*189 Decision will be entered under Rule 50.
1. Section 23(a)(2) -- Section 23(e)(3) -- Costs of Litigation -- Recovery of Stock -- Collection of Income -- Allocation. -- Petitioner expended $ 174,445.58 for attorneys' fees and other litigation costs in connection with a suit to establish her title to stock in a corporation. Judgment was rendered in her favor. She recovered the stock, dividends, and interest. Held: (1) The portion of the litigation expense attributable to the collection of income is deductible under section 23 (a) (2), but the portion allocable to the recovery of stock forms part of the cost of the stock; (2) The litigation expense incurred and paid to recover the stock is not a loss under section 23 (e) (3).
2. Section 22 (a) -- Taxable Income -- Dividends. -- Held: The petitioner recovered accumulated dividends in the amount of $ 61,000 which are income under section 22(a).
*339 The respondent has determined a deficiency in the petitioner's income tax liability for the year 1946 in the amount of $ 61,757.33. The petitioner concedes the correctness of certain adjustments made by the respondent to her income for 1946. This will be given effect in the computation under Rule 50.
On her return for the taxable year the petitioner deducted the sum of $ 90,338.04, consisting*191 of attorneys' fees and other expenses of litigation. The respondent allowed a deduction for litigation expense in the amount of $ 30,662.11, but he disallowed the deduction to the extent of $ 59,675.93. By amendment to her petition, the petitioner makes a claim for an additional deduction for litigation expense in *340 the amount of $ 84,107.54, making the total deduction claimed $ 174,445.58.
The issues are:
(1) Whether all or any part of the total amount of $ 174,445.58, expended for attorneys' fees and other litigation costs in connection with a suit to recover stock in a corporation is deductible as a nonbusiness expense under section 23 (a) (2) of the Code. If it is held that a part of the sum of $ 174,445.58 is deductible under section 23 (a) (2), then a question to be decided is what part of the total litigation expense is deductible. The petitioner contends, further, that the litigation expense of $ 174,445.58 incurred and paid in connection with the recovery of the stock constitutes a loss arising from theft or embezzlement which is deductible under section 23 (e) (3).
(2) Whether the amount of $ 61,000 received by the petitioner under the decree of a state court*192 constitutes taxable income under section 22 (a).
The petitioner filed her return with the collector for the first district of California.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts. During the taxable year the petitioner was married and was a resident of Oakland, California. None of the items of income involved in this proceeding are community income. The petitioner filed her returns on the cash basis.
The petitioner was born in October 1916, the daughter of Oscar Hansen, deceased, and Fay Bixby. In 1920, the petitioner's mother and father, who had been living in California, separated. The petitioner went to live with her mother, who had established her residence in Michigan. She continued to reside in Michigan until 1940, when she moved to California. Her father, Oscar Hansen, remained in California after separating from his wife and resided with his mother, Josephine Hansen. In 1922 the petitioner's father and mother were divorced. The decree of divorce became final in 1923.
In 1929, Oscar Hansen died intestate. The petitioner, then 13 years of age, was his sole surviving heir. Other survivors included Oscar's mother, Josephine Hansen, and*193 his brothers Albert Hansen and Charles L. Hansen. Alice Carmody Hansen is Albert Hansen's widow, and Florence J. Hansen and Robert Hansen are his children. Myrtle Hansen was Charles L. Hansen's wife, and Elizabeth Hansen and Carl Hansen are his children.
Until his death, Oscar was the president, manager, and a member of the board of directors of the Bear Film Co., hereinafter referred to as "Bear," a California corporation which was and still is engaged in the business of finishing photographs and processing film. Oscar *341 owned all of the outstanding stock of Bear, i. e., 2,500 shares of preferred stock and 2,500 shares of common stock. Before his death, Oscar established a trust of which he was the beneficiary and his mother, Josephine, was the trustee. The stock in Bear comprised the res of the trust.
After Oscar's death, Josephine Hansen and Oscar Uhle were appointed coadministrators of his estate by the Probate Division of the Superior Court of California. They filed reports appraising the assets of the estate as follows:
| Money | $ 1,378.86 |
| Accounts Receivable | 4,202.88 |
| Parcel of real estate in Oakland | 6,000.00 |
| Furniture and equipment | 150.00 |
| $ 11,731.74 |
*194 No mention was made of the stock of Bear, or of the fact that Oscar owned or had an equitable interest in the stock of Bear, or in the stock of any other corporation at the time of his death. The coadministrators did not report that Bear owed Oscar $ 18,950, which was unpaid at his death. In 1930, the probate court decreed that the assets of Oscar's estate, less the expenses of administration, be distributed to the petitioner. The value of the property so distributed to the petitioner was about $ 10,000.
