allowable as * * * nonbusiness expenses."

Section 212 allows an individual to deduct the ordinary and necessary expenses paid for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. In Cobb v. Commissioner, supra, referring to section 23(a)(2), 1939 Code, the predecessor of section 212, 1954 Code, the court said: "The true criterion would seem to be that, to become deductible under the statute, the expense must be in proximate relation to the production or collection of income or to the care and conservation of property held to produce it." (Emphasis supplied.) That interpretation of section 23(a)(2) was approved by the Supreme Court in Lykes v. United States, supra.It is a question of fact whether an expense comes within section 212 (nonbusiness expense), or section 162(a) (business expense), or whether the expense is a nondeductible capital expense which is proximately related to the disposition of a capital asset. In Bowers v. Lumpkin, 140 F. 2d 927, 928 (C.A. 4, 1944), certiorari denied 322 U.S. 755">322 U.S. 755, it was pointed out that the statute allowing the deduction of nonbusiness expense (section 212 and its predecessor) was not intended by the Congress to abrogate the settled rule the expenditures directly connected with the disposition of a capital asset constitute capital expenses. See also James C. Coughlin, 3 T.C. 420">3 T.C. 420.

The issue in this case, whether the legal fee awarded by the court to Hodes and the appraiser's fee, are capital expenses, or deductible expenses under either section 162(a) or section 212, presents questions of fact which must be decided on the basis of the facts of this case, with attention to basic principles. And since petitioner and respondent have adopted different views about the nature of the action instituted in the Superior Court by Ann Gunn, it also is necessary to determine the primary purpose of that legal proceeding, which, too, must be determined from the evidence in this case. See Georgia Leary Neill, 42 T.C. 793">42 T.C. 793, 799; and Industrial Aggregate Co. v. United States, 284 F.2d 639">284 F.2d 639, 645 (C.A. 8, 1960), where the court said: "Practicality and substance are to be recognized. The test which appears to have been established is that of primary purpose [of the particular litigation]."

The court proceedings in which Hodes represented Fred Gunn, the petitioner, have been fully described in our findings, and have been discussed above, at the outset. The primary purpose of that legal proceeding can be determined from the complaint filed by Ann Gunn. As set forth in the findings, she petitioned the court to order a sale of the Pine Street property; her complaint was an action for a partition-sale of realty, and she instituted the action as the owner of record of an undivided one-half interest therein. Ann had obtained an interlocutory decree of divorce in another proceeding; the court there had held that the interest of the Gunns in the Pine Street property was community property; and the court there had awarded one-half of the 50-percent interest in the Pine Street property to Ann, and one-half to Fred. Ann, it is evident, wanted to reduce to her possession her undivided 25-percent interest in the Pine Street property, and to separate her interest from the interests of those who owned the other 75-percent interests, which she had a right to do under California law. De Roulet v. Mitchel, 70 C.A. 2d 120, 124; 160 P. 2d 574. In the partition-sale action, the parties thereto, and all of their counsel, stipulated that a physical partition of the property was impossible, that a sale of the property was necessary, and that all of the parties acquiesced in the sale. The court so found, and the court appointed a sole referee, Gallagher, "to accomplish the sale." The court found that there was a copartnership, C & G Realty Co., in which the sole partners "in and to the vestees [of the property] of record were Annie Kwock Chow and Ann Wong Gunn, and that they had appeared in both their individual and partnership capacities." Fred Gunn retained a lawyer, Hodes, to represent him in the partition-sale proceeding, and the evidence here establishes that Hodes' services were devoted solely and wholly to helping Fred obtain the best and highest amount for his interest in the property, i.e., Hodes' services consisted of successfully objecting to and resisting the first return of sale to the court by the referee, recommending a sale for $ 402,600, as a result of which the court did not accept that price but ordered the reopening of the bidding for new bids on the condition that the first bid must exceed the bid of $ 402,600 by a minimum amount of $ 12,000, and the property finally was sold for $ 422,000.

