*2227 Attorneys' fees paid by the guardian of the petitioner to assert her rights to one-half of the net income of the trust estate of J. Dundas Lippincott during the life of Isabel A. Lippincott are deductible expenses in the computation of net income.
*881 This proceeding is for the redetermination of a deficiency in income tax of $7,300 for the calendar year 1923.
The respondent is alleged to have erred in each of the following particulars:
1. In disallowing the sum of $25,011.75 as a deduction in the computation of net income for the calendar year 1923, representing attorneys' fees paid during that year;
2. In failing to allow $5,029.15 in the computation of net income for said year, representing depreciation on the premises known as numbers 489-495 West End Avenue, New York, N.Y.; and
3. In disallowing $629.14 as a deduction in the computation of net income for said year representing depreciation on the premises known as 22 West 86th Street, New York City.
The second and third allegations of error above have*2228 been conceded by the respondent, hence no further reference thereto will be necessary.
FINDINGS OF FACT.
The Central Union Trust Co. is a corporation with offices in New York, and it appears in this cause as guardian for the petitioner, who is an individual residing in New York City.
J. Dundas Lippincott died while a resident of the State of Pennsylvania, leaving a will, which was duly admitted to probate in Philadelphia County, Pennsylvania, whereby he left his residuary estate to the Pennsylvania Company for Insurance on Lives and the Granting of Annuities, as trustee, with directions to invest it and divide the income "every six months between my wife, Isabel Armstrong Lippincott, and my nephew, Ralph Wurts-Dundas, share and share alike. Should either die before the other without descendants alive at his or her decease, this share shall go to the one surviving. On the death of my wife, Isabel Armstrong Lippincott, I give and *882 bequeath the residue and remainder of my estate to my nephew, Ralph Wurtz-Dundas for life, with remainder to his descendants taking per stirpe upon the principal of representation," with a further remainder to certain hospitals should*2229 he leave no descendants surviving him.
Ralph Wurts-Dundas, named as beneficiary in this will, was the father of the said Muriel H. Wurts-Dundas, and he died a resident of the State of New York on October 16, 1921, intestate, leaving said Muriel H. Wurts-Dundas as his only child and sole heir at law. Said Muriel H. Wurts-Dundas was then an infant under the age of 21 years; and on or about November 26, 1921, the Central Union Trust Co. of New York was duly appointed guardian of her property by the Surrogate's Court of the County and State of New York and, duly qualified as such guardian, took charge of her property and continued throughout the years 1922 and 1923 to act as such guardian. The said ward reached the age of 21 years on the 7th day of December, 1924, and thereupon the said guardian duly accounted to the Surrogate's Court for its administration as guardian, and was duly discharged as such guardian by the said court on the 20th day of November, 1925.
In the year 1922 the Pennsylvania Company, as trustee under the Lippincott will, filed a petition in the Orphans Court of Philadelphia County, Pennsylvania, for a judicial settlement of its accounts as trustee, for a construction*2230 of the will of the said J. Dundas Lippincott, and for a direction by the court as to whom the income from said trust should be paid during the life of the said Isabel Armstrong Lippincott. The Central Union Trust Co. of New York, as guardian as aforesaid, was made a party to this proceeding, in which it was necessary to employ attorneys to represent it in its said capacity as guardian of the property of the said Muriel H. Wurts-Dundas. Said guardian, through its said attorneys, claimed in said proceeding that the said Muriel H. Wurts-Dundas was entitled, under the terms of said Lippincott will, to one-half of the net income of said trust during the life of the said Isabel Armstrong Lippincott. No question was raised in said accounting proceeding with respect to the disposition to be made of the corpus of said trust under said Lippincott will, inasmuch as the said trust had not terminated, and the only issue involved in said suit was that of the disposition to be made of the income. The said attorneys, employed as aforesaid, served through the said proceeding, which resulted in a decree of the Orphans Court of Philadelphia County, Pennsylvania, sustaining the contention of the said*2231 guardian, which decree was later affirmed on appeal by the Supreme Court of Pennsylvania for the Eastern District. And said attorneys likewise served under said employment *883 in the appeal proceedings, all resulting, as aforesaid, in a favorable decree and the collection by the said guardian of the income claimed by said guardian to belong to the said Muriel H. Wurts-Dundas amounting to approximately $100,000 a year.
The said attorneys, for their services rendered as aforesaid, were paid in the year 1923 by the guardian, out of moneys belonging to its said ward, the sum of $25,011.75. The said Central Union Trust Co. of New York as guardian as aforesaid, pursuant to the statute in such cases made and provided, duly filed an income-tax return for the calendar year 1923 and claimed as a deduction in computing net income the said amount of $25,011.75 which was disallowed by the Commissioner of Internal Revenue.
OPINION.
MORRIS: The sole question for determination is whether the respondent incorrectly disallowed the sum of $25,011.75 as a deduction in the computation of net income representing attorneys' fees paid by the guardian herein out of the moneys belonging to*2232 its ward, the petitioner, in 1923.
Section 214 of the Revenue Act of 1921 provides, in so far as it is material to the issue here:
(a) That in computing net income there shall be allowed as deductions:
* * *
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.
The respondent contends that the expenditure here in controversy was for defending title to property, is a capital expenditure, and that, therefore, , is controlling. In that case the petitioner deducted from its gross income an amount paid as legal expenses in defending its title to valuable lands in Texas, which deduction was disallowed by the respondent and his action was approved by this Board on the ground that the cost of defending title to property is a capital expenditure.
