*1995 1. Where the proof does not show that petitioner was engaged in a trade or business, deduction of attorneys' fees, salaries to secretary and bookkeeper, and rent of a room used as an "office" are not deductible as ordinary and necessary expenses.
2. Depreciation is not allowable where there is no evidence that the property was used in a trade or business.
*937 This proceeding is for the redetermination of deficiencies in income taxes for the years 1922, 1923, 1924, and 1925 in the respective sums of $3,764.61, $3,571.07, $2,804.23, and $3,066.60.
The petitioner alleges that the respondent erred in refusing to allow as deductions from gross income (1) payments made to attorneys for professional services, (2) salaries paid to a secretary and bookkeeper, (3) rent for an office, and (4) depreciation.
FINDINGS OF FACT.
The petitioner is a resident of Pompton Lakes, N.J. She was born November 6, 1880, is the daughter of William Hall Walker, deceased, and has been an invalid physically since infancy, as the result of an attack of infantile*1996 paralysis. While somewhat improved *938 in health, she is unable to walk except with the assistance of two persons and is physically unable to attend to the details of her affairs, although she is consulted by those employed by her on matters of importance concerning which she renders her decisions.
Petitioner's father, William Hall Walker, was one of the earliest stockholders in the Eastman Kodak Co. of Rochester, N.Y. William Hall Walker died in 1917 and at the time of his death the bulk of his personal estate consisted of a large number of shares of the Eastman Kodak Co.
After the death of William Hall Walker his last will and testament was duly admitted to probate in the Surrogate's Court of the County and State of New York. The pertinent parts of the said last will and testament read as follows:
I have given much consideration to the wisest manner of disposing of my estate at Great Barrington, Massachusetts, known as "Brookside." I desire that my wife and daughter shall after my death continue to use and occupy "Brookside" so long as they desire to do so, free from the burden of its detailed management. For this reason I have made the provisions herein contained*1997 concerning "Brookside" and the trust fund provided for its maintenance and upkeep.
* * *
I give, devise and bequeath my real estate and property known as "Brookside," in the Town of Great Barrington, County of Berkshire, Commonwealth of Massachusetts, together with all works of art, books, household furniture, silver, china, cut glass, rugs and other articles used in connection therewith, and all automobiles, vehicles, farm and garden, implements, tools and supplies, and other articles used in connection with said estate, and all live stock and poultry, game and fancy birds, such as ducks, pheasants, swans, etc. thereon, unto my Trustees hereinafter named, to have and to hold the same for the use of my said wife, HARRIET D. WALKER, and my daughter, GERTRUDE D. WALKER, for and during the terms of their natural lives, or until they or the survivor of them shall by request in writing to the said Trustees direct the sale and disposition of the same. It is my desire that my said wife and daughter shall have free and unrestricted right to the use and occupancy of the said estate and all its appurtenances, and all of said personal property, so long as they or either of them shall so*1998 desire, and that they and each of them may freely use and consume any and all of said personalty; and my Trustees shall not be accountable for any of such personalty, except any which may be in existence at the termination of the trust, and shall then come into their actual possession.
I also give unto my said Trustees the power in their discretion to tear down or remove or cause to be torn down and removed, any of the farm and poultry buildings upon the said estate known as "Brookside" which they may deem unnecessary to maintain on account of the cost of the upkeep of the same.
I also give and bequeath to my said Trustees the sum of One Million Five Hundred Thousand Dollars ($1,500,000) to be invested and re-invested by them, and direct that the income thereof, or so much as may be necessary, be used by them for the payment of the taxes, assessments, insurance and other charges, and in the general maintenance, replacement and upkeep of "Brookside", *939 paying over one-half of the excess of the annual income, if any, unto my wife, and one-half thereof unto my daughter, during their joint lives, and after the death of one, dividing the same in the above mentioned ratio*1999 between the survivor and the executors or administrators of the one so dying until the death of the survivor, if my daughter shall die before my wife, and paying all of said excess income to my daughter, if she shall survive my wife.
The above trusts of the real estate and property known as "Brookside" and of the personal property to the extent of One Million Five Hundred Thousand Dollars ($1,500,000) aforesaid may be terminated in either of the following ways, and I make the following provisions for the distribution of principal accordingly:
(1) By the death of the survivor of my said wife and daughter;
(2) By a joint request in writing signed by my said wife and daughter, or the survivor of them, addressed to my Trustees requesting the termination of the said trust.
