tion to a taxpayer husband with respect to attorney's fees paid in a divorce proceeding in connection with an alimony settlement which had the effect of preserving intact for the husband his controlling stock interest in a corporation, his principal source of livelihood. The court reasoned that since the evidence showed that the taxpayer was relatively unconcerned about the divorce itself "the controversy did not go to question of . . . [his] liability [for alimony] 19 but to the manner in which . . . [that liability] might be met. .. without greatly disturbing his financial structure"; therefore the legal services were "for the purpose of conserving and maintaining" his income-producing property. 196 Fed. (2d), at 649-650, 651. 20 It is difficult to perceive any significant difference between the "question of liability" and "the manner" of its discharge, for in both instances the husband's purpose is to avoid losing valuable property. Indeed most of the cases which have followed Baer have placed little reliance on that distinction, and have tended to confine the deduction to situations where the wife's alimony claims, if successful, might have completely destroyed the husband's capacity to earn a living. Such may be the situation where loss of control of a particular corporation is threatened, in contrast to instances where the impact of a wife's support claims is only upon diversified holdings of income-producing securities." But the rationale too is unsatisfactory. For diversified security holdings are no less "property held for the production of income" than a large block of stock in a single company. And as was pointed out in Lykes, supra, at 126, if the relative impact of a claim on the income-producing resources of a taxpayer were to determine deductibility, substantial “uncertainty and inequity would inhere in the rule." We turn then to the determinative question in this case: did the wife's claims respecting respondent's stockholdings arise in connection with his profit-seeking activities? II. In classifying respondent's legal expenses the court below did not distinguish between those relating to the claims of the wife with respect to the existence of community property and those involving the division of any such property. Supra, pp. 2-3. Nor is such a breakdown necessary for a disposition of the present case. It is enough to say that in both aspects the wife's claims stemmed entirely from the marital relationship, and not, under any tenable view of things, from incomeproducing activity. This is obviously so as regards the claim to more than an equal division of any community property found to exist. For any such right depended entirely on the wife making good her charges of marital infidelity on the part of the husband. The same conclusion is no less true respecting the claim relating to the existence of community property. For no such property could have existed but for the marriage relationship. Thus none of respondent's expenditures in resisting these claims can be deemed "business" expenses, and they are therefore not deductible under § 23 (a) (2). In view of this conclusion it is unnecessary to consider the further question suggested by the Government: whether that portion of respondent's payments attributable to litigating the issue of the existence of community property was a capital expenditure or a personal expense. In neither event would these payments be deductible from gross income. The judgment of the Court of Claims is reversed and the case is remanded to that court for further proceedings consistent with this opinion. MR. JUSTICE BLACK AND MR. JUSTICE DOUGLAS dissent. It is so ordered. 19 Expenses incurred in divorce litigation have generally been held to be nondeductible See, e.g., Richardson v. Commissioner, 234 Fed. (2d) 248 (C.A. 4th Cir.); Smith's Estate v. Commissioner, 208 Fed. (2d) 349 (C.A. 3d Cir); Joyce v. Commissioner, 3 B.T.A. 393 See also Regs. (1954 Code) § 1.262–1(b) (7): “Generally, attorney's fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife." 20 See, e.g., the present case, 290 Fed. (2d), at 947: Tressler v. Commissioner, 228 Fed. (2d) 356, 361 (Ć.A. 9th Cir.); Howard v. Commissioner, 202 Fed. (2d) 28, 30 (C.A. 9th Cir.). 