Relatives of the petitioner advised her that the Bear stock was owned by her grandmother, Josephine Hansen. No trust with respect to the Bear stock was ever created for the petitioner's benefit by her relatives or by anyone.
The management and control of the business of Bear, after Oscar's death, were exercised by his mother, Josephine, and his brother Albert. Albert had been a member of the faculty of Purdue University, but he relinquished that position to manage Bear. In 1930, Josephine transferred the title to the Bear stock to Albert. Josephine died in 1932. Albert continued to operate the business of Bear in a very successful way until his death in 1940.
After Oscar *195 Hansen's death in 1929, Bear declared dividends on its stock in the aggregate amount of $ 95,000, of which amount $ 61,000 was paid to its shareholders of record, namely, Albert Hansen and his estate, as follows:
| Date | Amount |
| Dec. 31, 1937 | $ 25,000 |
| Oct. 31, 1938 | 10,000 |
| Apr. 20, 1940 | 1,000 |
| Aug. 22, 1940 | 20,000 |
| Aug. 13, 1941 | 5,000 |
| Total | $ 61,000 |
*342 None of the above dividends were paid to the petitioner.
At some time, Albert established an inter vivos trust for the benefit of his son, Robert Hansen, to which he conveyed 1,000 shares of Bear stock. Albert died testate in 1940. Under the terms of his will the remaining 4,000 shares of Bear stock were to be held in trust for the benefit of his widow, Alice Carmody Hansen, his daughter, Florence J. Hansen, and his son, Robert Hansen. Albert made no provision in his will for his brother, Charles L. Hansen, or for his niece, the petitioner.
Thereafter, Charles claimed that Albert had agreed during his lifetime to make certain bequests under his will in Charles' favor. A dispute arose between Charles and Albert's estate, in the course of which Charles' attorney advised the petitioner that there had been *196 some questionable circumstances surrounding the administration of her father's estate. She went to San Francisco in 1940 to consult Charles' attorney. Information was given her then which led her to believe that she was the rightful owner of the Bear stock. The petitioner filed a timely claim with Alice Carmody Hansen, the executrix of Albert's estate, for the recovery of the stock. The claim was rejected.
On August 16, 1940, the petitioner instituted a suit in the Superior Court of California in and for the City and County of San Francisco for the recovery of the Bear stock and for other relief. The defendants named in the action were: Bear; Alice Carmody Hansen, Albert's widow; Alice Carmody Hansen, as executrix of Albert's estate; Harold L. Levin, an attorney who represented Oscar, Josephine, and Albert Hansen, and Bear; Loren Vail, a member of the board of directors of Bear; Oscar Uhle, coadministrator of Oscar's estate and a director of Bear; Neita Zweifel, a director of Bear; Robert Hansen and Florence Hansen, children of Albert; and others. The petitioner retained the services of attorneys Richard S. Goldman and Gorman R. Silen to represent her in the litigation.
Charles*197 L. Hansen and his wife, Myrtle, at one time had in their possession certain documents which were vital to the petitioner's case. They had made a gift of these documents to their children, Elizabeth and Carl Hansen. They also had assigned to their children all their rights in any causes of action which they might have against Albert's estate and Bear. In order to obtain these documents, the testimony of Charles and his wife, and the services of her attorneys, the petitioner, on February 13, 1941, entered into a written agreement with Elizabeth and Carl Hansen and her attorneys. This agreement was modified on January 7, 1946. Both agreements are described hereinafter.
In the case of Virginia J. Hansen 1 v. Bear Film Co., et al., No. 296,867, the issue relating to the ownership of the Bear stock was *343 bitterly contested. On July 2, 1943, the Superior Court entered its findings of fact and conclusions of law, and a separate judgment order, all of which are incorporated herein by reference. The court ordered the following:
IT IS ORDERED, ADJUDGED AND DECREED:
1. That at the time of his death Oscar C. Hansen was the equitable owner of all the shares of preferred *198 stock, to wit, 2,500 shares, of Bear Film Co., and that accordingly the plaintiff, Virginia J. Hansen, as his sole heir at law, is now the equitable owner of the whole thereof.
2. That at the time of his death Oscar C. Hansen was the equitable owner of all the shares of common stock, to wit, 2,500 shares, of Bear Film Co., and that accordingly the plaintiff, Virginia J. Hansen, as his sole heir at law, is now the equitable owner of the whole thereof.
