
    434 F. 2d 1336
    SHIRLEY H. WEAVER GEORGE v. THE UNITED STATES
    [No. 359-66.
    Decided December 11, 1970]
    
      
      J. Leighton Green, Jr., attorney of record, for plaintiff.
    
      W. Stephen McOonnell, with whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller and Joseph Kovner, of counsel.
    Before CoweN, Chief Judge, Laramore, Dureee, Davis, ColliNS, SkeltoN, and Nichols, Judges.
    
   Per Curiam :

This case was referred to Trial Commissioner Mastín G. White with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on June 9,1970. On July 6,1970 plaintiff filed a notice of intention to except to the commissioner’s opinion. However, on October 23,1970 plaintiff filed a motion for leave to withdraw her intent to except to the commissioner’s opinion, which was allowed by the court on October 30, 1970. On November 9, 1970 defendant filed a motion that the court adopt the commissioner’s findings of fact, opinion and recommended conclusion of law as the basis for its judgment in this case pursuant to Rule 141(b). Since the court is in agreement with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby grants defendant’s motion filed November 9,1970 and adopts the same as the basis for its judgment in this case without oral argument. Therefore, plaintiff is entitled to recover, together with interest as provided by law, and judgment is entered for plaintiff, with the amount of recovery to be determined in subsequent proceedings pursuant to Rule 131 (c).

OPINION OE COMMISSIONER

White, Commissioner:

This is an action for the recovery of federal income taxes previously paid by the plaintiff for the calendar years 1962 and 1963. The case is here because of a controversy that arose between the plaintiff and the Internal Revenue Service over the question of the deductibility, for income tax purposes, of certain legal fees which the plaintiff paid in 1962 and 1963.

It is my opinion that the plaintiff is entitled to recover, although not to the full extent sought by the plaintiff.

For approximately 20 years prior to April 25, 1962, the plaintiff was married to W. R. Weaver (“Mr. Weaver”). They lived in El Paso, Texas. On April 25,1962, the plaintiff obtained a decree of divorce from Mr. Weaver in an uncontested divorce suit before a state court in El Paso.

In connection with the plaintiff’s divorce from Mr. Weaver, and pursuant to an agreement negotiated by their respective attorneys during the period January-April 1962: (a) the plaintiff was awarded the custody of the two daughters who had been born during the marriage and who were 16 and 12 years of age at the time of the divorce; (b) Mr. Weaver agreed to pay for the support of the children the sum of $666.67 per month per child until each child should reach the age of 21; and (c) the community property of Mr. Weaver and the plaintiff, valued at more than $6,000,000, was divided between them.

The items of property received by the plaintiff in the division of the community estate had a total value at the time of $3,198,671.06.

The plaintiff’s attorney in the 1962 divorce case was Tad B. Smith (“Mr. Smith”), of the El Paso law firm of Kemp, Smith, Brown, Goggin & White (now Kemp, Smith, White, Duncan & Hammond).

Mr. Weaver paid to Mr. Smith’s law firm on April 26,1962, a fee in the amount of $500 for legal services rendered to the plaintiff in connection with the preparation of the petition for divorce, the entering of the various orders and the decree in the divorce proceeding, matters pertaining to the custody and support of the children, and other related items which were considered to be routine in nature. This $500 fee is not involved in the present litigation.

The plaintiff paid to Mr. Smith’s law firm a fee in the total amount of $74,500 for legal services performed (a) in connection with the suit for divorce and related matters (other than the legal work of a routine nature referred to in the preceding paragraph), and (b) in connection with the preparation of a 1-year lease on an apartment for occupancy by the plaintiff. The $74,500 fee was paid over a 2-year period, $70,000 being paid in 1962 and $4,500 being paid in 1963.

In her federal income tax return for the calendar year 1962, the plaintiff claimed a deduction in the amount of $70,000 for legal fees, this being the $70,000 which the plaintiff had paid to Mr. Smith’s law firm in 1962; and in her return for the calendar year 1963, the plaintiff claimed a deduction for legal fees in the total amount of $5,421.60, which included the $4,500 that the plaintiff had paid to Mr. Smith’s law firm in 1963.

In September 1965, the Internal Revenue Service assessed against the plaintiff additional federal income taxes, plus interest, for the calendar years 1962 and 1963. These assessments involved the disallowance by the IRS of the deductions which the plaintiff had claimed in her income tax returns for 1962 and 1963 on account of the amounts paid to Mr. Smith’s law firm during those respective years. Such assessments, in the total amount of $31,231.52, were paid by the plaintiff.

