*44 Decision will be entered under Rule 50.
Petitioner employed attorneys to represent him in suits for attorneys' fees claimed by two groups of attorneys who represented him in a will controversy settled in his favor. Jurisdiction in both suits was obtained by attaching various income-producing property which he received as a result of the settlement. Held, legal expenses incurred with respect to the reduction of petitioner's liability for legal fees arising in connection with a will contest do not constitute ordinary and necessary expenses paid for the management, conservation, or maintenance of that property under section 212, 1954 Code, notwithstanding the attachment of petitioner's income-producing property or the sale and use of such property in satisfaction of the liability.
*192 Respondent determined deficiencies in petitioner's Federal income taxes for the years 1957 and 1958 in the respective amounts of $ 286 and $ 2,474.12. Respondent disallowed certain amounts deducted by petitioner as legal fees "incurred for the management, conservation, or maintenance of property held for the production of income."
Petitioner has since conceded that payments amounting to $ 9,900 made by him in the year 1958 were nondeductible legal fees, and the only issue remaining for our decision is whether legal fees paid by petitioner amounting to $ 1,100 in 1957 and $ 9,375.08 in 1958 were ordinary and necessary business expenses incurred for the conservation of property held for the production of income under section 212 of the Internal Revenue Code of 1954.
FINDINGS OF FACT.
Some of the facts have been stipulated and are incorporated herein by this reference.
Petitioner is an individual*46 residing in Arlington, Virginia. He filed his Federal income tax returns for the years 1957 and 1958 with the district director of internal revenue at Richmond, Virginia.
Petitioner's father died on or about March 19, 1955, leaving a will and codicil attached thereto, both of which were dated March 18, 1955. The will left the bulk of the estate to petitioner's stepmother but, under the terms of the codicil, petitioner was to receive various shares of stock owned by his father in some tobacco companies. The will and codicil were admitted to probate by an order of the Orphans Court for Worcester County, Maryland, dated March 28, 1955.
In June 1955 petitioner employed an attorney named John L. Sanford, Jr., sometimes hereinafter referred to as Sanford, to contest the *193 will and codicil of his father. The contract of employment entered into between petitioner and Sanford permitted Sanford to engage additional counsel and pursuant thereto he engaged the services of an attorney named Thomas F. Johnson, sometimes hereinafter referred to as Johnson. Petitioner agreed to pay Sanford and his assistants an initial fee of $ 500 and, in the event the will contest was compromised or*47 settled before trial, a total fee equivalent to 25 percent of the value of the property received by petitioner in excess of the appraised value of the property bequeathed to him in the will. Petitioner had the right to discharge Sanford at any time upon an additional payment of $ 2,000, which amount would constitute "payment in full of the services of said Attorney in filing said caveat proceedings and in conducting the proceedings up to the date of the discharge of said Attorney and/or dismissal of said caveat proceedings."
Petitioner subsequently became dissatisfied with the services of Sanford and Johnson and sometime in the year 1956 he engaged a Washington attorney named John H. Eisenhart, Jr., hereinafter referred to as Eisenhart, to represent him in the settlement of the will controversy. A letter drafted by Eisenhart, and agreed to by petitioner, which purported to set out the terms of Eisenhart's employment (which included the employment of an attorney named Bonuso), provided, among other things, that if a settlement were reached along certain lines proposed by Eisenhart petitioner would pay him a fee of $ 25,000.
Subsequently, all four attorneys -- Sanford, Johnson, Eisenhart, *48 and Bonuso -- became involved in the settlement of the will controversy. A settlement of the will controversy between petitioner and his stepmother was achieved on January 28, 1957, 1 whereby she agreed: (1) To transfer and deliver to petitioner certain articles of household furnishings, mostly family heirlooms with no specific intrinsic value; (2) to convey to petitioner the real property known as Edgewater; (3) to convey to petitioner the sum of $ 5,000; (4) to exercise a power of appointment in favor of petitioner or his son with regard to the corpus of a so-called "marital trust" created by the will of which she was beneficiary with testamentary power of appointment; and (5) to remit to petitioner or his son any payments she might receive from the so-called "second trust" created under the will, less all income and other taxes and service charges.