3. That the defendant Bear Film Co. holds as trustee for plaintiff 500 shares of the preferred stock and 500 shares of the common stock of said company, which formerly stood in the name of Albert A. Hansen and which were transferred by him to it in 1939 in trust for Robert Carmody Hansen, and that the defendant Alice Carmody Hansen as Executrix of the Last Will and Testament of Albert A. Hansen, also known as Albert August Hansen, deceased, holds as trustee for plaintiff 2,000 shares of the preferred stock and 2,000 shares of the common stock of Bear Film Co.
4. That said holders be, and they hereby are, ordered and directed forthwith to transfer the legal title to all of said shares and to endorse and deliver to the plaintiff certificates*199 of stock of Bear Film Co. representing the ownership of said stock.
5. That the plaintiff do have and recover judgment against the defendant Bear Film Co. for the sum of $ 18,500.00 2 principal, together with interest thereon in the sum of $ 18,688.91.
6. That the plaintiff do have and recover judgment against Bear Film Co. for the sum of $ 61,000.00, principal, representing dividends declared and paid on the foregoing stock subsequent to April 26, 1929, together with interest thereon in the sum of $ 17,676.09; and all right on the part of any person to recover for dividends declared but not paid, (including all credits now appearing on the books of said corporation for said unpaid dividends) shall be and is hereby cancelled and all such dividends shall be and are hereby cancelled.
7. That the defendant Bear Film Co. is not entitled to, and it is hereby ordered and decreed that it may not demand, attempt to collect or recover from the defendants or any of them the whole or any part of the sums heretofore paid Albert A. Hansen or his estate as or on account of dividends.
8. That the plaintiff take nothing against the defendants, Harold L. Levin, Oscar Uhle, Neita Zweifel, sometimes*200 known as Nieta Zweifel and Nieta Drake, Robert Carmody Hansen, sometimes known as Robert Fulton Hansen, a minor, Florence Josephine Hansen, or Alice Carmody Hansen, individually, and that no judgment for costs be entered for or against any of said defendants.
9. That plaintiff do have and recover judgment for costs against the defendant Bear Film Co., taxed at $ 1,122.38 but that no judgment for costs be rendered for or against Alice Carmody Hansen as Executrix of the Last Will and Testament of Albert A. Hansen, also known as Albert August Hansen, deceased.
* * * *
*344 The judgment of the Superior Court was appealed by some of the defendants to the District Court of Appeal, First District of California, where it was modified in part*201 on April 30, 1945, in Hansen v. Bear Film Co., 158 P. 2d 779. On July 26, 1945, the Supreme Court of California granted a hearing in this matter and vacated the decision of the District Court of Appeal. On May 7, 1946, the Supreme Court rendered its decision in Hansen v. Bear Film Co., 28 Cal. 2d 154">28 Cal. 2d 154, 168 P. 2d 946, affirming the judgment of the Superior Court, which judgment then became final.
Under the judgment, the petitioner received, during the taxable year 1946, 5,000 shares of Bear stock, having a value of $ 305,850; 3 $ 61,000 in cash, representing dividends; and $ 63,082 in cash, representing interest. 4
The material*202 provisions of the agreement executed by the petitioner, her cousins, Elizabeth and Carl Hansen, and her attorneys, Richard S. Goldman and Gorman R. Silen on February 13, 1941, a day before the trial began in the Superior Court, are summarized as follows:
(1) The petitioner agreed to pay one-half of any amounts recovered under a judgment of the Superior Court in her suit to her cousins, Elizabeth and Carl Hansen, after first deducting all attorneys' fees and other litigation costs.
(2) The petitioner's cousins agreed to pay to her one-half of any judgment they might receive by virtue of any suits brought against Bear or Albert's estate as a result of the causes of action assigned to them by Charles and Myrtle Hansen.
(3) Elizabeth and Carl agreed to advance all costs of litigation to the extent of their ability to do so, after which the petitioner's attorneys agreed to advance all the necessary litigation expense. The petitioner was not obligated to advance any costs.
(4) The petitioner's attorneys were to receive as fees for prosecuting suits for the petitioner and her cousins against Bear and Albert's estate, 25 per cent of the gross amounts recovered in such suits.
(5) Out of*203 the gross amounts recovered in the above legal actions, there was to be repaid to Elizabeth and Carl the litigation costs which they had advanced. Then the petitioner's attorneys were to be reimbursed for the litigation expenses, which they had advanced. The attorneys' fees were to be computed on the basis of 25 per cent of the total amounts recovered less the foregoing costs.