Upon the termination of the said trust my said Trustees shall in their discretion and as soon as they deem it wise with due regard to the best interest of my estate, sell and convert all of the principal of the said trusts into money, which shall then fall into and become a part of my residuary estate.
IV. I give and bequeath unto my Trustees hereinafter named Seven Hundred (700) shares of the common capital*2000 stock of Eastman Kodak Company of New Jersey, to hold the same in trust and receive the dividends thereon, and to pay over the net dividends as and when received, unto my daughter GERTRUDE DUDLEY WALKER, for and during the term of her natural life, and at her death, I give and bequeath said Seven hundred (700) shares unto such person or persons as my said daughter may by her last will and testament nominate.
V. All the rest, residue and remainder of my estate, including all lapsed legacies, I give, devise and bequeath unto the LAWYERS TITLE AND TRUST COMPANY, a corporation organized under the laws of the State of New York, and RICHARD T. GREENE, Counsellor-at-law, of the City of New York, as Trustees, in trust however, for the following uses and purposes, that is to say:To invest and re-invest the same, and after the payment of all necessary and proper charges and expenses against the same, to pay the net income arising therefrom quarterly, beginning with the day of the date of my death, as follows:
One-half thereof to my beloved wife, HARRIET DANA WALKER, and one-half thereof to my daughter, GERTRUDE DUDLEY WALKER, during the joint lives of my said wife and daughter, and*2001 upon the death of my said wife, to pay the whole of said income to my said daughter, for and during the term of her natural life.
* * *
VIII. I have for many years been the owner of a large number of shares of the Eastman Kodak Company. I wish my executors and trustees to have absolute freedom of decision and action regarding the sale of such shares, and I expressly authorize them to continue to hold such shares as a part of the investment of the trust funds herein provided, so long as in their judgment it may be advisable and for the best interest of my estate so to do. From my personal knowledge of this Company, I have perfect confidence that the Company is and probably always will be ably managed, and I caution my executors and trustees that the shares of this company are closely held, and, therefore, have a limited market, and that to throw them suddenly upon the market *940 or in large blocks would probably result in their being sold for far less than their real value.
I also hold certain other investments in stocks and well selected bonds and I authorize my executors and trustees to continue to hold them in whole or in part in the investment of the funds of*2002 the trusts herein provided for.
The executors and trustees named in said will duly qualified and thereafter, pursuant to the provisions of the will, they set up three trusts: (1) A trust for the sole benefit of petitioner, consisting of 700 shares of the Eastman Kodak Co. stock, the income from which is paid to the petitioner; (2) the "Brookside Trust," consisting of the Brookside property at Great Barrington, Mass., together with personal property which was valued on May 19, 1922, in the sum of $1,778,492. Originally the personal property held in the "Brookside" trust consisted almost entirely of shares of stock in the Eastman Kodak Co. The personal property contained in the "Brookside Trust" was greater in value than the sum of $1,500,000, which sum was the amount the will directed the trustees to hold for the purposes of said trust; (3) the residuary trust, the personal property of which was valued on May 19, 1922, in the sum of $1,592,445.57. The corpus of this trust consisted principally of shares of the Eastman Kodak Co. common stock.
Under the will the petitioner was not entitled to receive any of the corpus of any of the trusts, her interest being limited to income*2003 for life.
The principal source of petitioner's income was the above-mentioned trusts. During the years in question she engaged to a slight extent in some lumbering operations on her own behalf and the record shows that in 1926 she made a profit on the sale of a house and lot known as 23 West 54th Street, New York City.
Early in 1922 or shortly prior thereto the trustees of the estate of William Hall Walker sold or exchanged 6,234 shares of the Eastman Kodak Co. common stock. The 700 shares constituting the trust established for the sole benefit of petitioner were not included in the sale. All of the stock sold was sold or exchanged at less than the market price and 5,534 shares were sold at $662.50 per share at a time when the market price of Eastman Kodak Co. stock sold in the open market was $712 per share, or more.
The trustees also set up a sinking fund, paying into such fund a proportion of the income of the estate.
