*2802 1. Held that certain income from a trust fund received by the petitioner's wife pursuant to a formal and complete assignment by him to her of his interest therein should not be included in the petitioner's taxable income.
2. Where attorney's fees paid in installments pursuant to a contingent-fee contract for services which resulted in a decree for the petitioner under which income which otherwise he could not have received was paid to him, it is held, under the peculiar circumstances of this case, that the payments should be deducted in computing net income for the year in which such payments were made.
*718 In this proceeding the petitioner seeks a redetermination of his income tax for the calendar year 1922, for which year the respondent has determined a deficiency in the amount of $369,649.92.
The following issues are raised by the pleadings:
First, whether certain income from a trust fund, received by the petitioner"s wife pursuant to an assignment to her of his interest*2803 therein, is nevertheless taxable to the petitioner.
Second, whether an amount of money paid attorneys pursuant to a contingent-fee contract, for obtaining for the petitioner a court decree resulting in the receipt by him of income which otherwise he could not have received, may be deducted from the taxable income so obtained.
A third issue relative to excessive deductions from trust-estate income for depreciation has been by stipulation disposed of as to the amount of the excessive deductions, leaving for determination by this Board only the question as to whether the petitioner's income should be increased by the whole or only a part of such deductions.
FINDINGS OF FACT.
This proceeding involves the income received by this petitioner or his wife from the estate of the late Marshall Field of Chicago. All the income involved is from a residuary trust created pursuant to article "Twentieth" of his will.
The petitioner, Marshall Field, a grandson of said testator, is, since the death of his only brother, Henry Field, sole beneficiary of the trusts. As to three-fifths of the corpus of the residuary trusts the *719 petitioner was beneficiary from the beginning, and*2804 as to two-fifths he became beneficiary, under the terms of the "Twentieth" article of the will, as successor to his brother, Henry Field, upon the latter's death. It is exclusively with income of this latter interest that this case is concerned.
The testator died on January 16, 1906, a resident of and domiciled in Cook County, Illinois, leaving his residuary estate to trustees, all domiciled in Cook County, Illinois. At that time the petitioner was twelve years old, and his brother, Henry, younger. The will was admitted to probate in Cook County on February 21, 1906. The trustees qualified in due course and the trusts have ever since been administered in Cook County, Illinois.
The trust here in question was created by article "Twentieth" of the will. As regards Henry Field, the material provisions of the trust instrument may be summarized as follows: two-fifths of the residuary estate was given to the trustees to be held in trust for him. It was provided that such two-fifths of the residuary estate should be divided into halves and that all of the income of one-half should be accumulated and added to principal until the beneficiary should be 45 years of age; that the income*2805 of the other half should like wise be accumulated and added until the beneficiary should reach the age of 30 years; that thenceforth two-thirds of it should be accumulated and added until the beneficiary reached the age of 30 years; and thenceforth one-third should be accumulated and added until the beneficiary reached the age of 40. In other words, the beneficiary received no income until he reached the age of 30 years, a sixth of the income between the ages of 30 and 35, one-third of the income between the ages of 35 and 40, and one-half of the income between the ages of 40 and 45. After he reached the age of 45 he was to receive all of the income. It was further provided that at specific times named in the trust instrument the beneficiary was to receive outright a payment of principal. It was further provided that on the death of such beneficiary without issue, all of the property in trust for such decedent should thenceforth be held in trust for Marshall Field III, the petitioner herein, upon the same trusts and subject to the same directions. A similar provision was made for Marshall Field.
Henry Field died without issue on July 8, 1917, at which time the petitioner*2806 was nearly 24 years of age, and the provisions above stated, securing succession to the survivor, became operative, giving Henry Field's share to the petitioner, but in the language of the will, "upon the same trusts and subject to the same directions."
In 1915 the petitioner had married his present wife, Evelyn, to whom he made later the assignment here in question. Prior to that assignment two children were born, and subsequent thereto, one child.
