*124 Decision will be entered for the respondent.
Held, expenses incurred by a testamentary trust for maintaining an elaborate estate on which the decedent's widow resided as a "lessee" under an arrangement to pay "rent" of $ 1 a year were not deductible under sec. 212, I.R.C. 1954. Held, further, such expenses were similarly not deductible under sec. 642(c), I.R.C. 1954, merely because the estate was to be transferred to a charitable foundation upon the widow's death.
*36 The Commissioner determined income tax deficiencies for 1966 and 1967 in the amounts of $ 164,249.51 and $ 257,362.64, respectively, against petitioner, a testamentary trust created under the last will and testament of Alfred I. duPont. *127 Among petitioner's assets is "Nemours," an elaborate estate, which during the years in issue served as the principal residence of Jessie Ball duPont, Mr. duPont's widow and the principal beneficiary as well as a trustee of petitioner. At issue is whether expenses paid by petitioner in 1966 and 1967 for the *37 maintenance of Nemours are deductible. If such expenses are found generally to be deductible, a further question is presented as to whether certain of the expenditures were capital in nature and therefore not deductible for that reason.
FINDINGS OF FACT
The parties have filed two stipulations of fact which, together with accompanying exhibits, are incorporated herein by this reference.
Alfred I. duPont died on May 29, 1935, at the age of 71, a legal resident of Jacksonville, Fla. His will provided for the creation of a testamentary trust, the petitioner herein. The trust's fiduciary income tax returns for 1966 and 1967 were filed with the district director of internal revenue at Jacksonville, Fla. The trustees are the Florida National Bank of Jacksonville, Edward Ball, William B. Mills, J. C. Belin, T. S. Coldewey, W. L. Thornton, and Alfred D. Dent.
In or about 1910*128 Mr. duPont caused to be built a large mansion on a portion of a 300-acre tract of land located in Brandywine Hundred, New Castle County, Del. The mansion and the grounds were collectively named "Nemours," and a large staff of personnel was employed to maintain them. Over the years a substantial amount of landscaping and building was done on the grounds, so that at the time of Mr. duPont's death in 1935 they included formal gardens, three manmade lakes, a greenhouse, large monuments built in honor of Mr. duPont's ancestors, an extensive system of roadways, various bridges and walkways, stables, water pumping plants, and various other buildings.
In 1921, Mr. duPont, who was then about 57 years of age, married Jessie Ball, who was then about 37 years of age. They lived at Nemours until 1926, at which time they acquired a second home, Epping Forest in Jacksonville, Fla., which became their principal residence. However, they continued to reside at Nemours to some extent. From 1926 until 1964 it was kept open and ready for any use which Mr. and Mrs. duPont might make of it; a full-time staff was maintained to keep the house open. During this period Mr. duPont, while he was alive, *129 and Mrs. duPont used Nemours on the average of 2 months per year.
On January 14, 1925, Mr. duPont organized Nemours, Inc. ("the corporation"), to which he transferred Nemours in exchange for all of the new corporation's stock. He continued to hold all of the outstanding stock until his death, at which time it passed to his estate, as is set forth more fully below. On March 19, 1925, Nemours, Inc., as "lessor," entered into an agreement with Mr. and Mrs. duPont, as "lessees," whereby it agreed to "lease" Nemours to them "for the term of their joint natural lives and for the additional term of the life time *38 of the survivor of them upon the death of the other of them." In return, Mr. and Mrs. duPont agreed to pay "rent" of $ 1 per year. They also agreed, "As a further consideration for said lease * * * to pay all taxes of every kind and nature lawfully assessed against said property herein leased, during the continuation of the lease, and to pay all expenses for the necessary upkeep and repairs of said property, incurred during the term of the lease." On or about January 17, 1929, Mr. duPont transferred to Nemours, Inc., 20,000 shares of preferred stock of Almour Securities, *130 Inc., which had a fair market value at that time of $ 2 million. At the same time Mr. and Mrs. duPont and Nemours, Inc., executed an amendment to the March 19, 1925, agreement, whereby Nemours, Inc., agreed that since "certain income bearing securities" had been transferred to it "as further consideration," it would pay "the entire taxes of every kind and nature lawfully assessed against [Nemours] * * *, and also [that it would] promptly pay each year all the necessary and proper expenses and charges of upkeep and repairs of said property, and all expense of operating said property including the garage, greenhouses, gardens and all other necessary expense of maintaining the property in its present condition, save and except that the Lessees agree to pay the necessary expenses incurred inside the Mansion House upon said property, and the salaries of their personal employees." 1
*131 On the 1929 corporation income tax return of Nemours, Inc., the receipt of the Almour Securities, Inc., stock was reflected in a $ 2 million increase in "paid-in surplus." Similarly, on the balance sheets included in the corporation income tax returns of Nemours, Inc., for 1930, 1931, 1935, and 1936 the value of the Almour Securities, Inc., stock continued to be reflected in "paid-in surplus" or "surplus," which item, however, was reduced to take into account changes in other assets and liabilities of Nemours, Inc. On the balance sheets in its returns for 1932 and 1937, the latter being the year that Nemours, Inc., was dissolved, as set forth more fully below, this amount was reflected in the "undivided profits" and "earned surplus and undivided profits" items, respectively. 2 Moreover, the corporation's income tax returns for each of the years 1929-37 reported the holding of "stocks of domestic corporations" with a value of $ 2 million. This was by far the corporation's largest asset during these years, its next largest assets being "land" and "buildings" which, in the aggregate, steadily *39 increased in value from a low of $ 572,215.10 in 1929 to a peak of $ 1,039,521.75*132 in 1934 and 1935, and then decreased slightly to $ 1,036,420.37 for 1936 and 1937.