*345 Disputes arose between the petitioner and Elizabeth and Carl relative to the above agreement. On January 7, 1946, while the suit was pending before the Supreme Court, an agreement was entered into by the petitioner, her cousins, and her attorneys, which modified the original agreement of February 13, 1941. The modifying provisions which are material here are summarized as follows:
Instead of dividing the proceeds from their legal actions, one-half to the petitioner and one-half to Elizabeth and Carl, the parties agreed to apportion the amounts recovered as follows:
(1) The first $ 50,000 of any judgment was to be divided, one-half to the petitioner, and one-half to her cousins.
(2) If the recoveries exceeded the sum of $ 50,000, the second $ 50,000 recovered was to belong entirely to the petitioner. *204
(3) Any amounts recovered in excess of $ 100,000 and up to $ 200,000 were to be divided, one-half to the petitioner and one-half to her cousins.
(4) Any amounts recovered in excess of $ 200,000 were to be divided, 65 per cent to the petitioner and 35 per cent to Elizabeth and Carl.
Pursuant to the agreement of February 13, 1941, as modified on January 7, 1946, the petitioner, during 1946, transferred 1,375 shares of Bear stock having a total value of $ 84,107.54 or $ 61.17 per share to Elizabeth and Carl Hansen. Also, during 1946 she paid $ 36,000 cash to her cousins, and $ 54,338.04 to her attorneys for fees and other litigation expenses. Not all of the fees due her attorneys were paid by the petitioner during 1946. The total litigation expense paid in 1946 was $ 174,445.58. The payment of stock having a value of $ 84,107.54 to C. and E. Hansen was an ordinary and necessary expense of the litigation.
In her return for 1946 the petitioner reported income in the amount of $ 6,253.80, and interest in the amount of $ 63,082. She claimed a deduction for litigation expense in the total amount of $ 90,338.04, as follows:
| Attorneys' fees and litigation costs advanced by her attorneys | $ 54,338.04 |
| Cash payment to Elizabeth and Carl Hansen | 36,000.00 |
| 1375 shares of stock transferred to Elizabeth and Carl Hansen | ? |
| $ 90,338.04 |
*205 Of the total deduction of $ 90,338.04 claimed, the respondent allowed deduction of $ 30,662.11, upon his determination that it was "attributable to the recovery of incomes." He disallowed the remainder of the deduction, $ 59,675.93, on the ground that it was "attributable to acquiring and for perfecting your title to the stock of the Bear Film Company." The respondent also determined that the petitioner received *346 dividends in the amount of $ 61,000 which constituted additional taxable income, "as a result of the court's judgment."
The total recovery of the petitioner under the decree of the Superior Court amounted to $ 429,932, as follows:
| 5,000 shares of stock having a value of | $ 305,850 |
| Dividends | 61,000 |
| Interest | 63,082 |
| Total | 429,932 |
Of the total amount recovered, $ 124,082 constitutes collection and recovery of income, and $ 305,850 constitutes recovery of capital.
Under allocation of the total amount of litigation expense which was paid in 1946, in the amount of $ 174,445.58, 28.86 per cent or $ 50,345 is allocable to the collection and recovery of income, and 71.14 per cent or $ 124,100.58 is allocable to the recovery of capital.
Under section 23 *206 (a) (2) the petitioner paid deductible nonbusiness expense in 1946 for the collection of income in the amount of $ 50,345. The expenditure in 1946 of $ 124,100.58 was not for the management, conservation, or maintenance of property held for the production of income and was not proximately related to the collection of income within the scope of section 23 (a) (2).
The major objective and primary purpose of the suit instituted by the petitioner against Bear Film Co., and others, in the prosecution of which the petitioner expended sums claimed as deductions here, was to dispute the title of Bear Film Co., trustee, and of Alice Carmody Hansen, executrix of the estate of Albert Hansen, deceased, as trustee, to 500 shares of preferred and 500 shares of common, and to 2,000 shares of preferred and 2,000 shares of common stock of Bear Film Co., respectively, which the said trustees held for the benefit, respectively, of Robert Hansen, and of Alice, Florence, and Robert Hansen, and to dispute the title of Josephine Hansen, the individual through whom Albert Hansen had acquired title during his lifetime, to 2,500 shares of preferred and to 2,500 shares of common stock of Bear Film. The major*207 objective and purpose of petitioner's suit, also, was to establish that her father, Oscar Hansen, was the equitable and beneficial owner of the entire 5,000 shares of preferred and common stock during his lifetime; that the petitioner, as his sole heir at law, became the equitable owner of the stock upon the death of Oscar Hansen; and that the petitioner was entitled to have the legal title of all of the stock transferred to her, and delivery of all of the stock made to her.