*720 Following Henry Field's death came litigation involving accounts and the construction of the will. In that litigation the petitioner filed a cross-bill which resulted in a decree construing the will. Pursuant to the terms of that decree, the entire income of the two-fifths trust from the date of Henry Field's death has been paid currently to the petitioner or his assignees free of all the trust provisions as to accumulations. The decree established conclusively that at least from and after Henry Field's death the "spendthrift" provisions of article "Twentieth" of the will had no application to the two-fifths trust. The pertinent provisions of this decree follow:
(1) That the death of Henry Field without issue in*2807 nowise affected the trusts upon which Marshall Field III's original share (or three-fifths) of the residuary estate is held under the will of Marshall Field, deceased, and in nowise affected the powers or duties of the Trustees over in relation to said Marshall's original share of the residuary estate;
(2) That upon the death of Henry Field without issue, the entire accumulated income of his share (or two-fifths) of the residuary estate became an addition to the capital or principal of his share of the trust estate, and that said last mentioned share, with the accumulated income so added thereto, became a trust estate to be held upon the same trusts as said Marshall Field III's original share of the residuary estate is held under the said will, except that the net income therefrom as received by the Trustees under said will shall be paid to Marshall Field III, and that the amount to be paid to Marshall Field III, out of the capital or principal of Henry Field's share of said trust estate when Marshall Field III attains the ages of thirty, thirty-five and forty years, respectively, is Three Hundred Thousand Dollars ($300,000) instead of Four Hundred Fifty Thousand Dollars ($450,000) *2808 which said Four Hundred and Fifty Thousand Dollars ($450,000) is to be paid out of the capital or principal of Marshall's original share (or three-fifths) of said trust estate at the same times; and said Trustees are by said will given all the powers, rights, discretion and authority with respect to the capital or principal of Henry Field's share (or two-fifths) of the residuary estate that said Trustees are given by the said will with respect to said Marshall's original share of the residuary estate, unaffected by the death of Henry Field without issue.
(3) That said Henry Field having died without issue, said Trustees are by said will directed to pay to Marshall Field III out of the capital or principal of Henry Field's share of the trust estate, the sum of Three Hundred Thousand Dollars ($300,000) when Marshall Field III attains the age of twenty-five years, to-wit: On September 28th 1918; and also the like sum of Three Hundred Thousand Dollars ($300,000) when said Marshall Field III shall attain respectively the ages of thirty years, thirty-five years and forty years;
(4) That the trusts for accumulation of income from Henry Field's share (or two-fifths) of the said trust*2809 estate ceased upon the death of said Henry Field, and that thereupon Marshall Field III became entitled (absolutely with all the incidents of absolute ownership, including the right of testamentary disposition and transmission by him to his heirs and next of kin by inheritance from him) to all of the net income thenceforward accruing and to accrue from Henry Field's share (or two-fifths) of said residuary estate during the whole of the period during which said Trustees may hold the principal or corpus of said trust estate under the provisions of said will.
*721 This decree was entered on July 13, 1920. On February 1, 1922, by written assignment delivered on that date, the petitioner assigned to his wife a portion of the income to which he became entitled under the decree. Thenceforth all the income thus assigned has been credited to and paid by the trustees to Evelyn Field and the petitioner has had none of it. Evelyn Field returned it as her income and paid tax thereon. The amount of 1922 taxable income, exclusive of tax-exempt income so credited and paid, being the amount here in dispute, is composed of $332,790.33 in dividends and $128,006.67 in other taxable income. *2810 The following excerpt from the assignment gives the gist of it, the petitioner being the party of the first part, and his wife, Evelyn, the party of the second part:
That the said party of the first part, in consideration of love and affection, and of one dollar to him in hand paid * * * does hereby sell, assign, transfer and set over unto the said party of the second part an undivided two-thirds (2/3rds) interest in all the net income of the two-fifths (2/5ths) of the residuary estate of Marshall Field, deceased, * * * intending hereby to convey to and vest in the said party of the second part an undivided two-thirds (2/3rds) interest in all the net income adjudicated to belong to the said party of the first part * * * which shall accrue after the date of this indenture.
The provision of the decree that the income from Henry Field's two-fifths share should be distributed currently to the petitioner was directly attributable to the endeavors of the late John B. Stanchfield and his associates, who represented the petitioner in the legal proceeding.
The circumstances under which Stanchfield was retained by the petitioner were as follows: In the early part of 1918, *2811 shortly after the death of Henry Field, the petitioner found his current income insufficient for his needs. Accordingly, he engaged Stanchfield to procure for him, if possible, monies from the estate of his grandfather in addition to those which he was at that time receiving.