In connection with the proposition urged by the respondent it is well to observe the distinction in facts between the case relied upon and the facts of the instant case. There, the petitioner incurred*2233 expenses in the defense of its title to capital assets. Here, it was the income and not the corpus of the estate which was in question. Furthermore, the action out of which this expenditure arose was for a judicial settlement of the trustees' accounts and for a construction of the will, and not an attempt to divest the petitioner of property which she already owned or claimed any title to.
*884 In , a case involving the deductibility of money paid attorneys for obtaining a decree, resulting in the receipt of income which he otherwise could not have received, the Board held that under the peculiar circumstances there the payment should be deducted in the computation of net income for the year in which made.
In reaching its conclusion there, the Board reviewed and discussed several cases involving the deductibility of fees paid for legal services, and in all of them where the acquisition of capital assets or the litigation of matters appertaining to assets of a purely capital nature, were involved, the expenditures were held to be capital and, therefore, not deductible. In *2234 , where this question was involved, the Board said:
* * * It is our opinion that to the extent that such payments related to the rights of the taxpayers to retain the income or enlarge their share in the income of the mine, they are deductible; while to the extent that they represented expenditures made to acquire Loudon's interest in the mine or to enlarge their own interests as against the McLean estate, or to defend their title to the mine, such payments are in the nature of capital expenditures to be added to the other costs of the property and recovered as are such other costs. * * *
The amount paid by the guardian here was not in the defense of title to property nor to contest the rights of others to the corpus of the estate, but solely to insure the proper construction of the will and a correct distribution of the income of the estate to the petitioner thereunder. It was, therefore, an expense and not a capital expenditure.
That it was "ordinary and necessary" we believe admits of no reasonable doubt. The stipulated facts entered into between the parties were to the effect that it was "necessary*2235 to employ attorneys to represent it in its said capacity as guardian of the property of the said Murial H. Wurts-Dundas," therefore, it follows as a corollary that it was necessary to pay fees exacted therefor. In , the court, in holding that attorneys' fees paid in defending an accounting suit brought by a former law partner, respecting shares of stock received for professional services performed by him, as the partner alleged, during the existence of the partnership, were deductible in the computation of net taxable income, said:
* * * And it was an "ordinary and necessary" expense, since a suit ordinarily and, as a general thing at least, necessarily requires the employment of counsel and payment of his charges. * * *
We are, therefore, satisfied that the amount in question was an ordinary and necessary expense. It, therefore, remains for us to determine *885 whether it was paid in connection with a "trade or business" within the meaning of the statute.
In *2236 , where the petitioner claimed that an amount paid to a temporary administrator and his attorneys for services was an ordinary and necessary expense of carrying on the business of the estate and, therefore, deductible, the Board said in sustaining that contention:
We have heretofore had occasion to consider in this same connection commissions and fees similar to those involved in this proceeding and we have held that where expenses are paid or incurred in preserving an estate over a period of years, in making sales and collections, and in doing other things which are necessary for the maintenance of the estate and the production of income, the expenses are ordinary and necessary in carrying on the business of the estate and are deductible from income. See ; ; ; and .
* * * However, the weight of the evidence supports the contention that the amounts paid were reasonable compensation for personal*2237 services actually rendered in preserving and maintaining the estate and in producing income from it during the year, and our judgment is for the petitioner.
In , where the Board held amounts paid by trustees to attorneys for services in prosecuting a claim for the refund of taxes were deductible it said:
It may be safely stated that it was the intention and expectation of the testator, in creating the trust under consideration, that it would produce income for the use and benefit of each cestui qui trust, and it was the duty of the trustees to manage it, if possible, so that result would be obtained. To that extent, at least, the trust may be considered as a business. And it was as much the duty of the trustees to preserve and protect the trust property from losses as it was to produce income, and equally important in its effect upon the beneficiaries. In this case the estate had been compelled to pay taxes which the trustees believed and which were subsequently proved to be excessive in amount, and the trustees, in the proper exercise of their duties, employed counsel to prosecute a claim for the recovery of the tax that*2238 they considered to have been unlawfully exacted. They recovered not only the taxes that had been paid, but also interest in the amount of $8,000, which interest was income to the trust. It is our opinion that the fees paid to the attorneys constituted an ordinary and necessary business expense within the meaning of section 214 of the Revenue Act of 1921, and a proper deduction in computing the net income of the trust.
In the light of the cases in which similar deductions have been allowed trusts, reference to the section of the statute under which the guardian here prepared and filed a return of income for the year in controversy may prove helpful. Section 219 of the Revenue Act of 1921 provides:
(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -
* * *
*886 (4) * * * Income, collected by a guardian of an infant to be held or distributed as the court may direct.
* * *
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis*2239 as provided in section 212 * * *.
Section 212 referred to in section 219(b) above defines net income to mean "the gross income as defined in section 213, less the deductions allowed by section 214."
Thus it will be seen that the statute makes no distinction between trustees as such and guardians of infants in so far as allowable deductions are concerned. In , where the trustees paid attorneys' fees for services in prosecuting a claim for the refund of taxes, we said "To that extent, at least, the trust may be considered as a business," and furthermore, "that the fees paid to the attorneys constituted an ordinary and necessary business expense within the meaning of section 214 of the Revenue Act of 1921, * * *."
In , we said, in reaching the decision on a similar question, "that to the extent that such payments related to the rights of the taxpayers to retain the income or enlarge their share in the income of the mine, they are deductible * * *."
If a trust can be considered a business for the purpose of claiming a deduction under the law, there is no plausible reason why a guardianship*2240 may not also be so considered. Both are in the same fiduciary capacity and perform, generally speaking, the same duties. We can find no reasonable distinction between the deduction claimed here and those which have been allowed in the cases hereinbefore discussed, and we, therefore, conclude that the respondent erred in disallowing the deduction claimed. See, also, .
Reviewed by the Board.
Judgment will be entered under Rule 50.