On none of the corporation's income tax returns for the years 1928-37 did it report any rental income; however, it did report $ 100,000 of dividend income for each of the years 1929-36, and $ 75,000 of dividend income for that portion of 1937 prior to its dissolution in September of that year (as more fully hereinafter set forth). Also, for the years 1929-35 the corporation claimed an offsetting deduction for the full amounts thereof as dividends "from a domestic corporation" the income of which was subject to taxation under the applicable revenue acts, thereby in effect rendering such dividends tax free in the hands of the recipient corporation. 3 It also claimed a deduction, for each of the years 1929-37, for the expenses of maintaining Nemours' *133 grounds. 4
Nemours, *134 Inc.'s corporation income tax return for 1928, the year before it received the Almour Securities, Inc., stock, was blank except for identifying information and the words "None Operating" which were typed in the "Gross Income" area of the return. Its "tentative return" for 1928 similarly contained no information whatever as to any items of income or deduction, but simply had the words "Net Loss" written by hand as the final entry on the line calling for "net income." The corporation's income tax returns for each of the years 1929-37 showed a net loss for each year. Its income tax returns for 1928, 1929, and 1930 reported its business as "Owners and operators of Real Estate," while its returns for 1935 (the year of Mr. duPont's death), 1936, and 1937 reported its business as "Holding Real Estate for Charitable Foundation." 5
*135 Upon the death of Mr. duPont in 1935, title to the stock of Nemours, Inc., passed to his executors. The corporation continued to maintain *40 the grounds until it was liquidated in 1937, whereupon the executors paid for such maintenance. When Nemours was thereafter transferred to the trust, the petitioner herein, it continued to provide the maintenance for the grounds.
Mr. duPont's last will and testament, after providing for specific bequests to certain named individuals, including leaving the Epping Forest home and the contents of the mansion at Nemours to his wife, provided that the remainder of his estate, which included all of the stock of Nemours, Inc., was to comprise the corpus of a testamentary trust. There were several named trustees and alternate trustees (in the event that one or more of the named trustees proved to be unwilling or unable to serve), among the former being the Florida National Bank of Jacksonville and Mrs. duPont. At all times from the inception of the trust until her death Mrs. duPont served as a trustee. While she was alive the trustees were to pay her $ 200,000 each year from the trust's net income. After it was established that "sufficient*136 net income [was] available for that purpose" (i.e., to pay her that amount), certain annuities were to be paid from the remaining net income of the trust to certain named individuals. Finally, after the payment of the $ 200,000 to Mrs. duPont and the payment of the other annuities, any remaining net income was to be paid to Mrs. duPont. The will further provided that after Mrs. duPont's death the trustees were to "cause to be incorporated a corporation for charitable purposes, to be designated and known as 'The Nemours Foundation'," and to transfer to it "in fee simple forever, the entire property, together with the buildings and structures thereon situate in Brandywine Hundred, New Castle County, State of Delaware, known as 'Nemours'." They were also instructed to pay over periodically to the foundation the net income from the trust, subject to any remaining annuities. The foundation was to be operated "as a charitable institution for the care and treatment of crippled children, but not of incurables, or the care of old men or old women, and particularly old couples." The will further provided, with respect to the use of Nemours by the foundation, in part as follows:
"The Nemours*137 Foundation" shall be created and maintained as a memorial to my great, great grandfather, Pierre Samuel duPont de Nemours, and to my father, Eleuthere Irenee duPont de Nemours, and a proper tablet shall be erected in the present mansion to so indicate.