The petitioner consulted counsel with reference to the management of the estate by the trustees. Pursuant to the advice of these counsel, petitioner's personal attorney made investigations with reference to the sale of the Eastman Kodak Co. stock by*2004 the trustees of the estate of William Hall Walker. These investigations involved conferences with the trustees, conferences with persons informed as to *941 the conditions of the stock market and with officials of the Eastman Kodak Co. Thereafter, in the spring of 1924, the petitioner, pursuant to advice of counsel, filed objections in the Surrogate's Court of the County of New York to an intermediate accounting made by the trustees of the estate of William Hall Walker. The petitioner prayed the court for a decree: (1) Surcharging the account of the trustees with the difference between the amount realized by them on the sale or exchange of the Eastman Kodak Co. common stock hereinbefore referred to and the amount "which should have been realized for such stock to wit: To a sum in excess of Two Million ($2,000,000) Dollars"; (2) directing that the amounts of income set aside as a sinking fund be distributed to the persons entitled thereto, and (3) directing that the principal of the "Brookside" trust be reduced to and maintained at $1,500,000 and that any excess over such sum be transferred to the "residuary trust"; (4) granting such other or further relief, or both, as might*2005 be just and proper.
The objection with respect to the sale of the Eastman Kodak Co. stock was based on the contention that the trustees made the sale or exchange of such stock negligently, improvidently and improperly, without proper exercise on their part of the discretion given them by the will of William Hall Walker, deceased, as to the time for and method of disposing of such stock and without proper effort to ascertain or obtain the fair market value of such stock at the time of such sale or exchange, or whether it was for the advantage of the trust estate to hold the stock for a longer period.
The proceeding initiated in the surrogate's court by these objections to the trustees' accounting was still in progress at the time of the hearing. At that time a referee to whom the matter was referred had reported adversely to the petitioner's contentions but this report had neither been confirmed nor disapproved by the surrogate, although opposed by the petitioner.
The petitioner paid for the legal services hereinbefore referred to the following sums:
| 1922 | $2,250 |
| 1923 | 12,200 |
| 1924 | $16,500 |
| 1925 | 9,875 |
The widow of William Hall Walker, who was the petitioner's*2006 stepmother, took no part in the prosecution of the proceedings in the surrogate's court and did not pay any of its expense or any of the expense of the investigations made prior thereto with reference to the sale of the Kodak Co. stock.
In 1925 the petitioner paid to a firm of attorneys practicing at Utica, N.Y., the sum of $3,000 for professional services and disbursements. These professional services were performed in that year in connection with the purchase by petitioner of stock in the *942 Adams Sanatorium, which owned property at Pompton Lakes. It was the petitioner's intention through this purchase to acquire some of the property owned by the Adams Sanatorium at Pompton Lakes, and she did so acquire it. Some of the property so acquired has been used by the petitioner as a personal residence, but the larger amount has been developed as a business investment.
At the time of William Hall Walker's death he owned a house and lot in New York City, known as 23 West 54th Street. This had been his city residence before his death. Pursuant to the provisions of his will the trustees were directed to sell this property in their discretion within a reasonable time after*2007 his death. In 1919 the trustees offered the property for sale. Thereupon the petitioner consulted real estate men in New York City as to the advisability of buying this property and as to its probable salability after such purchase. She then purchased the property from the trustees for $100,000. Miss Walker herself lived in the house only three months thereafter, but her stepmother remained in the house for a considerable period of time without paying rent therefor. Petitioner, through her agents, endeavored to sell the property and consulted real estate men and architects with reference to the advisability of converting it into apartments, the cost thereof and the probable returns of income therefrom. Her secretary and bookkeeper on various occasions showed the house to possible purchasers. Petitioner sold the house in 1926 at a profit of $50,000.
During the tax years in question the petitioner employed a confidential secretary, whose name was Helen S. Watts. The latter was the petitioner's cousin and visited at her home more or less frequently from 1908 to 1913 and from 1913 was with petitioner constantly until the death of the latter's father, acting largely as a companion. *2008 After the death of William Hall Walker, Helen S. Watts became the petitioner's confidential secretary and occupied this position from that time up to the date of the hearing in this proceeding. She conferred with the petitioner concerning all her financial affairs, including collection and disbursement of income and the receipt and checking of reports. She conducted all the petitioner's correspondence in reference to her affairs and on her behalf interviewed trustees and petitioner's legal advisors.
