*930 The petitioner is the trustee of several trust funds. Under an arrangement which he made with a firm of attorneys all commissions receivable by him as trustee went to the attorneys, in consideration for which they furnished him a room in a suite of offices, stenographic and clerical assistance, and legal advice. By reason of an improvident investment of trust funds the trust sustained a loss for which the petitioner and his cotrustee were jointly and severally liable. To make good the loss each trustee in 1930 paid into the trust one half of the loss which had been sustained and the petitioner paid attorneys' and accountaints' fees. Held, that the amounts paid are not legal deductions from gross income.
*574 In this proceeding the petitioner contests a deficiency in income tax determined by the respondent in the amount of $4,538.50 for the calenoar year 1930, and also claims a refund in the amount of $718.23. The issues raised by the pleadings are (1) whether petitioner may deduct from gross income $35,633.55 which he paid in 1930 to a trust under*931 the will of Arioch Wentworth; (2) whether petitioner may deduct the sum of $7,411.26 representing attorneys' and accountants' fees paid by him in connection with a controversy over the payment made to the trust; and (3) whether an amount of $1,649 alleged profit from the sale of stock should be treated as ordinary income or capital gain.
FINDINGS OF FACT.
The petitioner is a resident of Cambridge, Massachusetts.
Since 1904 the petitioner has been trustee of a trust, comprising half a million dollars' worth of property, created by the will of his *575 grandfather, Arioch Wentworth, who died in 1904. The other trustees originally were petitioner's half brother, Arioch Erickson, and his mother, Susan M. Stuart. The latter was not active in the affairs of the trust, the details of the trust being attended to by the petitioner and Erickson. The mother died in 1926, since which time the petitioner and Arioch Erickson have been sole trustees.
The will of Arioch Wentworth provided that the net income of the trust should be paid to Susan M. Stuart -
* * * and upon her decease, to pay one-half of said net income to said Arioch Wentworth Erickson and one-half of the same*932 to said Willoughby Herbert Stuart, Jr., during their respective lives. Upon the decease of either of said grandsons leaving issue, to pay one-half the net income thereof to such issue and the other half to said remaining grandchild. If one of said grandchildren should decease leaving no issue, then the entire trust estate shall be held for the benefit of said remaining grandchild during his life. Upon the decease of the survivor of said grandchildren, the principal of said trust estate and all remaining accumulations thereon, shall be conveyed, transferred and set over in equal shares to the issue of said grandchild or grandchildren, to take per capita. * * *
Since the death of Susan M. Stuart in 1926, the petitioner has received one half of the net income of the trust.
Since 1915 the petitioner has also been trustee under a trust for the benefit of his father, involving property worth half a million dollars. He has also since the year 1926 been a trustee of a trust involving his mother's estate.
In 1904 the petitioner and his contrustee made an arrangement with the law firm of Loring, Coolidge, Noble & Boyd by which the petitioner and Erickson should each have a room*933 in the offices of the law firm and have the use of stenographers, bookkeepers, and legal advice of Loring and Noble, regardless of expense "other than receiving commissions from the estate." Since that time the petitioner has maintained as his office a room in the suite of offices occupied by the law firm.
During the year 1930, and for many years prior thereto, the only business activities of the petitioner have consisted of acting as trustee under the above mentioned trusts and attending to his own investments. In his income tax return for 1930 the petitioner designated his occupation as that of "trustee." He also has so designated himself in making applications for membership in clubs, and in his application for a passport in 1928. The petitioner was at his office "day after day." But all the clerical work connected with the management of the trusts was handled by the law firm above mentioned. In his income tax return for 1930, and for prior years, the petitioner never returned as income any commissions to which he was entitled as trustee, for the reason that under the arrangement with the law firm all such commissions were paid to the law firm.
*576 In 1914 the trust*934 u/w Arioch Wentworth made, at the suggestion of Erickson, a loan of $75,000 to a company known as the Quigley Furnace & Foundry Co. This was a new corporation which had been formed in May 1912 and which had not prospered. It had borrowed $189,000 during the year 1913 and in 1914 it incurred a loss of $84,000. Erickson was financially interested in the company. Shortly after the loan of $75,000 was made he became a director of the company and a month or two later became its president. Stuart knew the condition of the company and of Erickson's interest in it, but he consented to the loan being made because of Erickson's verbal statement that if anything went wrong with the loan he, Erickson, would stand the loss. The Quigley Co. became benkrupt. The result was that of the original loan of $75,000 only $3,732.90 was recovered and there was a loss of trust funds in the amount of $71,267.10.