Thereafter, the plaintiff timely filed with the Internal Revenue Service claims for refunds of 1962 and 1963 income taxes, contending that the amounts which she had paid to Mr. Smith’s law firm in 1962 and 1963 for legal services were properly deductible for income tax purposes. The plaintiff’s claims were denied by the Internal Revenue Service on May 13,1966.

The present action was subsequently filed 'by the plaintiff on October 17,1966.

The briefs indicate that the parties would now be in agreement as to the following conclusions:

(a) the sum of $150 out of the total fee of $74,500 which the plaintiff paid to Mr. Smith’s law firm was properly al-locable to legal expense in connection with the apartment lease, and this sum was not deductible for income tax purposes because it did not arise in connection with the plaintiff’s “profit-seeking activities” and, therefore, was a “personal” expense rather than a “business” expense (United States v. Gilmore, 372 U.S. 39, 48 (1963)) ;

(b) the remaining $74,350 out of the $74,500 legal fee was allocable (1) in part to legal expense for tax advice and counsel, and (2) in part to legal expense pertaining to the acquisition of capital assets;

(c) the portion of the $74,500 legal fee allocable to legal expense for tax advice and counsel was deductible for income tax purposes (Davis v. United States, 152 Ct. Cl. 805, 811, 287 F. 2d 168, 171 (1961), reversed on other grounds, 370 U.S. 65 (1962); Carpenter v. United States, 168 Ct. Cl. 7, 14, 338 F. 2d 366, 370 (1964));

(d) tbe portion, of tbe $74,500 legal fee allocable to legal expense pertaining to tbe acquisition of capital assets was not deductible for income tax purposes (United States v. Gilmore, supra, 372 U.S. at pp. 51-52; Davis v. United States, supra, 152 Ct. Cl. at pp. 811-15, 287 F. 2d at pp. 171-73), but, instead, sucb portion should ’be allocated pro rata, as of tbe time of the divorce, to the cost basis of tbe properties which tbe plaintiff received in tbe division of tbe community estate (Woodward v. Commissioner, 397 U.S. 572, 574-75 (1970); Gilmore v. United States, 245 F. Supp. 383 (N.D. Cal. 1965)).

The controversy between the parties at tbe present time boils down to tbe question of bow much of tbe $74,500' legal fee which tbe plaintiff paid to Mr. Smith’s law firm was properly allocable to legal expense for tax advice and counsel, and bow much was properly allocable to legal expense pertaining to tbe acquisition of capital assets.

The plaintiff’s present contention is that the sum of $60,000 was allocable to legal expense for tax advice and counsel, and that tbe sum of $14,350 was allocable to legal expense pertaining to tbe acquisition of capital assets. Such an allocation (including $150 allocated to legal expense in connection with tbe apartment lease) was made by Mr. Smith when be was requested by the plaintiff to allocate the $74,500 legal fee after tbe controversy arose between tbe plaintiff and tbe Internal Revenue Service.

On tbe other band, it is tbe defendant’s present position that, “at most,” 10 percent of tbe $74,500 legal fee, or $7,450, was allocable to legal expense for tax advice and counsel, and that the remainder of tbe $74,500 legal fee (after deducting $150 and $7,450) was allocable to legal expense pertaining to tbe acquisition of capital assets.

As indicated more fully in the findings of fact, most of tbe time, attention, and efforts which Mr. Smith devoted to tbe divorce case between tbe plaintiff and Mr. Weaver revolved around property matters, i.e., the problem of whether particular items of property controlled by Mr. Weaver were Ms separate property or belonged to the community estate, and especially the problem of how the community estate should be divided between the plaintiff and Mr. Weaver. There was agreement in principle on an equal division of the community property, but the actual division of the community estate was complicated by the circumstance that it did not seem desirable to the plaintiff or Mr. Weaver to split some property interests “down the middle,” with each party taking half, so it was necessary to wrestle with problems of equivalency valuations and the possible tax consequences flowing from various alternatives that might be adopted respecting the division of the community estate.

Negotiations concerning the aspects of the case mentioned above were conducted by Mr. Smith with counsel for Mr. Weaver during the period January-April 1962, and a substantial amount of research was done by Mr. Smith and his law firm on legal problems involved in determining a proper and feasible division of the community estate. Mr. Smith’s objective was to obtain for the plaintiff a property settlement which would not only be fair as regards the amount and value of the property received by her, but which would also be as advantageous as possible to the plaintiff with respect to the contemporary and future tax consequences.

