*1409 DEDUCTIONS - ORDINARY AND NECESSARY EXPENSES - CARRYING ON BUSINESS. - An estate which was continued by tacit consent of the residuary legatees was not engaged in carrying on any business as a result of its activities in keeping its funds invested in marketable securities and collecting the income therefrom, Higgins v. Commissioner,312 U.S. 212">312 U.S. 212, followed, nor was it engaged in any business through its activities in connection with various corporations in which it held stock, particularly where it was merely trying to protect its investment in corporations and was not using the corporations as a medium for carrying on any business of its own. Washburn v. Commissioner, 51 Fed.(2d) 949, and Foss v. Commissioner, 75 Fed.(2d) 326, discussed and distinguished.
*1114 The Commissioner determined deficiencies in income tax of $15,891.55 for the year 1935, $2,631.87 for 1936, and $796.55 for 1937. The sole question for decision is*1410 whether or not a so-called management fee of $6,000 paid by the petitioner in each taxable year and fees totaling $1,872 paid to certified public accountants and a reporting company in 1937 are deductible from the petitioner's gross income as ordinary and necessary expenses paid or incurred in carrying on any trade or business. The Commissioner concedes that he erred in including dividends of $4,436 in the petitioner's income for 1935. His other adjustments are not contested.
FINDINGS OF FACT.
Mary R. Donald died testate on April 3, 1933, while residing in the State of New York. Scott Scammell was appointed executor of her estate and qualified on April 26, 1933. He was the husband of Maysie Bruce Scammell, a niece of the decedent. He has acted as attorney for the estate at all times since April 3, 1933.
The will of the decedent gave the executor full power and authority "to sell, mortgage, lease, convey or dispose of any or all of my property, both real and personal, at public or private sale for cash or upon credit at such time and upon such terms and in such manner as he shall deem best for the purpose of paying the legacies hereby made and dividing the residue as herein*1411 provided."
*1115 The will gave cash legacies of $1,000 each to certain servants and $50,000 to Scammell. It also provided a $10,000 trust fund for each of several children during their minorities. The residue of the estate was to be divided into three equal parts, one part each to be distributed to Ida M. Bruce, Maysie Bruce Scammell, and Elizabeth Bruce Howe. Ida M. Bruce was the mother of the other two residuary beneficiaries. She died in May 1939. All of the legacies, except the one to Scammell and the residuary bequests, were paid in full before the end of the year 1935.
No account for the estate has been filed and no residuary legatee has ever requested that the estate be distributed. Scammell is under the impression that the residuary legatees have always been willing to have him administer and manage the estate for them as long as he cares to do so.
Scammell filed with the collector of internal revenue for the second district of New York income tax returns for the estate for the years 1935 and 1937, and a fiduciary return for the year 1936. An income tax return for the estate for 1936 was prepared by the office of the Commissioner.
The assets of the*1412 estate and their values at the close of each of the taxable years were as follows:
| Value | Value | Value | |
| Assets | Dec. 31, 1935 | Dec. 31, 1936 | Dec. 31, 1937 |
| Cash | $31,810 | $42,838 | $25,283 |
| $30,000 Evans Mortgage | 22,500 | 22,500 | 22,500 |
| Vetchorine note | 1,000 | n1 | n1 |
| $10,000 Richey, Brown & Donald, | |||
| Inc., mortgage | 10,000 | ||
| $14,000 Belle Mead Sweets note | n1 | n1 | n1 |
| Marketable stocks and bonds | 1,947,724 | 1,966,553 | 1,650,518 |
| Stock of close corporations: | |||
| 693 shares of S. L. Allen & Co., | |||
| 7% cumulative preferred | 51,975 | 51,975 | 51,975 |
| 498 shares of Chateau D'Armes | |||
| Realty Corp. common | 498 | 498 | 498 |
| 911 shares of Hamilton Investment | |||
| Co. common | 55,197 | 55,197 | 55,197 |
| 850 shares of Richey, Browne & | |||
| Donald, Inc., preferred | 42,500 | 42,500 | 42,500 |
| 76 shares of Belle Mead Sweets "B" | (1) | (1) | (1) |
| 796 shares of Merchants | |||
| Refrigerating Corp. common | 2,388 | 4,179 | 6,368 |
| 312 shares of Merchants | |||
| Refrigerating Corp. preferred | 14,664 | 21,528 | 27,456 |
| Total | 2,170,256 | 2,207,768 | 1,892,295 |
*1413 The liabilities of the estate during the taxable years consisted principally of bank loans and claims for taxes ranging in total amount between $100,000 and $125,000. The annual gross income of the estate during those years was about $100,000, and distributions to the residuary legatees amounted to about $67,500 in 1936 and $72,000 in 1937. The record does not show whether or not there was any distribution in 1935 to the residuary legatees.