In connection with the objections made by petitioner to the sale by the trustees of the Eastman Kodak Co. common stock the petitioner's confidential secretary checked various reports, made investigations of sales of the stock in the stock market, and on petitioner's behalf interviewed her counsel. On petitioner's behalf, also, the secretary corresponded with the trustees with reference to the maintenance, upkeep and operation of the "Brookside" property, insisting successfully *943 that weekly detailed reports of the expenses of operating "Brookside" be made to petitioner. As part of this scrutiny of the operation of "Brookside" the secretary made trips to "Brookside" and*2009 had conferences with the superintendent on the premises. The petitioner's secretary after the year 1921 carried on correspondence with real estate people with a view to the utilization or sale of the property known as 23 West 54th Street, New York City. She also at times went to New York to show the property to possible buyers.
In 1923 the petitioner purchased from the trustees of the estate of William Hall Walker the dead wood found on the "Brookside" property and entered into a contract on a "cost-plus" basis for the preparation of this wood for sale. Operations connected with this project were started in 1924 and the petitioner's secretary had the general oversight of the project. All bills in connection therewith were sent to petitioner, were checked by her secretary and her bookkeeper, and payments on the cost-plus basis were made by the petitioner. The petitioner, who by 1924 had become able to ride horseback, sometimes went to "Brookside" and inspected the so-called lumber operations personally. About one-third of the secretary's time was occupied in connection with the matters herein described.
The petitioner also employed a bookkeeper. Under the direction of the*2010 secretary this bookkeeper kept all the books relative to petitioner's income and expenses and also relative to matters hereinbefore referred to. She assisted the secretary in checking the management of the "Brookside" trust and also in the lumber operation and in the investigation of the estate's affairs, with special reference to the sale of the Kodak Co. stock.
The salaries paid to the secretary and the bookkeeper, respectively, in the years in question were as follows:
| Secretary | Bookkeeper | |
| 1922 | $2,750 | $900 |
| 1923 | 4,200 | 1,800 |
| 1924 | 4,200 | 1,800 |
| 1925 | 4,200 | 1,800 |
During the years in question the petitioner lived at a sanatorium at Pompton Lakes conducted by one W. Curtis Adams. She occupied at various times a varying number of rooms in the sanatorium, depending on the amount of space her treatment at the sanatorium required her to have. Among these rooms on the same floor with the petitioner's own personal sitting room was a room used by the secretary and bookkeeper for working purposes. This room contained office furniture, files, etc. The petitioner paid to the sanatorium for *944 services and space occupied by her a fixed sum yearly. *2011 During each of the years now in question $1,200 of such yearly sum was apportioned as the rent for the said room so used by the secretary and bookkeeper in connection with petitioner's affairs. This room was known and designated as the "office."
During the taxable years petitioner did not own stock in the corporation which owned the building in which the "office" was located. In her income-tax report for the years 1922, 1923, 1924, and 1925 the petitioner deducted from gross income the amount paid for attorneys' fees as hereinbefore stated in each of said years and also the salaries paid respectively to her secretary and bookkeeper, together with the sum of $1,200 in each year as rental for her office. In her income-tax reports for the years 1922, 1923, and 1925 she also claimed depreciation in the sum of $2,000 per year on the premises 23 West 54th Street, New York City, omitting through error to claim such depreciation for the year 1924. This depreciation was calculated at the rate of 2 per cent per year on the purchase price of $100,000. The respondent disallowed the deductions claimed for attorneys' fees, salaries of the secretary and bookkeeper and the amount paid for*2012 the rent of the office, on the ground that such payments were payments of personal expenses of the petitioner, and that if the amounts paid as attorneys' fees were necessary expenses of business they were paid for the benefit of petitioner's stepmother as well as for petitioner. The respondent disallowed the claim for depreciation on the ground that the petitioner purchased the premises 23 West 54th Street, New York City, as a residence and not for the purpose of investment or to receive income therefrom.
OPINION.
VAN FOSSAN: The first issue is whether or not the amounts paid by the petitioner to her attorneys in the years 1922, 1923, 1924, and 1925 are deductible under the provisions of the revenue acts applicable.