In the agreement which was made with Stanchfield through the exchange of letters, the petitioner represented that he found inadequate the money which he was then receiving under the will of the testator and that, accordingly, he desired to secure additional sums "under the trust created by said will or as compensation for services rendered as trustee, or in any other manner in advance of the definite periods at which I am to receive payments under the will." In consideration of counsel's agreement to act for the petitioner in prosecuting any action or proceeding which counsel might deem advisable, the petitioner agreed to pay counsel 15 per cent of all additional sums which he might secure for him, "whether the same be income, principal, compensation or in any other form." The agreement provided that payment of counsel fees should be made as and when additional sums, if any, were received by the petitioner. *2812 *722 A limitation was provided, in that, if the additional sums secured for the petitioner should exceed the aggregate of $10,000,000, the 15 per cent basis of compensation should not apply to the excess over that sum and that the fee to be paid for procuring any such excess should be adjusted at a lower percentage, as the petitioner and counsel might determine. The agreement further provided that the contingent fee should not attach to any specific sums directed by the will to be paid to the petitioner at the respective periods therein stated unless such payments were accelerated or advanced and in that case it was provided that the petitioner's consent should be obtained in advance.
After the conclusion of the litigation, Stanchfield was, by a court order, allowed a fee of $600,000 for services performed by him which were deemed beneficial generally to the trust estate and such fee was actually paid by the trustees from the corpus of the estate.
Subsequently, Stanchfield, or his firm, made a demand upon the petitioner for the maximum contingent fee provided for in the agreement. The amount of the contingent fee thus claimed was disputed by the petitioner and the controversy*2813 was not settled until June, 1922, when the claim was settled by the payment on account at that time of $200,000, and an agreement to pay $100,000 per year for the next eight years, beginning in 1923.
In his income-tax return for 1922, the petitioner, whose accounts were kept and whose returns were made on the cash receipts and disbursements basis, deducted the payment of $200,000 made in June, 1922, to Stanchfield or his representatives on account of the settlement of the contingent fee. This deduction was disallowed by the respondent.
It has been stipulated by the parties hereto in regard to the $11,701.32 by which the depreciation taken by the trustees was reduced, that this $11,701.32 is additional income in the noncumulative trust, of which Henry Field was formerly the beneficiary; that its taxability for the year 1922 depends upon the determination which the Board makes as to the effect of the assignment; that if the Board holds that after the assignment two-thirds of the income of Henry Field's share should be taxed to Evelyn Field, the petitioner's wife, this item of $11,701.32 should be treated as follows:
$3,575.40 as additional income to the petitioner
$7,150.81*2814 as additional income to Evelyn Field
and that in the event the assignment shall be held by the Board not to have the effect of making a part of the income of the trust fund the income of Evelyn Field, then the amount of $11,701.32 is to be added to the income of the petitioner.
*723 OPINION.
GREEN: The first question raised in this proceeding is whether certain income from a trust fund, received by the petitioner's wife pursuant to a formal and complete assignment by him to her of his right or interest, is nevertheless taxable to the petitioner.
The right of the petitioner in the trust was clearly and definitely established and determined by the courts of the State of Illinois, and as to property rights, its decree is unquestionably binding on this Board.
From this decree it is apparent that as to the two-fifths trust, the petitioner's right or interest is adjudged to be unqualified to the extent that he is not only entitled to all the income but is so entitled thereto with all the incidents of absolute ownership. By virtue of these provisions in the decree the right or interest in question is as freely assignable as any beneficial right or interest under a testamentary*2815 trust ever can be.
That the petitioner's vested estate in the two-fifths trust was assignable under the applicable law, namely, that of the State of Illinois, is not questioned. Consideration is not necessary to support and render perfect and irrevocable an executed assignment of a vested equitable right or interest such as the petitioner's interest in the two-fifths trust. . The petitioner by such assignment completely divested himself of any interest in the right to receive such income and it follows that he may not be taxed therefor.
The second question is whether a sum paid counsel, pursuant to a contingent-fee contract, for obtaining for the petitioner a decree resulting in income which otherwise he could not have received is a capital expenditure or a business expense.
