This case presents the question, similar to that decided today in No. 21, United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, as to the deductibility of certain legal fees paid by the respondent to his attorneys and attorneys representing his wife in connection with divorce proceedings instituted by the wife. In a suit for refund contesting the Commissioner's disallowance of such a deduction claimed in the taxpayer's 1956 federal income tax return, the United States District Court for the Western District of South Carolina held these expenses to be deductible under § 212(2) of the Internal Revenue Code of 1954 186 F.Supp. 48, the Court of Appeals affirmed, 288 F.2d 292, and we granted certiorari on the Government's petition, 368 U.S. 817, 82 S.Ct. 57, 7 L.Ed.2d 22.
In 1955 respondent's wife sued for divorce, alleging adultery on the part of her husband. Extended negotiations by the attorneys for both parties resulted in a property settlement agreement, and thereafter respondent filed his answer to the complaint neither admitting nor denying the allegations of adultery. Respondent did not testify at the trial. The South Carolina divorce court granted the wife an absolute divorce, approved the property settlement agreement, and in accordance therewith ordered respondent to pay the attorneys' fees for both parties.
At the time of these proceedings, respondent was president of the Herald Publishing Company in Rock Hill, South Carolina, and editor of the newspaper published by it. He owned 28% of the corporation's outstanding stock, his wife owned 28%, their oldest son, Hugh Patrick, owned 9%, and the remaining 35% was held in trusts for Hugh and the parties' two minor children. The real property on which the Herald Company was situated was owned by respondent and his wife, the former having an 80% undivided interest and the latter a 20% undivided interest. The couple also owned two houses. In addition, each independently owned diversified securities and other assets of substantial value.
The property settlement agreement recited that 'by virtue of this agreement a final and lump settlement has been made of any and all rights whatsoever * * * concerning the matter of support, separate maintenance, alimony or any financial obligation of whatsoever sort due to (the wife) * * * on account of and growing out of the marital relationship of the parties * * *.' Besides provisions for the custody and support of the minor children and a provision giving one of the two houses to each of the parties, certain arrangements were made concerning the respective interests in the newspaper properties. Respondent delivered to his wife high-quality securities worth $112,000, the agreed value of her 28% of the publishing company stock, which she transferred to him subject to the condition that such stock should go to their three children in the the event of his death or a sale of the entire business. A new long-term lease of the real property housing the newspaper was entered into with the corporation, and both parties then transferred their interests in this property to a trust, the income therefrom being payable to the wife for life and the remainder to pass in equal shares to the children. Finally, respondent agreed to pay all of his wife's attorneys' fees for services rendered in connection with the divorce and property settlement arrangements.
These fees, paid by respondent in 1956, amounted to $24,000 $12,000 to his attorneys and $12,000 to his wife's attorneys. The $24,000 total was allocated by agreement of counsel and the parties as follows: $4,000 for handling the divorce itself; $16,000 for rearranging the stock interests in the publishing company; and $4,000 for leasing the real property and transferring it to a trust. Respondent claimed a deduction for the $16,000 item and for 80% of the $4,000 ($3,200) item relating to the business real estate.