It is apparent from the provisions of the last will and testament of William Hall Walker, deceased, as set forth in the findings of fact, that the testator conferred upon the trustees of his estate large discretion with respect to the management and sale of the securities which after his death became a part of the residuary trust and the so-called "Brookside Trust." Admittedly, the trustees in the exercise of their best judgment and discretion, had the legal right*2013 to sell or to continue to hold the securities. The trustees chose to exercise this discretionary power of sale with respect to a large block of Eastman Kodak Co. stock. The petitioner complained of this exercise of their power. The trustees also performed certain *945 other acts related to the administration of the trust to which the petitioner objected. She, therefore, retained attorneys who advised her, made extensive investigations on her behalf and initiated and prosecuted a proceeding in the name of the petitioner against the trustees in the Surrogate's Court of the County and State of New York.
Even if there were sufficient evidence in the record of the present proceeding to enable us to determine the merits of the controversy between the petitioner and the trustees of the estate left by her father, it is not within our province to make such a determination. The merits of that controversy are before the courts of the State of New York for solution. The sole question before us in regard to these court proceedings and to the consultations and investigations preliminary thereto is whether or not the sums of money paid to her attorneys covering fees and expenses, *2014 are deductible from income for the taxable years in which they were paid.
The litigation in the Surrogate's Court of New York County is a proceeding which, in effect, charges the trustees with maladministration of the estate of William Hall Walker, deceased. If the litigation were successful the court would charge back to the trustees a large amount of money, claimed by the petitioner to have been lost to the estate because of the said alleged maladministration. There would also result, in the event of such success, a shifting of some of the assets of the estate to the residuary trust from the "Brookside Trust," a half interest in the surplus income of which latter trust the petitioner is entitled to in any event under the provisions of her father's will. The success of the proceeding would not, however, create for the petitioner any new rights. Her sole right is a right to income from the capital assets of the trusts established by her father's will. And whatever the capital value of said trusts at any time may be, that right, which was created by the will of petitioner's father, is not dependent upon her success or failure in the proceeding in the surrogate's court. That*2015 right can not be enlarged by a final decree in the said proceeding. Nor would the success of the proceeding create for petitioner any new source of income. So far as her income is derived from her father's estate, the source of that income is the estate itself, however much the assets of that estate may vary in amount and value from time to time. It is true, of course, that the proceeding in the surrogate's court, if successful, would result in increasing the capital assets of the estate available to produce income for the petitioner. But we do not consider that it necessarily follows that the amount paid to petitioner's attorneys for fees and expenses in respect to the prosecution of the proceeding and the investigations preliminary thereto is *946 therefore deductible from the income of the petitioner either in the years in which paid or otherwise.
Under the will of William Hall Walker, deceased, it was the business of the trustees to administer the estate left by him and to pay over the net income of the several trusts to the beneficiaries entitled thereto. It is apparent from the will that the testator intended that his daughter should be a "passive recipient" of*2016 the income he provided for her (), and should not be burdened with the management of any part of his estate. If, of her own motion or acting on legal advice, she chose to challenge the good faith, or the sound judgment of the trustees or the exercise of their discretion in the management of the estate, such challenge and all proceedings connected therewith must be considered as personal to the petitioner and all expenses growing out of such challenge or legal proceedings connected therewith are the personal expenses of petitioner and are not deductible from income under any section of the statute. If it be said that petitioner's income - her property - had been depleted through waste of the capital assets of the estate by the trustees and that the proceedings brought by her were necessary for the protection of her property, then the reasoning contained in , is in point. "Expenses of this sort must fall within those general costs of protecting one's property for which the statute makes no allowance." Nor does the fact that the proceedings in the surrogate's*2017 court might possibly result in increasing the capital assets of the estate, thereby increasing petitioner's income, render petitioner's prosecution of such proceedings a business, the expenses of which are deductible under the provisions of section 214(a)(1) of the Acts of 1921, 1924, and 1926. In order to bring petitioner's activities in respect to her objections to the administration of the estate of her father within the purview of that section, it would be necessary to stretch the definition of the words "trade or business" beyond their legal intendment. Petitioner argues that in some instances, such as , we have held that fees paid to attorneys for services in actions in the courts were deductible. However, in such cases the facts were peculiar and unusual and clearly distinguishable from those of the present proceeding. Petitioner contends also that this Board has allowed the deduction of fees paid to attorneys for services rendered in proceedings related to the administration of estates and that the proceeding brought by the petitioner in the Surrogate's Court of New York County concerns the management of the estate*2018 of petitioner's father, citing ; ; . Those proceedings, however, related *947 to the deduction of attorney's fees paid by fiduciaries, and we based our decisions in the proceedings on the proposition that under the law it is the duty of fiduciaries to protect the interests and income of the estates committed to their care; that so far as such protection is a duty it is the business of the fiduciaries, and that therefore any expenses, including attorneys' fees, properly incurred are expenses incurred in carrying on a business. It is manifest, therefore, that the decisions referred to are not applicable to the facts of this proceeding. We are, therefore, of the opinion that the payments to attorneys now under discussion were not proper deductions from petitioner's income.
