*62 Decisions will be entered under Rule 50.
1. Held: Legal fees and expenses incurred in settlement of a claim affecting the title to certain property were capital expenditures and not deductible under the provisions of section 23 (a) (2), I. R. C.
2. Held: The period of administration of an estate had terminated in the year the ordinary administrative duties were completed.
*87 The respondent determined deficiencies in income tax of the petitioners as follows: *63
| Petitioner | Docket No. | Year | Deficiency |
| E. W. Brown, Jr | 21343 | 1945 | $ 37,096.72 |
| E. W. Brown, Jr | 23426 | 1946 | 13,227.23 |
| Gladys Slade Brown | 21344 | 1945 | 10,233.04 |
| Gladys Slade Brown | 23425 | 1946 | 13,291.02 |
The questions presented for determination in these consolidated proceedings, after all other issues raised by the pleadings were either agreed to or abandoned, are whether the taxpayers are entitled to deduct certain legal fees and expenses paid in 1945 in connection with a claim against the estate of Carrie L. Brown, and whether certain income and gains realized by the estate in 1945 and 1946 were taxable to the estate or to the taxpayers in the event that the period of administration of the estate had terminated.
FINDINGS OF FACT.
The facts stipulated are found accordingly.
The petitioners, E. W. Brown, Jr., and Gladys Slade Brown, husband and wife, reside in Texas. They filed separate returns for each of the years in question with the collector of internal revenue for the first district of Texas. The taxpayers' books and records were kept on the cash receipts and disbursements basis, and their separate returns were rendered on that basis, under the community property*64 laws of Texas.
E. W. Brown, Jr., hereinafter referred to as the petitioner, is the son of E. W. Brown and Carrie L. Brown, both deceased. E. W. Brown died in 1917 survived by his wife, Carrie L. Brown, two sons, the petitioner *88 and H. L. Brown, and one daughter, Fannie Brown Moore. At the time of his death, E. W. Brown and his wife owned in community a large and varied estate of commercial and residential properties in Orange and Houston, Texas, and farm, grazing and timber lands in Texas and Louisiana, as well as stocks, bonds, cattle, farm machinery, and other properties. E. W. Brown left a will in which he devised and bequeathed all his properties to his three children, and requested that the properties, comprising his estate, be held intact for 10 years. This request was complied with by his widow and devisees and no partition was undertaken. Fannie Brown Moore died intestate in 1918 survived by her husband and one child, Babette Moore, who is presently married to E. R. Odom.
Carrie L. Brown died in October 1941, leaving a will dated July 11, 1931, in which she devised and bequeathed her properties to her two sons and granddaughter, Babette Moore Odom, in the proportions*65 of three-sevenths to the petitioner, three-sevenths to H. L. Brown, and one-seventh to Babette Moore Odom. Carrie L. Brown named her two sons independent executors of her estate and specifically requested that no action be taken on her estate other than the probating and recording of her will and the filing of inventory and appraisement and list of claims. Her will was probated and letters testamentary were seasonably granted to the named executors, who have continued to act in this capacity.
The Federal estate tax liability of the estate of Carrie L. Brown was paid and concluded in March 1945. The inheritance tax liability to the State of Texas was also paid and concluded in March 1945. The inheritance tax liability of her estate to the State of Louisiana was paid on May 18, 1945, and concluded by judgment on May 6, 1946. Upon settlement of the Federal estate tax liability, the executors, beneficiaries and cotenants of the properties, formerly comprising the community of E. W. Brown and Carrie L. Brown, commenced a voluntary partition of the properties.
In addition to her interest in the community property formerly owned by her and her deceased husband, Carrie L. Brown also *66 owned a large separate estate consisting of commercial and residential properties in Texas, and agricultural and timber lands in Texas and Louisiana, mineral rights in both of the states, an unpaid legacy from her mother, as well as stocks, bonds, notes, cattle, and other properties. These properties were valued for Federal estate tax purposes in excess of $ 5,000,000.
Carrie L. Brown participated in the management of the properties formerly owned in community with her deceased husband, and she controlled her separate properties until her death in 1941. During 1923 and 1924 she financed the organization of the Brown Paper Mill *89 Company, Incorporated, a Louisiana corporation, which manufactured pulp and paper in Monroe, Louisiana. She took an active interest in the corporation and its successor, The Brown Paper Mill Company, Inc., of Delaware, and served as a director and vice president until her death. Between 1923 and 1941, Carrie L. Brown entered into many various transactions affecting the properties she owned in whole or in part.
In 1934 Carrie L. Brown made gifts to her two sons consisting of cash, credits and common and preferred stock of the Brown Paper Mill Company, *67 Inc., aggregating $ 2,972,745. The preferred and common stock which the petitioner and his brother acquired by gift from their mother were income-producing property held by them for the production of income. The properties of the estate of Carrie L. Brown were principally income-producing and petitioner held his interest therein for investment and for the production of income.