In the litigation instituted by the petitioner there was no issue pleaded or decided that the Bear Film stock had been stolen or embezzled, and none of the litigation expenses and costs constitutes loss from theft or embezzlement.
*347 OPINION.
The petitioner claims that all of the expenses and costs of the litigation against Bear Film and others are deductible under section 23 (a) (2) of the Code as nonbusiness expenses. In the alternative, the petitioner claims deduction under section 23 (e) (3) on the theory that the expenses constitute a loss from theft or embezzlement.
The respondent contends that the primary purpose of the litigation was to establish that the equitable title to the Bear Film stock *208 was owned by Oscar Hansen rather than by his mother and, later, by Albert Hansen; that the stock was impressed with a trust for the petitioner's benefit upon the death of her father; and that the petitioner was entitled to have title and delivery of the stock transferred to her. He contends that part of the litigation expense represents capital expense which must be added to the basis of the stock and, therefore, that part of the expense is not deductible under section 23 (a) (2). He denies that any part or all of the expense is deductible under section 23 (e) (3). Since the respondent admits that part of the expense is deductible under section 23 (a) (2), there is before us for decision a question involving allocation of the expense between deductible nonbusiness expense and capital expense.
The petitioner did not include in her income for 1946 the sum of $ 61,000 which Bear Film Co. paid her pursuant to the decree of the Superior Court which became final in 1946. The respondent has determined that the $ 61,000 represents dividends on the Bear stock and is, accordingly, taxable income under section 22 (a). The question to be decided under this issue is whether the $ 61,000 represents*209 taxable income.
Issue 1. In determining whether the disputed litigation expenses and costs are deductible as nonbusiness expense under section 23 (a) (2), or must be capitalized and added to the basis of the Bear Film stock, the Court must find whether the major objective and purpose of the litigation was to perfect, settle, and acquire title to property -- all of the Bear Film Co., stock -- or was "for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income." Sec. 23 (a) (2). Upon all of the evidence, we have found that the major objective and primary purpose of the petitioner's suit was to dispute the claimed title of others to the stock; to establish that Oscar Hansen owned the beneficial interest in the stock; to establish that the petitioner, as the sole heir of Oscar Hansen, was the owner of the legal and equitable title to the stock; and to obtain transfer of the title and delivery of the stock to the petitioner. It follows from that finding that the portion of the expenses in question which are not allocable to the *348 collection of income (income having been recovered, also) is *210 not deductible under section 23 (a) (2), but must be capitalized.
In this proceeding, the facts are not in dispute, and we do not understand that the petitioner does not recognize that the primary purpose of her suit was to have a judicial determination made that Oscar Hansen rather than his mother, Josephine, was the equitable and beneficial owner of the stock, and that those who held the stock under claim of having acquired complete title thereto from Josephine had no title at all, and that, also, her purpose was to obtain the title to and the possession of the stock. The contention of the petitioner under this issue is, rather, that as a matter of construction of section 23 (a) (2), the expense in question, comes within the scope of the statutory provision. That such is the petitioner's chief contention is made evident by her argument that the rationale of Bingham's Trust v. Commissioner, 325 U.S. 365">325 U.S. 365, gives sanction to her claim; that Kornhauser v. United States, 276 U.S. 145">276 U.S. 145, and Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, are authority for allowing the deduction under section*211 23 (a) (2); that Bowers v. Lumpkin, 140 F. 2d 927, certiorari denied 322 U.S. 755">322 U.S. 755; should not be followed; and that the holding in Helvering v. Stormfeltz, 142 F. 2d 982 is wrong.
We must reject the petitioner's contention. Since it is based largely upon her construction of the rationale of Bingham's Trust v. Commissioner, supra, and since the Supreme Court has itself made clear the factors which distinguish Bingham's Trust in Lykes v. United States, 343 U.S. 118">343 U.S. 118, affirming 188 F. 2d 964, we need not discuss in extenso the reasons why the petitioner's argument is in error, other than to point out the fact that the petitioner, prior to her suit, did not hold the title or the possession of the Bear Film Co. stock. Her suit was not primarily for an accounting in which any question of title was merely incidental thereto. Cf. Rassenfoss v. Commissioner, 158 F.2d 764">158 F. 2d 764; Hochschild v. Commissioner, 161 F. 2d 817; Kornhauser v. United States, supra.*212 The case of Bingham's Trust is distinguishable on its facts, as are the Kornhauser and Heininger cases.