The Mansion House on the Estate of "Nemours" shall not be used for housing or hospital purposes of said institution, but buildings may be erected at any point on the Estate of "Nemours" suitable for such purposes and as shall be selected by the Board of Managers.
The rooms of said Mansion shall be used for the reception of visitors and their entertainment; also for executive and administrative purposes, should my Trustees so decide, but mainly for the purpose of providing a library and exhibiting *41 to the public interesting and valuable literature, works of art and any articles of historic and artistic interest for the advancement of education, and maintained, as far as possible, in their present condition.
My Trustees are specifically instructed that it shall be their duty, first, to care for the mansion and grounds and gardens surrounding "Nemours" in order that they be maintained for the pleasure and benefit of the public *138 in their present condition and the grounds improved from time to time, as their funds warrant; it being my particular desire that this memorial to my great, great grandfather, Pierre Samuel duPont de Nemours, and to my father, Eleuthere Irenee duPont de Nemours, be not permitted to deteriorate, but that it shall consistently become more beautiful and attractive to those who view it as time passes. Only after faithfully carrying out the above instructions shall my Trustees be warranted in using any portion of the capital or income of my estate for additional charitable purposes.
My Trustees shall arrange for the admission of the public to the Mansion and other buildings and the grounds at such times and under such rules and regulations as they may provide.
Provision was also made for the trustees to use up to $ 1 million of the principal of the trust for the "erection and equipping of buildings" for use by the foundation. Finally, the will provided that any surplus income remaining after providing for the operation of the foundation "may from time to time be used * * * in contributions to other worthy charitable institutions."
On September 22, 1937, pursuant to an order of the Chancery*139 Court of Duval County, Fla., the executors dissolved Nemours, Inc.; accordingly its assets, subject to the March 19, 1925, agreement as amended in 1929, became part of the estate of Alfred I. duPont. The order of the Chancery Court provided in part as follows:
That the assets of said Nemours, Incorporated, upon such distribution, shall constitute a part of the principal of the Estate of Alfred I. duPont and the real estate, buildings, structures and improvements constituting a part of said assets as described in said petition shall be subject to the terms of that certain indenture of lease made March 19, 1925, by said Nemours, Incorporated, to the said Alfred I. duPont and Jessie Ball duPont, as amended by a certain instrument in writing made January 17, 1929 by and between the said Nemours, Incorporated, and the said Alfred I. duPont, and the said Jessie Ball duPont, and also subject to that certain mortgage indenture made July 1, 1931, by and between the said Nemours, Incorporated, and the Florida National Bank of Jacksonville, a banking corporation under the laws of the United States of America, securing an issue of bonds of said corporation dated as of July 1, 1931, there being*140 now outstanding, pursuant to the terms of said indenture, bonds of the said Nemours, Incorporated, in the principal sum of $ 626,000, bearing interest at the rate of five per cent (5%) per annum and also subject to the charitable trust imposed upon them by the said Last Will and Testament and Codicils.
As already noted, Nemours, Inc., continued to maintain Nemours' grounds until its dissolution, when the executors began to bear the expenses of maintenance. The executors continued to do this until the *42 remainder of the estate, which included Nemours, was transferred to the trust, the petitioner herein, which has since maintained the grounds.
The value of Nemours as set forth in the estate tax return of the estate of Alfred I. duPont was $ 600,000. However, in valuing, for estate tax purposes, the Nemours, Inc., stock the executors subtracted an amount ("the reserve") which represented the anticipated cost of the requirement to maintain the property during the lifetime of Mrs. duPont. This amount was calculated by multiplying a fixed rate, which represented the approximate yearly cost of maintaining the grounds, by 19 1/2 years, which was the life expectancy of Mrs. duPont*141 as of the date of her husband's death. Thereafter, on its income tax return for 1938, the estate deducted its expenses of maintaining the property. This deduction was challenged by the Commissioner on the ground that it was a duplication of the deduction claimed on the estate tax return. Therefore, in order to avoid this duplication, the parties agreed to allocate a portion of each year's maintenance expense deduction to the reserve, and to allocate the remainder as a deduction against current income. The same pattern was followed in subsequent years by the trust after the property was transferred to it. 6 Thus, the trust claimed a deduction against current income, according to the allocation agreement, for a portion of its expenses in maintaining Nemours' grounds. The remainder of those expenses was applied against the reserve. The Commissioner did not challenge those deductions, and in the early 1950's the reserve was depleted. Thereafter, the trust claimed as a deduction against current income the full amount of the expenses it incurred to maintain the grounds.
