*81 Decision will be entered for the respondent.
Decedent, during the years 1935 through 1944, received $ 29,250 for services rendered as a trustee; and of this sum he received $ 22,500 in the year 1944. He claimed the benefit of section 107 (a) of the Internal Revenue Code (1939) on the ground that, if the gross compensation received were reduced by certain expenses claimed to be applicable to his services as trustee, the net compensation received in 1944 would be more than 80 per cent of his total net compensation for all years. The trust indenture provided that expenses of a trustee were reimbursable to him from the trust, and the trust assets were sufficient to permit such reimbursement. Held, that the benefits of section 107 (a) are not available for the reasons that (1) section 107 provides for allocation of compensation included in the "gross income" without making provision for any deduction of expenses; (2) the expenses claimed were not those of the decedent, but rather reimbursable advances on behalf of the trust for which deductions are not allowable, and (3) in any event, the deductibility of the claimed expenses has not been established.
*16 Respondent determined a deficiency in the income tax of W. P. McJunkin, deceased, for the taxable year 1944 in the amount of $ 6,663.67.
The issue for decision is whether the compensation which the decedent received in the year 1944 for services rendered by him as a trustee constituted at least 80 per cent of the total compensation which he received for such services over a period of approximately 10 years, so as to make available the benefits of section 107 (a) of the Internal Revenue Code (1939). 1
*83 *17 FINDINGS OF FACT.
Certain facts have been stipulated. We adopt the stipulation as part of our findings of fact, and incorporate it herein by reference.
W. P. McJunkin died a resident of Sewickley, Pennsylvania, on January 12, 1950. Fidelity Trust Company is the duly appointed, qualified, and acting executor of his last will. The return of the decedent for the calendar year 1944 was filed with the collector of internal revenue for the twenty-third district of Pennsylvania.
The decedent and one Patton were, at all times here material, partners in carrying on an investment banking business, under the firm name of McJunkin, Patton & Co. Their offices were in Pittsburgh, Pennsylvania. Profits and losses of the firm were divided equally between the partners.
In 1934 an involuntary petition in bankruptcy was filed against the Pittsburgh Water Heater Company, Pittsburgh, Pennsylvania, in the United States District Court for the Western District of Pennsylvania. The bondholders protective committee petitioned the court for leave to file a plan of reorganization. Pursuant to such plan the permanent trustee, by an indenture of trust dated March 28, 1935, conveyed to the decedent*84 and two other individuals, as trustees, certain assets of the bankrupt company, including the entire capital stock of two subsidiary companies, Allegheny Garbage Company and the Pittsburgh Melting Company, which had been pledged under the bond indenture. The decedent thereafter acted as a trustee until the trust was terminated on December 31, 1944.
The objects of the trust were the sale and liquidation of the trust property, and the distribution of the net proceeds as soon as practicable; and in the meantime, the conservation, management, and control of the trust assets, and the division of net income and proceeds of the property among the holders of participating trust certificates. Pursuant to the accomplishment of such purposes, the trustees, immediately after their appointment, organized a corporation, named The Pittsburgh Water Heater Corporation (as distinguished from the bankrupt "Company"), to take over all those assets of the bankrupt which had been used in the manufacture of water heaters. The entire common stock of this corporation was issued to the trustees in exchange for the assets; and thereafter until 1938, the trustees exercised direct control over the operation*85 of the business, without receiving any additional compensation for such services. In December 1938 the trustees effected a new arrangement, under which one McNamara took over the operation of the corporation as its president, the common stock was placed in escrow for delivery to McNamara upon his fulfillment of certain financial commitments, and all the preferred stock was retained by the trustees. Dissolution of the *18 escrow and delivery of the common stock to McNamara were not effected until 1944. In the interim, the trustees continued their supervisory interest in the business.
The decedent acted as "head trustee"; and he devoted more time and took a more active part in the administration of the trust and the supervision of the three corporations which were operating the trust assets, than did his cotrustees. He and the other two trustees became directors of all the corporations in 1935; and during each of the years 1942, 1943, and 1944, he was vice president of the Water Heater Corporation, in charge of finance. In 1942, the Water Heater Corporation entirely converted its business from that of manufacturing water heaters to the manufacture of munitions; and, in this*86 connection, the decedent personally arranged large loans with which to finance war contracts. Also, he conferred extensively with the several corporate officers, and cosigned trust checks to provide use of the trust funds in the corporation's business.
