UNITED STATES v. DAVIS
Legal provision: Internal Revenue Code
Argument of I. Henry Kutz
Chief Justice Earl Warren: Number 190, United States, Petitioner, versus Thomas Crawley Davis et al.and Number 268, Thomas Crawley Davis et al., Petitioner, versus United States.
Mr. I. Henry Kutz: Mr. Chief Justice, may it please the Court.
In this consolidated peti -- cross-petitions, my associate, Mr. Wilkenfeld will state the facts and give the argument in Number 268 in which the United States is respondent.
With the Court's permission, I will argue Number 190 in which the United States is the petitioner.
The issues in Number 190, and the questions are quite desperate in the two cross-petitions, the issue in Number 190 is whether a taxpayer husband realized capital gain when he transferred to his former wife, a stock which had appreciated in value during his ownership.
And when the transfer was made in consideration of the wife's release of his marital obligations to her, the Court of Claims have -- has held that no capital gain was realized but in so ruling expressly recognized conflict with decisions of the Second and the Third Circuit.
On the other hand, it found support in the reasoning of the decision by the Sixth Circuit.
The facts are not in dispute.
Both taxpayer and his former wife were residence of Delaware and all the property involved was located in Delaware.
Taxpayer was the director and vice president of the du com -- du Pont Company and the stock in issue is du Pont stock.
Serious marital disputes arose between them.
And by July 1954, they had both retained attorneys and property settlement negotiations commenced being conducted through the attorneys.
In November 1954, a formal property settlement agreement was arrived at and signed.
And the court explicitly found that all the property involved in the settlement negotiations was owned by Mr. Davis, subject only to her marital rights under the laws of Delaware.
Those were the marital rights of the common law state she had.
I will describe in a little more detail later.
She had a dower, the common law dower interest in his real estate, otherwise, no property rights in his estate.
Justice Potter Stewart: No property rights in any personal --
Mr. I. Henry Kutz: That's correct.
Justice Potter Stewart: -- no property rights in what's involved here.
Mr. I. Henry Kutz: That's right.
The agreement, so far is pertinent, however, provided for various transfers made by him to her under specific categories.
The agreement was wrong to say that this and this shall be transferred to her for her support and this and that, including the stock here involved, shall be transferred to her in division of property.
But -- in as much as she had no -- no property in the stock, it will be our contention that that's a mere language and could give her no property.
The -- so far as pertinent, the agreement provided that he was to deliver to her 500 shares of the du Pont stock, agreement having been made in November 1954.
On April 1, 1955 and 500 shares of du Pont stock on April 1, 1956, these shares were to be delivered to her at his cost free and flair.
Justice Potter Stewart: Wait a minute Mr. Kutz.
We're not talking about the basis?
Mr. I. Henry Kutz: Yes.
Justice Potter Stewart: You're talking --
Mr. I. Henry Kutz: Yes.
Justice Potter Stewart: -- that he's --
Mr. I. Henry Kutz: And no --
Justice Potter Stewart: -- any expenses would be charged to him.
Mr. I. Henry Kutz: --(Voice Overlap) and everything else.
In other words, she was to get that stock.
And there's no provision that it was any particular stock that he own.
He could go out and buy it.
Indeed, he's just part of it.
Justice Potter Stewart: This -- this agreement was made while they were husband and wife?
Mr. I. Henry Kutz: Yes.
Justice Potter Stewart: Before any suit for divorce have been filed?
Mr. I. Henry Kutz: That's correct.
Further, for her support, he was to make certain monthly payments.
And in addition, he was per some commencing January 1955 equal to the dividends declared upon the du Pont's stock to the extent that he hadn't delivered the stock to her.
In other words, if du Pont declared dividends before he actually delivered the stock, he was to pay her an equivalent amount.
And this was said to be for her support.
In consideration of all of the transfers both those label for support and those label as divisions of property, she expressly released him from all her rights against his property and for any claim of support by him and of herself or their child.
The agreement provided that if a divorce was obtained, the divorce should in no way effect the obligations of the party under the agreement.
And the provisions of the agreement might but need not be incorporated in the divorce.
Actually, a divorce was granted by a Nevada Court in January 1955, a couple of months after the agreement, the decree approved the settlement agreement and directed the parties to carry it out.
Justice Potter Stewart: This was the entire agreement between the party where there was -- in addition to this, there was no alimony, no support or (Voice Overlap) --
Mr. I. Henry Kutz: Yes.
There was ali -- I -- I meant to mention, if I haven't.
She was to get 500 -- I think $50 a month for ten years up to -- from 1954 to 1964 in addition to lump sum, I think of $25,000 and in January --
Unknown Speaker: So there were other (Inaudible)
Mr. I. Henry Kutz: There were also some insurance policies and so on.
The Commissioner determined a deficiency against him for the du Pont stock -- for the transfer of the du Pont stock.
Chief Justice Earl Warren: We will have recess now, Mr. Kutz.
Argument of I. Henry Kutz
Chief Justice Earl Warren: Mr. Kutz, you may continue your argument.
Mr. I. Henry Kutz: Thank you, Your Honor.
On March 21, 1955, the taxpayer delivered the 500 shares of du Pont stock, which he -- a little early, he was supposed to deliver it on April 1.
His cost basis for the stock was $74,775 in market value, at the time of transfer was $82,250.
The Commissioner determined that he had realized the gain between the cost basis and the market value, with the date of transfer and has held that this gain was in the amount of about $7500.
The court below did not rule that the transfer was not a taxable event, but relieved the husband from liability only because it felt unable to measure the amount of the taxable gain.
That is the value of the discharge of his marital obligations, a consideration which he received for the transfer.
I should like, however, to discuss because it discussed in taxpayer's brief and we have discussed it in our brief whether this transfer was a taxable event.
The pertinent statutory provisions have been in the revenue laws for many years.
They're the ones that -- familiar ones that deal with the gain on -- or loss on disposition of property in the 1954 code which governs here, Section 1001 (a) provides, that the gain from the sale or other disposition of property shall be the excess of the amount realized there from over the adjusted basis.
In subsection b, the statute defines what the amount realized as.
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property other than money received.
Now, we say that it's our contention and that is the sale or other dispos -- disposition of this du Pont stock, in exchange for the discharge of the marital obligations owed by taxpayer to his wife, was a discharge of a legal obligation that it's the familiar situation, where taxes have often -- have been assessed without any question.
That the satisfaction of a legal obligation, that is a discharge of a debt is a receipt to the obligor.
And here, he used property which had appreciated in value great -- to some extent during his period of ownership and he used it, we say at its market value, he is therefore liable for the difference between the basis and the value of the stock at the time of transfer.
It's the same as if he had sold the stock and used the proceeds to pay the debt, that he goes through the form of selling a stock that doesn't go through the form of the selling of stock, doesn't take away from his realization of economic gains who increased in market value.
In the earlier cases decided by the Third and the Second Circuits in 1941 and 1942, this was the holding, and in those cases in the Third Circuit case, the Mesta case, the taxpayer transferred to his wife a stock that it cost him $7500, and at the time of the transfer, it was worth $156,000.
In the Halliwell case, the Second Circuit case, he transferred stock that it cost a $160,000 and the market value was $461,000.