*142 In February of 1962, while in Delaware, Mrs. duPont fell and broke her leg. She never returned to Jacksonville, and Nemours thereafter again became her principal residence. She was for all practical purposes an invalid until her death on September 27, 1970, at the age of 86. After a second accident in 1966 she was almost entirely confined to a wheelchair. Mrs. duPont was physically very frail after the second accident, and, while she was visited by her family, friends, and business associates, she did not do any entertaining on the grounds. Approximately two to three times per week she would "go out" and tour the grounds with her secretary. She was interested in seeing that Nemours was properly maintained, and she would occasionally speak to the men who were caring for the grounds. Although her husband was buried at Nemours, on none of her trips outside with her secretary did she visit his grave. After her death in September of 1970, a hospital *43 for crippled children, which is still in existence, was built upon 22.5 acres of Nemours' grounds. The remainder of the property, however, was not opened to the general public.
The principal assets of the trust consisted of*143 a large number of blocks of valuable securities -- e.g., as of December 31, 1966, its inventory included 764,280 shares of E. I. duPont de Nemours & Co. common stock and 1,101,898 shares of General Motors Corp. common stock -- which were productive of large amounts of dividend income. The record fails to show that the great bulk, if not all, of the trust's securities did not have their source in assets owned outright by Mr. duPont at his death rather than in assets owned by Nemours, Inc., when it was liquidated in 1937. The record also fails to show that the trust received any rental income from real estate apart from a possible item of "Sign Board Location Rental" in the amounts of $ 120, $ 360, and $ 480, for the years 1964-66, respectively, and an amount of $ 360 for 1967, none of which, however, was shown to relate to the Nemours property, and which could have related to other real estate owned by the trust.
During each of the years 1966 and 1967 the trust received over $ 13 million of gross income, of which over $ 11 million was distributed each year to Mrs. duPont. The trust expended $ 255,753.38 in 1966 and $ 274,451.11 in 1967 for general maintenance of the Nemours property. *144 In addition, the trust expended $ 114,284.82 7 during 1967 for the following items:
(1) Repaving all existing paved roadways and walkways with a 2-inch layer of blacktop, at a cost of $ 25,743.20. 8 The work performed in respect of this item as well as in respect of the item immediately following had a useful life of 12 years.
(2) Paving all existing unpaved roadways on the grounds then being used, by applying a 2-inch layer of blacktop on a 6-inch base of crushed stone and dust, at a cost of $ 12,288.52. 8
(3) Five projects involving rehabilitation of various structures such as a circular classical temple, ornamental balustrades, steps, fountains, terraces, flagstone areas, urns, etc. Years of exposure to weather had caused considerable disintegration of mortar in various structures, some flagstones were broken and required replacement, other flagstones needed to be realigned or repitched, some stairs needed repairs, the ceiling in the classical temple leaked and had to be replaced. Comprehensive programs of rehabilitation, including substantial amounts of repointing of mortar, resurfacing of marble, and extensive repairs of various kinds, were required to deal with these*145 and related conditions *44 that had developed over the years. Had these structures, etc., received periodic care, only comparatively minor expenditures would have been required from year to year to maintain them properly; but the five major projects involved herein were necessitated by many years of neglect. The aggregate cost of these five projects was $ 68,000, and they had a useful life of from 5 to 15 years.
(4) Purchase of a jeep wagon and dump truck for $ 4,001 and $ 4,252, respectively. The parties agree that such cost represents a capital expenditure and that the useful life of each vehicle was 4 years.
On its fiduciary income tax returns for the years 1966 and 1967 the trust claimed $ 255,753.38 and $ 388,735.93, respectively, as a deduction for *146 "Nemours Property Maintenance." This latter figure was composed of general maintenance costs of $ 274,451.11 plus additional costs of $ 114,284.82 for the paving and repaving work, the jeep and dump truck, and the five rehabilitation projects. In his deficiency notice to petitioner the Commissioner disallowed the entire amount of these claimed deductions, for the reasons that:
(1) the property was not held for the production of income; (2) the expenditures do not qualify as administration expenses; and (3) the expenditures do not qualify for the charitable deduction.
Alternatively, the deficiency notice stated that if the maintenance expenses were held to be allowable deductions then "expenditures totalling $ 114,284.82 claimed as maintenance expenses in the tax year 1967 constitute capital expenditures under section 263 of the Internal Revenue Code and are not allowable as a deduction."