It is a well established rule that expenses of acquiring or recovering title to property, or of perfecting title, are capital expenses which constitute a part of the cost or basis of the property. Regulations 111, sections 29.23 (a)-15 and 29.24-2; Murphy Oil Co. v. Burnet, 55 F. 2d 17; Jones' Estate v. Commissioner, 127 F. 2d 231; Safety Tube Corp. v. Commissioner, 168 F. 2d 787; E. B. Elliott Co., 45 B. T. A. 82, 87. And that rule has not been altered by the enactment of section 23 (a) (2) of the Code (section 121 of the Revenue Act of 1942). See: Bowers v. Lumpkin, supra;Helvering v. Stormfeltz, supra;Garrett v. Grenshaw (C. A. 4), 196 F. 2d 185; James *349 , 3 T. C. 420; James M. Straub, 13 T. C. 288; Agnes Pyne Coke, 17 T. C. 403;*213 Cobb v. Commissioner, 173 F. 2d 711, which is cited by the Supreme Court with approval in the Lykes case. The holding in Bingham's Trust did not effect any curtailment of that rule in the application of section 23 (a) (2). The costs of perfecting title to property were not deductible before the enactment of section 23 (a) (2), and it was not the intendment of that section to enlarge the class of expenses deductible under section 23 (a). Rather, the category of incomes from which expenses could be deducted was enlarged. McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57.
The issues presented in the suit of the petitioner are set forth in Hansen v. Bear Film Co., 168 P. 2d 946, to which we refer. There can be no doubt whatever that the primary purpose of petitioner's suit was to establish, first, that Oscar Hansen was the equitable and beneficial owner of all of the Bear stock during his lifetime, that upon his death there was a resulting trust for the benefit of his estate; and that the petitioner as Oscar's sole heir succeeded to the equitable and beneficial ownership*214 of the stock. It is true, of course, that the stock was property which is productive of income, and that income, also, was awarded to the petitioner by the California court's decree, but the recovery of the income which had accrued to the stock since Oscar Hansen's death was merely incidental to the chief purpose of the litigation which was to obtain determination of the question of disputed ownership of the title to the stock, just the reverse of the situation in the Rassenfoss case. Cf. Safety Tube Corp. v. Commissioner, supra.The "matter of title was directly involved and not merely incidental." Also, the facts here are distinguishable from those in Hochschild v. Commissioner, supra, where it was noted that "the title as such was not perfected in any way by his expenditures for legal assistance."
Section 23 (a) (2) provides for two classes of deductions, namely, expenses "for the production or collection of income," and expenses "for the management, conservation, or maintenance of property held for the production of income." Our holding under this issue that the petitioner cannot obtain deduction of capital*215 charges under the aegis of section 23 (a) (2) does not disregard the first provision, relating to the collection of income. The respondent's determination involves recognition that the claims of the petitioner included claims which could be satisfied only by a money judgment as, for example, the earnings of the stock while it was held by the defendants, as well as interest, and he has allowed deduction of part of the expenses, namely, $ 30,662.11. The expenditures which are "at least comparable to those required for the collection of income" are deductible under section 23 (a) (2). Harold K. Hochschild, 7 T. C. 81, 88, reversed on other grounds, Hochschild v. Commissioner, supra.The petitioner is entitled *350 to a deduction of that portion of the expense properly allocable to the recovery of interest and other items of income, but she is not entitled to a deduction for that portion properly allocable to the recovery of capital. Helvering v. Stormfeltz, supra, p. 985; Agnes Pyne Coke, supra, p. 409, and authorities there cited.
How the allocation*216 of the total expense properly is to be made is dependent upon determination of the respective amounts of the total recovery under the litigation, of the total amount of the income items. recovered, and of the total amount of the litigation expenses and costs. Before we can consider the question of the proper allocation, it is necessary to consider other issues.
Issue 2. The next question is whether $ 61,000 paid to the petitioner in 1946 under the judgment of the Superior Court is taxable income. The court decreed and ordered that the petitioner was entitled to recover from Bear Film Co., $ 61,000 "representing dividends declared and paid on the foregoing stock subsequent to April 26, 1929, together with interest thereon in the sum of $ 17,676.09" (par. 6 of the court's decree). The petitioner included in income for 1946 interest which was paid under the court's decree but did not report the receipt of $ 61,000 as income. The respondent has determined that it represents income. The petitioner denies this, contending that the sum in question represents damages and that it is, therefore, not taxable as income under section 22 (b) (5).
The evidence does not support petitioner's*217 argument that $ 61,000 represents an award of damages. The decree of the court specifically describes the $ 61,000 as representing dividends declared and paid after April 26, 1929, and the evidence shows that Bear Film Co. declared and paid dividends on the stock involved in petitioner's suit, aggregating $ 61,000. The Superior Court found that of $ 95,000 declared as dividends, only $ 61,000, and no more, had been paid to stockholders of record (p. 86, Ex. A-1). The court in ordering payment of $ 61,000 to the petitioner, was restoring to her, as the rightful beneficial owner of the stock, the dividends which had been earned by the stock, which erroneously had been paid to the record owner of the stock, i. e., to Albert Hansen during his lifetime, and thereafter to his estate.
