1935 BTA LEXIS 901">*901 Petitioner deducted from income of decedent's estate in 1929 and 1930 certain amounts paid attorneys in those years for defending the estate in litigation involving the income tax liability of decedent as member of a business partnership. Respondent disallowed all but 10 percent of the amounts thus deducted. Held, that the attorneys' fees were not a business expense of the estate and, therefore, were not deductible from the gross income of the estate.
32 B.T.A. 728">*728 The respondent determined deficiencies in income tax against the estate of David H. E. Jones for the years 1929 and 1930 in the respective amounts of $2,014.31 and 7,178.13. The sole issue presented is whether the respondent erred in refusing to allow, as necessary 32 B.T.A. 728">*729 business expenses, the full amounts paid by the petitioner in the taxable years as attorneys' fees for services in connection with litigation involving the decedent's tax liability for the years 1917, 1918, and 1919.
FINDINGS OF FACT.
David H. E. Jones died on December 15, 1919, and on December 23, 1919, his will1935 BTA LEXIS 901">*902 was admitted to probate and petitioner appointed executrix by the Surrogate's Court of Kings County, New York. Since December 23, 1919, and through the year 1930 petitioner has been administering Jones' estate.
Jones, at the time of his death and prior thereto, and his son Howard were the sole partners of the firm known as James W. Elwell & Co., 17 State Street, New York City. At Jones' death this firm began to liquidate and has continued to do so through the year 1930.
Petitioner has included in the income tax returns of the estate for the years 1920 to 1930, inclusive, the proportionate share of the estate in the income of the Elwell partnership then in liquidation. About July 1921 an examination was made by an internal revenue agent of the decedent's income and excess profits returns for the years 1917 and 1918 and for that period of 1919, January 1 to December 15, next preceding decedent's death, and the determination of additional taxes and a refund of taxes were reported, as follows:
| Additional tax for the year 1917 | $160,941.56 |
| Additional tax for the year 1918 | 106,906.21 |
| Refund of tax for the period from Jan. 1 to Dec. 15, 1919 | 124,261.64 |
Decedent's1935 BTA LEXIS 901">*903 principal source of income in 1917, 1918, and 1919 was the Elwell partnership business, and the additional taxes and refund both resulted from adjustments in the income from the partnership received by the decedent during this period.
Petitioner hired certain lawyers, Wood, Molloy & France, of New York City, to defend the estate's interest against the respondent's claims for additional taxes and to assist in recovering the refund. From July 1921 until April 1930 this firm of lawyers rendered continuous and extensive professional services to petitioner toward this end, the respondent throughout refusing to allow petitioner's claims, and as a result of these services and the proceedings taken, orders were entered by this Board decreeing that there was no additional tax liability for the years 1917 and 1918, and under a court judgment the sum of $124,280.30 for the period January 1 to December 15, 1919, was refunded, plus interest in the sum of $68,505.86.
32 B.T.A. 728">*730 Petitioner returned as income of the estate in 1930 the sum of $68,505.86 received in that year as interest on the sum refunded.
For their professional services in the tax litigation petitioner paid $10,000 to1935 BTA LEXIS 901">*904 the attorneys in 1929, and in 1930 petitioner paid them $50,347.60, of which latter amount the sum of $347.60 represents disbursements. The amounts thus paid were reasonable compensation for the services rendered. Petitioner claimed that these amounts were deductible in full as necessary business expenses of the estate in the respective years. Respondent allowed 10 percent of the sums so paid, or $1,000 in 1929, and $5,034.76 in 1930, as properly attributable to the earning of petitioner's gross income in those years, but disallowed the balance on the ground that they were attributable to the corpus of the estate.
OPINION.