The details concerning the negotiations relative to the status and division of the community estate, the problems encountered, and the ultimate property settlement are set out in the findings of fact and need not be repeated here. It should be sufficient for present purposes to note that both Mr. Smith and counsel representing Mr. Weaver were very knowledgeable and experienced in the field of tax law, and that their negotiations concerning the division of the community estate were influenced throughout by their respective desires and intentions to avoid, as far as might be possible, unfavorable tax consequences — both contemporary and future — for their respective clients.

The circumstance that tax problems were entangled in such a significant way with the other matters involved in effecting a mutually satisfactory division of the community estate between the plaintiff and Mr. Weaver makes it very difficult to carry out the court’s present assignment of determining how much of the $74,500 legal fee which the plaintiff paid to Mr. Smith’s law firm was properly allocable to legal expense for tax advice and counsel, and how much was properly allocable to legal expense pertaining to the acquisition of capital assets. However, the court is aided in its task by evidence in the record to the effect that when Mr. Smith undertook to determine the amount of the fee that should be charged for all of the work performed in connection with the plaintiff’s divorce proceeding and related matters, he relied on a schedule of minimum fees recommended by the State Bar of Texas and by the El Paso Bar Association. Under that schedule, the fee of an attorney in a divorce case involving a division of community property and complex legal questions was to consist of 10 percent of the first $5,000 worth of property recovered for his client, and 5 percent of the amount over $5,000.

The application of the fee schedule mentioned in the preceding paragraph to the amount of property received by the plaintiff in connection with her divorce from Mr. Weaver would have entitled Mr. Smith to a fee of approximately $150,000. However, Mr. Smith considered such an amount excessive under the circumstances of the Weaver divorce case; and he, in effect, reduced the $150,000 fee by half and charged $75,000, of which Mr. Weaver paid $500 and the plaintiff paid $74,500.

Thus, Mr. Smith’s fee was actually based upon the value of the property which the plaintiff acquired in the divorce proceeding, and not upon the extent or value of the tax advice and counsel furnished in connection with the divorce proceeding. It necessarily follows that the plaintiff’s present position to the effect that $60,000 out of the $74,500 legal fee should be allocated to legal expense for tax advice and counsel, and that only $14,350 is allocable to legal expense pertaining to the acquisition of capital assets, cannot be sustained under the facts of this case.

On the other hand, the defendant’s concession that, “at most,” 10 percent of the $74,500 legal fee which the plaintiff paid to Mr. Smith’s law firm may properly be allocated to legal expense for tax advice and counsel seems reasonable. The evidence in the record shows that Mr. Smith and his associates devoted a total of 151.3 man-hours of legal work to the Weaver divorce case and related matters, including the property settlement. The evidence also shows that Mr. Smith customarily charged a fee based upon an hourly rate of $40 or $45 for tax advice and counsel furnished in a consultative relationship. Even if the entire 151.3 man-hours of legal work were regarded as consisting of tax advice and counsel, and such services were charged for at an hourly rate of $45, the resulting amount would be less than the $7,450 figure mentioned by the defendant as allocable to legal expense for tax advice and counsel.

Accordingly, it is concluded that the sum of $7,450, out of the $74,500 legal fee which the plaintiff paid to Mr. Smith’s law firm, should be regarded as properly allocable to legal expense for tax advice and counsel. Under previous court decisions, such sum was deductible for income tax purposes.

It necessarily follows that the plaintiff, in preparing her income tax return for 1962, was entitled to claim a deduction for legal expense in the amount of $7,000 (10 percent of the $70,000 which the plaintiff paid to Mr. Smith’s law firm in 1962); and that, in preparing her income tax return for 1963, the plaintiff was entitled to claim a deduction for legal expense in the amount of $450 (10 percent of the $4,500 which the plaintiff paid to Mr. Smith’s law firm in 1963). The Internal Eevenue Service erred in wholly disallowing the plaintiff’s deductions for legal expenses in 1962 and 1963; and the plaintiff is entitled to recover in the present action pursuant to the determination stated in the preceding sentence.