Justice John M. Harlan: (Inaudible) to you, is that the marital case?
Mr. I. Henry Kutz: Yes, Your Honor, they both were marital cases.
They both were cases where in this charge of the husband's marital obligations, he transferred appreciated property.
There was -- the cases were hard fought.
The -- in the -- both cases represented reversals of the Board of Tax Appeals and in the Mesta case, the Third Circuit said en banc and there were -- it was a three to two decision, but they have been the law since 1941 and when the Mesta case was decided and the first questioning of them in long -- in the period of about 20 years from that time to this was in the Sixth Circuit, in the Marshman case, decided in 1960.
Although, that case actually didn't go on that ground, there was reasoning in it.
The case -- the Marshman case went on the ground that the market value of the security there in option couldn't be determined.
Now, taxpayer argues that this wasn't a taxable event.
There were two possible categories other than sale or exchange that this might fall into.One is, that it was a division of property of a -- between the spouses.
But that we say is not the fact under the state of the law of Delaware, and it wasn't then the Halliwell case, the Second Circuit case, discussed that same thing under the similar common-law rules of the State of Connecticut.
There was nothing that could have prevented Mr. Davis from selling his stock at any time.
His wife had no share in it.
It wasn't -- as if she had some interest in it.
It wasn't a division of property at all.
She had -- she had claims against him.
And although, the claims would differ on -- depended upon his ability to pay, I'm thinking of alimony, that is none unusual situation.
It was a claim.
It was his property.
He used that to discharge the claim against him.
Now, another possible category that was suggested below by taxpayer, but is not suggested in his brief here is that he was making a gift to her.
But this seems completely contrary to the facts.
There was no act of generosity.
They bargained very closely, and he got consideration for it.
As I say, taxpayer has not advanced that ground in his (Voice Overlap) --
Justice Potter Stewart: Precisely the same result would follow where this denominated as a gift or working on, made it as a division of property, wouldn't it?
Mr. I. Henry Kutz: I think so --
Justice Potter Stewart: So far as it goes as the -- the wife's subsequent basis were concerned and all other tax, was it?
Mr. I. Henry Kutz: That's a -- that's true.
Now, at corollary of the holding here will be the wife's basis.
Now, it also seems to us, unrealistic to suppose that she expected she was going to get her husband's lower basis.
And -- so that when she sold the stock, she'd have to pay the tax which he would normally have paid.
And I've -- I stated I believe a -- if the Court will recall in stating the terms, the agreement, she was to get it free and clear.
Well of course, that wouldn't prevent it from being free and clear, but I think like in the Mesta case, would have been very much surprised if she found that there's $150,000 worth of -- of stock that she received, she had a cost basis of $7500.
And here, although the difference -- the economic gain is not as great, I think it is normal and fairer and -- and the more accurate construction of the agreement of the parties to assume that she took it at the basis which is -- of his -- of its market value at the time of the transfer.
Now -- and also an important consideration is that this has been a law for approximately 20 years that undoubtedly many marital agreements have been made based on the Mesta and Halliwell principle which our leading cases.
Taxpayer says that the effect of -- of the decision that the husband is taxable will create a difference between community property and common-law states and that's a bad thing.
But the tax laws for long have had the deal with that difference.
It exists under the law, the separate states.
Congress has amended the tax laws when it's thought wise to do it.
This rule has existed for many years and the court -- the courts must deal with the property law of the states as it finds them.
And it's to be assumed that the party's contract knowing what the property law of the states are.
Justice John M. Harlan: (Inaudible)
Mr. I. Henry Kutz: As far as I know I think I know, yes.
Justice John M. Harlan: (Inaudible) as to -- is that the only importance of Congress during this?
Mr. I. Henry Kutz: In addition to the Court of Claims, yes sir.
The Court of Claims in its opinion if Your Honor pleases states that it had to chose between Mr. Halliwell and Marshman and there have been --
Unknown Speaker: (Inaudible)
Mr. I. Henry Kutz: I beg Your Honors.
Unknown Speaker: (Inaudible)
Justice Potter Stewart: Like the Court of Claims here, placed it's decision upon its inability to place evaluation upon what it was that the wife --
Mr. I. Henry Kutz: Yes.
Justice Potter Stewart: -- paid or gave up.
Mr. I. Henry Kutz: Entirely and apparently --
Unknown Speaker: No court has ever held that this was not a transfer -- transfer of a kind that would normally be taxable.
Mr. I. Henry Kutz: That is correct.
Also, if I may add this to my answer Mr. Justice Harlan, the Second Circuit in the case called Farid-Es-Sultaneh and the Third -- and the Fourth Circuit have been at the case called Commissioner against Patino, in Farid-Es-Sultaneh, there was a transfer made prior to marriage and in release of marital rights antenuptial.
And in Patino, it was during marriage and the question was the basis of the wife and in order to determine the basis of the wife, they really had to decide this question.
They both held that she got the market value with the ba -- basis at the time of the transfer.
Now, the question -- the second issue in the case is how is this property to be valued?
He gets his consideration as a discharge of marital rights.
Now, the -- the -- the Third Circuit stated in the Mesta case that it would be assumed that the parties would get their moneys worth, that if he was willing to transfer this appreciated stock and he could have easily sold it and given her the money instead for the discharge of marital rights that he considered he was getting his money's worth.
The Court of Claims in the Sixth Circuit felt that the marital rights value could not be estimated.
They went on the ground that it was impossible to ascertain what he received here.
They said that tension and emotion enter into marital transactions and that would prevent an equality of value or transfer.
But tension and emotion certainly under into many transactions, and if we would try to find that a result which is unjust, we would say we will make no decision.
There's nothing to prevent the taxpayer if these values are not equal from -- from introducing evidence to show that they are unequal.
But presumably, in absence of any evidence, it's fair to assume and a more reasonable rule and one which would protect the wife from having the husband's basis to say that these are equality of exchanges.
Justice John M. Harlan: Where there any provisions in the separation agreement that readjusted or made the alimony provisions readjustable in the light of regular events?
Mr. I. Henry Kutz: Nothing was said about it, sir.
There was none.
Now, for the first time in his brief here, counsel has made two contentions.
These contentions were not made in the Court of Claims.
They weren't made in the brief submitted in opposition of petition for certiorari.
They first appear here.
One of them is that the date on which the value of the husband's marital obligation should be -- on which they should be valued is that -- is the November 1954 date on which the -- at which the agreement was signed and not the March 1955 date when the property was transferred.
He says, “If you take the November 1954 date, you will find that at that time, the market value of the stock was below his basis.
And there's -- they -- he for the first time in search in the record the -- or in his briefs states what the market value where the stock in November 1954 was though that is of course a matter of -- that one can find out by looking at the reports of the stock market, and we do not dispute the value.
But the reason I mentioned that is to show how this is the first time that it comes into the case.
It seems to us that it was the intention of the parties to make their adjustment of values at the time of the transfer in March when there was an accretion in value and appreciation in value in the husband's stock, not the date of the agreement.
And this was the date that was also taken in the Mesta and Halliwell cases.
It was the date of the transfer.
No issue was raised in those cases on that point but the Court took the date of the transfer in agreements often the date of the transfers what counts.