MATTHEWS: The sole question before us is whether the petitioner, as executrix of the will of her husband, David H. E. Jones, who died on December 15, 1919, was entitled to deduct in 1929 and 1930 the full amounts of attorneys' fees paid out in those years for services in Federal income tax litigation involving income of decedent as a member of a partnership, the estate having been in process of administration and the partnership in liquidation since the decedent's death. The petitioner had successfully defended the estate before this Board against additional1935 BTA LEXIS 901">*905 taxes sought to be imposed by the respondent for the years 1917 and 1918, and had recovered by a suit in court a refund of tax for that period of 1919 before decedent's death. The interest@ on the refund was returned by petitioner as income in the year it was received. Of the sums paid out by the petitioner as attorneys' fees in the taxable years the respondent allowed one tenth as attributable to the earning of gross income in those years, but disallowed the remaining nine tenths on the theory that it was chargeable against the corpus of the estate and represented capital expenditures which were not deductible from the income of the estate.
Sections 23(a) and 162, Revenue Act of 1928, set out in part in the margin, are controlling. 1
It must be determined1935 BTA LEXIS 901">*906 whether the attorneys' fees constituted "ordinary and necessary expenses" and also whether they were paid "in carrying on any trade or business."
32 B.T.A. 728">*731 The respondent directs our attention to the provisions of article 282 of Regulations 74, as follows:
* * * The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. * * * Expenses of the administration of an estate, such as court costs, attorneys' fees, and executors' commissions, are chargeable against the corpus of the estate and are not allowable deductions. * * *
It is contended by the respondent that the petitioner, in asserting claims which arose in the decedent's lifetime, was merely protecting something which properly constituted part of the corpus of the estate, and it is denied that the petitioner was carrying on a business.
We are of the opinion that the position of the respondent must be sustained. In , a similar question was presented, the issue being the correctness of the respondent's action in refusing to allow as a deduction from gross income the sum of $10,000 paid1935 BTA LEXIS 901">*907 out during the taxable year by the decedent's estate as legal fees in connection with a suit brought against the estate for an additional estate tax, and it was held that such deduction was properly disallowed, as being a corpus charge which was not deductible in determining the net income of the estate for the taxable year. The Board said:
* * * Ordinarily the purpose of the administration of an estate is to collect together the assets, pay the debts and claims against the estate and make distributions of remaining assets according to the terms of the will or according to the law of the jurisdiction. The respondent's demand for the payment of an additional estate tax would come within the classification of debts and claims against the estate and any action taken by the executors toward the settlement of it either by contesting it in court or by paying it would not constitute the carrying on of business, but would be the performance of a usual and ordinary duty arising from the administration of an estate. Consequently, any legal expenses incurred in performing such a duty would be in the nature of pure administration expenses.
1935 BTA LEXIS 901">*908 See . Cf. , affirming ; ; ; .
The petitioner has cited and places reliance on the case of (C.C.A., 2d Cir.), which affirmed the decision of this Board reported at . There the question at issue was the deductibility of attorneys' fees paid by a guardian on behalf of its ward in a proceeding instituted in the orphans' court by the trustee under a will to determine to whom the share of a deceased beneficiary should be paid. The guardian participated in the action and succeeded in establishing its claim that the 32 B.T.A. 728">*732 ward was entitled to be paid the deceased beneficiary's share. The court held that the attorneys' fees were deductible, saying:
* * * But, where a guardian incurs reasonable and necessary expenses in securing the income to which it is entitled as1935 BTA LEXIS 901">*909 guardian, it is acting wholly in its capacity as a fiduciary, and is carrying on the business of administering its ward's estate. The income received is the income which results from the guardian's conduct of that business, whatever may be the source of the income. The expenses of the guardian are the expenses of that business. * * *
In , the Circuit Court of Appeals for the Fifth Circuit declined to follow the Wurts-Dundas case and because of this conflict of decisions certiorari was granted by the Supreme Court of the United States in the Van Wart case. In an opinion rendered on April 29, 1935, , the Supreme Court affirmed the decision of the lower court in the Van Wart case and in effect disapproved the reasoning contained in the above quoted opinion of the circuit court in the Wurts-Dundas case.
In view of the foregoing we hold that the respondent did not err in refusing to allow as deductions from the gross income of the estate for the taxable years the full amounts paid by the petitioner as executrix in those years to attorneys for legal services rendered.
Reviewed1935 BTA LEXIS 901">*910 by the Board.
Judgment will be entered for the respondent.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
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 * * *. ↩