Daugherty v. Commissioner

HARRY A. DAUGHERTY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Daugherty v. Commissioner Docket No. 41905. United States Board of Tax Appeals 24 B.T.A. 531; 1931 BTA LEXIS 1626; October 29, 1931, Promulgated *1626 Petitioner, an attorney, and other attorneys contracted in writing to conduct law proceedings to establish the rights of an individual in a certain trust estate. Said contract provided that the attorneys were to share equally in 40 per cent of any amount which might be recovered for the client. It was understood and orally agreed among all the parties concerned that petitioner should not be required to render any services in such litigation, subsequent to the making of the contract, in order to receive his portion of the amount recovered, and he did not render services subsequently. He had rendered some professional services previous to the making of the contract. Before any amount was recovered and before there was any assurance that any would be recovered, petitioner made a gift to his wife of one-half of his interest in the contract. Later an amount was recovered and a portion thereof was paid to petitioner's wife in accordance with the assignment of the contract interest to her. Held, that such amount as petitioner's wife was entitled to and received under the assignment is taxable to petitioner, following Lucas v. Earl,281 U.S. 111; Edward J. Luce,18 B.T.A. 923;*1627 and John Leo Stack,22 B.T.A. 707. Jay C. Halls, Esq., and E. H. McDermott, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. MCMAHON *531 This is a proceeding for the redetermination of an asserted deficiency in income tax for the calendar year 1926 in the amount of $12,416.40. It is alleged that the respondent erred in including in petitioner's income for the year 1926 the amount of $47,180.28, paid in that year to the wife of the petitioner for her share or interest in a certain contract. *532 FINDINGS OF FACT. The petitioner is an individual residing in Chicago, Ill. Petitioner was admitted to practice law in Illinois in 1896. For several years thereafter he was engaged in general practice in Chicago. In 1915 petitioner was employed as one of the general attorneys of the Standard Oil Company of Indiana. Thereupon he retired from general practice and had his office in the general offices of that company. Prior to his employment by the Standard Oil Company of Indiana, while engaged in general practice, petitioner had acted as attorney for Mrs. Estelle Howland (then Mrs. Estelle Jennings) *1628 daughter-in-law of John D. Jennings and sister-in-law of Edwin Jennings. In about 1912 petitioner and Robert J. Folonie were engaged in litigation to establish Mrs. Howland's rights in connection with the trust estate created by John D. Jennings, who died in 1889. Petitioner and Folonie spent a great amount of time and effort on the case, which was strenuously contested, but finally the litigation terminated unsuccessfully to Estelle Howland in the Appellate Court of Illinois. Certain adverse interests were represented by the law firm of Campbell and Fischer of Chicago, of which John G. Campbell was a member. On October 31, 1923, Edwin Jennings, the last surviving son of John D. Jennings, died. Learning of his death, Campbell called petitioner on the telephone and asked him if he still represented Mrs. Howland and petitioner stated that he did. Campbell then stated that in connection with the prior litigation he had studied and briefed the question of Mrs. Howland's rights in the trust estate and that he had reached the conclusion that in view of the death of Edwin Jennings, Mrs. Howland was entitled to a substantial interest therein. Campbell offered to give this brief to*1629 petitioner. Petitioner said he would ascertain the wishes of his cilent with regard to the matter, but that in no event could he handle litigation for her, because his position with the Standard Oil Company of Indiana occupied all of his time and attention. It was orally agreed between Campbell and petitioner that petitioner would not engage in any of the litigation, but that petitioner was simply to furnish the client. On November 3, 1923, Mrs. Howland conferred with petitioner and informed him that she desired proceedings instituted to establish her rights in the trust estate. At a conference between Mrs. Howland, her husband, petitioner, and Campbell at petitioner's offices in the Standard Oil Company building in Chicago, it was agreed that a bill to construe the will should be filed; that all of the work in connection with the proceedings should be performed by Messrs. Campbell and Fischer, and that there should be paid to the attorneys an *533 amount equivalent to 40 per cent of whatever might be recovered for Mrs. Howland, this amount to be