*119 Decisions will be entered under Rule 50.
1. A Texas decedent died testate in 1900. In his will, which was probated early in 1901, he directed that his property be held in trust and that the trust continue for a certain specified time which ended in 1929. Held, the basis of petitioner Pierce Estates, Inc., for certain cattle which were sold or died during the taxable years was the same as it was in the hands of the transferors; held, further, the basis in the hands of the transferors was zero, because under the will it is held that although the decedent provided for an administration of his estate independent of the probate court, such administration did not continue until 1929, but ended sometime prior to 1913, when the trustees took over for the benefit of the transferors. No cattle which were sold or died during the taxable years were on hand March 1, 1913. Since all the cost of raising the cattle in question had been deducted prior to the transfer to petitioner, there remained no basis in the hands of the transferors which could be transferred to petitioner.
2. Upon the record reasonable allowances for salaries for services actually rendered Pierce Estates, Inc., *120 during the taxable years by two women vice presidents are determined.
3. In 1932 petitioners (except Pierce Estates, Inc.) assigned certain oil and gas leases to an oil company in consideration for certain payments to be paid out of "all oil and other minerals produced" and retained an overriding royalty. Wells were drilled which resulted in the production of gas, but no oil. This in turn resulted in a dispute over the method of calculating the payments called for by the assignment. Petitioners brought a suit and the defendants contended that no payments should be made, as gas was not a mineral. The trial court issued an order holding that as a matter of law gas was a mineral. A compromise and judgment followed. During the taxable years petitioners paid out certain amounts as attorney fees, court costs, and other legal expenses in connection with this litigation. Held, the expenditures in question are not capital expenditures, but are deductible as ordinary and necessary expenses under section 23 (a) of the Revenue Act of 1938 and the I. R. C. as amended by section 121 of the Revenue Act of 1942.
4. During the taxable year 1940 petitioner Louise K. Hutchins purchased certain*121 radium and gave it to two physicians, who were building a hospital, with the understanding that they were to use the radium only for treating the poor and needy and without compensation to themselves, which understanding was carried out. Held, petitioner is entitled to deduct the cost of the radium as a charitable contribution under section 23 (o) of the I. R. C. as amended by section 224 of the Revenue Act of 1939.
*876 These proceedings, which have been consolidated, involve income tax deficiencies determined against petitioners for the calendar years indicated and in the amounts as follows:
| Petitioner | Docket No. | Year | Deficiency |
| Pierce Estates, Inc | 619 | 1938 | $ 4,499.55 |
| 1939 | 4,336.20 | ||
| 1940 | 15,281.09 | ||
| Pierce Withers | 2029 | 1938 | 3,723.28 |
| 1939 | 138.57 | ||
| Do | 2504 | 1940 | 19,329.32 |
| Louise K. Hutchins | 2511 | 1940 | 1,895.38 |
| J. F. Hutchins | 2512 | 1940 | 1,694.20 |
The above deficiencies result from several adjustments to the net income as reported by petitioners. Not all of the adjustments are contested*122 except in Docket No. 2029, wherein petitioner Pierce Withers not only contests all of the adjustments made to the net income as reported by him for the years 1938 and 1939, but by an amendment to the petition assigns an additional error and prays that this Court determine "that there is no deficiency for either year and that there has been an overassessment in the amount of $ 9,562.54 for the year 1938, and in the amount of $ 9,364.42 for the year 1939, with refund for taxes heretofore assessed and paid in the full amounts set forth."
The issues which have been raised by appropriate assignments of error are as follows:
1. What is the "basis," if any, to petitioner Pierce Estates, Inc., for cattle which were sold or which died in the years 1938, 1939, and 1940?
2. Did the respondent err in disallowing in their entirety salaries of $ 3,000 and $ 4,500 per annum, paid by petitioner Pierce Estates, Inc., *877 to two of its women vice presidents, respectively, for the years 1938, 1939, and 1940?
3. Did the respondent err in refusing to allow petitioners Pierce Withers and Louise K. and J. F. Hutchins to deduct from their respective gross incomes for all of the years involved in those*123 proceedings certain amounts expended by those petitioners, jointly, for attorney fees, court costs, and other legal expenses in connection with litigation involving certain oil and gas leases?