OPINION
Petitioner is a testamentary trust created under the will of Alfred I. duPont, who died in 1935. He had owned a magnificent estate of some 300 acres in Delaware. In addition to the large "mansion house," the estate was improved by formal gardens, three manmade lakes, a greenhouse, statuary, *147 large monuments, an elaborate colonnade, a classical temple, an extensive system of roadways, bridges, walkways, stables, water pumping plants, and various other buildings and structures. A large staff was employed to maintain the property. The entire estate -- mansion, grounds, and all other buildings and structures -- was known collectively as "Nemours." In 1925 Mr. duPont transferred Nemours to a wholly owned corporation which was created for that purpose and which was known as Nemours, Inc. Between 1925 and 1929 Nemours appeared to be the only asset of consequence owned by the corporation. Shortly after the foregoing transfer the corporation, as "lessor," entered into an agreement with Mr. duPont and his wife, as "lessees," whereby it agreed to "lease" Nemours to *45 them for their joint lives plus the additional period of the life of the survivor after the death of the other. The stated "rent" was $ 1 per year. As further consideration, however, the duPonts agreed to pay all maintenance expenses and real estate taxes applicable to the property. A change in the arrangement occurred in 1929, when Mr. duPont transferred to the corporation 20,000 shares of preferred stock*148 of Almour Securities, Inc., which had a then fair market value of $ 2 million and which paid dividends of $ 100,000 a year. An amendment to the 1925 agreement was then executed whereby it was agreed that since these income-bearing securities were transferred to the corporation, it would pay the real estate taxes assessed against Nemours as well as all the expenses for the upkeep and repair of the entire property, except the expenses incurred inside the "Mansion House" and the salaries of the personal employees of Mr. and Mrs. duPont. The duPonts had meanwhile (in 1926) acquired another home, in Florida, which became their principal residence; but a full-time staff kept Nemours open for them for any use which they or the survivor of them might make of it, and it was in fact thus used by them, and by Mrs. duPont after her husband's death, on the average of 2 months per year until sometime during the first half of the 1960's, when it again became the principal residence of Mrs. duPont until her death in 1970.
Upon Mr. duPont's death in 1935 the stock of Nemours, Inc., passed to his executors, who dissolved the corporation in 1937, 9 and who thereupon undertook to maintain Nemours *149 in accordance with the 1925 agreement as amended in 1929. At some later time not disclosed in the record, the property along with all other residuary assets of Mr. duPont's estate was transferred by the executors to the testamentary trust, the petitioner herein, which then continued to provide for the maintenance of Nemours (except as it related to the interior of the mansion). The trust thus expended $ 255,753.38 in 1966 and $ 388,735.93 in 1967 for the upkeep of Nemours, for which it claimed deductions from gross income on its returns for those years. Its income for each of those years was derived almost exclusively from dividends and interest, and exceeded $ 13 million, over $ 11 million of which was distributed to Mrs. duPont in each year.
The principal question before us is whether the foregoing expenditures of $ 255,753.38 and $ 388,735.93*150 in 1966 and 1967, respectively, are deductible from gross income. The Government contends initially that the cost of maintaining Nemours represented merely the payment of personal living expenses of the primary beneficiary of the trust, the deduction of which is explicitly forbidden by section 262 of *46 the 1954 Code. 10*151 There is much force to this position, for the arrangements under which Mr. and Mrs. duPont had the possession and enjoyment of Nemours amounted in substance to little more, if anything, than life estates in that property, and the expenses in question were plainly those which a life tenant would incur in connection with his or her personal use of the property. Living at Nemours was life on a grand scale, and the fact that Mrs. duPont, because of her advancing years and physical condition, was unable to take full advantage of its facilities in no way affects the nature of these expenses as being her nondeductible personal living expenses in the circumstances. 11
However, we need not rest our decision on section 262, because, in our view, the very statutory provisions upon which petitioner relies to support the deduction are not applicable. Those provisions are contained in section 212 of the 1954 Code, which provides: 12
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 --
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; * * *
A knowledge of the history of the provisions*152 of section 212 is essential to an understanding of their scope and meaning.Section 212 had its origin in a 1942 amendment to the 1939 Code. 13 Prior thereto, section 23(a)(1) of the 1939 Code had allowed deductions for ordinary and necessary expenses "in carrying on any trade or business." The 1942 amendment extended these deductions to certain nonbusiness situations. In form, the old deduction for business expenses was retained in section 23(a)(1)(A) of the 1939 Code, and the new deduction for nonbusiness expenses was set forth in the provisions of section 23(a)(2) of that Code. Although the new legislation dealt with the nonbusiness deduction in a single paragraph, it provided for the deduction in two separate, although related, situations, namely, (i) expenses "for the production or collection of income," *47 and (ii) expenses*153 "for the management, conservation, or maintenance of property held for the production of income." When the 1954 Code was enacted it was apparently thought desirable to make even more clear the difference between these two situations, and the first was incorporated in section 212(1) while the second was included in section 212(2). We hold that neither section 212(1) nor section 212(2) affords any basis for the deductions claimed herein.