As indicated earlier in this opinion, the portion of the $74,500 fee allocable to legal expense pertaining to the acquisition of capital assets, i.e., $66,900, should be allocated pro rata, as of the time of the plaintiff’s divorce from Mr. Weaver, to the cost basis of the properties which the plaintiff received in the division of the community estate. Some of the property items which the plaintiff received in the 1962 property settlement were disposed of by the plaintiff in 1962 with a resulting gain, and other such property items were disposed of by the plaintiff in 1968 with a resulting gain. The addition of a proportionate part of the $66,900 to the cost basis of the properties disposed of in 1962 and 1963 will, of course, decrease the gains from such property dispositions previously reported by the plaintiff in her income tax returns for 1962 and 1963, and will provide an additional ground for recovery by the plaintiff in the present action for refunds of 1962 and 1963 income taxes.

For the reasons previously stated in this opinion, the plaintiff is entitled to recover in the present action, and judgment should be entered to that effect. The amount of the recovery can be determined in subsequent proceedings under Rule 131(c).

FINDINGS of Fact

1. This is an action for the recovery of federal income taxes previously paid by the plaintiff for the calendar years 1962 and 1963. This court has jurisdiction by reason of Title 28 U.S.C., Section 1491.

2. (a) The plaintiff is Shirley H. Weaver George, formerly known as Shirley H. Weaver, who resides at 1935 Carla Ridge, Beverly Hills, California.

(b) The plaintiff was married to W. R. Weaver (“Mr. Weaver”) for 'approximately 20 years, but they were divorced in April 1962. The plaintiff and Mr. Weaver are the parents of two daughters, who were born during the marriage. One daughter was 16 years of age, and the other was 12 years old, at the time of their parents’ divorce.

(c) The plaintiff and Mr. Weaver maintained their matrimonial domicile in Texas, a community property State.

(d) The plaintiff was married to Robert B. George on August 20,1966, and he is now deceased.

3. The plaintiff on January 16,1962, filed suit for divorce against her then husband, Mr. Weaver, in Cause No. 101, 988, 34th District Court, El Paso County, Texas, styled Shirley Ruth Weaver v. W. R. Weaver, and a decree of divorce was entered on April 25,1962.

4. (a) The plaintiff’s attorney in the divorce case was Tad R. Smith (“Mr. Smith”), of the law firm of Kemp, Smith, Brown, Goggin & White (now Kemp, Smith, White, Duncan & Hammond) in El Paso. The law practice of Mr. Smith is — and it was at the time of the Weaver divorce— principally in the areas of taxation and corporations, and his handling of divorce cases has been chiefly limited to those involving substantial problems or amounts of property and tax questions.

(b) For tax advice and counsel in a consultative relationship, Mr. Smith customarily charges a fee based on an hourly rate of $40 or $45.

5. The plaintiff’s then husband, Mr. Weaver, was represented in the divorce case by Randolph Delk, who was at that time employed full-time by Mr. Weaver as his tax and investment manager. Mr. Delk is — and was at that time — a lawyer and a certified public accountant, with extensive experience in the area of taxation as a Revenue Agent and Appellate Conferee of the Internal Revenue Service and as a tax partner in a firm of certified public accountants. Mr. Delk was assisted in matters related to the divorce by an investments manager, an accountant, and another lawyer, Richard Brooks, who had extensive experience in tax matters.

6. The divorce itself was uncontested, and there was no question or objection to the plaintiff’s request for custody of the children. No trial or pretrial hearing was ever held. There was no alimony awarded, nor was there any question concerning alimony. The only question relating to child support was the amount to be paid, the plaintiff desiring $1,000 a month per child, her husband offering $500 per month per child, and the final amount being compromised at $666.67 per month per child.

7. The plaintiff accepted the financial statements furnished by her then husband as showing all of the assets owned by them as of the dates of the statements. No formal discovery proceedings were ever initiated. There was never any dispute or question concerning the scope of the assets, or their basis for accounting and tax purposes, although there was a question about the value of certain assets.

8. (a) The attorneys for Mr. Weaver attempted to assert that certain property was the separate property of Mr. Weaver, and not community property. This was successfully resisted by Mr. Smith, except that the family home and a country club membership were ultimately determined to be the separate property of Mr. Weaver.

(b) Mr. Smith’s efforts resulted in the addition to the community estate of property having a value of $600,000, which Mr. Weaver’s counsel initially contended was the separate property of Mr. Weaver.

9. There was a question about the value of the oil properties, which were among the assets to be included in the divorce property settlement. An appraisal was obtained on the oil properties.