Upon the death of the petitioner's mother, Susan M. Stuart, in February 1926, and in connection with the accounting for her estate, there was also an account prepared for the Arioch Wentworth trust. This account showed a deduction from trust funds of the above mentioned loss of $71,267.10. *935 Erickson signed the account, but the petitioner refused to sign it because of a doubt in his mind as to whether the loss was a proper one to charge against the trust. Meanwhile a guardian ad litem, appointed by the court to represent the minor remaindermen under the trust, filed an objection to the account because of the inclusion of the above mentioned loss. About this time the petitioner consulted Frederick H. Nash, a Boston attorney. Nash already had independent knowledge of the Quigley Co. because he had represented the Bausch Machine Tool Co. in litigation involving the taking over by that company of the remaining assets of the bankrupt Quigley Co. Nash made a further investigation of the facts and advised the petitioner that unquestionably if the matter were litigated the court would hold that the loan to the Quigley Co. was an improper one for the trust to make and that the trustees were liable to reimburse the trust for the loss. Erickson then filed a substituted account, in which it was claimed that the $75,000 loan to the Quigley Co. was actually made out of funds belonging to Susan M. Stuart and that $75,000 of bonds which it had been supposed belonged to the Susan*936 M. Stuart estate actually belonged to the Arioch Wentworth trust. Nash spent a great deal of time investigating the facts in that connection and the petitioner also engaged the services of a firm of certified public accountants to investigate this account. The accounts of the trust and also Susan M. Stuart's personal accounts had been kept in the office of Augustus P. Loring. There had been a certain amount of commingling in these accounts and furthermore there were many missing papers which had to be located. A great deal of time was *577 required to develop fully the facts relating to the Quigley Co. and the loan of the $75,000 that was made to it in 1914. The accountants made a report and, later, a supplemental report. As a result of these investigations, the reports of the accountants, and of his own investigation of the facts and the law, Nash advised the petitioner that the bonds belonged to his mother's estate; that the trust had loaned the $75,000 to the Quigley Co.; that the petitioner and Erickson were jointly and severally liable; that the petitioner was liable for the whole amount if half of it could not be obtained from Erickson; and that he would try to get*937 the whole of it from Erickson.
Nash thereupon brought a bill in equity in the Probate Court in an attempt to make Erickson pay the full amount of the loss and to have the bonds restored to the estate of Susan M. Stuart. There were various interlocutory hearings on these proceedings, but they never came to trial.
When the hearing on the substituted accounting was about to come on for trial Nash advised the petitioner that since Loring and the other lawyers in his office were intimate friends of his he did not wish to conduct a trial which would require overhauling of the accounts of Loring's office and might result in some criticism of his bookkeepers. Nash accordingly requested the petitioner to engage other counsel for the trial and the petitioner engaged the services of Hugh McLellan, an attorney. Nash had many conferences with McLellan about the matter and McLellan had conferences with Erickson's attorney. Finally before the case came to trial it was settled. Erickson withdrew his contentions with respect to the $75,000 of bonds and the petitioner and Erickson each paid the amount of $35,633.55, representing one half of the loss in the trust. This payment was made by*938 petitioner in May 1930.
After his further investigation of the law on the question of exoneration, Nash came to the conclusion that Erickson's verbal agreement as to being responsible himself for any loss would be held to be unenforceable by the Massachusetts courts. He so advised the petitioner and the bill in equity for exoneration was dropped.
For the services above mentioned the petitioner in July 1930 paid Nash his bill in the amount of $3,057.93. McLellan's bill in the amount of $1,000 was paid in May 1930, and the accountants' bill in the amount of $3,353.33 was paid in July 1930. The total of these payments was $7,411.26. The petitioner filed a claim on his behalf with the collector at Boston, on March 7, 1933, for the refund of $718.23 based upon the contention that these expenses of $7,411.26 should have been deducted from the petitioner's income in his income tax return for 1930.
*578 In 1934 the petitioner had four living children and Erickson three.
In his income tax return for 1930, the petitioner reported $18,102.41 as profit from the sale of real estate, stocks, bonds, etc. The respondent determined that the correct amount of such gains was $17,410.43; *939 that $15,852 arising from the sale of 471 shares of Engineers Public Service Co. was taxable as capital net gain, but that $1,558.25 arising from the sale of 14 shares of preferred and 52 shares of common stock of the Multibestos Co. was taxable as ordinary income. These shares were acquired in 1920 and not in 1930, as determined by the revenue agent. The profit constituted capital net gain.
OPINION.
SMITH: Section 23 of the Revenue Act of 1928 permits an individual to deduct from gross income, among other items:
(a) Expenses. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
* * *
(e) Losses by individuals. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.
The petitioner claims deduction of the payment of $35,633.55*940 as a loss under section 23(e) of the Revenue Act of 1928, and of the payment of the $7,411.26 as an expense under section 23(a) of the statute. The respondent has disallowed these deductions upon the ground (1) that the $35,633.55 was not a loss incurred in business; and (2) that the attorneys' and accountants' fees in the amount of $7,411.26 were not ordinary and necessary expenses paid during the taxable year in carrying on any trade or business.