*1116 The estate sold or disposed of stocks and bonds in 17 transactions during the years 1935 to 1937, inclusive. It acquired stocks and bonds during that same period in 20 separate transactions. The following table shows the amount realized from disposals and the value at the end of the year of acquisitions made during the year:
| 1935 | 1936 | 1937 | Total | |
| Proceeds from disposal of | ||||
| securities | $116,215.86 | $109,825.67 | $31,196.00 | $257,237.53 |
| Value of securities | ||||
| acquired | 14,579.00 | 172,526.00 | 8,615.50 | 195,720.50 |
A part of the proceeds from securities disposed of in 1935 was used to pay estate taxes.
Scammell has been engaged for many years in the practice of law in New York and New Jersey. He*1414 has an office in New York City. Books and records of the Conald estate are kept in that office. He employs an attorney and a secretary, each of whom devotes part time to the assistance of Scammell in handling the affairs of the estate. Scammell has had business experience as a director or officer of banks and manufacturing companies.
Scammell charged the estate and was paid by the estate a so-called management fee of $6,000 in each of the taxable years. He took into consideration, in fixing this fee, the annual salary of about $5,000 which he paid his attorney and the salary of $2,080 which he paid his secretary, the office rent, and the services rendered that he considered were in addition to those for which he would be compensated by an executor's commission upon the winding up of the estate. He spent about 230 working hours annually during the taxable years in performing the services described above. His attorney spent from 150 to 200 working hours annually, and the secretary spent about half her time in connection with those services.
The services which he rendered to the estate included the following: Collecting and depositing income; checking monthly bank statements; *1415 holding conferences with banks and the residuary legatees in connection with bank loans; checking interest payments on bank loans; attempting to collect amounts due; supervising the audit and the disbursement of the income; conferring with brokers and the residuary legatees in connection with the sale, exchange, and reinvestment of assets; checking and studying market price of securities daily for the purpose of determining whether or not to make sales or purchases; checking the periodic reports of the corporations in which assets were invested; studying plans of reorganization proposed for corporations in which the estate had an interest; studying surveys by investment counsel; consulting his brother-in-law, a broker, in order to reach decisions as to purchase and sale of assets; and keeping in touch with*1117 and taking part in the affairs of enterprises in which the estate had an interest, as described in the paragraphs 1 to 7, inclusive, appearing below:
1. Chateau D'Armes Realty Corporation. - The estate owned all of the stock of this corporation during the taxable years. The stock was valued at $498 on the estate tax return. The corporation was organized to hold*1416 a second mortgage of $130,000 on a 70-unit apartment house in New York City. The decedent had received the mortgage as part payment on a farm. There was a first mortgate of $200,000 on the property. The owner of the property became hopelessly in arrears and deeded the property to a corporation organized by Scammell, the Fort Washington Avenue Realty Corporation, all of the stock of which was held for the benefit of the petitioner. Fort Washington employed agents to rent the property and collect the rents. Chateau D'Armes loaned funds to make up operating deficits. Scammell held conferences with the first mortgagee, real estate brokers, and architects in an effort to improve the property and protect the second mortgage. He finally determined that the condition of the real estate market did not warrant further advances for the operation of the property, when the first mortgagee took over the property upon foreclosure. He then arranged all details of the dissolution of the Chateau D'Armes and Fort Washington corporations, which took place in 1937.