The appraised value of*49 Edgewater at the date of settlement was $ 16,500. The value of the interest petitioner received in the "second trust" was not less than $ 125,000 at the time of the settlement.
The real property known as Edgewater was rented during the years 1957 and 1958 for $ 180 per annum. No rental income was reported *194 on petitioner's Federal income tax returns for these years because such income was offset by depreciation and taxes. Petitioner had no plans to use Edgewater and he would prefer to sell it if offered a reasonable price. This property has since been placed in the soil bank. Petitioner reported the dividends, together with the capital gain derived from the sale of the tobacco stock, on his Federal income tax return for the year 1958.
After settlement of the will controversy, a dispute arose between petitioner and Sanford, Johnson, Eisenhart, and Bonuso as to the amounts of fees owed to them by petitioner. It was petitioner's position in these disputes that Eisenhart and Bonuso had orally agreed to reduce their fee of $ 25,000 upon the readmission of Sanford and Johnson into the settlement of the will controversy. Failing to reach an accord with Eisenhart, petitioner*50 refused to honor Eisenhart's oral demand for his and Bonuso's fee of $ 25,000, and petitioner did not pay Sanford and Johnson their contract fee based on 25 percent of the value of the property received by petitioner in excess of the appraised value of the property bequeathed to him in the will.
On or about March 22, 1957, Sanford and Johnson brought suit against petitioner for attorneys' fees alleged to be due and owing in the amount of $ 34,000 for their services in bringing about or contributing to the settlement of the will dispute between petitioner and his stepmother. Jurisdiction was based upon attachment of the real property known as Edgewater. Subsequently, Eisenhart and Bonuso brought suit against petitioner for the sum of $ 25,000 for their fees in bringing about the settlement between petitioner and his stepmother. Jurisdiction for the suit was based upon attachment of the tobacco stock bequeathed to petitioner under the terms of the codicil of his father's will and attachment of the $ 5,000 cash paid to petitioner as a result of the settlement.
Petitioner employed an attorney named Richard W. Kiefer, hereinafter referred to as Kiefer, of Baltimore, Maryland, and an*51 attorney named Charles H. Duff, sometimes hereinafter referred to as Duff, of Arlington, Virginia, to represent him in the actions brought by the attorneys who participated in the will controversy.
As a result of the efforts of Kiefer and Duff, a judgment in favor of Sanford and Johnson was set aside, and the matter was ultimately settled out of court for a total sum of $ 15,000, which amount petitioner paid by various promissory notes secured by a mortgage on petitioner's real property known as Edgewater.
Eisenhart and Bonuso were awarded a judgment on a quantum meruit basis for $ 9,000. Payment was made from the sale of the tobacco stocks petitioner had received from his father.
Petitioner paid attorneys Kiefer and Duff $ 1,100 in 1957 and *195 $ 9,375.08 in 1958 for legal services in connection with the attachment suits. These payments were both claimed as deductions on petitioner's Federal income tax returns for the taxable years 1957 and 1958, respectively.
ULTIMATE FINDING OF FACT.
The attorneys' fees paid to Kiefer and Duff in the amounts of $ 1,100 and $ 9,375.08 in the years 1957 and 1958, respectively, were incurred by petitioner for the primary purpose of minimizing*52 his liability for fees payable by him to Sanford, Johnson, Eisenhart, and Bonuso for their legal services rendered to him incident to the settling of a will controversy.
OPINION.
The question presented for our decision is whether attorneys' fees paid to resist demands from two groups of attorneys participating in the settlement of a will contest may be deducted as ordinary and necessary expenses paid for the conservation or maintenance of property held for the production of income within the meaning of section 212 of the Internal Revenue Code of 1954. 2
Petitioner contends that the legal fees paid in defending his income-producing property against attachment proceedings brought by Sanford and Johnson*53 and Eisenhart and Bonuso constitute ordinary and necessary expenses paid for the conservation or maintenance of income within the meaning of section 212 of the Internal Revenue Code of 1954.