The Superior Court ordered Bear Film Co. not to attempt to recover any sum which had been paid to Albert Hansen or his estate as dividends (par. 7 of the court's decree). This order of the court was based upon its finding, par. XXXIV of its findings and conclusions of law entered on June 22, 1943 (page 87 of Ex. A-1), that, "The reasonable value of his [Albert A. Hansen] services to the corporation *218 for said period was not less than the sum of said amount [$ 81,210.09, compensation for services] and the amount of dividends paid out to him and his estate [$ 61,000]." That is to say, the Superior Court devised a *351 way of obviating a suit by Bear Film Co. against the estate of Albert Hansen to recover dividends improperly paid (sec. 1510, California Corporation Code) by finding that he had rendered services having a value of $ 61,000 in excess of what Bear Film Co. had paid to him as salary or compensation for services ($ 81,210.09), so that what had been paid by Bear Film Co. to Albert Hansen or his estate as dividends was to be deemed to have been additional payment of compensation for his services, and Bear Film Co. was ordered to pay $ 61,000 to the petitioner as dividends. These orders of the court also eliminated the formal steps of a payment of additional compensation by Bear to the Albert Hansen estate, the return of erroneously paid dividends by the estate to Bear, and the payment of the dividends by Bear to the petitioner, all obligations involving the same amount, $ 61,000. We understand the decree and orders of the Superior Court to mean that Albert's estate*219 was obligated in 1946 to make restitution to Virginia of $ 61,000 dividends improperly received by the estate or by Albert; that in 1946 Bear became obligated to pay additional compensation for Albert's services in the amount of $ 61,000; and that a compound novation was effected by the decree of the court whereby Bear discharged the obligation of Albert's estate to make restitution of $ 61,000 accumulated dividends to Virginia, thereby satisfying its obligation to pay the estate for Albert's compensation, $ 61,000.
The sum of $ 61,000, received by petitioner in 1946, was accumulated dividends owing to her by the estate of Albert. The incidence of the tax on such income is not affected by the fact that payment was made under a court order rather than voluntarily. Cf. Hort v. Commissioner, 313 U.S. 28">313 U.S. 28; United States v. Safety Car Heating & Lighting Co., 297 U.S. 88">297 U.S. 88. It is held that the $ 61,000 is taxable income under section 22 (a). Respondent's determination is sustained.
Issue 3. It has been held under Issue 1, supra, that part of the litigation expenses were capital charges and, therefore, are not*220 deductible under section 23 (a) (2). The petitioner has advanced, in the alternative, the contention that the entire expense of the litigation, $ 174,445.58, constitutes a loss under section 23 (e) (3). The petitioner does not cite any authority, and we find none, which is in point. Furthermore, similar contentions, to the effect that litigation expenses come within the scope of provisions of the Code allowing deduction for loss, have been rejected. Kornhauser v. United States, supra;Hales-Mullaly, Inc. v. Commissioner, 131 F. 2d 509, 512; Levitt & Sons, Inc. v. Nunan, 142 F. 2d 795, 798; Commissioner v. Gilt Edge Textile Corporation, 173 F. 2d 801, 803. The petitioner's contention here must be and is rejected.
Consideration has been given to the petitioner's argument and to cases cited by way of analogy. Earle v. Commissioner, 72 F. 2d 366, *352 and Rankin v. Commissioner, 60 F.2d 76">60 F. 2d 76, are distinguishable on their respective facts and are not in point. Furthermore, *221 in the petitioner's suit, no issue involving the question of theft or embezzlement was pleaded, tried, or proved, and no finding or conclusion of law was made by the Superior Court on such issue. Cf. John L. Seymour, 1111">14 T. C. 1111, and Mary Frances Allen, 16 T. C. 163, which involved theft and embezzlement. The petitioner, in this proceeding, loosely construes the acts of Oscar Hansen's mother, Josephine, and of his brother, Albert, as tantamount to "theft" or "embezzlement." But they held the Bear stock under a claim of right, and we cannot impute to them the commission of a crime. Bula E. Croker, 27 B. T. A. 588. Both Josephine and Albert Hansen were dead at the time of the trial of petitioner's suit against Bear Film Co., Albert's estate, and others. The petitioner's alternative contention lacks merit. However, burdensome taxation of some of the fruits of the litigation may be to the petitioner, we cannot properly conclude as a matter of law that section 23 (e) (3) provides the relief sought. Deductions are a matter of legislative grace, and "a taxpayer seeking a deduction must be *222 able to point to an applicable statute and show that he comes within its terms." New Colonial Ice Co. v. Helvering, 229 U.S. 435">229 U.S. 435.