2. S. L. Allen & Co. - The Chateau D'Armes Realty Corporation held as collateral for a loan some stock which represented directly*1417 or indirectly voting control of S. L. Allen & Co. Scammell's brother was president of the company. It manufactured Flexible Flyer sleds and Planet, Jr., farm implements at Philadelphia. Scammell frequently conferred with his brother at Trenton respecting problems relating to the operation of this business, in order to increase its profits and enable it to pay accumulated dividends on its preferred stock. Fourteen dollars per share was paid on this preferred stock in 1937.
3. Belle Mead Sweets Corporation. - Scammell tried to assist this company in its financial difficulties and it was able to continue business for a while until it finally went into bankruptcy at some time not disclosed by the record, but prior to the close of 1935. Thereafter, Scammell assisted the receiver in bankruptcy in operating the business. Scammell owned some of the stock of this company, but he thought the stock was worthless and interested himself in the affairs of the company only for the purpose of protecting the investment of the estate.
4. Hamilton Investment Co. - The estate owned about 30 percent of the outstanding stock of this company. Scammell corresponded and conferred with*1418 officers and stockholders of the company during the taxable years for the purpose of determining whether or not it should *1118 sell its assets and liquidate. He objected to the liquidation of the company in 1935 and liquidation was postponed until 1939. Had the company liquidated in 1935, the Donald estate would have received about $60,000, whereas in 1939 it received $90,000 as its share of the assets of this company.
5. Richey, Browne & Donald, Inc. - The estate owned 85 percent of the preferred stock of this company. The company manufactured windows at a plant on Long Island. The common stock of the company was owned by Richey, Browne, and Donald. The latter was an uncle of the decedent. Scammell was a director. The cumulative dividends on the preferred stock were in arrears, as a result of which Scammell, representing the estate, was able to exercise considerable control over the company. He frequently consulted with Richey and Browne with reference to manufacture, sales, and finance. He checked and studied monthly reports of the company. The company had financial difficulties, which became increasingly acute in 1936. This required Scammell to meet or*1419 communicate weekly with Richey and Browne during a part of 1936 and 1937. The business of the company showed some improvement in 1937 but required additional capital, which was furnished by the petitioner through a loan of $10,000 secured by a bond and mortgage on real estate. The beneficiaries of the estate consented to the loan. Scammell assisted in arranging additional loans and credits for the company through banks.
6. Merchants Refrigerating Corporation. - The earnings of this company declined during the year 1936, whereupon Scammell discovered by investigation that certain differences existed among the persons charged with the management of the company. He conferred with the directors, officers, and large stockholders of the company and, as a result, the managerial difficulties were finally eliminated in 1939.
7. Evans mortgage. - The Evans mortgage was on an apartment house in New York City. The taxes on the property and the interest on the mortgage were in arrears during the taxable years. Scammell spent some time in 1935 going over plans with the owner for improving the property by dividing it into smaller apartments. Those improvements were eventually*1420 made. Scammell held monthly conferences with the owner during 1936 and 1937 in an attempt to collect interest on the mortgage and to check up on necessary improvements and repairs to the property.
Additional services performed by Scammell during the taxable years, which he considered were the services of an executor and which he did not consider in fixing the $6,000 annual fee, included the following: Taking care physically of the assets; selling assets in order to pay taxes; attempts to collect interest on certain German securities; correspondence relating to the Vetchorine note; supervision of*1119 the preparation of income tax returns; correspondence and conferences with Treasury Department and state officials in connection with the valuation of the estate for Federal estate tax and New York transfer tax purposes; preparing for trials in connection with Federal and state income taxes for 1929; representing the estate before the Board in 1937 in connection with a 1929 Federal income tax deficiency; representing the estate in negotiations and liquidation involving claims against the estate by former servants of the decedent and a claim of the estate against the Bank of*1421 the United States; and conferring in regard to the settlement of the trust legacies. The record does not show how many working hours Scammell and his office force spent on these latter activities.
