Before DUFFY, PARKINSON*fn1 and CASTLE, Circuit Judges.
This is an appeal by the United States of America from a judgment in the amount of $10,601.63 entered in favor of the Illinois National Bank as conservator of the estate of Earl Davenport, an incompetent person, and Nellie Davenport, the wife of Earl Davenport in a suit for refund of an alleged overpayment of $15,231.12 in federal income tax for the year 1948.
Prior to July 25, 1947 Earl Davenport and Mayme Davenport were husband and wife. On July 18, 1947 Earl and Mayme Davenport entered into and executed a "Post Nuptial Stipulation and Settlement of Property Rights" and that part of the stipulation with which we are concerned is as follows:
"1. That the Plaintiff, Mayme Davenport intends to file an Amended Complaint for divorce in the above entitled cause, and
"2. The Defendant, Earl Davenport, will convey to the Plaintiff all his rights, title and interest by Quit Claim Deed in and to all real estate owned by the Plaintiff, Mayme Davenport; and the Plaintiff Mayme Davenport, shall Quit Claim to the Defendant all her rights, title and interest in the real estate owned by the Defendant, Earl Davenport, subject to the provisions hereinafter set forth.
"3. That the Defendant, Earl Davenport, will pay to the Plaintiff, Mayme Davenport, the sum of Fifty-two Thousand Dollars ($52,000.00) in full settlement of all her right, title and interest in the real estate of the Defendant, and as settlement of her property right, claim for alimony or support money and including her attorney fees and court costs, said sum of money to be paid in the manner following:"
(The stipulation then recites the method of payment).
Paragraph 11 of said stipulation states as follows:
"It is understood and agreed that in case a decree is entered in this cause, this contract and each and all of the terms thereof shall be incorporated in such decree, and may be considered a part of such decree."
Thereafter, on July 25, 1947 the Circuit Court of Sangamon County, Illinois, in its decree dissolving the marriage between Earl and Mayme Davenport, incorporated and approved the agreement in accordance with the terms above set forth. Earl Davenport and Mayme Davenport carried out the provisions of the contract and decree by executing quit claim deeds in favor of each other in respect to their separate properties and on August 7, 1947, Earl Davenport paid Mayme Davenport $52,000 as agreed in the post nuptial agreement. A portion of the land which Earl Davenport owned at the time of the settlement and divorce was sold on January 3, 1948, by Earl and his present wife, Nellie Davenport, for $120,221.75. In the joint return filed for the year 1948, the taxpayers, in computing an alleged loss on the sale of this land, included in full the $52,000 payment to Mayme Davenport as a cost of acquiring the land that was sold; which payment, in effect, they added to their cost basis of the land for the purpose of determining gain or loss. The $52,000 item was disallowed. On April 17, 1952, the Commissioner of Internal Revenue made a timely assessment of a deficiency in tax in the amount of $12,747.66, plus interest of $2,483.46. The total deficiency was paid, and on October 11, 1955, the taxpayers filed a timely claim for refund, which was denied on September 10, 1956. The taxpayers filed this suit for refund.
The District Court found that, of the $52,000 paid to Mayme Davenport, $5,000 was paid for her attorney's fees and was not attributable to the cost of acquisition of the land, but that "$47,000 was paid for release of her dower, homestead and rights of inheritance", and concluded that "the Director of Internal Revenue erred in disallowing the said $47,000 as a cost of acquisition basis". Judgment was entered against the United States on April 8, 1959, and notice of appeal was filed by the Government on June 5, 1959.
The contested issues are:
1. Whether, as a matter of law, the District Court erred in concluding that, for federal income tax purposes, a payment to a divorced spouse for release of her inchoate right to dower in real property may properly be added to the ...