You may have a stock of a corporation, a close corporation exchanged for marketable stock, an agreement to that effect and the agreement provides in several months later, the exchange shall be made.
And it's necessary to have stockholder's consents and director's consents in many other formalities.
And the parties always expect that the exchange of values when the close corporation stock may not be possible to value at all, except in relation to the market value, the exchange and always the time of transfer is taken.
Another point that he makes is that --
Justice John M. Harlan: Before you leave that point, was there a provision in the agreement that call for a -- gave a specific transfer date?
Mr. I. Henry Kutz: Yes, Your Honor.
It said April 1, 1955 for 500 shares, April 1, 1956 for 500 shares.
And in that connection, he makes a second point which is that the consideration was not received.
That is a consideration of discharge as marital rights was not received by the husband till 1956 when the whole thousand shares was delivered or perhaps 1964 when the alimony payments where to be made.
But we say that our -- it's our position that -- and this is also a point that he first makes here, it's our position that consideration was received pro-rata.
Chief Justice Earl Warren: Mr. Wilkenfeld.
Argument of Harold C. Wilkenfeld
Mr. Harold C. Wilkenfeld: Mr. Chief Justice, may it please the Court.
The issue in Number 268 to which I shall now address myself is one in which the Government is the respondent rather than the petitioner.
However, by agreement with counsel and in the interest to somewhat more orderly argument, we shall present the case for the Government at this time.
Essentially, this is related to the Gilmore and Patrick cases which have already been heard.
The issue in this case is whether a husband who has paid on behalf of his wife, the fees incurred by her for tax advice which he has received in connection with the divorce proceeding and the negotiation of the property settlement agreement, whether the husband in such a case is entitled to deduct the fee paid to the wife's attorney.
Chief Justice Earl Warren: Precisely what was that for did you say again Mr. -- I didn't quite hear?
Mr. Harold C. Wilkenfeld: The services --
Chief Justice Earl Warren: The services.
Mr. Harold C. Wilkenfeld: -- the services concerned here are services for tax advice or tax counsel.
Chief Justice Earl Warren: Yes.
Mr. Harold C. Wilkenfeld: That is advised as to the tax consequences of the arrangement which was being entered into between husband and wife in connection with the divorce proceeding.
Chief Justice Earl Warren: Yes.
Mr. Harold C. Wilkenfeld: The Court of Claims had before it in this case two distinct classes of legal fees.
One class was legal fees which were paid by the husband both to his -- his own attorney and to his wife's attorney for services rendered in the negotiation and preparation of the properties settlement agreement and other documents and transfers in connection therewith.
The other set of legal fees were fees paid by the husband both to his attorney and to his wife's attorney for services rendered by them in furnishing advice as to the tax consequences of the transaction.
The Court of Claims found as to the latter that each attorney was rendering services for his own client.
This again, emphasizing the advisory character of the divorce proceeding.
And that the husband was, therefore, not entitled to deduct the fee pay to his wife -- to his wife's attorney on account of advice for tax counsel which he had received.
On the other hand, the Court of Claims held that the husband was entitled to deduct that portion of the fee paid to his own attorney which was allocable to tax advice which he had received from his own attorney.
The statutory provision upon which the Court of Claims relied is a different subsection of Section 212 of the 1954 Internal Revenue Code then the subsections which were involved in the Gilmore and Patrick cases in which the Court heard this morning.
In the previous cases, the subsections involved were one and two of Section 212.
Those Sections traced back to Section 23 (a) (2) of the Internal Revenue Code of 1939 and where primarily the product of the case of Higgins against Commissioner decided by this Court in 1941.
Justice Hugo L. Black: When was this passed, this amendment?
Mr. Harold C. Wilkenfeld: Subsection 3 which is the one involved in this proceeding was passed in 1954, was not in the law before then in any form.
Justice Hugo L. Black: Was it passed because of any decisions defended by this Court?
Mr. Harold C. Wilkenfeld: Yes, Your Honor.
It was passed expressly in view of the decision of this Court in Lykes against Commissioner which is cited in our brief in the Gilmore and Patrick cases.
The Lykes case as my associate Mr. Barnett pointed out this morning held that legal fees paid in disputing a gift tax assessment were personal in character and that their proximate cost was the gift, and that a gift is a personal intrafamily transaction.
Justice Hugo L. Black: Do you remember now that the first section in which you said it was derived, that was under the discussion here, the cases, was that passed to meet the decision of this Court?
Mr. Harold C. Wilkenfeld: Yes, Your Honor, I believe it was passed in direct consideration of the decision of this Court in Higgins v. Commissioner decided in 1941 and 23 (a) (2) was added --
Justice Hugo L. Black: Both of them -- both being passed to expand the deductions beyond what the Court has said, they were entitled here before?
Mr. Harold C. Wilkenfeld: Quite so, quite so.
The very question in this case is the extent of the expansion.
We view Section 212 (3) which speaks of expenses incurred ordinary and necessary expenses incurred in connection with the determination, collection or refund of any tax.
We conceive of this as being very narrow in its scope and application.
And as leaving a good thought of the rationale and decision of the Lykes case, remaining as good and applicable law which we feel is controlling in this case and should deny the grant of a deduction on account of any fees incurred by this taxpayer for advice either as to his own tax consequences or as to the tax consequences of the wife's aspect of the divorce settlement.
Justice Hugo L. Black: Did the House and the Senate Committee report make any the statement about it?
Mr. Harold C. Wilkenfeld: The --
Justice Hugo L. Black: Have you referred to this in the brief?
Mr. Harold C. Wilkenfeld: The House and Senate Committee reports are quoted in our brief at pages 46, the House report and at page 48, Senate report.
The Court will note that the italicized words in the Committee reports speak of contest over tax matters.
The words used in Section 212 (3), we think were used with very careful deliberation.
The word “determination” for example is a word with very precise meaning and its very origin, the word “determination” implies the coming to a final decision whether it'd be the final decision itself or the process of arriving at a final decision.
And under the well-accepted principle of noscitur a sociis we feel that the word “determination” here taken in the context of collection or refund indicates that Congress intended that this word be used in a very narrow sense and not in the sense of a mere prediction or forecast or advice of a preliminary characteristic to the possible tax consequences of some transaction which either has not yet been entered into or is in the process of being entered into but not yet consummated.
The regulations I think indicate quite clearly that this is the understanding of the Commissioner as to the scope of the expansion of the Lykes case in the adaption of Section 212 (3).
Justice Hugo L. Black: Is anything in the report of the hearing that indicates that was the purpose of the Congress before the Commissioner issued the regulation?
Mr. Harold C. Wilkenfeld: I think that when one reads the report -- reports, in the context of the Lykes case which had just been decided and which is the decision referred to in the report, and in the context of the prior Treasury Regulations which are quoted in the Lykes' decision, one can see that the Congress was using the word “determination” in a narrow sense such I have suggested.
The Lykes' opinion quotes with approval from the regulation which was enforced prior to the adaption of Section 212 (3).
At page 126 of the opinion in Lykes which is at 343 U.S., the previous regulation is quoted almost in full.
That is there said that, “Expenses paid or incurred by an individual in determining or contesting, determining or contesting any liability asserted against him do not become deductible merely because of maybe necessary for him to dispose of property which maybe income-producing in order to satisfy the liability.”