Issue 4. The petitioner in her amended petition alleged, in part, that the respondent erred in allowing deduction of only $ 30,662.11. We take a liberal view of this pleading and consider that under the entire pleadings, the question of the proper allocation of the total litigation expense between the expense of collecting income and the capital expense is before us. Indeed, under Issue 1, supra, involving section 23 (a) (2), the question of allocation is present and inherent. Cf. Helvering v. Stormfeltz, supra, p. 985, and we believe we would be in error if we failed to give this inherent question the consideration which the record indicates can be given, and which our conclusions under Issue 1 requires, even though neither party has considered the problem of allocation on brief. Since recomputation of the deficiency under Rule 50 is necessary, the matter of adjusting the amount of the allowable deduction under the first part of section 23 (a) (2) for the expense which properly*223 is allocable to collecting income may be made. To that end, the following is pertinent:
(a) It is evident that the petitioner did not complete the schedule of the items of litigation costs and expenses in her return, having left blank the space where she could have inserted the value of the 1,375 shares of Bear Film Co. stock which she delivered to Carl and Elizabeth Hansen under her agreement with them. In this proceeding the parties have stipulated that the value in 1946 of the 1,375 shares of stock was $ 84,107.54, or about $ 61.17 per share. That amount is properly added to the litigation expenses reported and deducted in *353 petitioner's return, $ 90,338.04, and brings the total amount of the litigation expenses to $ 174,445.58. The petitioner had amended her petition to claim an increase in the disputed deduction to $ 174,445.58, to include $ 84,107.54, the value of the stock. It has been found as a fact that the total amount of the litigation expense was $ 174,445.58, and that the payment of $ 84,107.54 in stock to the Hansens was an ordinary and necessary expense of the litigation.
(b) Under Issue 2, supra, it has been held that $ 61,000 constituted taxable *224 income. It follows that of the total recovered by and awarded to the petitioner by the Superior Court, $ 124,082 represents the collection or recovery of income, and this has been found as a fact.
(c) The amount of the total recovery was $ 429,932, which comprises $ 305,850, the value of 5,000 shares of stock at the stipulated value of $ 61.17 per share, plus interest and dividends of $ 124,082; and this has been found as a fact.
(d) The respondent allowed deduction of part of the expenses, to the extent of $ 30,662.11. The record does not disclose the respondent's basis for the foregoing amount, and we are unable to determine the way in which he arrived at that amount. It is possible that in making a computation which had the result of $ 30,662.11, the respondent did not take into account as part of the total litigation expense, $ 84,107.54, the value of the stock transferred to Carl and Elizabeth Hansen. We assume that he included in his computation $ 61,000 of income, since he made the determination that it was taxable income.
A method of making the proper allocation is indicated in Helvering v. Stormfeltz, supra, p. 985, and we apply that *225 method here. We conclude and have found that 28.86 per cent of the total expense of litigation, or $ 50,345, is the part of the expense which is properly allocable to the recovery and collection of income, interest, and dividends, ($ 124,082/$ 429,932 x $ 174,445.58); and that 71.14 per cent of the total expense, or $ 124,100.58, is properly allocable to the recovery of capital, the 5,000 shares of stock ($ 305,850/$ 429,932 x $ 174,445.58). We make this determination, also, under the doctrine of Cohan v. Commissioner, 39 F. 2d 540, 543, 545. (See dissenting opinion of Frank, J., in Hochschild v. Commissioner, supra.)
It is held, therefore, that under section 23 (a) (2) the petitioner is entitled to deduction of $ 50,345, and that she is not entitled to deduction of $ 124,100.58, which amount represents capital expense.
Decision will be entered under Rule 50.
Footnotes
1. Suit was instituted by the petitioner in her maiden name.↩
2. From the findings of fact and conclusions of the Superior Court, it is evident that this figure should be $ 18,950 and that the figure $ 18,500 is a misprint in the copy of the judgment introduced into evidence here.↩
3. The parties have stipulated that the stock had a value of about $ 61.17 per share in 1946.↩
4. The evidence in this proceeding does not show that the petitioner recovered the items of $ 18,950 and $ 1,122.38 from Bear during 1946 which are set forth in paragraphs 5 and 9 of the decree of the Superior Court.↩