Respondent argues that the expenditures in question should be classified as nondeductible personal living expenses under section 262 of the 1954 Code 3 for the reason that attorneys' fees incurred to reduce petitioner's liability for legal services rendered in connection with a will contest are not deductible and, further, that legal fees paid to reduce petitioner's liability for such legal services do not become deductible under section 212 by reason of the fact that property held for the production of income may be sold or used to satisfy the liability, citing Lykes v. United States, 343 U.S. 118">343 U.S. 118.
Section 212, quoted*54 in the margin, allows the deduction for all the ordinary and necessary expenses for the management, conservation, or maintenance of property held for the production of income. The statutory language "ordinary and necessary" implies that expenses, in *196 order to be deductible, must be reasonable in amount and must bear a proximate relation to the management, conservation, or maintenance of property held for the production of income. Lykes v. United States, supra;Trust of Bingham v. Commissioner, 325 U.S. 365">325 U.S. 365; sec. 1.212-1(d), Income Tax Regs.4
Respondent*55 does not contend that the legal fees paid to Kiefer and Duff were unreasonable in amount. Respondent questions the proximate relation of such expenses to the management, conservation, or maintenance of the property held for the production of income.
It is well settled that expenditures incurred in defense of or to perfect title to property are not deductible, but are capital expenditures to be added to the cost of the property. Robert L. Wilson, 37 T.C. 230">37 T.C. 230, on appeal (C.A. 5, 1962); Porter Royalty Pool, Inc., 7 T.C. 685">7 T.C. 685, affd. 165 F. 2d 933, certiorari denied 334 U.S. 833">334 U.S. 833.
The deductions claimed by petitioner for legal fees incurred with respect to the settlement of the will controversy have been conceded. The deductions in question represent expenditures for legal services rendered in defense and settlement of the attachment proceedings brought to reduce to judgment and enforce payment of petitioner's liability for legal services rendered. The nature of the attachment proceedings did not constitute an attack on petitioner's title in the property which was attached. *56 The litigation between petitioner and Sanford, Johnson, Eisenhart, and Bonuso was over petitioner's liability and, if liable, the amount of such liability for legal services he received. Therefore we do not decide this case on the ground that the expenditures for legal services paid to Kiefer and Duff are not deductible under section 212 because they were incurred in defending or perfecting petitioner's title to property in connection with a will contest.
In Henry M. Rockwell, 37 T.C. 246">37 T.C. 246, we quoted from and followed that portion of Lykes v. United States, supra, which explained that by enactment in 1942 of section 23(a)(2) of the 1939 Code, the predecessor of section 212 of the 1954 Code, Congress did not intend to authorize widespread deductibility of personal, living, or family expenditures which was prohibited by section 24(a)(1) of the 1939 Code, the predecessor of section 262 of the 1954 Code. The rationale of this rule was explained in Lykes v. United States, supra at 125, as follows:
Legal expenses do not become deductible merely because they are paid for services which *57 relieve a taxpayer of liability. That argument would carry us *197 too far. It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-producing property he might have. For example, it suggests that the expense of defending an action based upon personal injuries caused by a taxpayer's negligence while driving an automobile for pleasure should be deductible. Section 23(a)(2) never has been so interpreted by us. It has been applied to expenses on the basis of their immediate purposes rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-producing assets by reducing his general liabilities. See McDonald v. Commissioner, supra, at 62-63. [323 U.S. 57">323 U.S. 57.]
This view is also reflected in section 1.212-1(m), Income Tax Regs., which provides, in part, that an expense paid in determining or contesting a liability asserted against a taxpayer does not become deductible by reason of the fact that property held for the production of income may be required to be used or *58 sold in satisfying such a liability. This same language appeared in section 29.23(a)-15(b), Regs. 111, as amended by T.D. 5513, 1 C.B. 61">1946-1 C.B. 61, which the Supreme Court in Lykes found to be entitled to great weight because it survived several amendments by Congress to the Internal Revenue Code. 5
In the present case the legal fees paid to Kiefer and Duff were incurred by reason of the dispute between petitioner and his other attorneys. Although the litigation between petitioner and his attorneys involved the attachment of petitioner's income-producing property, and although such property was used and sold in satisfaction of the liability*59 determined to be due, it does not appear that petitioner's purpose in defending himself in the suits brought by his attorneys was other than to minimize his liability for the fees involved in those suits. The amounts paid to Kiefer and Duff were therefore not proximately related to the management, conservation, or maintenance of property held for the production of income but, rather, were proximately related to the will contest suit out of which the litigation arose. Accordingly, the rationale of the Lykes case is determinative here. Cf. Sefton v. Commissioner, 292 F. 2d 399, affirming a Memorandum Opinion of this Court; Lewis v. Commissioner, 253 F. 2d 821, affirming 27 T.C. 158">27 T.C. 158; Richardson v. Commissioner, 234 F. 2d 248, affirming a Memorandum Opinion of this Court; Henry M. Rockwell, supra.We hold that the legal fees paid to Kiefer and Duff by petitioner in the amounts of $ 1,100 and $ 9,375.08 in the years 1957 and 1958, respectively, are not deductible pursuant to section 212 of the Internal Revenue Code of *60 1954.