divided equally between Campbell, Fischer, petitioner, and R. J. Folonie, whose name was suggested by petitioner because of*1630 his connection with petitioner in the prior unsuccessful litigation for Mrs. Howland. An agreement in writing was entered into as follows: CHICAGO, ILL., Nov. 5, 1923. I hereby appoint HARRY A. DAUGHERTY, ROBERT J. FOLONIE, JOHN G. CAMPBELL and HERMAN A. FISCHER, Jr. to act as my solicitors and attorneys in all matters pertaining to my interest in the Trust Estate founded by the last Will of John D. Jennings, deceased. They are authorized to commence or participate in, any proceedings they deem necessary in order to establish my interest therein. As their full compensation for services they are to receive an amount equal to forty per cent (40%) of any money or property I am awarded or receive, in connection with the subject matter of said Trust Estate; it being agreed and understood that this compensation is to be in addition to any fees which may be awarded, either to me on account of my solicitors' fees, or directly to my solicitors, by any Court, from the Trust Estate as a whole, on account of legal services rendered by them in any suit or suits which they instituted or participated in involving the subject matter above mentioned, but does not include anything which I*1631 may receive directly from the estate of Edwin Jennings. deceased, as distinguished from said Trust Estate, found by the Will of John D. Jennings, Deceased. (Signed) ESTELLE G. HOWLAND FRANCIS H. HOWLAND Hoboken, N.J. ACCEPTED: HARRY A. DAUGHERTY ROBERT J. FOLONIE JOHN G. CAMPBELL HERMAN A. FISCHER, Jr. By H. A. DAUGHERTY It was agreed between the attorneys and Mrs. Howland that petitioner and Folonie would be required to do no work whatever in connection with the case. On November 3, Campbell and Fischer filed the bill to construe the will. There were numerous parties to the litigation and a great deal of time and effort was put on the case by Campbell and Fischer. No time whatever was spent and no work of any kind was done on the case by petitioner or by Folonie, although Campbell signed petitioner's and Folonie's names to the pleadings in the litigation. On January 30, 1924, petitioner wrote a letter to his wife, enclosing petitioner's copy of the original contract with Mrs. Howland. On the margin of such contract petitioner endorsed an assignment in longhand as follows: Chicago, Ill., January 30, 1924 In consideration of love and affection, I hereby*1632 assign to Elizabeth M. Daugherty, my wife, an undivided one-half of my interest in and to this contract. HARRY A. DAUGHERTY *534 The letter and the contract with the assignment endorsed thereon were delivered by petitioner to his wife on the evening of January 30 and were retained by her in her private desk at home until requested by petitioner for use in connection with the controversy over petitioner's income-tax liability. Petitioner orally advised Campbell of the assignment sometime in 1925. The letter from petitioner to his wife was as follows: DEAR BESS: You have often expressed the desire to build a home according to your own plans, and I had hoped to be able to be in a position to make it possible for you to realize your dream. However, circumstances have always seemed to prevent it. Some two or three months ago I made a contract with Estelle G. Howland of Ho-Ho-Kus, New Jersey, whom I had previously represented in some litigation, to represent her in connection with Mr. R. J. Folonie, J. G. Campbell and H. A. Fischer, Jr. in the prosecution of her claim against the estate of John G. Jennings, deceased, the same to be handled upon a contingent basis of 40%*1633 of the amount she might realize, said 40% to be divided equally between the above named parties. If we are successful, Mrs. Howland will realize a very substantial amount, and the contingent fee will be correspondingly large. I am therefore assigning to you an undivided one-half interest in my share of whatever fees may be coming to me under the contract. I hope it will be sufficient to enable you to build the home, or if you should decide not to use it in that way, then I want you to feel at liberty to use the money in any way you see fit. I am attaching hereto a copy of the agreement on which I have noted your interest. With all my love, I am as ever, (Signed) HARRY At the time of the gift the litigation to which the contract related was pending and undetermined. No settlement had then been arrived at and there was then no assurance that the litigation would terminate successfully, or that any settlement could be made. At the time of the gift the value of the petitioner's interest in the contract and the value of the interest transferred by petitioner to his wife were wholly contingent and undeterminable. In