*634 A trust with power to invest and reinvest the principal, collect the income, pay taxes and expenses, and distribute the income for the maintenance of the beneficiary during his minority and the principal periodically to him at certain ages, can not be dogmatically held to be carrying on a trade or business. Upon the evidence, held, an attorney's fee paid by a trust as an incident to litigation involving the trust's claim to accumulated income and corpus of another trust, is not deductible as an ordinary and necessary expense of carrying on a trade or business.
*968 The Commissioner determined deficiencies of $4,361.30 and $4,357.72 in the petitioners' income taxes for 1930. They assail the disallowance of a deduction of an attorney's fee paid for services in litigation to determine who among petitioners and others was entitled to certain accumulated income and corpus of another trust.
FINDINGS OF FACT.
Petitioners, whose principal office is in New York City, are the surviving trustee of two trusts created*635 for the benefit of George and Alfred G. Vanderbilt, respectively, by the will of Alfred G. Vanderbilt, deceased, their father, who died on May 7, 1915.
By the twelfth article of decedent's will, the residuary estate was bequeathed to petitioners in equal shares. The trustees were given power to invest and reinvest the principal, to collect the income, and to pay taxes and expenses. They were directed thereafter to pay over the net income and principal of each trust to its respective beneficiary, as follows:
During his minority to apply to his support, maintenance and education so much of said net income as in the judgment of said Trustees may be necessary, accumulating meantime any surplus income; * * *
and when the beneficiary should reach the ages of twenty-one, twenty-five, thirty, and thirty-five years, to "pay over to him all accumulations of income and one-quarter of the principal of said share * * *." Alfred G. Vanderbilt's will was admitted to probate on June 16, 1915; by December 31, 1916, the five executors, among whom were the trustee petitioners herein, had paid all taxes, debts, and legacies of the estate except one legacy of $100,000 which was paid on January 19, 1920. *636 They kept a single bank account in their names as "executors", which they or the survivors of them have continued to use in administration of the trusts without change of designation of "trustees." In 1930 the beneficiaries were sixteen and eighteen years of age, and to each the trustees paid an allowance of $35,000 for maintenance.
Alfred G. Vanderbilt, deceased, was the residuary legate under the will of his father, Cornelius Vanderbilt, who died on September 12, 1899. By the seventh article of his will, Cornelius Vanderbilt bequeathed to his wife, Alice Vanderbilt:
* * * the annual income or sum of Two Hundred and Fifty thousand dollars * * * arising from securities to be selected from my estate, and set apart by my Executors, and which I give to them to be held in trust for that purpose. * * *
By the eighth article, the principal so set apart was to be given to his children upon the death of his wife. In November 1928 Alice Vanderbilt petitioned the Surrogate's Court of New York County for a judicial settlement of her account with the trustees and a construction *969 of the will. She alleged that for many years the annual net income of the trust's principal had*637 exceeded $250,000, and prayed for a determination of the persons to whom such excess should be paid. Among others, petitioners "as executors of and trustees under the last will of Alfred G. Vanderbilt, deceased", appeared in the proceeding, by their attorney, Roy C. Gasser, answered, objected to the account, and claimed, as the persons entitled to the residuary estate of Cornelius Vanderbilt, the surplus income of the trust and the principal in excess of the amount required to provide the widow's $250,000 annually.
On July 3, 1929, the Surrogate's Court entered a decree that the accumulated surplus income and part of the principal not needed to produce the widow's annuity were "payable to the executors of the last will and testament of Alfred G. Vanderbilt, deceased", and that all surplus income earned in the future was payable to them. This decree was affirmed on appeal, In re Vanderbilt's Will,229 App.Div. 574; 243 N.Y.S. 165">243 N.Y.S. 165. As a result of this litigation, petitioners received $2,005,015.39 in cash and securities, which they allocated equally between the two trusts of George and Alfred G. Vanderbilt, and credited on their books, as follows: *638
| To the principal of the Alfred G. Vanderbilt Estate: | |
| Securities taken from the widow's trust, valued as of December 3, 1930, the date of receipt | $440,707.57 |
| Securities purchased with surplus trust income prior to May 7, 1915, value as of that date | 359,660.93 |
| Cash | 1,187.60 |
| To the residuary trust income account of the Estate: | |
| Securities purchased with surplus trust income after May 7, 1915, and with income on the investment thereof | 1,034,631.32 |
| Cash | 168,827.97 |
| $2,005,015.39 |
None of this amount was reported as income on the trustees' 1930 income tax returns for the two trusts.
In 1930 Roy C. Gasser was paid $50,107.70 for his services in the litigation, by checks signed by the "executors." The amount was entered on the books as an expense of the estate paid from residuary trust income, and thereafter credited, half of such income to the respective income accounts of the two beneficiaries.
OPINION.
STERNHAGEN: The petitioners claim a deduction of the amount paid in the taxable year to their attorney in the litigation to construe the will of Cornelius Vanderbilt and determine to whom belonged the accumulated excess corpus and income in which they*639 claimed through the decedent Alfred as a residuary legatee. In re Vanderbilt's Estate,134 Misc.Rep. 574; 236 N.Y.S. 316">236 N.Y.S. 316; In re Vanderbilt's Will,229 App.Div. 574; 243 N.Y.S. 165">243 N.Y.S. 165. They can succeed only if they *970 bring this expenditure within the deduction described in section 23(a), Revenue Act of 1928, as one of "the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The issue, made clear from the time of the notice of deficiency through the trial, has been whether the petitioners were in fact carrying on any trade or business to which this attorney's fee would be properly regarded as an incident. The record, however, gives not the slightest evidence of what these trusts did that might be called carrying on trade or business. It appears only that by the will of Alfred G. Vanderbilt his executors were appointed trustees of these two trusts and that they had power to invest and reinvest the principal, to collect the income, pay taxes and expenses, and distribute to their separate beneficiaries in the prescribed manner. How they exercised these powers*640 does not appear except as to the distributions, and according to this record they may have been mere passive conservators of a well invested trust fund.