The context in which the word “determination” is here used is the context of a contest, a determination which results in tax liability and not merely a determination which is in the nature of a forecast, a weather prediction which may or may not be reliable because the circumstances are not yet fixed.
The circumstances themselves are not yet determined so that the tax cannot be determined.
Justice William J. Brennan: Legislative history speaks and confines it to contested contest as to liability, doesn't it?
Mr. Harold C. Wilkenfeld: Yes, it does.
Justice William J. Brennan: But the Commissioner has never interpreted that narrowly, hasn't it?
Mr. Harold C. Wilkenfeld: The -- the Commissioner has somewhat expanded the interpretation which might be indicated by the legislative history.
But we believe that that expansion is consistent with the language of the statute.
In other words, the Commissioner has said that expenses incurred in the preparation of tax returns are deductible.
Now, in our system of taxation, the preparation of a tax return certainly in -- of a federal context is a determination unlike the British system.
In the British system, the taxpayer merely reports the amount of his income.
The assessment is made at some subsequent date.
In our system, the taxpayer assesses himself.
He computes his tax and he pays it.
And in most instances, certainly in many instances, this is the last act with respect to the determination of his tax for that particular period.
It maybe post-order that it may not.
It may go into the file.
It may merely result in an entry of the item on an assessment list which is automatically recorded and goes into the files.
The preparation of the return in and of itself can be in -- and many cases is the final act of determination.
And so we believe that it was proper for the Commissioner to say that the word “determination” in the context of the American tax system includes the preparation of a return.
Now, there is further language in the regulation which seems to have puzzled the Court of Claims somewhat and that is the reference to expenses for tax counsel.
These words we feel must be taken within the context of the balance of the regulation and certainly within the statute itself.
If they are to any extent ambiguous, I believe that it is certainly proper to refer to the statute in interpreting the regulation.
And the statute itself and its history are quite clear in indicating that in matters relating to non-income tax determinations, only those counsel fees which relate to the preparation of the return, a determination in the nature of a dispute, the refund of tax or the collection of tax can be deducted.
We emphasize this because --
Justice Hugo L. Black: Would there be -- would there be for distinguishing between advice to make your return than you make your return and advice to find out what's going to happen from your situation when you do make your tax return?
Mr. Harold C. Wilkenfeld: I should like to distinguish between the income tax situation and the any tax other than income tax situation in answering this question.
It has been clear for many years and certainly was clear at the time of the adaption of the 1954 Revenue Code and the insertion of 212 (3) into the law.
That advice received in connection with income tax matters whether it'd be in advance of a projected transaction, whether it'd be of an investment character that all such advice was deductible provided that it met the provisions of Section 23 (a) (2) or now 212 (1) and (2).
In other words, if these were expenses for the production or collection of income or for the management, conservation or maintenance of property held for the production of income, these expenses were deductible irrespective of whether the tax advice was received in connection with a consummated transaction or a transaction which was contemplated or one which might never be entered into.
However, the Lykes case did not deal with an income tax matter at all.
The Lykes case dealt with a gift tax deficiency and held that legal fees incurred in disputing a gift tax deficiency were personal in character and non-deductible.
As the one now reads, the express holding of the Lykes case has been overruled by 212 (3) because the legal fees there involved would now be expressly deductible under subsection 3.
This is not to say, however, that it was the intention of Congress and we certainly deny that it was the intention of Congress to say that it was the purpose of 212 (3) to expand as to non-income tax matters, all sorts of expenses which might be incurred in other than the particular situations which are set out to a determination, collection or refund of any tax so that in the present case, we have two problems which emanate from this.
First, it is not clear from the facts to what extent these fees were paid for income tax advice or for advice with regard to other taxes.
The finding of the Court of Claims which is at page 121 of -- of the record finding number 20, there is no testimony or evidence in this case from which it can be -- can be determined the extent to which the attorney's fees paid by Mr. Davis either to Mr. Young, his own attorney or to Mr. Morford, his wife's attorney were reasonably allocable to the effort of Mr. Davis to retain his shares of du Pont and there -- thereby to preserve his position.
And then on page 119 and going over to page 120, it is expressly stated that the Court was unable to determine to what extent these services related to income tax or the gift tax matters but that there was a merging of both income and gift tax advice.
But we do not feel that even had there been any clear-cut allocation of the fee as between income tax advice or gift tax advice that even the income tax advice would be deductible for we say, and I'm speaking now of the husband, the husband's tax advice for we say that this was clearly personal to the same extent as the other fees paid in the divorce proceeding were personal.
As to the fees which may have been paid for gift tax advice, we, again, say that the fees paid were personal and we also say that it was not the intention of Congress in enacting 212 (3) to permit the deduction of legal fees incurred in estate planning, that is for the preparation of inter vivos trust for the preparation of wills even though in their preparation, a considerable amount of thought was given to the possible gift tax consequences or to the possible estate tax consequences of such preparation.
There is a narrower ground upon which the decision below can be affirmed and that is the one upon which the Court of Claims decided that the husband was not entitled to a deduction on account of the fees paid to his wife's attorney.
This Court has many times held that a deduction belongs only to the person whose affairs gave rise to it, that a deduction cannot by contract or by any other legally binding arrangement be transferred from one taxpayer to another so that the transferee of the deduction maybe permitted to take it just as the transferor of the deduction may have been able to.
We do not concede --
Justice Potter Stewart: -- (Voice Overlap) this case -- these --
Mr. Harold C. Wilkenfeld: Yes, sir.
Justice Potter Stewart: -- these expenditures were made at the time when the parties were man and wife, isn't that correct?
Mr. Harold C. Wilkenfeld: Yes, sir.
Justice Potter Stewart: And presumably, I suppose in the State of Delaware as in most states, the husband had the legal duties of -- to support his wife.
Certainly under that doctrine if it's the wife's, let's take something that's clearly deductible, medical expenses beyond 3%, if the man and the wife are -- are man and wife and if the wife has medical expenses beyond 3% of the adjusted gross income, those are deductible although the -- clearly the wife's and only the wife's expendents -- expenses if the husband pays for her under deductible gross income of that, simply because of that legal obligation that he has to pay for her expenses.
Mr. Harold C. Wilkenfeld: I believe that the question indicates the answer.
Insofar as expenses of this character are concerned, unlike medical expenses which go into another area not as the purely legislative grace because these --
Justice Potter Stewart: Well, I was just trying to get something that's clearly deductible.
There's an argument here which you've made up to this point as to whether or not fees would be deductible even if they were his expenditures or his tax advice.
But now you're turning and you say alternatively, this case can be decided on a narrower point as I understand it.
That is that even if deductible to him, they would not be deductible from his income because they were his wife's expenditures, isn't that the point you're now about to make?
Mr. Harold C. Wilkenfeld: Yes.
The suggestion is made in taxpayer's brief as a matter of fact that these were necessaries that the husband was obligated to protect his wife and supply such funds necessary to provide her with legal counsel when she needed it.
This, I think suggests the -- the very answer because as to the wife, possibly, possibly although we deny it, she might be entitled to a deduction on account of tax advice which she receives.