The construction of the will of the late Marshall Field was brought about by litigation instituted by the petitioner. The court in its decree held that upon the death of Henry Field the petitioner succeeded to his brother's interest in the two-fifths trust, free from all provisions as to accumulations of income. The decree, being one of construction, *2816 added nothing to the petitioner's rights, which it merely declared.
The effect of the decree was to give the entire income of the two-fifths trust to the petitioner, whereas, but for the decree, the trustees would have received none of it until he arrived at the age of 30 years, but one-sixth of it between the ages of 30 and 35, but one-third of it between the ages of 35 and 40, and but one-half of it between the ages of 40 and 45. The income so retained by the trustees under *724 the terms of the trust instrument, that is, the whole for a time, then for 5 years five-sixths, then during successive 5-year periods, two-thirds and a half, would, but for the decree, have been added to principal and have been treated as capital, so that none of it would have been income received by the petitioner.
The provision of the decree that the income from Henry Field's two-fifths share should be distributed currently to the petitioner was directly attributable to the endeavors of Stanchfield and his associates, who represented the petitioner in the proceeding.
The circumstances in regard to the making of the contingent-fee agreement and the subsequent settlement of the disputed claim*2817 for professional services have been set up at length in the findings of fact.
The applicable statutes are sections 212, 213, and 214 of the Revenue Act of 1921.
Section 212(a) reads as follows:
That in the case of an individual the term "net income" means the gross income as defined in section 213, less the deductions allowed by section 214.
SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatsoever. The amount of all such items (except as provided in subdivision (e) of section 201) shall be included in the gross income for the taxable year in which received by the taxpayer, * * *
and section*2818 214:
(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, * * *
In , we held that "legal expenses incurred in breaking a will by which a taxpayer comes into possession of his inheritance are not expenses incurred in carrying on a trade or business."
In , we said, "the attorney's fee of $1,000 was paid, not in connection with the defending, protecting or establishing the petitioner's title or right to the possession of property, but in connection with the litigation to establish the petitioner's legal liability to pay the debts for material incurred by the contractor. We think that this amount, as well as the $500 attorney's fee paid in 1923 in connection with other matters, constitutes ordinary and necessary business expense."
*725 In , there was presented the question as to whether attorney's fees paid were capital expenditures or business expenses. *2819 We said:
It is our opinion that to the extent that such payments relate to the right of taxpayers to retain the income or to enlarge their share of the income of the mine, they are deductible; while to the extent that they represent expenditures made to acquire London's interest in the mine or 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.
In , in holding that the attorney's fees, etc., paid in connection with the consolidation of the bank, were capital expenditures, we said: "The transaction which called forth the expenditures here in question was presumably one which increased and maintained the earning power of the taxpayer and thus throughout its corporate life the taxpayer will enjoy the fruits of these expenditures."
In , we held that fees paid for legal services in connection with the taxpayer's negotiations with brokers and in the amendment of its charter*2820 authorizing the sale of its stock, were capital expenditures.
In , we held that attorney's fees paid in connection with the acquisition of leases were capital expenditures.
In , the heirs of a certain estate, which had among its assets a coal mine under lease, became dissatisfied with the lessee's performance and employed engineers and attorneys to collect data and institute suit for the cancellation of the lease. We held, "The payment made to engineers and others by the corporation for and on behalf of the lessors was a capital expenditure and the value of the securities so paid has been added to the March 1, 1913, value in the determination of gain or loss."
In , the facts were that the petitioner was the sole beneficiary of a trust and was desirous of having himself appointed as successor to the then trustees. This he desired for two reasons. First, he was dissatisfied with the management of the estate and wished to control it himself, and, second, to avoid the payment of compensation to the trustees to the end that*2821 the moneys which would be paid to them if they continued in office, would ultimately come to him. An arrangement was effected whereby the petitioner paid the trustees $200,000 in consideration of which they relinquished their positions and he became the sole trustee. In holding that the amount paid was a capital expenditure rather than a business expense, we said, "The elimination of the other trustees and *726 the qualifying of the taxpayer as trustee did not vest in him a full ownership of the property, but merely put him in sole control under the instrument creating the trust and the laws governing trust estates. He was not, in effect, buying an estate which forthwith would become his property and the purchase price of which he could not take into consideration in computing his income until he should dispose of the property acquired, but he was rather buying the right to be sole trustee without interference over a period of 12 years. We think the Commissioner was wrong in not allowing any deduction, and that the taxpayer was wrong in claiming in one year deduction of the entire amount paid. The taxpayer should be regarded as having for the purpose of insuring his interest*2822 in the estate against waste, purchased a right to do certain things for a period of time and the cost to him of that right should be spread over the period of time during which he was in a position to exercise it."
