DocketNumber: Docket Nos. 21317-81, 21318-81.
Citation Numbers: 50 T.C.M. 200, 1985 Tax Ct. Memo LEXIS 319, 1985 T.C. Memo. 302
Filed Date: 6/25/1985
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM OPINION
CLAPP,
These consolidated cases were submitted fully stipulated inder
Petitioners are the daughters*321 of Garvice Kincaid. In June 1973, Joan executed an option which gave Mr. Kincaid the right to purchase all the stock she owned in Lexington Finance Company (LFC). Also in June 1973, Joan and Jane executed options which gave Mr. Kincaid the right to purchase all the stock they owned in several banks. Jane and her father also executed two options that were not dated. These options provided that Mr. Kincaid would purchase other bank stock owned by Jane whenever she requested him to do so and that Jane would sell the stock to Mr. Kincaid whenever he requested her to do so.
Mr. Kincaid died on November 21, 1975, without having exercised any of the options. On November 11, 1976, Joan informed the executor of Mr. Kincaid's estate that she was cancelling the LFC option. On December 1, 1976, the executor notified Joan of its election to exercise the LFC option and tendered payment, which Joan refused. On January 14, 1977, the executor completed a blank stock power which Joan had given to Mr. Kincaid and transferred the stock. LFC issued a new certificate for the stock to the executor. On January 19, 1977, Joan instituted an action in Fayette Circuit Court, Fayette, Kentucky. *322 The relief Joan requested included: 1) that the LFC option be declared null and void; 2) that she be declared the owner of the LFC stock; and 3) punitive damages.
The Fayette Circuit Court granted summary judgment for the executor on August 30, 1978, declaring it to be the owner of the LFC stock. Joan appealed. The Kentucky Court of Appeals reversed the decision of the Circuit Court on January 11, 1980. The Supreme Court of Kentucky affirmed the decision of the Court of Appeals on May 26, 1981, finding that the right to purchase the LFC shares was personal to Mr. Kincaid and did not pass to the executor. On remand to the Circuit Court, Joan filed on July 21, 1981, a supplemental complaint in which she requested additional relief, including any dividends paid on the LFC stock which were received by the executor.
On November 11, 1976, Joan and Jane notified the executor that they were cancelling all bank stock options and demanded return of the bank stock certificates. Upon refusal, petitioners, on January 27, 1977, instituted separate actions in Fayette Circuit Court. The relief they requested included: 1) that the bank stock options be declared null and void; 2) that*323 they be declared owners of the bank stock; and 3) punitive damages.
On July 22, 1977, the executor attempted to exercise the options on some of the bank stock. On October 25, 1979, the Circuit Court granted summary judgment for the executor declaring it to be owner of the stock subject to the options it had attempted to exercise. On December 4, 1979, the Court extended its judgment to the undated options, deciding that those options were binding on Jane and the executor. The Kentucky Court of Appeals affirmed the decision of the Circuit Court on December 19, 1980. The Kentucky Supreme Court did not review the case.
Joan paid legal fees of $58,155.82 during 1977 with regard to the LFC stock case. She contends this amount is deductible under
*324 Joan paid legal fees of $752.24 during 1977 with regard to her bank stock case. Jane paid legal fees of $55,980.14 during 1977 with regard to her bank stock case. They contend those amounts are deductible under
Respondent contends none of the legal fees are deductible because they are capital expenditures within the meaning of section 263. We agree with respondent.
LFC STOCK CASE
1.
Whether legal fees are deductible under
Joan argues that the litigation in the LFC case involved the collection of income and the management, *325 conservation, and maintenance of income-producing property. The record is clear, however, that the linchpin of the LFC case was title to the LFC stock. The litigation arose out of Joan's grant to her father of an option to acquire stock she held for investment. Although the nominal issue in the case was the validity of the option, 4 the real issue was who owned the stock. Whether the origin of Joan's claim is viewed as the disposition of a capital asset or the defense of title is immaterial since her legal fees are nondeductible in either event.
Joan relies on
Joan also contends that even if some of her legal fees are nondeductible capital expenditures, that portion of her fees which relates to her claim for dividends and punitive damages are deductible. She is correct to the extent that
*327 Furthermore, Joan may not deduct legal fees purportedly allocable to her claim for punitive damages. It is a basic principle of remedies that a claim for punitive damages may not be made independently. It must accompany an underlying claim of an actual wrong.The origin of the underlying claim controls whether legal fees allocable to a claim for punitive damages are deductible, and in this case we have found that the origin of the claim pertains to title. A portion of otherwise nondeductible expenses should not be transformed into a deduction just by the addition to a pleading of a demand for punitive damages.See
2.
Joan*328 also contends that the legal fees she paid are deductible under
BANK STOCK CASES
Joan and Jane repeat the arguments relating to
1. All references to sections are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue.↩
2.
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year--
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income * * *. ↩
3.
(a) General Rule.--There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
* * *
(c) Limitation on Losses of Individuals.--In the case of an individual, the deduction under subsection (a) shall be limited to-- * * *
(3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.↩
4. The primary question in the LFC case and in the bank stock cases was whether the options were personal to Mr. Kincaid and, therefore, expired upon his death.↩
5. See also
6. For example, in
7. But see
8. Even if a theft had occurred, the origin of claim rule applies to deductions claimed under