21 Compare, with the present case, Davis v. United States, 287 Fed. (2d) 168, reversed in part on other grounds, 370 U.S. 65, in which the Court of Claims held to be nondeductible the legal expenses of resisting the wife's threat to stock not essential to protect the husband's employment. The respondent's attempted analogy of a marital "partnership" to the business partnership involved in the Kornhauser case, supra, is of course unavailing. The marriage relationship can hardly be deemed an income-producing activity. SECTION 23 (m).—DEDUCTIONS FROM GROSS INCOME: DEPLETION Regulations 111, Section 29.23 (m)-1: Depletion of mines, oil and gas wells, other natural deposits, and timber; depreciation of improvements. Extent to which crushing and grinding of limestone will be considered an ordinary treatment process for percentage depletion purposes. See Rev. Rul. 63-48, page 118. Regulations 118, Section 39.23 (m)-1: Depletion of mines, oil and gas wells, other nat ural deposits, and timber; depreciation of improvements. Extent to which crushing and grinding of limestone will be considered an ordinary treatment process for percentage depletion purposes. See Rev. Rul. 63-48, page 118. Percentage depletion allowance based on constructive income from. crushed limestone. See Ct. D. 1875, page 363. SECTION 23 (p)-DEDUCTIONS FROM GROSS INCOME: CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN Regulations 118, Section 39.23 (p)-1: Contributions of an employer to an employees' trust or annuity plan and compensation under a deferred-payment plan; in general. Employee pension trust contribution carryovers from years when taxpayer employer was tax-exempt. See Rev. Rul. 63-102, page 96. SECTION 23(s).—DEDUCTIONS FROM GROSS INCOME: NET OPERATING LOSS DEDUCTION Treatment of net operating loss deductions attributable to losses incurred prior to the acquisition of a new corporate business activity. See Rev. Rul. 63-40, page 46. SECTION 24(a).-ITEMS NOT DEDUCTIBLE: GENERAL RULE Regulations 118, Section 39.24 (a)-1: Personal and family expenses. Legal expenses incurred in a divorce proceeding for the conservation of income-producing assets. See Ct. D. 1878, page 355. PART IV.-ACCOUNTING PERIODS AND METHODS OF ACCOUNTING SECTION 41.-GENERAL RULE Regulations 118, Section 39.41-1: Computation of net income. Taxable year of inclusion of deferred dancing lesson fees. See Ct. D. 1879, page 99. SECTION 45.—ALLOCATION OF INCOME AND DEDUCTIONS REGULATIONS 118, SECTION 39.45-1: Determination of the taxable net income of a con trolled taxpayer. United States companies and their manufacturing affiliates in Puerto Rico. See Rev. Proc. 63-10, page 490. PART V.-RETURNS AND PAYMENT OF TAX SECTION 55.-PUBLICITY OF RETURNS 26 CFR 458.324: Inspection of returns by committees of Congress other than those enumerated in section 55 (d) of the Internal Revenue Code of 1939. Inspection of certain returns by the Senate Committee on Foreign Relations. See E.O. 11080, page 302. Inspection of certain returns for the years 1947 to 1963, inclusive, by the Senate Committee on Government Operations. See E.O. 11082, page 303. Inspection of certain returns for the years 1947 to 1963, inclusive, by the House Committee on Government Operations. See E.O. 11083, page 303. Inspection of certain returns for the years 1947 to 1963, inclusive, by the Committee on Un-American Activities, House of Representatives. See E.O. 11109, page 304. The decision of the United States Court of Claims in Otis Elevator Company, a Maine Corporation v. United States, 301 Fed. (2d) 320 (1962), did not sustain the position of the Internal Revenue Service that any purchases, regardless of amount, outside the Western Hemisphere will disqualify a corporation as a Western Hemisphere trade corporation as defined in section 109 of the Internal Revenue Code of 1939. This section, in part, defined the term "Western Hemisphere trade corporation" as a domestic corporation all of whose business is done in the Western Hemisphere. The Internal Revenue Service will not litigate this issue in any other cases arising under the 1939 Code where the aggregate of the purchases outside the Western Hemisphere for a taxable year does not exceed an amount equal to five percent of the corporation's gross receipts from all sources for such taxable year. SUPPLEMENT B.-COMPUTATION OF NET INCOME SECTION 114.