10. (a) There was also a question about the value of certain businesses of Mr. Weaver at that time. His three principal businesses were the W. R. Weaver Company, Weaver Manufacturing, Inc., and Elite Laundry, all located in El Paso, Texas. These three businesses together were involved in the manufacture and sale of telescope sights for guns. Weaver Manufacturing, Inc., manufactured the scopes. W. R. Weaver Company, a partnership, handled the sale of the scopes. All of the patents on the gun scopes were owned by Elite Laundry, which also engaged in the laundry business. Elite Laundry had a licensing agreement with Weaver Manufacturing, Inc., to authorize manufacture of the gun scopes under the patents.

(to) At the time of the divorce, 90 percent of W. R. Weaver Company was held in trust for the children of Mr. Weaver and the plaintiff, and 10 percent was held toy Mr. Weaver and the plaintiff. The common stock of Weaver Manufacturing, Inc., belonged to the trust, and the preferred stock belonged to Mr. Weaver and the plaintiff. There was no question about the value of the preferred stock of Weaver Manufacturing, Inc., but there was a question about the value of W. R. Weaver Company and Elite Laundry. These values were ultimately resolved through negotiations between the attorneys.

11. (a) The principal problems in tb.e divorce case related to the disposition of the three business properties and the oil properties. The parties agreed almost immediately that there should be an equal division of the total assets. However, both Mr. Weaver and the plaintiff wanted the plaintiff out of the three businesses; and in addition, the plaintiff did not want any portion of the oil properties because of her lack of knowledge and experience in the oil business. The difficulty lay in the fact that the business properties and the oil properties had a low basis for tax purposes compared to the value at the time of the divorce, while the investment securities, which the plaintiff desired in exchange for her interests in the business properties and in the oil properties, had a 'basis not significantly different from their value at the time of the divorce.

(b) Mr. Smith (representing the plaintiff) wanted to use the then-current values of the business properties and the oil properties in determining the value of the plaintiff’s one-half interests in such properties for the purpose of selecting investment securities of equivalent value. On the other hand, Mr. Weaver’s counsel insisted on using the after-tax values of the business properties and the oil properties for equivalency purposes (assuming an early sale of such properties — although no sale was actually contemplated at the time — and the payment of capital gains taxes on the difference between the cost basis and the then-current market value).

(c) The negotiations between Mr. Smith and counsel for Mr. Weaver centered on how untenable tax consequences could be avoided by the parties if an equal division of the total assets in the community estate was made, but with the plaintiff being given investment securities in exchange for her one-half interests in the business properties and in the oil properties.

12. Another tax problem which had to be considered, researched, and discussed was the avoidance of a sale or exchange, for tax purposes, in the division of the property. Legal research was done on the circumstances under which a sale or exchange would result for tax purposes if each community asset was not divided in half.

13. There was also legal research done by Mr. Smith, and negotiations between the parties, concerning the liability for income taxes on the income received during the year of the divorce, and who would ultimately pay this. In addition, there were negotiations on the possibility of, and liability for, additional gift taxes which might be due as the result of assigning different values in the divorce property settlement to certain assets a portion of which had been previously given to certain trusts by Mr. Weaver and the plaintiff.

14. At one point, there was a proposal to pay the child support through a trust, and fund this trust with tax-exempt municipal bonds. Research was done by Mr. Smith on the income tax consequences to the plaintiff of this proposal; and in the negotiations, the proposal was rejected because of the adverse tax consequences to the plaintiff.

15. Legal research was done by Mr. Smith, or other lawyers in his office, concerning the liability of the husband for the fees payable to the plaintiff’s attorneys in the divorce case, and to what extent the fees would be deductible by either party. There was negotiation between the attorneys concerning the payment of fees to the plaintiff’s attorneys. It was ultimately agreed that Mr. Weaver would pay the plaintiff’s attorneys for the routine legal work performed in connection with the filing and prosecution of the divorce case, including matters pertaining to child custody and support ; and that the plaintiff would pay her attorneys for other services performed in connection with the divorce proceeding.

16. (a) The negotiations which Mr. Smith conducted on behalf of the plaintiff with counsel for Mr. Weaver resulted in a document which was entitled “Agreement in Contemplation of Divorce” and which the plaintiff and Mr. Weaver signed on April 23,1962.