We may readily dispose of any argument that might be founded upon section 212(1). It is concerned only with expenses paid or incurred during the taxable year "for the production or collection of income." And there is no basis whatever in this record for any contention that the expenses involved herein were paid or incurred for the production or collection of income. At most, the only income that petitioner might theoretically have received (but apparently did not receive) in respect of the 1966 and 1967 expenditures*154 was the nominal rental of $ 1 a year from Mrs. duPont. We reject as wholly without merit the notion that the expenditures herein qualify for deduction under section 212(1).
Petitioner has relied in the main upon section 212(2), which deals with "expenses for the management, conservation, or maintainenance of property held for the production of income." It may well be conceded for this purpose that the expenses in question were for the "management, conservation, or maintenance" of Nemours. The critical question, however, is whether Nemours was "property held for the production of income." In our judgment it was not so held, and we are wholly unpersuaded by petitioner's arguments to the contrary as well as by its attempted reading of section 212(2) that would dispense with the necessity of satisfying the "held for the production of income" requirement in the case of a trust.
The requirement that the property be "held for the production of income" has been regarded as involving an inquiry into whether there exists a genuine "expectation of profit" on the part of the taxpayer. See Frank A. Newcombe, 54 T.C. 1298">54 T.C. 1298, 1303; Samuel Yanow, 44 T.C. 444">44 T.C. 444, 452,*155 affirmed per curiam 358 F. 2d 743 (C.A. 3); Eugene H. Walet, Jr., 31 T.C. 461">31 T.C. 461, 472-473, affirmed 272 F. 2d 694 (C.A. 5). And the burden in this respect is on the taxpayer. See International Trading Co. v. Commissioner, 275 F. 2d 578, 586 (C.A. 7); Frederick H. Prince Trust, 35 T.C. 974">35 T.C. 974, 978.
In support of its position that the expenses in question were related to "property held for the production of income," petitioner stresses two matters, first, that Mr. duPont's transfer of $ 2 million in Almour preferred stock to Nemours, Inc., in 1929 constituted "pre-paid rent" for the use of Nemours by himself and his wife for the remainder of *48 their lives, and, second, that the trust had gross income of over $ 13 million in each of the 2 years involved herein, 1966 and 1967. Neither of these points is sound.
We reject completely the argument that the 1929 transfer of the Almour preferred stock to Nemours, Inc., represented "pre-paid rent." It was never characterized as such; it was never reported as "rent"; and no income tax was ever*156 paid by Nemours, Inc., in respect of any such alleged "rent." No amount of repetitive characterization of this item as "pre-paid rent" by petitioner's counsel in their briefs can belatedly transform what was plainly a contribution to the capital of Mr. duPont's wholly owned Nemours, Inc., into "pre-paid rent." No rental income or any other kind of income was reported in the corporation's 1929 return in respect of the receipt of the Almour securities, which were reflected simply in a $ 2 million increase in "paid-in surplus" on the balance sheet. The fact that this item was reflected in some other manner in later balance sheets hardly changes the situation. The point is that the transfer of these securities to Nemours, Inc., was not intended as "pre-paid rent," and we so find as a fact on the materials before us, bearing in mind that the burden of proof is upon petitioner.
Petitioner's reliance upon the fact that it received income in excess of $ 13 million during each of the years 1966 and 1967 is of no greater help to it. That income was derived almost entirely from dividends and interest, and no part of the expenses of maintaining Nemours was shown to have any connection, let*157 alone "a reasonable and proximate relation to" (Trust of Bingham v. Commissioner, 325 U.S. 365">325 U.S. 365, 370) the securities or other sources from which such income was derived. It is not enough that the taxpayer have income; the particular expenses must relate to "property held for the production of income." Cf. International Trading Co. v. Commissioner, 275 F. 2d 578 (C.A. 7).
Finally, on this aspect of the case, petitioner makes the argument that since it is a trust and since the expenses were incurred for the management of trust property, i.e., Nemours, they are deductible "whether or not they related directly to property held for the production of income." In this connection it relies upon Trust of Bingham v. Commissioner, 325 U.S. 365">325 U.S. 365, and several lower court cases. Petitioner's position would thus excise from the statute the requirement of section 212(2) that the expenses must be incurred "for the management, conservation, or maintenance of property held for the production of income" (emphasis supplied), and it rests upon a misreading of the Bingham case.