The estate paid $300 in 1937 to a certified public accountant for "A summary statement of the executor's account of proceedings" for the period from April 3, 1933, to December 31, 1936. It paid $1,500 in that same year to another certified public accountant for services rendered in connection with hearings before the Board relating to the 1929 income tax. It paid $72 in 1937 for a transcript of the testimony of the hearing before the Board.
A deduction was claimed on the return for each year for the annual fee of $6,000 and deductions were claimed for 1937 on account of the expenditures, amounting to $1,872, above described. The Commissioner disallowed all of those deductions. He explained in regard to the $6,000 deduction claimed for 1935 that the estate was not engaged in any trade or business and, therefore, was not entitled to any deduction for management expense. In disallowing the decuctions for 1936 and 1937, the Commissioner explained that "Article 24-2 of Regulations*1422 94 provides that 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."
OPINION.
MURDOCK: Scott Scammell has attempted to differentiate between the services rendered by him to the estate as executor and those which were separate from and in addition to services rendered in discharge of his duties as executor. He regards the latter as services performed in managing the estate, for which he was paid the annual fee of $6,000. He claims that these extra-executorial services were rendered in connection with the conduct of a business by the estate and payment for those services represented ordinary and necessary expenses of the operation of that business. Although the Commissioner does not regard the $6,000 as an excessive amount for the services rendered, nevertheless, he has disallowed the annual deductions and defends his action upon the ground that the payments were not ordinary and*1120 necessary expenses paid in the operation of any business within the meaning of section 23(a) of the Revenue Acts of 1934 and 1936.
The petitioner, *1423 to overcome this determination, would have to show not only that the estate was engaged in the operation of some business during the taxable years, but also that all or some ascertainable part of the $6,000 was paid as an ordinary and necessary expense of that business. The only authority which Scammell has for continuing the estate is the tacit consent of his wife and her sister, the surviving residuary legatees. While this circumstance may be more or less immaterial, it does not reduce the difficulties of his attempt to divide his services into the two classifications. Although Scammell has attempted to describe his extra-executorial duties in some detail, his differentiation is not entirely satisfactory. It seems clear that some of the services for which he says the fee of $6,000 was paid were in fact services which an executor would be expected to perform in the ordinary discharge of his duties. Thus, at the very beginning, it is apparent that not all of the $6,000 fee can be attributed to extraexecutorial services.
Merely keeping records, collecting interest and dividends, and keeping funds invested through managerial attention does not constitute the operation of a trade*1424 or business whthin the meaning of section 23(a), no matter how large the estate or how continuous or extended the work required may be. ; ; ; ; ; and . This rule is applied in the foregoing cases not only to individuals but also to fiduciaries, and it applies here. Approximately 90 percent of the assets of this petitioner were represented by marketable stocks and bonds. The petitioner, in so far as it was engaged in keeping account of those funds, collecting interest and dividends therefrom, and investing the funds, was not engaged in the operation of any business within the meaning of section 23(a). Consequently, in so far as the annual fee of $6,000 was paid for those services, it was not deductible. Furthermore, it appears from this record that a very large part of the fee was paid for those services*1425 or would have to be allocated thereto.
The petitioner argues that it took an active part in the management and operation of several corporations in which it had large investments and those activities constituted the carrying on of a business, citing ; . The court held that Washburn, who had an office with a complete organization and gave personal attention to and participated in the management of various companies not merely for*1121 the purpose of conserving his investments but of carrying on the companies successfully and making them profitable, was thus engaged in business. The court in the Foss case said that Washburn's activities closely resembled those of Foss and held, following the Washburn case, that Foss, who was a majority owner of stock of the American Blower Co. and participated in the management, was thereby engaged in business. Some courts have taken the view that the Washburn case has been overruled by subsequent decisions of the Supreme Court. See *1426 ; ; If the Washburn case was overruled, no doubt, the Foss case was also overruled. Since the Supreme Court has decided , and , there would seem to be even greater reason to think that the Washburn and Foss decisions do not correctly state the law. However, there may be some doubt about this and, consequently, we shall consider the extent, if any, to which the facts in this case parallel the facts in those cases.