(b) Among other things, this document provided for the division of the community estate, valued at more than $6,000,000, between the plaintiff and Mr. Weaver, identifying the property interests that were to be received by the plaintiff and by Mr. Weaver, respectively; it provided that Mr. Weaver would receive all the community property interest in Weaver Manufacturing, Inc., i.e., the preferred stock, valued at $600,000, with the plaintiff receiving extra investment securities in lieu of her one-half share of such preferred stock; that the plaintiff and Mr. Weaver would each receive one-half of the community property interest in W. K. Weaver Company and in the Elite Laundry, valued at $224,000 and $940,501.86, respectively; it provided for the purchase by Mr. Weaver, on the installment basis, of the interests received by the plaintiff in W. B. Weaver Company and in the Elite Laundry, at purchase prices of $112,000 and $470,-250.93, respectively; it provided that the plaintiff should have the sole custody and full control of the Weaver children during their minorities; it provided that Mr. Weaver should pay to the plaintiff, for the support and maintenance of each child, the sum of $666.67 per month until such child reached the age of 21; it provided that Mr. Weaver should pay the plaintiff’s attorneys the amount of $500 for their legal services in connection with the divorce action; and it provided that the plaintiff should be obligated to pay her attorneys “for legal services rendered regarding the questions of property and taxation, negotiation of the property settlement, the preservation of the Wife’s estate, and the protection and preservation of property held for investment and for the production of income.”

(c) After the parties signed the “Agreement in Contemplation of Divorce,” a decree of divorce was entered on April 25, 1962, in the case of Shirley Ruth Weaver v. W. R. Weaver.

17. Pursuant to paragraph 2 of the “Agreement in Contemplation of Divorce,” the community estate of the plaintiff and Mr. Weaver was partitioned and divided equally, except that the plaintiff received additional investment funds in exchange for: (1) her one-half interest in the preferred stock of Weaver Manufacturing, Inc. (which had a fixed value of $100 per share); (2) her one-half interest in the office equipment; (3) her one-half interest in Investors Croup Canadian Fund; (4) her one-half interest in Scope Oil Company; and (5) her one-half interest in paving cer-tifica/tes outstanding at April 24, 1962. These items were taken by Mr. Weaver, and in exchange therefor, the plaintiff took additional investment funds. With these minor exceptions, the division was equal, with the plaintiff taking a one-half interest in all the rest of the property.

18. The plaintiff’s property after, and as a result of, the partition and division of the community estate was as follows:

Cash- $137,674.42
Accounts Receivable (one-half)_ 18,746.03
Note Receivable (one-half interest in Note from Elite Laundry-Cleaners Co.)_ 60,000.00
Oil Inventories (one-half)_ 18,961.82
Documentary Stamps (one-half)_ 10.99
Salaries Receivable (one-half)_ 31,035.52
Interest Receivable (one-half)_ 976.12
Paving Certificates (one-half)_ 454.89
Municipal Bonds (one-half)_$1,055,151.75
Investment Funds_ 991, 372.68
(1) One-half community interest and
(2) Additional investment funds in exchange for:
(I) the Wife’s one-half of the preferred stock of Weaver Manufacturing, Inc.,
(II) i one-half interest in the office equipment,
(III) one-half interest in Investors Group Canadian Fund,
.(IV) one-half interest in Scope Oil Company, and
■(V) one-half interest in Paving Certificates outstanding at April 24, 1962.
Papercraft Corporation (one-half)_ 10,800.00
Vitro Corporation (one-half)_ 7,500.00
W. R. Weaver Co., a partnership (one-half of the community’s 10 percent interest)_ 112, 000. 00
Oil Reserves and equipment (one-half)_ 287,800.00
Elite Laundry-Cleaners Co. (one-half)_ 470,250.93
Furniture, furnishings, paintings, silver, crystal, linens, plus all of the personal jewelry, furs, clothing, and the like private effects of the Wife.
1962 Fleetwood Cadillac- 5, 935.91
Total $3,198,671. 08

19. After the divorce decree was entered, there was some legal work which was done by Mr. Smith in connection with transfers between the parties of the various assets, or interests in assets. Most of the schedules relating to the assets were prepared by, or under the direction of, the attorney for Mr. Weaver, and Mr. Smith did not spend any substantial amount of time on this work after the divorce.

20. As a result of that part of the property settlement under which Mr. Weaver received all of the preferred stock of Weaver Manufacturing, Inc., with the plaintiff receiving additional investment funds in exchange for her one-half interest in such stock, Mr. Weaver ultimately paid approximately $50,000 more in capital gains tax on the sale of this stock than he would have paid if the preferred stock of Weaver Manufacturing, Inc., had been divided equally between Mr. Weaver and the plaintiff in the 1962 division of the community estate.