June, 1926, as a result of negotiations between the*1634 parties, in which petitioner in no way participated, a settlement of the litigation was agreed upon, by the terms of which $943,605.60 was awarded to Mrs. Howland in satisfaction of her claim. Pursuant to the contract of employment, 40 per cent thereof, or $377,442.24, was duly paid to Campbell and Fischer. Campbell called petitioner to his office in order to figure out just what each attorney was entitled to receive. Petitioner's wife was not invited to such conference. On June 22, 1926, Campbell delivered to petitioner a check in his favor in the amount of $47,180.28 and a check in favor of Mrs. Daugherty in the amount of $47,180.28. *535 Mrs. Daugherty deposited (or caused to be deposited) this check in an account which she opened in the Illinois Merchants Trust Company, a downtown bank in Chicago. She invested the money in stocks, secured the certificates in her own name, and deposited them in her private safe-deposit box. She used the dividends of the stocks entirely for her own purposes and she did not contribute in any way to the household expenses, nor did petitioner derive any benefit whatsoever from the money paid to his wife or from the securities purchased*1635 therewith or from the dividends received by Mrs. Daugherty on such securities. In determining the proposed deficiency for 1926 the respondent included in petitioner's income the amount of $47,180.28 received by petitioner's wife. OPINION. MCMAHON: The question presented is whether the respondent erred in including in petitioner's taxable income for the year 1926 the amount of $47,180.28, which was paid to petitioner's wife as a result of petitioner's unqualified assignment to her of an undivided one-half interest in the contract of November 5, 1923, with Estelle G. Howland. Respondent takes the position that the income in question constitutes compensation paid by or on behalf of Mrs. Howland to petitioner for his personal services as attorney, and contends that such income was first taxable income to petitioner, citing . After carefully considering the evidence in the instant proceeding, we are of the opinion that the income in question amounted to compensation paid to the petitioner for personal services rendered to Mrs. Howland. It is true that petitioner regarded his a nominal representation and there was an understanding, *1636 among all the parties concerned in the suit, that petitioner should not be required to render further services with regard to thf prosecution of the suit after the contract was entered into. Petitioner did not in fact render services after such time, but the evidence discloses that prior to the time the contract was entered into petitioner had rendered some professional services. At the time of the agreement petitioner still represented Mrs. Howland as attorney. At the suggestion of Campbell to petitioner that Mrs. Howland was entitled to a substantial interest in the trust estate, petitioner conferred with her, and brought Campbell and Fischer into the contemplated litigation in her behalf. It is reasonable to infer that he gave her some advice upon the subject. He was present at the conference when it was decided to proceed with the litigation. Under the agreement in question Mrs. Howland agreed *536 that the attorneys, including petitioner, should receive an amount equal to 40 per cent of any money or property she might be awarded as full compensation for services. The case, then, falls within the principle laid down in *1637 , wherein it was held that under the Revenue Acts of 1918 and 1921 income derived from salaries, wages or compensation for personal services is taxable to the person earning the same, even though there was a preexisting arrangement between such person and his wife to the effect that all such income should be treated as owned by them as joint tenants. The Revenue Act of 1926, with which we are here concerned, is not different in this regard from the Revenue Acts of 1918 and 1921. See sections 210, 211, 212(a) and 213(a) of the Revenue Act of 1926. To the same effect, in principle, are , and . The petitioner cited ; ; Rosenwald v. commissioner,; and . However, those cases are clearly distinguishable from the instant proceeding, since they did not deal with the assignment of income derived from salaries, wages, or compensation for personal*1638 services. We hold that the respondent did not err in including the amount in question in petitioner's taxable income. Reviewed by the Board. Judgment will be entered for the respondent. TRAMMELL TRAMMELL, dissenting: In my opinion, the res which gave rise to the income was assigned, not the income from the contract. This distinguishes this case from the principle of the Earl case. SMITH agrees with this dissent.