The decedent performed most of his services on behalf of the trust and the above-mentioned corporations, in the offices of the partnership, McJunkin, Patton & Co. The other partner, Patton, was absent from the office most of the time; and since the firm's investment banking business was not very good, he was pleased to have this other activity in the office. All office expenses for each of the years 1935 through 1944, were paid by the partnership; and the amounts thereof were entered in the partnership accounts and taken into consideration in determining the distributive shares of the partners.
The trust indenture, under which the decedent and his co-trustees acted, provided expressly that the trustees could advance, either personally or out of the trust funds, moneys required for any purpose of the indenture; that the trustees could reimburse themselves for the amount of any such advances together with interest, out of the first*87 moneys or property thereafter becoming distributable; and that the trustees would have a lien for the amount of such advances and interest, until repaid, on the subsequent income, avails, and proceeds from the trust property. The indenture further provided that the trustees had full power to employ such attorneys, secretaries, accountants, office assistants, and other employees as they deemed necessary; to pay such wages and salaries out of the trust funds as they deemed necessary and advisable; to pay themselves reasonable compensation; and to reimburse themselves for all their disbursements, liabilities, and expenses, out of the income or assets of the trust.
The amounts of compensation to all the trustees, which were paid out of the trust funds over the entire period of the trust, were as follows: *19
| Year | Trustees' fees |
| 1935 | |
| 1936 | $ 4,500 |
| 1937 | |
| 1938 | |
| 1939 | 6,750 |
| 1940 | 2,250 |
| 1941 | $ 2,250 |
| 1942 | 2,250 |
| 1943 | 2,250 |
| 1944 | 49,500 |
| $ 69,750 |
The amounts shown for the first 9 years were paid in equal portions to the three trustees; and they reflect average fees, exclusive of reimbursements of expenses, of $ 750 per year to each trustee.
The decedent never submitted any*88 statement or bill to the trust for reimbursement of any expenses; and he never was paid any amount in reimbursement for expenses. Other trustees, however, did receive reimbursements for certain expenses; and the amounts thereof were disclosed in the year-by-year certified audit statements of the trust.
The amounts of compensation which the decedent received directly from the trust for his services as trustee, and the dates on which the same were received, were as follows:
| Dec. 24, 1936 | $ 1,500 |
| Dec. 9, 1939 | 2,250 |
| Dec. 23, 1940 | 750 |
| Dec. 24, 1941 | 750 |
| Dec. 10, 1942 | 750 |
| Dec. 29, 1943 | $ 750 |
| Oct. 18, 1944 | 10,000 |
| Dec. 28, 1944 | 12,500 |
| Total | $ 29,250 |
In addition to the above amounts which were received directly from the trust, the decedent received payments from the three corporations which were operating the trust assets, as follows:
| 1942 | 1943 | 1944 | |
| Pittsburgh Water Heater Corp | $ 1,250 | $ 3,750 | $ 2,500 |
| Allegheny Garbage Company | 1,000 | 1,000 | 1,000 |
| Pittsburgh Melting Company | 1,000 | 1,000 | 1,000 |
The amounts received from the Water Heater Corporation represented salary paid to the decedent as vice president; and the amounts received from the other two companies*89 represented director's fees.
The decedent, in his individual income tax returns for the year 1936 and each of the years 1939 through 1943, reported as compensation for personal services the entire amount of trustee's fees which he received in each of said years, without claiming any deduction for expenses in respect of the same; and he reported also the amounts which he received from the three corporations, and his distributive shares of the partnership income as shown on the partnership books and in the partnership information returns. Upon the respondent's audit of the 1942 and 1943 returns, which occurred in the year 1945, the decedent accepted minor adjustments respecting his partnership income and capital losses; but he made no claim to any deduction for expenses related to his services as trustee.
In his individual return for 1944, the decedent reported the receipt of $ 22,500 as compensation for his services as trustee; and he there *20 claimed the benefit of section 107 of the Internal Revenue Code (1939). In support of such claim, he attached to the return a schedule, in which he first allocated to each of the 10 years of the trust period, a portion of the total trustee's*90 fees which he had received over that period; and in which he then listed offsetting expenses against each of such years, in the amounts of $ 240 for each of the first 4 years, and in the amount of $ 120 for each of the last 6 years. Upon respondent's audit of this 1944 return, the decedent was informed that his actual fees for the year 1944 were less than 80 per cent of his total fees from the trust, and that the benefits of section 107 of the Code were not available to him.