21. Although the community property interests in W. R. Weaver Company and the Elite Laundry were divided equally between Mr. Weaver and the plaintiff, Mr. Weaver agreed to purchase, and he did purchase, over a period of years the interests received by the plaintiff in these companies, thus giving the plaintiff an opportunity to report these sales as installment sales for income tax purposes.

22. The sale of the plaintiff’s interest in the Elite Laundry to Mr. Weaver was postponed until September 1963, to avoid the unfavorable income tax consequences if this corporation was found to be a collapsible corporation by the Internal Eevenue Service. In connection with this question, legal research was done by Mr. Smith on both the question of whether this was a collapsible corporation and the possibility of obtaining a ruling.

23. A minimum fee schedule promulgated by the State Bar of Texas and the El Paso Bar Association recommended that in a divorce case involving a division of community property and complex legal questions, an attorney’s fee should consist of 10 percent of the first $5,000 worth of property recovered for his client and 5 percent of any amount over $5,000.

24. On April 19,1962, Mr. Smith, sent the following- letter to the plaintiff:

Please find enclosed herewith copies of memoranda regarding my meetings with Randolph Delk, John St. Clair, and Richard Brooks, and copies of memoranda of legal authorities on legal questions in this case. So far as the legal authorities are concerned, I know that this will 'be technical stuff in which you probably will not be interested. Nevertheless, there have 'been a number of ticklish legal problems involved, and you may want to take a casual look at some of the memoranda.
At this writing — early Thursday morning, April 19— the question of attorney’s fees still has not been resolved. You will see in the memorandum of authorities on the attorney’s fee question that, while the husband ordinarily is required to pay the attorney’s fees of the wife in a divorce suit, nevertheless, when what the courts call an “adequate award” has been made to the wife, then ordinarily the husband is not required to pay the fees. I am negotiating with Randolph Delk about this now.
The recommended minimum fee established by the El Paso Bar Association some time ago for divorces is 5% of the amount of the community property awarded to the wife. 'Since the amount of community property awarded to the wife in this case is in the neighborhood of $3,000,000, the fee would be $150,000 under this schedule. I consider that excessive and will be talking to Randolph Delk about a lesser amount. In any event, I will be calling you about this as soon as any developments occur. I hope that we can get the divorce taken care of on Monday, April 28.

25. Mr. Smith finally decided to charge, and' his law firm collected, fees totaling $75,000 for the legal services discussed in these findings of fact. Thus, the possible fee of $150,000 mentioned in Mr. Smith’s letter of April 19,1962 (see finding 24) was reduced by half.

26. The plaintiff’s ex-husband, Mr. Weaver, paid to Mr. Smith’s law firm the sum of $500 on April 28,1962, for legal services to the plaintiff in connection with the divorce action. This payment was made pursuant to paragraph 8 of the “Agreement in Contemplation of Divorce.” This payment covered the routine matters involved in the divorce action, which were considered personal to the plaintiff. This included preparation of the petition, the entering of the various orders and the decree, child custody and child support, and related matters. This fee is not in issue in this case.

27. In addition to the legal services relating to the routine divorce matters, the other legal services furnished to the plaintiff in connection with the suit for divorce included (1) tax advice and (2) services pertaining to acquisition of the assets received by the plaintiff pursuant to the “Agreement in Contemplation of Divorce.” The plaintiff’s attorneys also provided legal services to her in connection with the preparation of a 1-year lease for a personal apartment for her. For all of these legal services (excluding the routine divorce matters) , the plaintiff incurred and paid to Kemp, Smith, Brown, Goggin & White, her attorneys, the total sum of $74,500, of which $70,000 Was paid in 1962 and $4,500 was paid in 1963.

28. The defendant does not question the reasonableness of the fees that were charged by Mr. Smith and his law firm for the legal services which they rendered to the plaintiff.

29. At the time of the divorce, no allocation was made of the $74,500 legal fee between (1) tax advice and counsel, (2) services pertaining to acquisition of the assets received by the plaintiff pursuant to the “Agreement in Contemplation of Divorce,” and (3) services pertaining to the apartment lease, because the divorce occurred prior to the decisions of the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), and United States v. Patrick, 372 U.S. 53 (1963). After the time the plaintiff’s income tax returns for 1962 and 1963 had been examined by the Internal Revenue Service, Mr. Delk (who was then handling the plaintiff’s investments) asked Mr. Smith to allocate the $74,500 fee for use on the claims for refund. The allocation made by Mr. Smith was (1) $60,000 to tax advice and counsel, (2) $14,350 for work pertaining to the acquisition and protection of property, and (3) $150 for work relating to the apartment lease.