But when the husband pays this, he is not paying a fee or an expense which is related in any sense to his business affairs.
He's paying something which is imposed upon him because of the marriage contract just as in Interstate Transit Lines against Commissioner.
The payment by the parent of the subsidiary's deficit was imposed upon it and was legally binding by reason of a contract entered into between the parent and subsidiary.
But one must look to the source of the expense.
And in this case, the source of the expense had no relation to the husband's income-producing activities or to his tax and therefore, we believe non-deductible.
Chief Justice Earl Warren: Mr. Murdoch.
Argument of Converse Murdoch
Mr. Converse Murdoch: Mr. Chief Justice, may it please the Court.
Mr. Kutz in his argument quoted the statutory provision which bears on this matter of the realization of gain by husband in connection with the transfer property to his wife.
And the risk of repetition, I like to restate those statutory provisions because I think they're all important in this case.
Section 1001 of the Code provides that gain from the sale or other disposition of the property shall be the excess of amount realized there from over the adjusted basis for the property.
Statute goes on to provide that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property other than money received.
On a statutory conglomeration such as the Internal Revenue Code which is replete with complex provisions I point this out as a provision which is remarkably simple and clear.
I can understand this provision.
There seems to be no dispute about the fact that the transaction by which Mr. Davis transferred property to his wife is du Pont stock would not, under common understanding of the word, be considered a sale.
Also that doesn't seem to be any question about the proposition that what Mr. Davis received in exchange for this du Pont stock was not money.
And that means if there are only two inquiries here which most of which must be answered affirmatively before the Court of Claims can be reverse on this point.
And those two inquires are these.
First, was Mr. Davis' transfer of du Pont stock to his wife a disposition, as that word use in the statute?
And secondly, assuming an affirmative answer to the first was the fair market value of what Mr. Davis received an amount in excess of his basis for the property he transferred.
Now, I submit that either of those questions must be answered in the negative then the Court of Claims must be affirmed on this point, otherwise, the statutory provision hasn't been met.
Now, the word “disposition” in the statute has never been construed to encompass all transfers.
It's obviously possible to read it -- it's meaning any transfer is a disposition.
Now, the Government itself conceives in its brief that there are many types of transfers which do not constitute taxable dispositions and the Government's quite candid in pointing out this analo -- somewhat analogous situations.
Example of those would be transfers in connections with division of partnership property or transfers in connection with distributions of shares of estates or trust transfers in connection with in kind corporate distributions to stockholders, transfers in connection with marital separations of couples residing in community property states.
Further, the Government has never contended so far as I can determine that there is any taxable disposition for purposes of the Internal Revenue laws in such common place transfers as gifts or transfers of appreciated property to a charitable organization or a transformation of property from a descendant to his heirs.
Since not all dispositions, not all transfers rather, qualify as taxable dispositions, it must be the position of the Government that the word “disposition” has a narrower meaning than the word “transfer” for purpose of the statute.
I submit that the most satisfac --
Unknown Speaker: (Inaudible)
Mr. Converse Murdoch: Yes, Your Honor.
And I submit that to make sense out of the statute, we have to accept the definition of disposition which seems to be either implicitly or explicitly assumed by everyone who has handled cases in this area and that is the somewhat art -- inartistic definition of disposition as meaning a transfer like a sale.
Using that definition of disposition, we come to this inquiry in this particular case and that is was Mr. Davis' transfer of du Pont stock to his wife a part of a transaction which was like a sale.
Now, the Government has done a good job in its brief of narrowing the issue down considerably in this case and it's done it by making a very candid concession.
The Government said in its original brief that as an original matter, this inquiry could have been answered either way that indicates if the Government believes that if this was a new issue, an answer either way would be reasonable and if you were the Government.
I'm not ready to make a light concession but I'm ready to proceed on the assumption that the Government meant what they said in that concession.
The Government then goes on from that concession and analyzed a certain considerations which had asked the Court to take into account in deciding this case and concludes here I'm quoting, “Other considerations being inconclusive, the factor which should be determined have been favor reversing the Court of Claims is the force of precedent.”
Now, the Government submits two principle Circuit Court decisions as exerting this force of precedent in its direction.
Those are the Mesta and the Halliwell cases.
Now, since these are the principle cases in which the Government relies for the one factor which it says -- (Inaudible) this case towards its side.
I think it's worth analyzing those cases in some detail.
In Mesta, the husband taxpayer agreed to deliver stock to his wife and I'm quoting, “In full settlement and satisfaction of all claims and demands on the part of Mrs. Mesta for her maintenance and support”.
Now, it's true that the agreement also resided that the transfer was in lieu of all marital rights of the wife and the husband's property.
The Board of Tax Appeals decided that the husband did not realize a taxable gain on account of his transfer of stock to his wife.
But the Court of Appeals for the Third Circuit reversed disposition but in its opinion noted only that the transfer was in settlement and satisfaction of the wife's claim for alimony and support.
As a matter of fact, the Board of Tax Appeals in its opinion stated that the Government's argument in Mesta was on the basis that the transfer was in discharge of the husband's support obligation.
In Halliwell case, the parties attached to their separation agreement a schedule listing certain securities where agreed values attributed to each and a cash adjustment figure to bring the total of the property transferred to the wife, the $462,561.
This indicates to me that the parties in the Halliwell case had arrived in an understanding that the husband would transfer a specific dollar amount to the wife and then had set about finding securities which the husband could transfer to her in satisfaction of that specific amount.
As in the Mesta case, the Court of Appeals would reverse the Board of Tax Appeals and help for the Government noted in its opinion that the transfer was in discharge of a support obligation and also in discharge of the husband's obligations to support a child.
In the Halliwell case, it's true as the Government points out that the wife also executed a release of her rights to share in her husband's estate.
But the Court of Appeals in Halliwell did not refer to this as a consideration for the transfer of the securities.
Again, as in the Mesta case, the agreement did not refer to the transfer as being a part of a division of property.
Now, those are the two cases, which the Government says are precedence for deciding the T.C. Davis case on the basis of holding that he realized gain.
In the Davis case, the agreement which is set forth in full in the record is quite explicit to the effect of the transfer of stock was part of a division of property.
Entirely separate provisions were made in the agreement for satisfaction of Mr. Davis' obligation to support his wife and his minor child.
For that reason, we submit that the Mesta and Halliwell cases, both of which involve transfers and discharge of a support obligation, are not at all in point for the Davis case which involved a transfer and division of property and the agreement is clear on that.
Justice Potter Stewart: I -- I don't quite -- I perhaps being obtuse because I know this is a distinction that you spend a good time on your brief.
I realize that there are differences but this is -- this is not a division of jointly owned property or partnership property or community property.
This is a conveyance to the wife of the husband's property which is belonged exclusively to him and I don't quite see what the -- what the great difference is between this case and -- and Halliwell and Mesta under those circumstances.
I would understand your point that these were jointly owned property or if they are on argument about who owned or if it were community property but this is his property, solely his, exclusively his that he's transferring to her and return for her relinquishment of marital rights.
Mr. Converse Murdoch: Yes, Your Honor.
I appreciate that (Inaudible).
Unknown Speaker: Well, I don't -- in that the reason I don't see your distinction and I appreciate being in line.