The petitioner may rely upon its activities in connection with the following assets: Evans mortgage, Belle Mead Sweets note and stock, Hamilton Investment Co. common stock, Merchants Refrigerating Corporation common and preferred, Richey, Browne & Donald, Inc., mortgage and preferred stock, S. L. Allen & Co. stock, and Chateau D'Armes Realty Corporation stock. The evidence indicates that the activities of the petitioner in connection with most of these investments were merely for the*1427 purpose of conserving them, rather than for the purpose of using the corporations as an outlet for investing its funds by carrying on a successful and profitable business through those corporations. The petitioner, apparently, was only trying to save a few burnt chestnuts in most of these instances. None of the corporations, with the exception of the Chateau D'Armes Realty Corporation, could be regarded as the alter ego of the petitioner. Thus, most of these activities would not meet the test of the Washburn case.
There was no corporation connected with the Evans mortgage, and Scammell's activities in connection with that mortgage were those of an executor trying to collect on a debt due the decedent's estate. The determination of the Commissioner, as well as the testimony of Scammell and the records of the estate, would indicate that the entire investment of the petitioner in Belle Mead Sweets was lost prior to the beginning of the taxable years. Furthermore, the company was in bankruptcy in 1935 and may have been in bankruptcy even before 1935. Scammell's activities in connection with the business of that company did not represent the carrying on of a business by*1428 this petitioner. Scammell successfully opposed the liquidation of the Hamilton Investment Co. in 1935, and he was *1122 active in eliminating some internal friction in the Merchants Refrigerating Corporation, but those efforts would not bring this case within the Washburn and Foss cases.
The petitioner had a mortgage of $10,000 on property of Richey, Browne & Donald, Inc., and held 85 percent of the preferred stock of that corporation. Scammell was a director and took part in the conduct of the business. The petitioner owned some of the preferred stock of S. L. Allen & Co. and it had some hold on the voting control stock. Scammell consulted with his brother, who was president of the corporation, and discussed with him various problems relating to the operation of the business in an effort to increase its profits so that it might pay the past dividends on its cumulative preferred stock. The petitioner was not using either of these corporations to carry on any business for profit, but interested itself in their affairs only for the purpose of preserving its investment in them.
This leaves for consideration the activities of the petitioner in the affairs of the*1429 Chateau D'Armes Realty Corporation. The Chateau D'armes Realty Corporation stock was valued for estate tax purposes at $498 and has since been carried at that same value. It was organized to hold a second mortgage on an apartment building. The second mortgage had been received by the decedent as part payment for a farm. The record does not show just how the stock of the Fort Washington Avenue Realty Corporation was held. Assuming that the activities of the petitioner in connection with Chateau D'Armes Realty Corporation bring it within the Washburn case, what part, if any, of the $6,000 compensation paid to Scammell during each of the taxable years could be allocated to his services in connection with the activities of this corporation? The entire investment of the petitioner in the stock of this company was valued at only $498 at the time the decedent died and during the taxable years. The record does not justify the allocation of more than an insignificant portion of the $6,000 fee to these activities. Thus, under no circumstances could the determination of the Commissioner in disallowing the annual deduction of $6,000, be disturbed.
*1430 The amounts paid to the certified public accountants and the amount paid for a copy of the record of a proceeding before the Board were incidental to the ordinary administration of the estate. . They have not been shown to be ordinary and necessary expenses of any business carried on by the petitioner.
Decision will be entered under Rule 50.
Footnotes
1. Value not disclosed by the record. The petitioner claimed $13,750 on its income tax return for 1935 as representing a bad debt on account of the Belle Mead Sweets note. The Commissioner disallowed the deduction on the ground that the note was deemed to be "worthless in the estate tax report." ↩