The action instituted by Ann was not for a receivership of the partnership, C & G Realty; or for a partnership accounting; and her action was not caused by or the result of a dispute among the partners about the conduct of the partnership business. The facts in this case are markedly different from those in the proceeding in the Superior Court in Dwight A. Ward, supra, and with respect to this Court's allowance in the Ward case of a deduction of part of the attorneys' fees, $ 6,000, the Ward case is distinguishable from this case. In the Ward case, the attorney for the taxpayer, Parks, testified about the variety of services he had rendered. This Court found that Parks had rendered "general services" to the taxpayer which were different from other services related to obtaining a bidder for the partnership business that was sold. Parks' services were not limited to legal services. Upon the evidence, we found and concluded, in effect, that the larger proportion of Parks' services came within the area of ordinary and necessary business services to Ward; therefore, $ 6,000 of Parks' fee constituted an ordinary and necessary expense of Ward's business activities and was deductible under section 23(a)(1)(A), 1939 Code. In the instant case, the evidence does not support the same finding with respect to Hodes' services to Fred. Petitioner's reliance is misplaced on the determination in Ward that $ 6,000 of the lawyer's fee was not a capital expense but was a deductible business expense.

On the other hand, this Court's findings in Ward that $ 4,000 of the lawyer's fee, and that the fee of $ 5,000 of a broker and appraiser, Seeley, constituted nondeductible capital expenses support respondent's determinations here, relating to the appraiser's fee and Hodes' fee. See Dwight A. Ward, 20 T.C. 332">20 T.C. 332, 342-343, where we said (p. 343): "The services of the attorney [for which a deduction of $ 6,000 was allowed] related also to partnership matters in general other than the sale, and an allocation of the attorney's fee to items other than the sale was proper. But in respect to Seeley's services, those services were directly attached only to the auction sale. Under these circumstances no allocation seems permissible. Respondent did not err in determining that Seeley's fee was an expense of the sale and, as such, is an offset against the selling price."

Since petitioner attempts to find an analogy of a receiver's sale to the referee's sale in the Ann Gunn proceeding, the following is noted: Pending the procedures of offering the property for sale, obtaining bids and concluding a contract of sale, it was necessary for the operations of the property, the collection of rents, and the payment of the expenses thereof to be carried on by the partnership, and for that purpose, the court appointed a receiver, Frank Argall. Eventually the court awarded $ 3,500 to Argall for his services as receiver. That was an ordinary and necessary business expense of the partnership which was fully deductible. There is no issue in this case about that expenditure. The respondent did not disallow the partnership a business expense deduction for $ 3,500. The receiver, Argall, was not the individual who was to engage in obtaining a buyer for the property. The Pine Street property was not sold at a receiver's sale.

The court appointed Frank Gallagher to be the referee to advertise the property for sale, obtain bids, and report the highest bid to the court. The procedure was that the court would determine the amount of the highest bid and would then direct the sale of the Pine Street property to the highest bidder under court order. The referee was to engage in the matter of selling the property. The court awarded Gallagher a fee of $ 7,500 for his services. The total costs of the sale amounted to $ 7,977, consisting of $ 7,500 to Gallagher, and $ 477 for revenue stamps and recording fees. None of these expenses are in issue.

The evidence here does not establish that Hodes' services to Fred related to any matters handled by the court-appointed receiver, Argall; nor does it show what Argall did; and it must be assumed that what he did was a routine matter of looking after receipts, disbursements, and operations until the property was sold. C & G Realty may have employed customarily a management agent, anyway, as it deducted in its 1961 tax return a "Management Fee" of $ 500, which appears to be unrelated to Argall's services, as far as we know. Of course, the Superior Court had jurisdiction to appoint a receiver of the apartment business, pending the sale, but that was an ancillary matter in the primary action for a sale of the property. Blodgett v. Haddock, 212 P.2d 26">212 P. 2d 26.

A receiver's fee for management services is an ordinary, deductible expense. Sec. 1.162-1(a), Income Tax Regs.

The local law providing a method for terminating joint interests in real property has no bearing upon the classification of the ensuing expenditures for Federal tax purposes, as either deductible expenses or capital expenses.