There remains for our consideration under the first issue the question of the deductibility from income of the sum of $3,000 paid to a firm of attorneys in Utica, N.Y., in connection with the purchase by petitioner of stock in the Curtis Adams Sanatorium, *2019 in which she was a patient. We think it is clear from the facts that this expenditure constituted a part of the cost of the property purchased and it is, therefore, not deductible from income.
The second question is whether the petitioner is entitled to make a deduction from income on account of depreciation of the premises known as 23 West 54th Street, New York City. This property had been used as a home by petitioner's father and was purchased by her from the trustees. Though probably purchased with the hope of profitable resale, the property was used for no purpose during the taxable years.
To be allowable depreciation must have occurred to property "used in a trade or business." The evidence does not indicate that this property was so used or that, in fact, petitioner was engaged in any trade or business. We must, therefore, disallow the deduction.
The remaining issues are whether a portion of the salaries paid to petitioner's secretary and bookkeeper and the sums paid annually for the rent of an office by petitioner are deductible.
Admittedly, a large part of the time of the secretary and bookkeeper was occupied in matters which were purely personal affairs of*2020 the petitioner. It is claimed, however, that the time spent by the secretary and bookkeeper in matters connected with the investigation of the sale of the Kodak Co. stock by the trustees of the estate of petitioner's father and in matters related to the management of the so-called "Brookside Trust" was spent on account of a trade or business carried on by the petitioner.
We have already determined that the investigations into the sale of the Kodak Co. stock and the prosecution of the proceeding in *948 the Surrogate's Court of the County of New York did not constitute a business carried on by petitioner. In our opinion the same conclusion must be reached with respect to the activities engaged in by the petitioner's secretary and bookkeeper in reference to the management of the "Brookside Trust." In his will the petitioner's father expressly stated his desire that his daughter should be free from the burden of the responsibility of management of the "Brookside" property. It is quite natural, however, for a beneficiary under a will to exhibit a personal interest in the management of property held in trust for her. And the secretary and bookkeeper undoubtedly, at petitioner's*2021 behest, busied themselves to a very considerable extent in the affairs of "Brookside." But being busy about matters does not constitute such matters a business within the meaning of the statute. There is no evidence of weight that the trustees of the estate gave over the management of "Brookside" to the petitioner and no evidence that they did not continue to manage it in accordance with the duty imposed by the will of William Hall Walker. It is, therefore, to be inferred that "Brookside" continued to be managed by the trustees who qualified as such in the State of Massachusetts. While it may be true that the trustees received and acted on suggestions made by the petitioner or her secretary with reference to the management of "Brookside," and so acted as to decrease the expense of management and thereby increase the surplus income distributable among the beneficiaries of the estate, nevertheless it is obvious that the management was not the business of the petitioner within the meaning of the statute.
The facts show that the secretary and bookkeeper were employed by the petitioner in the conduct of a small lumber operation, but the amount of time spent by them in connection therewith*2022 appears to have been negligible and can not be determined from the proof.
Thus, even if it were held that in this respect petitioner was engaged in a trade or business, it would be impossible to determine the amount of the deduction allowable on account of part of the salaries paid to petitioner's secretary and her bookkeeper. Similarly, we can not allow, for want of proof of the allocable part thereof, any of the rent of the office occupied by petitioner and her employees. The evidence shows that by far the larger share of the activities carried on in the office were personal in nature. The deductions are not allowable.
Reviewed by the Board.
Decision will be entered for the respondent.