Petitioner relies on several cases which, in our opinion, are distinguishable. In Willy Zietz, 34 T.C. 369">34 T.C. 369, petitioner incurred legal expenses *198 in obtaining the dismissal of suits in which his income-producing property was attached. The thrust of the suits against petitioner was to obtain petitioner's income-producing property itself by asserting title thereto. This Court found that the attack on the petitioner's title was not bona fide and that he was forced to act to keep his income-producing property free from attachment under a malicious claim wholly without merit. We concluded that the legal expenses incurred under these circumstances bore a reasonable and proximate relation to the conservation of property held for the production of income. Notably absent in the instance case is an attack on petitioner's title to his income-producing property which was malicious and wholly without merit.
In Frederick E. Rowe, 24 T.C. 382">24 T.C. 382, the petitioner acquired a remainder interest in a testamentary trust by settlement of a will contest. The executors instituted a suit for the approval of their final account which*61 included a request for approval of their allocation to corpus, pursuant to the settlement of the will controversy, of certain reserves for depreciation and depletion. The executors were opposed by the life tenant and her assignee. The petitioner incurred legal fees by intervening in the suit in support of the executors' allocation. The Commissioner disallowed the deduction for such legal fees on the ground that they were paid for defending or perfecting title to property. We found that the expenditures incurred by petitioner were not related to title, but were incurred to maintain and conserve petitioner's remainder interest in the trust corpus which properly included income set aside in the form of reserves for depreciation and depletion. The legal fees incurred in Rowe did not relate to a liability asserted against petitioner, which is the subject of the instant case, but were related to the conservation or maintenance of the integrity of the trust corpus, petitioner's income-producing property.
In Baer v. Commissioner, 196 F. 2d 646, legal expenses paid in connection with a divorce proceeding were held to be deductible. It was found *62 in that case that the expenditures for legal services were not incurred in contesting or reducing the taxpayer's liability for alimony to his wife, but were incurred in providing for the liability without impairing the taxpayer's stock ownership and control of a corporation. As a consequence of such ownership and control, the taxpayer served as the corporation's president at a salary of over $ 100,000 per annum. The Baer case is distinguishable from the instant case because there the expenditures did not go to the question of the taxpayer's liability or its amount, but to the manner in which the liability might be met. Cf. Henry M. Rockwell, supra, and Charlotte M. Douglas, 33 T.C. 349">33 T.C. 349, which similarly distinguish the Baer case.
Decision will be entered under Rule 50.
Footnotes
1. The settlement agreement was dated January 28, 1956. It appears from the record that the correct date, as stipulated, was January 28, 1957.↩
2. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --
* * * *
(2) for the management, conservation, or maintenance of property held for the production of income; * * *↩
3. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.
Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.↩
4. Income Tax Regs.
Sec. 1.212-1 Nontrade or nonbusiness expenses.
(d) Expenses, to be deductible under section 212↩, must be "ordinary and necessary". Thus, such expenses must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income.
5. See also sec. 39.23(a)-15(k), Regs. 118.
Major enactments since Lykes v. United States, 343 U.S. 118">343 U.S. 118↩, without resulting in congressional change to the Commissioner's regulation, include Internal Revenue Code of 1954; Technical Amendments Act of 1958, 72 Stat. 1606; Revenue Act of 1962, 76 Stat. 960.