With regard to the payment of the $35,633.55, it is pertinent to consider whether this represented a loss to the petitioner. The Arioch Wentworth trust had sustained a loss of $71,267.10 upon its loan in 1914 of $75,000 to the Quigley Furnace & Foundry Co. Since 1926 the petitioner and his cotrustee have been equal life beneficiaries of the income of the trust. Upon the death of either trustee his half of the income is payable to his children and upon the ultimate dissolution of the trust, that is, upon the death of the other trustee, the corpus and accumulations of the trust are to be divided per capita among the children of the above trustees. At the hearing of this proceeding the petitioner had four living children and his cotrustee*941 three. By the payment of $35,633.55 by each trustee to the corpus of the trust their immediate estates were *579 reduced by that amount, but the corpus of the trust was increased by the total and their estates (including therein their interests in the trust) were not diminished. Assuming, however, that an actual loss was sustained by the petitioner from the payment into the trust, we are of opinion, for reasons stated hereinafter, that the amount is not a legal deduction from gross income.
At the hearing of this proceeding the petitioner testified that when in 1914 he consented to the loan by the trust of $75,000 to the Quigley Furnace & Foundry Co., and also when in 1930 he reimbursed the trust to the extent of $35,633.55, he never expected personally to profit therefrom. See . The loss, if any, was not therefore one "incurred in any transaction entered into for profit" within the meaning of section 23(e)(2) of the Revenue Act of 1928. It follows that if the amount is a legal deduction from gross income it must be by reason of having been "incurred in trade or business,"
*942 The term "business" has been defined as "that which occupies the time, attention and labor of men for the purpose of livelihood or profit" (Bouvier's Law Dictionary), and this definition was adopted by the United States Supreme Court in ; . The respondent contends that the petitioner's activities as trustee did not constitute a business within the meaning of the taxing statute. He points to the fact that the petitioner's return for 1930 did not show any income from the receipt of commissions for acting as trustee.
The evidence indicates that the petitioner's activities as trustee were not "for the purpose of livelihood or profit." Although the petitioner testified that his only business during the tax year 1930 and for many years prior thereto was acting as trustee, the evidence does not show how much of his time was devoted to such activities. He testified that the was at his office "day after day", but it is apparent from the entire testimony that his income was from one or more trusts and from interest and dividends and profits from the sale of securities*943 which he owned individually. In , and , the question was whether a net loss was sustained under section 206(a) and (b) of the Revenue Act of 1924 and section 204(a) and (b) of the Revenue Act of 1921, which permit the carrying forward of a net loss "attributable to the operation of a trade or business regularly carried on by the taxpayer." In its opinion in , the Supreme Court quoted with approval the following language from the opinion of the Circuit Court of Appeals for the Second Circuit in the same case, :
By the statute, allowing the deductions and carrying over the loss for two years, Congress intended to give relief to persons engaged in an established *580 business for losses incurred during a year of depression in order to equalize taxation in the two succeeding and more profitable years. It was not intended to apply to occasional or isolated losses. * * *
Although the decisions of the Court in the above cited cases are not strictly in point, inasmuch as the question there was whether the business*944 was "regularly carried on by the taxpayer", they stand for the proposition that the term "business" means an established business, and we think that the term "trade or business" used in section 23(e)(1) of the Revenue Act of 1928 likewise refers to an "established" trade or business; otherwise, there would be no reason for section 23(e)(2). Where a taxpayer seeks to deduct from income an amount claimed as a loss incurred in trade or business it must be shown that such loss was sustained in the actual business of the taxpayer as distinguished from isolated personal transactions. This principle was upheld by the Court of Claims in , in which it was stated:
* * * A single isolated activity or transaction is not sufficient to constitute a business or trade. ; ; .
In , the court said:
"We think that the language 'losses incurred in trade' are correctly construed by the Treasury Department as meaning in the actual*945 business of the taxpayer, as distinguished from isolated transactions. If it had been intended to permit all losses to be deducted, it would have been easy to say so. Some effect must be given to the words 'in trade.'"
See . Cf. ; .
We are of the opinion that the respondent correctly disallowed the deduction of the claimed loss in the amount of $35,633.55.
We are also of the opinion that the petitioner's claim for the deduction of $7,411.26 paid as attorneys' and accountants' fees in 1930 stands on no better ground. This amount, if deductible at all, must be an "ordinary and necessary" expense "paid or incurred during the taxable year in carrying on any trade or business." In view of our conclusion that the petitioner was not engaged in carrying on a trade or business, the amount is not a legal deduction from gross income.
The remaining issue relates to the failure of the respondent to treat as a capital gain in computing the deficiency an amount of $1,649 representing the profits realized by the petitioner from the*946 sale in 1930 of 14 shares of preferred and 52 shares of common stock of the Multibestos Co. which he acquired in 1920. The evidence shows that the amount for which the respondent held the petitioner liable to income tax on this count was $1,558.25 and not $1,649. The evidence further shows that the revenue agent who examined the *581 petitioner's books of account for the purpose of verifying his income tax return for 1930 assumed that the petitioner acquired the Multibestos stock in 1930. It was, however, acquired in 1920. In view of this fact the petitioner is entitled to be taxed upon the profit of $1,558.25 as from a sale of capital assets, along with other gains from the sale of capital assets.
Reviewed by the Board.
Judgment will be entered under Rule 50.
BLACK and LEECH dissent, being of the opinion that the disputed expense and loss items were deductible under section 23(a) and (e)(1) of the Revenue Act of 1928.