Bingham similarly*158 involved a testamentary trust, but there was no dispute in the Supreme Court that the property comprising the corpus *49 of the trust was "held for the production of income." See 325 U.S. at 368. The expenses there involved included certain income tax litigation expenses and legal fees in connection with payment of one of the legacies and final distribution of the trust among the residuary legatees. The question which the Supreme Court addressed was whether the expenses in controversy had "a reasonable and proximate relation to the management of property held for the production of income." 325 U.S. at 370. And it decided that these expenses did have the necessary relationship to such property, even though the expenses themselves had no connection with the production of income, the latter being dealt with in the 1939 Code's equivalent of section 212(1). What was involved in Bingham was the 1939 Code's equivalent of section 212(2), which was concerned with "property held for the production of income," and reasonable expenses proximately related to such property were deductible, regardless of whether they were productive*159 of income or related to the production of income. Throughout its opinion the Supreme Court repeated the idea that it was dealing with a situation involving property "held for the production of income." See, e.g., 325 U.S. at 372, 373, 374, 376. The critical consideration in this case is that Nemours was not held for the production of income. Bingham is of no aid to petitioner.
Similarly, petitioner makes misleading use of a quotation from a portion of Commissioner v. Goldberger's Estate, 213 F.2d 78">213 F. 2d 78, 84 (C.A. 3), referring to Bingham, to the effect that "a trust is an entity for producing income * * * and the particular expense in question may be deductible even though it does not directly produce income if it was incurred to manage or conserve the trust fund." What petitioner omits is language which precedes this quotation and which makes clear that what was involved was the allowance of a deduction for an expense of "management of property held for the production of income." Neither Bingham nor Goldberger's Estate furnishes any basis for the deduction of expenses of management of property which *160 is not held for the production of income. See also Loyd v. United States, 153 F. Supp. 416">153 F. Supp. 416, 420 (Ct. Cl.).
For like reasons petitioner's reliance on section 1.212-1(i), 14 Income Tax Regs., which provides in part that "Reasonable amounts paid * * * by the fiduciary of [a] * * * trust on account of administration *85 expenses, * * * which are ordinary and necessary in connection with the performance of the duties of administration are deductible under section 212," is misplaced. As was stated in Estate of Mortimer B. Fuller, 9 T.C. 1069">9 T.C. 1069, 1075, affirmed per curiam 171 F. 2d 704 (C.A. 3), certiorari denied 336 U.S. 961">336 U.S. 961, "necessary expenses of administering an estate and of conserving the properties of the estate can not be used as a cloak for expenses which are not for those purposes but are for the quite different purpose of providing [the personal living expenses of some of the trustees]." The expenses herein bear a close resemblance to those involved in Frederick H. Prince Trust, 35 T.C. 974">35 T.C. 974, 978, and the deductions therefor*161 were properly disallowed for similar reasons. 15
*162 In view of our conclusion that none of the expenditures in question are deductible under section 212, we do not reach the Government's alternative contention that a portion of the 1967 expenses were in any event capital in nature and therefore not deductible for that reason.
Petitioner's final contention is that the expenditures in question are deductible under section 642(c)16 as "income * * * paid or permanently set aside for a [charitable, etc.] purpose." The Government argues that this issue was raised by petitioner for the first time on brief and that it is not properly before us. This procedural matter is not free from doubt, but we think that there is no merit to petitioner's position in any event.
*163 Mrs. duPont was in possession of Nemours during the taxable years 1966 and 1967 and up to the time of her death in September 1970. It did not pass to the charitable foundation until after her death. Certainly, the general expenses of maintaining Nemours in 1966 and 1967 were not amounts that were "paid or permanently set aside" for charitable purposes. They were paid for the current maintenance of the property.
*51 Only in respect of the $ 114,284.82 portion of the 1967 expenses is there any semblance of an arguable claim for deduction under section 642(c). The Government has contended in another connection that this portion represented capital expenditures, a contention that might operate in petitioner's favor on this issue. However, even if section 642(c) were otherwise applicable, we cannot say on this record that any part of the $ 114,284.82 was paid or set aside for charitable purposes.
For one thing, as the person in possession of Nemours during 1966 and 1967 Mrs. duPont, and not the foundation, was the immediate beneficiary of these expenditures. Moreover, although the foundation obtained Nemours after Mrs. duPont's death in September 1970, and a hospital for crippled*164 children was built upon 22.5 acres of the grounds, no part of the remaining property appears to have been opened to the general public even up to the time of the trial herein. And not only does the record fail to show that any of the expenditures were incurred in respect of the 22.5 acres, but even if some portion of the $ 114,284.82 were otherwise deductible in respect of the remainder of Nemours there is no showing as to how much, if any, of the remaining useful lives of the various components of that item would actually be devoted to charitable purposes within the terms of section 642(c). We do not mean to suggest that expenditures of the type involved herein might generally qualify under section 642(c), but on the record before us we conclude there is complete failure of proof that the particular expenditures can in any event come within its scope. This case is wholly unlike Estate of Edward T. Bedford, 39 B.T.A. 1039">39 B.T.A. 1039, relied upon by petitioner, where the property involved was already being used for a public purpose at the time of the expenditures in question and where it was found that the primary purpose of the expenditures was in connection*165 with that public or charitable use.