Mr. Converse Murdoch: I'll spell that out for you, Your Honor.
The du Pont stock, which was transferred to Mrs. Davis in this case, was clearly prop -- property which was titled in Mr. Davis' name.
There's no dispute about that.
The stock on the books of the du Pont Company is registered in the name of T.C. Davis.
But the point of this is that there was another property involved in this agreement, other properties besides from the du Pont stock.
The agreement points out that the wife among other things agreed to transfer to the husband certain insurance policies on his life.
I'm not contending that the du Pont stock is jointly owned.
I'm saying that it was part.
Its transfer was part of an overall division of the property of the parties.
These include their household furnishing, other insurance policies, the residence in they live.
All that have to be straightened out and that's what they did.
And as a part of that, the husband transferred du Pont stock to his wife.
Then entirely as part from that and another part of the agreement, they made provision for the discharge of the support and alimony obligation of the husband.
Mr. Kutz in his argument said that there was -- there would have to be evidence in the record in cases of this sort as to the value of the wife's right to support an alimony and if there was no evidence of that kind in this case other than the evidence of the value of the stock of the du Pont Company and I submit that the agreement itself furnishes evidence of what the parties had agreed was the consideration and therefore apparently, the value in the Government's view of this support, an alimony obligation.
Now, the Government in its brief points to paragraph 13 of the agreement and that appears on page 97 of the record and says that that paragraph indicates as the Government puts it that a division of property as a legal misnomer in this case.
I think what they're trying to say is, and they're sparing my fillings apparently by putting in terms of a legal misnomer, they're trying to say that they don't believe this that this was in fact a division of property but certainly paragraph 13 does not support the argument that this was not a division of property because all paragraph 13 does is to wrap up the whole agreement and have both sides agree that the whole agreement is to be a final combination of their respect of obligations to each other as to alimony or support or any property interest they had.
Now, there's an important issue of the facts in this case which is raised in the Government's reply brief but not in its main brief.
In the Government's main brief they state that all of the property involve in the settlement negotiations were owned by Mr. Davis and that's an accurate statement and that's what the Court of Claims found.
In the replied brief, the Government says that all of the property involved in the agreement was owned by Mr. Davis and that is not what the Court of Claims found.
And to appreciate the difference in those words, the Court must remember that in the Court of Claims, we were also arguing about the deduction of counsel fees to protect Mr. Davis' interest in the du Pont Company and that it was page after page of testimony about the lawyer's negotiating with respect to this du Pont stock, and it was at that point that the Court of Claims noted that the du Pont stock was owned by Mr. Davis and that was the subject of the negotiations.
But the record itself shows that there was other property involved in the agreement.
Now, we submit to the Court that if there's any force of precedent work in this case, it's a work on the side of the taxpayer.
We submit that the cases involving situations varying a very close analogy to the Davis case have been uniformly decided by determinations that the transfers do not constitute taxable dispositions.
I've already mentioned some of those are distributions of shares of estate or trust, those are not considered taxable dispositions.
Unknown Speaker: (Inaudible)
Mr. Converse Murdoch: No, Your Honor.
Not the dispositions --
Unknown Speaker: (Inaudible)
Mr. Converse Murdoch: Not testamentary.
I'm talking about an estate or trust distribution of property to an heir where it's in satisfaction of an heir's right to a share in the estate or in the trust.
I'm not talking about transmission from the living to dead.
I'm talking about the fiduciaries transfer.
In that situation, there's no statutory provision that covers this, nonetheless, as a matter of such thing as tax common-law, a tax common-law.
There is no taxable disposition found in that situation, neither is there a taxable disposition on division of partnership property.
Now, it seems to me that if a business partnership breaks up and men who are dealing with each other as businessmen and decide to break apart and conduct their businesses separately, if they have no gain when one takes one part of their partnership property and another one takes another part of partnership property, I failed to see how in a completely non-business transaction such as a marriage and a divorce, the parties can have a taxable gain when they do the same thing that a business partnership does without any realization to gain.
The same thing is true in breaking up a corporate relationship.
The Government doesn't contend that when a corporation is dissolved, the corporation realizes any gain when it transfers the property of the corporations in kind, in liquidation and the same thing is true of divisions of community property.
The Government seems to recognize that the deci -- decision holding Mr. Davis has a taxable gain here would create a divergence of tax treatment as between common-law and community property law jurisdictions.
And as I understand the Government's position, it makes still attempt to say that that's a desirable state of the law.
The Government's answer seems to be instead that if there's a divergence of treatment, this is a matter of this just inherent in the differences between community property and common-law property jurisdictions.
The Government also suggests that if there's to be a cure for this divergence, the cure should come from Congress and not from this Court.
If I was arguing here today in the face of a statute which said that there must be a gain in the situation such as Mr. Davis' or if there were precedents in this Court which required that result then I would think that the Government's answer on this community property problem would be worthy of consideration.
In that case obviously, the jury relies with Congress.
But in this case, the Government itself concedes that the Court could reasonably decide this as an original proposition either way.
And I submit that if that is the fact, the Court could decide either way then its wise policy to decide this case on a basis which would give us a uniform system of taxation rather than a divergence system of taxation.
Justice Potter Stewart: To your view, the -- the wife would have as her basis, one of the husband's bases -- no, no she haven't -- she'd have a --
Mr. Converse Murdoch: Under my view --
Justice Potter Stewart: Yes, she'd have (Voice Overlap)--
Mr. Converse Murdoch: The only views I have right at the moment Your Honor --
Justice Potter Stewart: -- (Voice Overlap) --
Mr. Converse Murdoch: -- part that Mr. Davis shouldn't pay a tax on this type --
Justice Potter Stewart: Oh, I know, but --
Mr. Converse Murdoch: -- of transaction.
Justice Potter Stewart: -- wouldn't it inevitably follow that the wife would take the husband's basis if your view -- if your view is correct.
Mr. Converse Murdoch: Yes, Your Honor, I think that should be the law if the husband is not to pay a tax then the wife should pay the tax when if ever she sells --
Justice Potter Stewart: Well --
Mr. Converse Murdoch: -- the property --
Justice Potter Stewart: -- obviously she pays the tax but she sells that if she has a capital gain, what's important is what her basis is.
Mr. Converse Murdoch: That's correct, Your Honor.
Justice Potter Stewart: Her basis would be the -- the -- the husband's basis just as over a gift she would take (Inaudible) basis.
Mr. Converse Murdoch: That's correct, Your Honor.
Justice Potter Stewart: If your view is correct.
Mr. Converse Murdoch: Now, I'd like to address myself to this matter of the proper measure of the taxpayer's gain and the proper year in which the tax is gained.
Now, I've assumed so far in my argument that Mesta and Halliwell are first not applicable here because they involved transfers and discharge of a support obligation whereas Mr. Davis' transfer was part of a division of property.
That I'm not ready at this point to assume that Mesta and Halliwell do apply in this case and that their reasoning applies and that means if you accept the reasoning of Mesta and Halliwell, you must conclude that the husband engaged in a taxable transaction and then moved over and find out whether he had a gain or a loss on the transaction.
Now, on Mesta, the Court of Appeals was faced with the problem of once having decided if there was taxable disposition, how do you measure the amount moving to the husband.