30. Mr. Smith and his associates kept a diary showing (by date, the attorney involved, the nature of the service performed, and the number of hours) all of the 'legal services furnished to the plaintiff in connection with the divorce case and related matters, including the property settlement. Such diary entries show that Mr. Smith and his associates devoted a total of 151.3 hours to these legal services.

31. (ra) On or about April 15,1963, the plaintiff duly and timely filed a federal income tax return for the calendar year 1962 with the District Director of Internal Revenue, Austin, Texas, showing total income of $84,021.22, itemized deductions of $86,053.01, and no tax to be due.

(b) Among the deductions was a deduction for legal fees of $70,000, this being the $70,000 which the plaintiff paid to Mr. Smith’s law firm in 1962.

(c) Schedule D of such return showed sales or exchanges of assets having a total gross sales price of $1,423,672.58, depreciation allowed of $66,338.21, basis of $1,435,871.13, and net gain of $54,139.66 (exclusive of capital gain dividends). All of the assets sold or exchanged were received by the plaintiff in the divorce property settlement.

32. (a) On or about April 15,1964, the plaintiff duly and timely filed a federal income tax return for the calendar year 1963 with the District Director of Internal Revenue, Austin, Texas, showing total income of $33,471.48 and tax of $3,590.36, which tax was duly and timely paid by the plaintiff.

(b) Schedule O-l of such return showed legal fees of $5,421.60, of which $4,500 is involved in this suit.

(c) Schedule D of such return showed sales or exchanges of assets having a total gross sales price of $311,801.66, basis of $150,938.86, and net gain of $160,862.80, with $132,111.92 of the basis being related to assets received in the divorce settlement.

(d) Part II of Schedule D of such return showed sales of certain depreciable property for a gross sales price of $16,028.21, a basis of $67,956.26, total depreciation allowed of $51,928.05, and net gain of zero.

(e) Schedule C-l of such return showed a loss of $5,981.44 on sale of inventory received in the divorce settlement and having a basis of $13,512.33.

33. (a) On or about September 27, 1965, the District Director assessed against the plaintiff additional federal income taxes of $30,222.12 for 1962 and $2,362.14 for 1963.

(b) On or about September 24, 1965, the plaintiff duly and timely paid to the District Director on account of such assessment the following:

Year Tax Interest Total
1962. . $30,222.12 $4,441.82 $34,663.94
1963.. .III.... 2,362.14 205.44 2,567.68
Total.... $37,231.62

(c) The payment included interest to September 27,1965, the date on which the District Director actually received such payment.

34. (a) On December 16, 1965, the plaintiff duly and timely filed with the District Director of Internal Revenue, Austin, Texas, a claim for refund for overassessment of $28,534.04 (or such greater amount as might be legally refundable) for the year 1962, and a claim for refund for over-assessment of $1,962.91 (or such greater amount as might be legally refundable) for the year 1963. These claims were based on the assertion that a certain portion of the legal fees were deductible.

(b) On May 13, 1966, the District Director mailed to the plaintiff by certified mail a notice of disallowance of each of such claims for refund.

35. The plaintiff is the sole owner of each of the claims for refund mentioned in finding 34, and has made no assignment of either of such claims.

36. (a) The sum of $7,450, out of the $74,500 legal fee which the plaintiff paid to Mr. Smith’s law firm, was properly allocable to legal expense for tax advice and counsel.

(b) The sum of $66,900, out of the $74,500 legal fee, was properly allocable to legal expense in connection with the acquisition of capital assets.

(c) The sum of $150, out of the $74,500 legal fee, was properly allocable to legal expense in connection with the apartment lease mentioned in finding 27.

CONCLUSION OE LAW

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, together with interest as provided by law, and judgment is entered to that effect. The amount of the recovery will be determined in subsequent proceedings under Buie 131 (c).

In accordance with the opinion of the court, a stipulation of the parties and a memorandum report of the commissioner as to the amount due, it was ordered on December 23,1970 that judgment for the plaintiff be entered for $15,939.39, together with interest as provided by law. 
      
       The plaintiff and Mr. Weaver maintained their matrimonial domicile in Texas, which is a community property State.
     
      
       The defendant does not question the reasonableness of the fees aggregating $75,000 which Mr. Smith and his law firm received for the legal services that were performed for the plaintiff.
     