Petitiners cite John H. Watson, Jr., et al., Trustees,35 B.T.A. 706">35 B.T.A. 706, as supporting their position and as holding generally that the management of any testamentary trust of a residuary estate constitutes a carrying on of business within the statute. That decision, however, can not be given such a broad scope. The case apparently arose originally, not upon the Commissioner's determination that the trust was not carrying on trade or business, but upon his determination that, although it was carrying on trade or business, a portion of its expenses was not deductible because allocable to tax-exempt income. After the hearing, however, the respondent in his brief broadened his position to contend that the petitioner was entitled to no deduction whatever because it was not carrying on a trade or business, and the Board held that the broadened position had no merit. Whether it would have had merit if the petitioner had had an opportunity to litigate it and had failed in his proof would be a different question, and that*641 is the question here. It is a question of fact. Conceivably, testamentary trusts such as these petitioners may be engaged in business of one kind or another, and no less conceivably they may refrain from engaging in business. The statute applies its provisions similarly to trusts and to individuals, and it can not be dogmatically said as to a trust, even though it be one of long standing, that an attorney's fee reasonably and necessarily paid by it is deductible as an expense of carrying on business any more than it can be said as to an individual. Dorr v. United Stattes,18 Fed.Supp. 92; Morse v. Helvering, 85 Fed.(2d) 262; Monell v. Helvering, 70 Fed.(2d) 631; Ames v. Commissioner, 49 Fed.(2d) 853.
The respondent's argument also makes the point that, even though the trusts were to be regarded as carrying on a trade or business, *971 this fee was not a business expense deductible to reduce gross income but was either (or both) an administration expense of the decedent estate of Alfred G. Vanderbilt or a nondeductible capital expenditure because incident only to the enlargement of the corpus*642 of the trust fund. He suggests also that the fee may not be deducted by these petitioning trusts because it was actually paid by the executors of the decedent's estate and not by the trustee, who were parties to the surrogate's proceeding involving Cornelius Vanderbilt's will only because they had become the residuary legatees under the will of their father, one of Cornelius' sons and a residuary legatee. These questions, however, escape decision in view of the principal determination that the fee has not been shown in fact to be an expense of "carrying on any trade or business" by the taxpayers, and the Commissioner's determination is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.
TYSON dissents.
LEECH, concurring: The holding of the majority is predicated wholly upon the premise that the conduct and management of the petitioning trusts, during the taxable year, was not a "carrying on [of] any trade or business."
The trusts in question, apparently, had existed, in fact, for some 14 years. The powers of the trustees were very broad, including a right to invest and reinvest the principal and to collect income. The*643 corpus of each trust was large and the income therefrom correspondingly substantial. Obviously, such income was so substantial that $35,000 therefrom was paid to each of the two present trusts annually for the support of their respective beneficiaries. This was so during the tax year. These facts seem to me to be implicit in this record. Therefore, I think that the conduct and management of these trusts during the taxable year was the "carrying on of [a] trade or business" during the taxable year. Flint v. Stone Tracy Co.,220 U.S. 107">220 U.S. 107; John H. Watson, Jr., et al., Trustees,35 B.T.A. 706">35 B.T.A. 706; acquiesced in by the respondent (C.B. XVI-18-8673).
Although the record does not disclose the identity of the items deducted by the petitioners which were allowed by the respondent, since the deduction of compensation for the trustees is not contested, it would seem such an item had been allowed. In any event, from a reading of the respondent's brief, the respondent apparently placed little if any reliance on the position that the conduct and management of the petitioning trusts did not constitute the carrying on of a trade or business during the taxable*644 year. Thus, his brief states:
* * * It is the position of the respondent that the attorney's fees were capital expenditures incurred by the executors of the estate and were made *972 to increase the value of the estate, and hence not an ordinary and necessary expense, and that in any event they were expenditures occurred [sic] in an isolated, unusual and extraordinary transaction, and were not ordinary and necessary expenses in carrying on any business.
If the action of the respondent in disallowing the disputed deductions is correct, it is so, in my opinion, because the payments supporting those deductions were made in the acquisition of capital assets and, for tax purposes, are nondeductible capital expenditures. Stephens Fuel Co.,13 B.T.A. 666">13 B.T.A. 666; Columbia Theatre Co.,3 B.T.A. 622">3 B.T.A. 622; First National Bank of St. Louis,3 B.T.A. 807">3 B.T.A. 807; Emerson Electric Manufacturing Co.,3 B.T.A. 932">3 B.T.A. 932; Charles P. Hewes,2 B.T.A. 1279">2 B.T.A. 1279; Laemmle v. Eisner,275 Fed. 504. Cf. *645 S. & L. Building Corporation,19 B.T.A. 788">19 B.T.A. 788 (reversed on other grounds); Spinks Realty Co.,21 B.T.A. 674">21 B.T.A. 674; affd., 62 Fed.(2d) 860; certiorari denied, 290 U.S. 636">290 U.S. 636; Central Bank Block Association,19 B.T.A. 1183">19 B.T.A. 1183; affd., 57 Fed.(2d) 5; Horn & Hardart Baking Co.,20 B.T.A. 486">20 B.T.A. 486; Clara Hill Lindley,26 B.T.A. 741">26 B.T.A. 741; affd., 63 Fed.(2d) 807.
ARNOLD concurs in the above.