Obviously, a man doesn't buy -- divesting himself for property alone gain income, he gains income by having something moved towards him.
And the Court of Appeals for the Third Circuit in Mesta met that problem very neatly by saying that they would assume that a man who gives property of a fixed value must be getting his money's worth.
Well, that's a very broad assumption particularly in marital situations.
But let's assume for the moment that that is the correct way to analyze this and that that is the correct way to measure the gain moving to the husband.
Now, if that's the fact then we must assume that when Mr. Davis negotiated with Mrs.Davis, he placed a value on the rights which were going to move to him.
And he placed, using the Mesta reasoning again, he placed the value of exactly the same dollar amount as the value of what he was going to transfer to her.
Now, Mr. Davis even though he was the Vice President of the du Pont Company in 1954 didn't, so far as I know and so far as the record shows, know in November of 1954 what is going to be the value of the du Pont stock in March of 1955.
So we can assume that if Mesta is right that the husband got his money's worth and was negotiating in terms of what the value was or what he was going to transfer, he must have been reasoning in terms of the value on the date he made the agreements.
And the Court, I believe, can take judicial notice of the stock quotations in the Wall Street Journal that day and the value of the du Pont stock that Mr. Davis transferred on that date had a basis, had a -- was less than Mr. Davis' basis for the stock.
Now, the Government answers these arguments about the wrong value and the wrong year without seem to meet them head-on.
The first answer the Government gave in its replied brief as to why the date of agreement value would not work was to say that using that date as the critical date for fixing value would result in a rule which would be difficult to please.
Now, I construe that argument in saying no more than if you take Mesta and apply it reasonably and logically, you reach a point where it's difficult to hold.
Therefore, you take Mesta, you adopt its rule but you don't apply its reasoning logically to the conclusion to which it obviously points, you'll apply it in a new logical and unreasonable way so as to reach the result which is easy to please.
The Government's second argument about the wrong value and wrong year matter is to state that in Mesta and Halliwell, the date of delivery value rather the date of agreement value was used.
The opinion of the Board of Tax Appeals in Mesta shows that the so-called “value” used to determine the gain was merely a figure agreed upon by the husband and wife as part of the negotiations.Also in that case, it should be noted that the transfer actually occurred only four days after the date in the agreement.
On Halliwell case, the values used for measuring the gain are later recited by the Court of Appeals to have been the date of delivery values which was July 16, 1938 where in fact the values described in the securities by the parties in an agreement executed on March 16, 1938.
The date of delivery in the Halliwell case was just four months after the agreement date.
In Halliwell, the transfer securities consisted of stock of ten corporations.
When it's noted that eight of those stocks were publicly traded, it passes my understanding how on July 16, 1938, those stocks can have a value, a fair market value to the penny equal to their value on March 16, 1938 when the parties signed the agreement.
Government's next answer to this major value question is to state that the Commissioner's use of the date of delivery was not contested by the taxpayers in the Court of Claims.
That's quite correct.
That we contend that where we have objected to the fundamental error of the Commissioner, namely the error of saying that we had a taxable disposition here, it's not necessary for us to object to every subsidiary error which is associated with that principle errors.
Justice Potter Stewart: Well, do you also contend that you can defend this judgment in your favor in any grounds?
Mr. Converse Murdoch: Yes, Your Honor.
Justice Potter Stewart: Can you do it?
Mr. Converse Murdoch: In my opinion as the respondent, we are entitled to have the decision of the court below affirmed if there is any ground which supports it, whether or not it was brought to the attention of the court below.
The last answer the Government has about this major value question is to analogize to the situation where a person takes property with a known value, we'll assume it's known because it's stock of a listed corporation where you can check the newspaper quotations and exchanges that for stock of a corporation in which is difficult to determine the market value.
Let's assume for cycle illustration that the stock we're talking about is a million dollars worth of du Pont stock which is transferred by a du Pont stockholder to the XYZ Corporation in a taxable transaction and the du Pont stockholder gets back all of the stock of the XYZ Corporation.
Now, the first place of this analogy falls down is that in that situation, we're not talking about taxing the transferor on the value of a release of rights in the du Pont stock he transferred.
We're talking about the tax on the transferor by virtue of receiving stock of the XYZ Corporation.
On that situation, it seems to me it's perfectly reasonable to say that in the absence of any better evidence of value, the stock of the XYZ Corporation on the date when the man transfers the du Pont stock to it, you can assume that the value of the XYZ Company is the value of the underlying asset, the du Pont stock, and that's perfectly reasonable.
But that doesn't happen to be the case in marital settlements.
After Mr. Davis transferred a stock of the du Pont Company to Mrs. Davis, he didn't retain an interest in that stock through her.
He had no interest at all in the stock after he had once transferred it to her and let the worst had gone through.
Therefore, it's entirely unlike the situation when you transfer something and retain an indirect interest in it.
I think it's somewhat ironic --
Justice Potter Stewart: How -- how is that point helped you on your position?
Mr. Converse Murdoch: I just think that is not an answer.
The answer of -- that I've been reciting was the Government's answer to why you value on the date of delivery and you use the value of the date of the property transfer as the measure.
I'm suggesting the analogy proposed for the Government is not apt in a marital situation.
Justice Potter Stewart: I see, because the agreement (Inaudible) date of the actual transfer?
Mr. Converse Murdoch: Yes, Your Honor.
The agreement was the time -- it was done at the time when -- if the parties thought about this and valued it, they then knew the value of the du --
Justice Potter Stewart: Yes.
Mr. Converse Murdoch: -- Pont stock and if they were going to attribute to them bargaining about the value of the wife's right, that's the date they must have valued.
Justice Potter Stewart: Or is it possible to bargain (Inaudible) to be the value as of the date of transfer and (Inaudible) agreement.
(Inaudible) down that we've agreed that whatever it is, whatever value maybe on that day, a year now is (Inaudible).
Mr. Converse Murdoch: Yes, Your Honor.
I appreciate that but I think that is inconsistent with saying that the parties actually thought there was an agreement.
That is more consistent with the proposition of the parties didn't think there was consideration moving her husband at all.
They agreed that she would get certain property which he owned as part of a breakup for their property which is in kind type of distribution is using, not in discharge of a fixed obligation.
The first court which considered this problem was the Board of Tax Appeals and then the Mesta case, which that Board of Tax Appeals decided for the taxpayer.
In commenting on this valuation and the consideration problem, the Board said that the value agreed upon by the husband and the wife is not controlling.
It's doubtful as the respondent, meaning the Commissioner of Internal Revenue would so contend if her venture petitioner were claiming a loss.
The Board of Tax Appeals in my view was being prophetic when they said that and they were prophesying the Davis case.
On both Mesta and Halliwell, the date of agreement and the date of transfer and the date of release of the wife's rights all occurred within one taxable year in each case.
Here, unlike that situation, the agreement was executed in 1954.
The first transfer of the du Pont stock occurred in 1955 and the second half of the stock was transferred in 1956.
And the husband has still not fully performed all of his obligations under this agreement.
I think with that state of facts, it's perfectly reasonable to argue that Mrs. Davis released her rights against Mr. Davis and that is the consideration the Government says makes it a taxable event.