-BASIS FOR DEPRECIATION AND REGULATIONS 118, SECTION 39.114-1: Basis for (Also Section 23(m), Regulations 118, Section 39.23 (m)-1.) (Also Part I, Sections 611, 613; 26 CFR 1.611-1, 1.613-3.) Ct. D. 1875 INCOME TAX-INTERNAL REVENUE CODE OF 1939-DECISION OF COURT 1. PERCENTAGE DEPLETION DEDUCTION-Basis-GROSS INCOME FROM A corporation which mines, crushes, and transports crushed lime- 1 Based on Technical Information Release 469, dated April 22, 1963. The case is controlled by the opinion of the Supreme Court in United States v. Cannelton Sewer Pipe Co., 364 U.S. 76 (1960), Ct. D. 1849, C.B. 1960-2, 452, which held that the depletion allowance should be based on constructive income from the raw mineral product, if it is marketable in that form, and not on the value of the finished product. 2. JUDGMENT REVERSED. Judgment of the United States Court of Appeals for the Ninth SUPREME COURT OF THE UNITED STATES No. 528. Decided January 14, 1963 Riddell, District Director of the Internal Revenue v. Monolith Portland Cement Co. On petition for writ of certiorari to the United States Court of Appeals for the Ninth Circuit PER CURIAM. The taxpayer respondent during the taxable year 1952 mined limestone from its own quarry, crushed it, transported the crushed product two miles to its plant, and there, through the addition of other materials and further processing, manufactured the limestone into cement which it sold. It paid taxes for the year mentioned, based on a depletion allowance computed in accordance with Treasury Regulations. Thereafter taxpayer filed claim for refund and now prosecutes this suit on the ground that the depletion allowance should not have been based upon constructive income at the crushed limestone stage, but rather upon gross receipts from sales of the mining product after its "treatment processes" were completed and it became finished cement.1 The District Court found that the taxpayer's depletion base was the income from the sale of finished cement, and the Court of Appeals affirmed. 301 Fed. (2d) 488. Section 23 (m) of the Internal Revenue Code of 1939, 53 Stat. 14, provided that in computing taxable net income certain percentage deductions from gross income should be allowed for depletion of mines. The Congress further provided, Section 114(b)(4) of the Act as amended, c. 63, Section 124(c) (B), 58 Stat. 45 (1944), [Revenue Act of 1943, C.B. 1944, 756, at 772] that included within the term "mining" were "the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product. . . In United States v. Cannelton Sewer Pipe Co., 364 U.S. 76 (1960), [Ct. D. 1849, C.B. 1960-2, 452] we considered at some length the application of this term to the mining industry and held that the statutory percentage depletion allowance on the gross income of an integrated mining operator should be cut off at the point where the mineral first became suitable for industrial use or consumption. After careful study of the record here we believe that this case is controlled by Cannelton. We concluded there "that Congress intended to grant miners a depletion allowance based on the constructive income from the raw mineral product, if marketable in that form, and not on the value of the finished articles." 364 U.S., at 86. We found that "the cut-off point where 'gross income from mining' stopped has been the same" ever since the first depletion statute, namely, "where the ordinary miner shipped the product of his mine." Id., at 87. It therefore appears from this record that the "property" with which the Act deals here is the taxpayer's product at the point when "mining" terminated, i. e., when it reached the crushed limestone stage. This results in limiting the taxpayer's basis for depletion to its constructive income from crushed limestone, rather than from finished cement. There is no question involved here under the Act of September 14, 1960, 74 Stat. 1018, since taxpayer elected to pursue his claim for depletion on the finished cement product rather than accept as a correct cut-off point for depletion the prekiln feed stage of manufacture as permitted by that Act. In this connection crushed limestone was not only "marketable in that form but, according to the Bureau of Mines Minerals Yearbook, 1952, p. 26, an exhibit in the record, it was actually sold in California in 1952 in an amount exceeding 1,500,000 tons. Sales in the United States for that year exceeded 216,000,000 tons. Both of these figures exclude the tonnage used in the manufacture of cement. A stipulation in the record shows that limestone sold or used for all purposes totaled almost 300,000,000 tons in 1952. |