4. Did the respondent err in refusing to allow petitioner Louise K. Hutchins to deduct from her gross income for the year 1940 as a charitable contribution the cost of certain radium which she gave to two physicians who were building a hospital with the understanding that they were to use the radium only for treating the poor and needy and without compensation to themselves?
5. Did the respondent err in including in the taxable income of petitioners Pierce Withers and Louise K. and J. F. Hutchins for each of the years there involved certain amounts as representing ordinary dividends received by those petitioners from Pierce Estates, Inc.?
Counsel for petitioners stated at the hearing that issue No. 5 will depend upon our holdings on the first two issues, and that the parties have agreed to settle issue No. 5 under Rule 50.
FINDINGS OF FACT.
Issue No. 1. -- Petitioner, Pierce Estates, Inc., was incorporated under the laws of the State of Texas on September 23, 1929, for the purpose of engaging*124 in the business of ranching and farming, with its principal office at Pierce, Texas. Its returns for the taxable years here involved were filed with the collector of internal revenue for the first district of Texas, at Austin, Texas.
The adjustments to petitioner's net income for the years 1938, 1939, and 1940 which resulted in assignments of error raising issue No. 1 were explained by the respondent in a statement attached to the deficiency notice as follows:
(e) The amounts reported as the basis for the gain or loss on livestock sold or died during the taxable years 1938, 1939, and 1940 in the respective sums of $ 39,180.00, $ 45,220.00 and $ 41,140.00, have not been allowed. The basis of assets previously owned by the Estate of A. H. Pierce and transferred to you in 1929 has been determined to be the March 1, 1913 value of such assets transferred as were acquired by the Estate of A. H. Pierce prior to March 1, 1913 plus the cost of assets acquired by it by purchase subsequent to March 1, 1913 and on hand at the date of the transfer. Since no cattle were on hand at date of transfer in 1929 which were also on hand on March 1, 1913, the March 1, 1913 valuation does not apply.
With*125 reference to the costs of raising cattle since March 1, 1913, inasmuch as such costs were deducted as expenses in the income tax returns of the Estate *878 of A. H. Pierce, which Estate reported its income upon the basis of cash receipts and disbursements, the basis for such raised cattle in your hands is zero.
The basis for cattle in the hands of the transferor, Estate of A. H. Pierce, when transferred to you during the taxable year 1929 has been determined to be $ 26,498.50, the cost price of cattle purchased since March 1, 1913 and on hand at date of transfer. However, since this basic value has been fully recovered by you prior to the taxable years in question, there is no basis for claiming in the years 1938, 1939, and 1940 cost of 1929 cattle either as death losses or cost of sales. Amounts aggregating $ 125,540.00 claimed as deductions with respect to livestock sold and died during the taxable years 1938, 1939, and 1940 are, therefore, disallowed.
Abel H. Pierce, hereinafter sometimes referred to as the decedent, died testate on December 26, 1900, a resident of Wharton County, Texas, leaving an estate consisting of real estate, cattle, notes, cash, and other personal*126 property. His will, dated November 25, 1898, was duly probated in the County Court of Wharton County, Texas, on March 5, 1901.
Abel H. Pierce was survived by his wife, Hattie Pierce, his daughter, Mamie Pierce Withers, and her four children, Lacy Withers, Mary Withers, Abel Pierce Withers, and H. Pickett Withers.
At the March 1901 term of the county court, in probate, application was made by Abel Pierce Borden and Mamie P. Withers for the probate of the will, and they were duly qualified as executors and/or trustees thereunder. Upon the death of Mamie P. Withers, J. P. McCrosky of Wharton County, Texas, was appointed in her stead, and upon the resignation of Abel Pierce Borden in 1922, Clive Runnells of Chicago, Illinois, was chosen to serve as executor and/or trustee, acting in concert with J. P. McCrosky. Clive Runnells resigned in 1923 and J. F. Hutchins succeeded him.
The executors and/or trustees, following the probate and record of said will, took no action in the County Court of Wharton County, Texas, except to return an inventory and appraisement of the assets of, and a list of the claims against, the estate. All debts of the decedent and all claims against his estate *127 were paid or settled by the then acting executors and/or trustees within a short time after the probate of the will and their qualifications as executors and/or trustees.