It's perfectly possible to argue that that event occurred in 1954 when Mrs. Davis signed the agreement.
It's also reasonable to argue that she still hasn't released her rights and won't until all of Mr. Davis' obligations under the agreement have been met and that one occur until 1964.
However, I cannot believe that it's reasonable to argue that the release by Mrs. Davis occurred in March of 1955 when the most essential parts of the agreement were still not carried out.
I suggested at the outset of my argument that there were two inquiries for which there must be affirmative answers before the Court of Claims should be reversed.
The first was whether Mr. Davis had made a -- a transfer which is a disposition within the meaning of Section 1001.
And the second is whether the fair market value of consideration moving to Mr. Davis exceeded his basis for the property.
I submit that both of those questions must be answered in the negative.
However, I submit that even if both of them are answered affirmatively, the Government has still picked the wrong year and has picked the wrong measure of gain with which to tax Mr. Davis.
Therefore, even if both questions are answered in the negative, I submit that the decision of the Court of Claims should be affirmed on this point.
I would like to address myself now to the tax counsel fee issue.
In the Court of Claims, we were litigating about two tax counsel fees.
There were other fees about which we were litigating but they are not here before this Court.
In the Court of Claims, we had two tax counsel fees involved.
One was the tax counsel fee, which Mr. Davis pays to his own attorney.
The other was the tax counsel fee which Mr. Davis paid to the attorney who represented his wife.
In the Court of Claims, the Government disapproved and fought the deduction of both tax counsel fees.
Now, this phase of the case seems to me that posed purely an issue of statutory construction.
And on the statutory construction issue, the Court of Claims rejected the Government's contention that Section 212 (3) only applied to fees for contested tax matters.
However, the Court of Claims, while rejecting that interpretation of the statute, held that Mr. Davis was not entitled to a deduction for his wife's tax counsel fees but that decision was solely on the basis that they believe that the fees being to the wife's counsel rather than to the payor's counsel, they were not deductible under the statute.
Now, the Government didn't petition for certiorari with respect to this broader issue which was involved in the deduction of the husband's tax counsel fees paid it with his own counsel.
And our petition was solely with respect to this matter of the deduction of the tax counsel fees paid to the wife's attorney.
Now, the Government pictures its principle argument on the statutory construction in terms of legislative history.
And at points the two fragments of legislative history which it believes support the proposition that only fees were computing or contesting taxes or deductible under Section 212 (3).
The first is the statement in the Committee reports of Congress in connection with the 1954 Code which referred to deductions for contested tax matters.
I think the Government's argument has brought out the relationship between the decision of this Court in the Lykes case and the congressional action in 1954 in inserting Section 212 (3).
And with that background as to why Congress enacted Section 212 (3), it's obvious to me why in the Committee reports, in discussing this new provision, they've mentioned only by way of exemplification in my view, the matter of contested tax matters.
The reason for that is that in Lykes, this Court was dealing with a contested gift tax liability.
So it's quite natural for the draftsman of the Committee report having in mind the Lykes' decision to mention that as an example of the type of deduction which would now be a liable under Section 212 (3).
But certainly, I can't believe that the Committee report was intended to limit deductions under Section 212 (3) to just the matter which is exemplified in this Committee report.
And the Treasury its own regulations has conceded this because it has gone far beyond what it claims the Committee report group in describing this -- type of fees which can be deducted.
Now, the second bill of legislative history which the Government brings in to this phase of the case is a very short excerpt from a written statement from the ABA Tax Section which was submitted to the Senate Finance Committee after a hearing for the Senate Finance Committee and that comment of the ABA Tax Section is really a comment about the House Committee report rather than a comment about the statutory language.
That statement of the ABA states that the problem is not raised by the statute.
The problem was raised by the House Committee report and it recommends doing something about the Committee report.
Now, it strikes me if we're to bring in that type of legislative history where then embarked on a new course -- search for legislative history, we're now looking for history of legislative history rather than the history of legislation.
And in our brief, we've cited cases to show that in analyzing legislative history even the statements of members of Congress on the floor are not admissible for purposes of showing congressional intent.
And if that so, I can't see how we can now consider statements in a written, long written document submitted to a congressional committee after a hearing which for all we know is never read by anyone in Congress.
Now, presenting ambiguity Section 212 (3), I submit that that ambiguity is completely dispelled by the Treasury Regulations which unequivocally provide for the deduction of tax counsel fees.
That regulation provides, and here I'm reading, this is on page 25 of the taxpayer's brief, for the deduction of expenses paid or incurred by a taxpayer for a tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining.
Now, if the Government's statement of this rule is correct then this regulation adds unnecessary words in it.
It should have said expenses paid or incurred by a taxpayer for tax counsel in connection with the preparation of his tax returns.
Obviously, they thought that tax counsel fees could be unrelated to these enumerated things which follow on the regulation.
In trust of Bingham, this Court approved a deduction of fees paid by a trustee for tax advice in connection with problems arising in connection with the distribution of a trust estate.
And that was before the 1954 Code.
Now, it seems obvious to me that in 1954, Congress thought when they enacted Section 212 (3), they were introducing a liberalizing provision of the law, which the effect of which would be to change the rule of the Lykes' decision.
I can't believe that Congress thought that in enacting Section 212 (3), they were going to limit the broad category of deductions which had therefore been allowed.
Now, the narrow ground on which the Court of Claims decided this tax counsel fee issue was on the ground that the counsel fee was paid by Mr. Davis, not to the attorney represented him, but to the attorney who represented the wife.
And I believe to understand why the taxpayers believed that that's immaterial for purposes of this statute.
It's necessary to understand that in Delaware as in most states, counsel fees incurred by a wife are considered necessaries for which the husband is obligated to pay just as he's obligated to pay for groceries for the wife.
Once it's determined that the tax counsel fees in this case are deductible by virtue of their nature regardless of who they're paid to and that I think the Treasury Regulations made clear then I see no reason in the statute or in legislative history or in any policy consideration for denying Mr. Davis a deduction for those fees merely because they were paid under his legal duty to pay them imposed on them by state law merely because they're paid by him to the attorney who represented his wife.
Chief Justice Earl Warren: Mr. Kutz, nothing more?
Rebuttal of I. Henry Kutz
Mr. I. Henry Kutz: No, no, Your Honor.
Chief Justice Earl Warren: Very well.
Justice Potter Stewart: May I, Mr. Chief Justice, ask --
Chief Justice Earl Warren: Yes, you may.
Justice Potter Stewart: -- this question?
In a community property state, Mr. Kutz, would the result be different, if your position is accepted, would the result be different in
Mr. I. Henry Kutz: I think --
Justice Potter Stewart: California?
Mr. I. Henry Kutz: I thnk it would, because she would own half of the property.
Justice Potter Stewart: So that would be a true division of property?
Mr. I. Henry Kutz: True division.
And I -- I think it's perfectly clear from the findings there and the agreement itself that this property was owned entirely by him.
I can't begin -- I don't think anything fair question about it.
Justice Potter Stewart: So, if we accept your contention, the result would be that there would be variants between community property states and common-law states inevitable?
Mr. I. Henry Kutz: That is true in many other respects.
Justice Potter Stewart: I appreciate this.
Chief Justice Earl Warren: Very well.