In 1947 the decedent made certain arrangements with his partner, whereby an accountant revised the partnership books for the years 1942 and 1943, and allocated to the decedent, individually, estimated portions of the office expenses which the partnership had theretofore paid and entered in its accounts. For example, the decedent was thus charged with expenses for the year 1943 in amounts equal to 20 per cent of the salaries, 50 per cent of the office rent, 18 per cent of the telephone and telegraph, 22 per cent of the insurance and postage, 33 per cent of the towel service, and 12 per cent of the office supplies and miscellaneous. The total expenses so charged to the decedent in this revision of the partnership*91 accounts were $ 1,035.31 for the year 1942, and $ 1,051.88 for the year 1943. No similar revision of the partnership accounts was made for 1944, or for any other year except 1942 and 1943. The original entries in the partnership books were made with full knowledge of the decedent's use of the offices for trust business; and the revision of these entries was made pursuant to new arrangements between the partners that were not effected until 1947.
Subsequent to this revision of the partnership books in 1947, amended information returns were filed on behalf of the partnership for the years 1942 and 1943 only, to reflect the revision; and at or about the same time, the decedent filed amended individual returns for the same years. In these amended individual returns, the decedent entirely eliminated the trustee's fees of $ 750 per year which he had reported in his original returns for 1942 and 1943, by offsetting against them the amounts of office expense which had been allocated to him in the revision of the partnership accounts, and also by offsetting automobile expenses in the amount of $ 120 per year. No corresponding amended returns were filed for the year 1944, or for any other*92 year except 1942 and 1943.
If all trust compensation for each of the years 1942 and 1943 were eliminated by allowance of the deductions claimed in the amended returns, then the compensation received in the year 1944 would be more than 80 per cent of the total compensation received by the decedent over the entire period of the trust.
*21 The compensation which the decedent received in 1944 for his services as trustee, constituted less than 80 per cent of his total compensation for such services over the entire period of 1935 through 1944.
OPINION.
We approve respondent's determination. Accordingly, we hold that the benefits of section 107 (a) of the Internal Revenue Code (1939) are not available to the petitioner.
First, it is to be observed that section 107 (a) provides for allocation of compensation included in the gross income; whereas the petitioner seeks to reduce the decedent's compensation to a net basis, by deduction of various claimed expenses. It is our opinion that this does not conform with the statute. Cf. Weldon D. Smith, 17 T. C. 135, 144, reversed on other grounds 203 F.2d 310">203 F. 2d 310.
Secondly, the *93 expenses which the petitioner seeks to deduct are items for which the decedent could have obtained reimbursement from the trust funds, under the express provisions of the trust indenture. The trust was solvent, and on termination there remained assets for distribution. Thus, even assuming the validity of the expense items, they represent not expenses of the decedent, but rather reimbursable advances for which deductions are not allowable. Glendinning, McLeish & Co., 24 B. T. A. 518, 523, affd. 61 F.2d 950">61 F. 2d 950; Standard Oil Co. of New Jersey, 7 T. C. 1310, modified 11 T. C. 843; Horace E. Podems, 24 T.C. 21">24 T. C. 21.
Finally, even if the expenses were not reimbursable, the petitioner has failed to establish that they would qualify for deduction. All amounts were estimated; and the evidence concerning them is insufficient to overcome the respondent's challenge to their validity. The amounts claimed for 1942 and 1943 were not paid or accrued by the decedent in those years; nor were they claimed in 1945, when the decedent's returns for those years*94 were audited, and adjusted by agreement with the decedent. All office expenses actually were paid by the partnership; and they were currently taken into consideration in determining the distributive shares of the partners. The 1947 revision of the partnership accounts reflected a new method of accounting between the partners, which differed from the method used in 1942 and 1943 when the deductibility of the items by decedent became determinable. Moreover, the revision of accounts was not made consistently for all years, with the result that it effected a distortion in the relationship of the 1942 and 1943 accounts of both the partnership and the decedent, as compared to the accounts for all other years, including the year 1944. Also, notwithstanding that the office was used extensively by the decedent in 1942 and 1943, in performing services as vice president of the Water Heater Corporation, no portion *22 of the office expense was charged against the salaries and fees which he received from that corporation and its subsidiaries. We regard the amounts claimed as expenses to be both unreliable and unproved.
By reason of the holdings above made, it is unnecessary for us to*95 consider respondent's further contention: That the petitioner, in seeking the benefits of section 107 (a), has improperly excluded from the decedent's compensation in respect of the trust, all amounts received from the corporations which were used by the trustees to operate the trust assets, and one of which was organized by the trustees for such purpose.
Decision will be entered for the respondent.
Footnotes
1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.
(a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.↩