Shortly after the death of decedent, the executors and/or trustees made a settlement with Hattie Pierce, wife of decedent, who had elected not to take under the will, and purchased from her all of her right, title and interest in and to said estate of Abel H. Pierce and thereafter the entire estate was administered for the sole benefit of the four surviving grandchildren of decedent, in accordance with the terms of decedent's will. H. Pickett Withers, the youngest grandchild of decedent, reached the age of 30 years on August 5, 1929, whereupon the executors and/or trustees, J. F. Hutchins and J. P. McCrosky, *879 distributed in kind all of the assets then held by them belonging to the estate of Lacy Withers Armour, Mary Withers Runnells, Abel Pierce Withers, and H. Pickett Withers, surviving beneficiaries under the will of decedent.
In September 1929 said Lacy Withers Armour, Mary Withers Runnells, Abel Pierce Withers, and H. Pickett Withers conveyed to petitioner all of the assets theretofore distributed in*128 August 1929 from the estate of A. H. Pierce, save and except money on hand or in the bank as of August 5, 1929, and a certain quantity of cotton which had been pledged to secure loans or advances theretofore made to the executors and/or trustees of the estate. The assets so distributed consisted of land and the improvements thereon and thereto appertaining, farming implements, canals and laterals, cattle and all other livestock, accounts and notes receivable, etc. In exchange for the transfer of said assets, Lacy Withers Armour, Mary Withers Runnells, Abel P. Withers and H. Pickett Withers received capital stock of petitioner Pierce Estates, Inc., in equal amounts and were thereafter in control of petitioner. The number and kind of cattle transferred to petitioner by the four above named individuals and the fair market value of such cattle at the time of transfer are stipulated in the record and reference thereto is hereby made. None of such cattle was in existence on March 1, 1913. If the fair market value of said cattle as of September 23, 1929, is to be used as the cost basis thereof, the parties have stipulated the correct figures which should be used.
For all taxable years*129 up to and including the year 1929, the estate of A. H. Pierce filed its Federal income tax returns on the cash receipts and disbursements basis. In said returns the costs of raising the aforesaid cattle were currently deducted as expenses.
A copy of decedent's will and four codicils thereto is included in Exhibit A, attached to the Stipulation of Facts and are incorporated herein by reference. For convenience the parts of the will and codicils referred to by the parties in their briefs are as follows:
Paragraph First.
I recognize that my wife, Hattie Pierce, has an interest in the community estate of myself and my said wife, but I likewise recognize the fact that it will be exceedingly difficult, if not impracticable, to ascertain definitely what property constitutes such community estate; also, after mature reflection, it is my judgment that the best results to my said wife and all the residuary beneficiaries under the trust hereinafter created will be attained by keeping the estate, which is made the corpus of said trust, under one and the same management. For these reasons, as also my desire to make ample allowance for my said wife to live in comfort and without the annoyance*130 and trouble incident to a personal management of business affairs, I have determined to devise all of my separate estate, and all of said community estate, including the interest of my said wife therein, to my executors, and their successors as provided for, upon the trust here *880 inafter created in Paragraph Second of this Will, believing that my said wife will appreciate the motives that prompt me to do so, and that she will acquiesce in my better business judgment in the premises; and I do therefore direct that my said wife shall have two calendar months after my decease in which to elect whether or not she will accept as a beneficiary under said trust.
* * * *
Paragraph Second.
In accordance with the above expressed intention, I do give, devise and bequeath all of my separate property and estate, and all of the community property of estate of myself and my said wife, of any and every character, real, personal and mixed, and wheresoever situated, unto my executors, Abel Pierce Borden of Wharton County, Texas, and Mamie P. Withers of Kansas City, Jackson County, Missouri, and to their successors, as hereinafter provided for, upon this trust here declared, to say:
Section*131 First. -- The purposes of this trust shall be as follows:
* * * *
Direction No. 2. -- The first day of the first month next succeeding the probate of this Will, and each such day of said month in each year thereafter shall mark the beginning of a fiscal year, in the conduct of this trust; and after there shall have been paid the following, to say: all of my debts and liabilities, and those encumbrances or liens, if any, which may be charges upon said trust estate, or any part thereof, and which my executors may elect to pay, and after said special legacies as before stated shall have been paid, or provisions made for their payment as directed, my executors shall, at the termination of each fiscal year, ascertain the amount of monies in their hands as such executors, or in bank to their credit as such, and after making payment or provision for payment of any unsatisfied obligations or expenses incurred in the conduct of said trust, and also deducting such sums as in their judgment would be necessary to meet the expenses of conducting said trust until its revenues accruing shall be sufficient to pay the same, then the net balance in money so remaining shall be the dividend for*132 such fiscal year upon such trust estate, and shall be thus applied, to say: To my said wife, if then a beneficiary hereunder, there shall be paid and properly charged her due portion of one-third (1-3) of such dividend, after proper deduction of the amount of any allowances paid to her under the special directions No. One (1) above, as therein provided.