In August 1945, the petitioner was informed that Babette Moore Odom contended that Carrie L. Brown lacked testamentary capacity when she executed her will in 1931 and lacked the requisite mental capacity in 1934 when she made the gifts to her sons, and that she, Babette Moore Odom, contemplated legal proceedings against the petitioner and his brother as individuals and as executors of the estate. Babette Moore Odom addressed a letter to the petitioner and H. L. Brown as independent executors of the estate of Carrie L. Brown, as follows:
In reference to certain alleged gifts of stocks, credits, forgiveness of indebtedness and other things of value made by Mrs. Carrie L. Brown to E. W. Brown, Jr. and Lutcher Brown during the years 1932 and subsequent thereto, and especially as relates to gifts made December*68 31, 1934, you are advised that it is believed that Mrs. Carrie L. Brown, at the time of making said alleged gifts was lacking in contract capacity and the making of said gifts was not valid legal transactions, and therefore the subject of said gifts should be restored to the Estate of Mrs. Carrie L. Brown. You are therefore requested, as executors of said Estate, to cause E. W. Brown, Jr., individually and Lutcher Brown, individually, to make restoration to said Estate of said gifts or the value thereof, together with the value of the use of same, and otherwise take such action as to properly protect said Estate.
Upon receipt of this information the petitioner and his brother employed a law firm to investigate the claim asserted and to defend them in any legal action or proceeding which might be instituted. No action or proceeding was ever undertaken by Babette Moore Odom with respect to this claim. The law firm employed reached the conclusion that there was no basis, in law or in fact, for the claim. The attorneys recommended that the claim be settled because publicity and circulation of its contentions would cast a cloud upon Carrie L. Brown's numerous transactions.
*90 *69 A settlement agreement was executed among the petitioner, his brother and Babette Moore Odom on September 26, 1945. This agreement provided, in part, as follows:
WHEREAS, there has arisen between Mrs. Babette Moore Odom upon the one hand, and E. W. Brown, Jr., and H. Lutcher Brown, upon the other hand, a dispute and controversy as to the validity of the said will and testament of Mrs. Carrie L. Brown and the validity of said gifts which were made and delivered by Mrs. Carrie L. Brown to her sons, E. W. Brown, Jr., and H. Lutcher Brown, as aforesaid, and Mrs. Babette Moore Odom has threatened to institute a suit to set aside the judgment of the county court of Orange County, Texas, admitting said will and testament of Mrs. Carrie L. Brown to probate and to have the probate thereof set aside and held for naught and to have said will declared to be invalid and of no force and effect, and likewise has threatened to institute a suit or suits for the purpose of setting aside and invalidating the said gifts which were made by the said Mrs. Carrie L. Brown as aforesaid, to E. W. Brown, Jr., and H. Lutcher Brown, which said gifts were made and executed during the lifetime of Mrs. Carrie L. *70 Brown to them;
The settlement agreement also provided that Babette Moore Odom was to receive $ 314,867.36 over and above the share in the estate devised to her by the will of Carrie L. Brown, to be paid out of the shares in the estate devised to petitioner and his brother; that Babette Moore Odom and her husband were bound thereunder never to contest the will; that she acknowledged the validity of the gifts of property to petitioner and his brother, and agreed never to question them in any court; that she also agreed to sell her stock in the Brown Paper Mill Company to the two brothers upon payment of $ 101,771.42; that any attorney fees incurred by petitioner and his brother should be paid by them personally; and that the properties in the estate should be divided among the parties in certain fixed proportions.
During 1945 the firm of attorneys employed to investigate the claim was paid the sum of $ 40,500 as a fee, and the amount of $ 2,640.33 [sic] was paid for other expenses in the matter. The following checks were drawn against the account of the estate of Carrie L. Brown:
1. Nov. 15, 1945 No. 1371 payable to Dr. Titus H. Harris in the amount of $ 150.00;
2. Nov. 15, 1945*71 No. 1372 payable to Dr. Guy H. Witt in the amount of $ 150.00;
3. Nov. 15, 1945 No. 1373 payable to Dr. J. H. Dameron in the amount of $ 150.00;
4. Nov. 17, 1945 No. 1386 payable to Benckenstein, Brown & Wells in the amount of $ 830.66;
5. Nov. 10, 1945 No. 1496 payable to J. J. Collins and Martin Dies in the amount of $ 40,500.00;
6. Nov. 30, 1945 No. 1497 payable to E. L. Reid in the amount of $ 4,000.00.
The total amount was charged on the books of the estate to the account of the petitioner and H. L. Brown, respectively, and in the distributions thereafter made between the beneficiaries, the aggregate amount of the checks was deducted from the cash distributions to the petitioner and H. L. Brown, respectively.
*91 In his income tax return for 1945, the petitioner claimed a deduction of $ 22,890.33 for legal fees and expenses paid in connection with the Odom claim. The respondent disallowed this deduction. The parties agree that if the fee and expenses are deductible, the amount of $ 22,890.33 should be apportioned one-half to the petitioner and one-half to his wife.