Expenditures of the kind herein involved are not usual and their classification is not easy. Tested in the light of the above-cited cases, excerpts from the opinions of which we have quoted, we are of the opinion that the amounts paid Stanchfield and his associates are in the nature of capital expenditures and that they may not properly be classified as ordinary and necessary business expenses. The right which the petitioner acquired through the expenditure is an exhausting or wasting right and the petitioner is accordingly entitled to have reasonable allowances to the end that his capital expenditures be returned to him.
In determining how this allowance should be made, we are confronted with the practical difficulty of determining the life of the right acquired as the result of the expenditure to the end that the amount of an annual allowance be determined. Since the petitioner's income at some time should be reduced by the amount of the payments, it would seem*2823 that the petitioner's income will be most accurately reflected by allowing a deduction from income each year of the amount paid. Accordingly, the amount of the attorney's fee paid in the year under consideration, should be deducted before reporting the amount received as income.
Reviewed by the Board.
Judgment will be entered under Rule 50.
SIEFKIN dissents.
STERNHAGEN, dissenting: This, in my opinion, is directly contrary to numerous other cases which have been decided by the courts and by the Board, and which are, in my opinion, correct. Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; Mitchel v. Bowers, 9 Fed.(2d) 414 *727 (D.C.); Mitchel v. Bowers, 15 Fed.(2d) 287; 273 U.S. 759">273 U.S. 759; Bing v. Bowers, 22 Fed.(2d) 450; 26 Fed.(2d) 1017; American Telegraph & Cable Co.,2 B.T.A. 991">2 B.T.A. 991; American Telegraph & Cable Co. v. United States,61 Ct.Cls. 326; 271 U.S. 660">271 U.S. 660; Louis Cohen,5 B.T.A. 171">5 B.T.A. 171; Samuel V. Woods,5 B.T.A. 413">5 B.T.A. 413; Hudson M. Knapp,5 B.T.A. 762">5 B.T.A. 762;*2824 Fred W. Warner,5 B.T.A. 963">5 B.T.A. 963; Alfred LeBlanc,7 B.T.A. 256">7 B.T.A. 256; Ella D. King,10 B.T.A. 698">10 B.T.A. 698; Arthur H. Van Brunt,11 B.T.A. 406">11 B.T.A. 406; George M. Cohan,11 B.T.A. 743">11 B.T.A. 743; M. C. Garber,11 B.T.A. 979">11 B.T.A. 979; Julius Rosenwald,12 B.T.A. 350">12 B.T.A. 350; Charles F. Colbert, Jr.,12 B.T.A. 565">12 B.T.A. 565; T. B. Noble,12 B.T.A. 1419">12 B.T.A. 1419; Florence V. Cruickshank,13 B.T.A. 508">13 B.T.A. 508; Maud Dunlap Shellabarger,14 B.T.A. 695">14 B.T.A. 695.
Under varying states of fact the principle has been consistently recognized that by an assignment of future income the assignor does not escape tax. To say that such an assignment is a transfer of an interest in the fund is to override the principle by casuistry. By its very terms the assignment gave to the wife only an interest in income and the corpus remained unaffected in petitioner; so that even if there is a distinction between a transfer of an interest in the corpus and a so-called transfer of the right to receive income, this is in the latter category. The assignee derives through the petitioner and the law treats the income*2825 as if it were received by him before it goes to her. This theory is no harder to grasp and involves no more fiction than many other concepts of the law, while to disregard it would distort the income tax by making it depend upon the disposition of income.
As to the Stanchfield payment, I am unable to find its place among the statutory deductions allowed in the determination of taxable net income.
MARQUETTE, TRAMMELL, ARUNDELL, VAN FOSSAN, and MURDOCK agree with this dissent.