Decision will be entered for the respondent.
Footnotes
1. All of the foregoing expenses (except those relating to the inside of the mansion and personal employees) will be referred to from time to time for convenience as expenses for maintenance of the "grounds."↩
2. For 1933 and 1934 this figure was reflected in Nemours, Inc.'s balance sheets simply in the total of "surplus" and "undivided profits" without being specifically attributed to either.↩
3. After 1935 the 100-percent deduction for dividends of domestic corporations theretofore allowed (see, e.g., sec. 23(p) of the Revenue Act of 1934) was eliminated, and in lieu thereof there was substituted an 85-percent dividends-received credit in respect of dividends received by a corporation from a domestic corporation. See sec. 26(b) of the Revenue Act of 1936.↩
4. This maintenance deduction was challenged by the Commissioner for the years 1934 and 1935, on the ground that the expenditures involved were not incurred in connection with the production of income. An agreement was eventually entered into by the parties wherein they agreed that a substantial portion of the expenses were nondeductible. However, the allowance of any portion of the maintenance deduction does not appear to be a matter of consequence for those years, since the only income reported was the $ 100,000 in dividends and that amount was fully offset by the $ 100,000 dividends-received deduction. See fn. 3 supra↩.
5. The corporation's income tax returns for the years 1931 and 1932 contain no indication of the kind of business it was engaged in. Similarly, its returns for the years 1933 and 1934 are silent in this respect; however, its "[Returns] of Capital Stock Tax" for the years ending June 30, 1933 and 1934, respectively, report the nature of its business as "Real Estate."↩
6. The record does not show when the assets of the estate, including Nemours, were transferred to the trust.↩
7. There is an unexplained difference of $ .10 between this stipulated figure and the sum of its stipulated components.↩
8. These figures do not necessarily represent the total costs of the respective items, but represent merely the amounts paid in 1967.↩
9. Throughout its existence the corporation does not appear to have owned any assets of consequence other than Nemours and the Almour preferred stock or assets related thereto.↩
10. 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.↩
11. It has been suggested that Mrs. duPont's injury to her leg made it impossible for her to return to her Florida home and that it was only for that reason that she remained at Nemours during the last 6 or 8 years of her life. We do not find this credible. No convincing evidence was presented to prove that she could not have been moved to Florida, and we are satisfied that she stayed at Nemours of her own volition, for whatever reason.↩
12. Although these provisions relate to deductions of an "individual," there is no dispute that they are made applicable to trusts like petitioner by reason of sec. 641(b) of the Code.↩
13. Sec. 121(a) of the Revenue Act of 1942, ch. 619, 56 Stat. 819.↩
14. Sec. 1.212-1 Nontrade or nonbusiness expenses.
(i) Reasonable amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including fiduciaries' fees and expenses of litigation, which are ordinary and necessary in connection with the performance of the duties of administration are deductible under section 212, notwithstanding that the estate or trust is not engaged in a trade or business, except to the extent that such expenses are allocable to the production or collection of tax-exempt income. But see section 642(g)↩ and the regulations thereunder for disallowance of such deductions to an estate where such items are allowed as a deduction under section 2053 or 2054 in computing the net estate subject to the estate tax.
15. The mere fact that deductions for maintenance expenses in respect of Nemours had been mistakenly allowed in earlier years does not preclude correction of that mistake for the years in issue. Cf. Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180, 183-185; Dixon v. United States, 381 U.S. 68">381 U.S. 68; Union Equity Cooperative Exchange v. Commissioner, 481 F. 2d 812, 817 (C.A. 10), affirming 58 T.C. 397">58 T.C. 397, certiorari denied 414 U.S. 1028">414 U.S. 1028; George R. Tollefsen, 52 T.C. 671">52 T.C. 671, 681, affirmed 431 F. 2d 511 (C.A. 2), certiorari denied 401 U.S. 908">401 U.S. 908↩.
16. Sec. 642(c), I.R.C. 1954, provided during the years in issue --
SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
(c) Deduction for Amounts Paid or Permanently Set Aside for a Charitable Purpose. -- In the case of an estate or trust (other than a trust meeting the specifications of subpart B) there shall be allowed as a deduction in computing its taxable income (in lieu of the deductions allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid or permanently set aside for a purpose specified in section 170 (c↩), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit. * * * [Emphasis supplied.]