During 1945 and 1946 the executors of Carrie L. Brown's estate maintained an office and employed clerical*72 employees, accountants, a surveyor, and other persons for the collection of income, payment of taxes, management, conservation, and administration of its affairs, and the partitioning of its properties and assets. The executors and their employees were active in 1945 and 1946 handling the affairs of the estate and receiving income from dividends, interest, oil properties, land rents, and farm operations. No final report or account was filed by the executors of the estate in 1945 or 1946, and no final discharge by the beneficiaries was given to them in these years.
OPINION.
The first issue to be determined is whether the legal fees and expenses incurred by the petitioner in connection with the settlement of the claim made by Babette Moore Odom are deductible by the taxpayers. It is the taxpayers' contention that section 23 (a) (2) of the Internal Revenue Code1 authorizes deduction of such expenses from gross income as ordinary and necessary expenses incurred in the production or collection of income or in connection with the management, conservation or maintenance of property held for the production of income.
*73 The respondent urges that the amounts were expended for the purpose of defending and perfecting title to property, and are not deductible. See Regs. 111, sec. 29.23 (a)-15.
It is clear, especially from the written agreement of settlement, that the Odom contention attacked both the validity of the will and the title to the properties transferred to petitioner by his mother's gifts. If pressed to a successful conclusion in the courts, it would, in all probability, have caused both the will and the gifts to be declared invalid. Such a result was a real threat to petitioner's title to property owned or in expectation. That the threat was of real consequence, despite the opinion of counsel that it had no merit, appears when it is observed *92 that the agreement provided for the payment of some $ 314,000 to Babette, in addition to assuring her of her full share under the will. This sum was substantial even where the total amount involved runs into millions. Certainly, it is not de minimis.
True, the above conclusion would have deprived petitioner of income from the properties, but such income is once removed in propinquity from the fundamental and basic fact, i. e., that *74 petitioner would first have lost whatever title he then had or claimed either under the will or the gifts. Petitioner's rights to income depended directly and entirely on the possession of title to the property producing the income.
There are many cases holding that the fees paid to defend or perfect or acquire title are capital expenditures and not deductible. James C. Coughlin, 3 T. C. 420; Porter Royalty Pool, Inc., 7 T. C. 685; Marion A. Burt Beck, 15 T. C. 642, affd. 194 F. 2d 537. The facts of record, and notably the provisions of the settlement agreement, together with the necessary implications arising therefrom, support the conclusion that the expenditures here made were capital expenditures for defending or perfecting title. Such expenses were not incurred in the production or collection of income nor were they incurred in the management, conservation or maintenance of property held for the production of income.
If it be argued that at least some part of the fees was incurred in defense of income and that an apportionment or allocation should be made, *75 as was done in William A. Falls, 7 T. C. 66, it must be rejoined that the record contains no data which could be used as a guide or basis in such an allocation. To do so would be purely arbitrary and speculative. In fact, we may properly observe that such proof may be extremely difficult, perhaps impossible.
The proof being as it is, we have no alternative to a holding that the legal expenses here involved were of a capital nature, and accordingly, not deductible from income.
The second issue is whether the administration of the estate of Carrie L. Brown was terminated in 1945 or 1946, causing income and gains of those years to be taxable to petitioner and his wife rather than the estate. 2 Carrie L. Brown's will specifically requested that *93 no action be had on her estate other than the probating and recording of her will and the filing of inventory, appraisement and list of claims. The period of administration is the time required to perform the ordinary duties pertaining to administration. William C. Chick, 7 T. C. 1414, affd. 166 F. 2d 337; Regs. 111, sec. 29.162-1.
*76 The determination of the date on which administration of an estate is concluded calls for a practical approach. The estate of Carrie L. Brown consisted of large interests in real property, corporate securities, capital, mineral rights and royalties. She died in October 1941. Her will was probated soon thereafter. Estate and inheritance taxes were paid in 1945 and partitioning was commenced. The settlement agreement with Babette Moore Odom was reached in 1945. No problem concerning the collection of assets and payment of debts requiring continuance of administration existed after 1945 and there appears no valid reason why administration was not legally concluded in that year. Partitioning of the estate did not require extension of the period of administration. It is conceivable that much of the property might never have been partitioned. As the management of the extensive holdings of the estate is not an administrative duty compelling the continuance of the administration period, and since the same process could as well have been carried out without such continuance, we find no basis for an extension of the administration period into 1946. Josephine Stewart, 16 T. C. 1,*77 affd. 196 F. 2d 397; Joseph M. Roebling, 18 T. C. 788. It is our conclusion that the period of administration terminated in 1945.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
* * * *
(2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩
2. SEC. 161. IMPOSITION OF TAX.
(a) Application of Tax. -- The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including --
* * * *
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
SEC. 162. NET INCOME.The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that --
* * * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;↩