Petitioner cites Otto C. Doering, Jr., 39 T.C. 647">39 T.C. 647, affd. 335 F. 2d 738 (C.A. 2, 1964), but it is inapplicable here. The Doering case (p. 650) involved expenses (legal fees) which were found to be a cost of collecting sums due to the taxpayer under "a fully executed and enforceable contract"; the expenses were not incurred to effect a disposition of a capital asset. The court, in affirming this Court, observed (335 F. 2d at 741-742) that there is a distinction between the nature of a capital expense connected with the sale of a capital asset, and the nature of expenses of collecting a sum of money which of itself is a capital gain. Conceptually, expenses of collecting income are not part of a capital transaction. The court emphasized that the word "income" in section 212(1) "is not to be given a wholly literal reading. If a taxpayer sells securities or other capital assets, section 212(1) does not permit him to deduct expenses of sale even though the sale produces a gain which constitutes 'gross income,'" See Spangler v. Commissioner, 323 F. 2d 913, 921, (C.A. 9, 1963), where the court noted that "Costs connected with the disposition of a capital asset are also capital expenditures to be added to the taxpayer's basis, or offset against the sales price, rather than expenses deductible from ordinary income." In Spangler the the court cited and followed the reasoning of Munson v. McGinnes, supra.

Frank L. Newburger, Jr., 13 T.C. 232">13 T.C. 232, cited by petitioner, is also inapplicable here; it does not relate to legal fees connected with the disposition of a capital asset.

The reasoning of Munson v. McGinnes, supra, applies to this case. In Munson there was litigation about sales of shares of stock in Williamsport Wire Rope Co. to Bethlehem Steel Co. Later, former Williamsport stockholders, including Munson, sued to have the sale reopened on the ground that Bethlehem had acquired the stock fraudulently. The court found that the sales of stock to and the acquisition of the Williamsport assets by Bethlehem had resulted from fraud. The court ordered the payment of an additional $ 6 million by Bethlehem to the Williamsport stockholders. Munson received out of the litigation an additional payment for the sale of the Williamsport stock, from which he realized additional capital gain. His share of the legal expense was for successfully asserting and litigating his claim with the other shareholders. In a subsequent tax case, the U.S. District Court, 178 F. Supp. 380">178 F. Supp. 380, and the Court of Appeals for the Third Circuit in Munson v. McGinnes, supra, held that the legal fees of an attorney of a stockholder for services in opening up the matter of the sale of stock, where a receivership was involved, must be treated as capital expenditures, and cannot be treated as expenses incurred for the production or collection of income, or as a business expense, under section 162 or section 212(1), 1954 Code. In Munson the court held (p. 336), in denying a deduction from ordinary income, "that in those situations where the capitalization of business selling expenses is a long established and accepted requirement, despiteSection 162, equivalent or closely analogous nonbusiness expense must also be capitalized and used only as an offset to capital gain, despite Section 212(1)."

Our finding and conclusion are, and must be upon the evidence in this case, that the services of Hodes were solely in connection with the disposition of a capital asset. Apparently he earned his fee by convincing the court to reject the offer of $ 402,600, cash, and in this way he safeguarded Fred's one-fourth interest which was worth in excess of $ 100,000. Hodes' services were directly connected with the sale of property in which Fred had an interest for which Fred wanted to obtain the highest market price obtainable. As the result of Hodes' services in the court proceedings for the sale of the property by the court-appointed referee, the property was sold at a higher price, $ 19,400 more than was originally offered. The court-awarded legal fee to Hodes was an expense directly connected with the sale of the property. It was a capital expense to be offset against the sales price. Respondent's determinations are sustained with respect to both the disallowance of deductions of the appraiser's fee of $ 500, and the legal fee of $ 10,000. In the absence of evidence to the contrary, it must be assumed that the appraiser's fee was incurred for an appraisal of the property in connection with the sale thereof; therefore this expense was directly connected with the sale and is a capital expense to be offset against the sales price. No facts were stipulated about this fee and there is no evidence relating to it.

A Rule 50 computation is necessary because of respondent's concession of a deduction for depreciation in the year of the sale.

Decision will be entered under Rule 50.