* * * *
Direction No. 3. -- After the youngest of my said grand-children, who may become beneficiaries hereunder as before provided, and then living, shall attain the age of twenty-five (25) years, then this trust shall continue for five (5) years thereafter, and said executors shall in like manner as before provided, hold, control, manage and dispose of said trust estate, and keep invested for the benefit of the same said residuary beneficiaries, to say, the children of my said daughter, Mamie Pierce Withers, who are and may be born before my decease and survive me, the said two-thirds (2-3) portion of the dividends (or all of the same in the contingency as above provided), accruing for each fiscal year, until the expiration of said five (5) years period mentioned, and thereupon my said executors then acting, shall pay over whatsoever*133 monies shall remain in their hands, proceeds of investments of said two-thirds portion of said annual dividend, and convey, transfer and deliver the property representing the said investments thereof, in whatsoever form existing, to the residuary beneficiaries thereto entitled, and in the interests, shares and portions to which they may be entitled hereunder; *881 and upon the termination of said period of five years as before mentioned, thereupon this trust shall determine and then my said executors, after payment of every expense and debt pertaining thereto, shall pay over whatsover funds they hold as assets thereof, and convey, transfer and deliver all of the property of any and every character thereto belonging to the residuary beneficiaries thereto then entitled, under the terms of this will, and in the interests, shares and portions as by it declared and capable of ascertainment.
* * * *
Section Fourth. -- There shall be two (2) executors to act jointly as such, and as trustees, in the administration of the trust herein declared, and I designate them as "Managing Executor and Trustee," and "Advisory Executor and Trustee." * * *
* * * *
Paragraph Fourth.
Finally, I *134 do direct that no other action be had in the County Court in relation to the settlement of my estate than the probating and recording of this Will and the return of an inventory, appraisement and list of claims of my estate, and I do further direct that no bond nor other security be required for the faithful performance of their duties as executors and trustees hereunder, of those parties who are nominated as executors and may become executors under this will and who are mentioned by name in the last preceding paragraph.
The period of administration or settlement of the estate of Abel H. Pierce, deceased, ended shortly after the executors and trustees qualified and in any event prior to March 1, 1913. At the time that the administration of the estate came to an end the executors took possession of the property of the estate as trustees of the testamentary trust created by decedent in his will and from then on until August 5, 1929, the trustees managed the property as a testamentary trust.
Issue No. 2. -- The adjustments to petitioners' net income for the years 1938, 1939, and 1940 which resulted in assignments of error raising issue No. 2 were explained by the respondent in a*135 statement attached to the deficiency notice as follows:
(f) Payments during the taxable years 1938, 1939, and 1940 to Mrs. Lacy W. Armour, Chicago, Illinois, in the amount of $ 4,500.00 for each year and to Mrs. Mary W. Runnells of Chicago, Illinois, in the amount of $ 3,000.00 for each year are not considered allowable, ordinary and necessary expense deductions since there is no evidence showing that the amounts were paid for personal services actually rendered.
The following salaries were paid by petitioner Pierce Estates, Inc., to its two vice presidents:
| 1938 | 1939 | 1940 | |
| Mrs. Clive (Mary Withers) Runnells | $ 3,000 | $ 3,000 | $ 3,000 |
| Mrs. Lawrence (Lacy Withers) Armour | 4,500 | 4,500 | 4,500 |
Both Mrs. Runnels and Mrs. Armour are stockholders of petitioner and live in Chicago, Illinois, but they visit the ranch owned and operated *882 by petitioner from three to six times a year and discuss with J. F. Hutchins, the president and manager of petitioner, and with Pierce Withers, secretary of petitioner, all matters in connection with the affairs of petitioner. They did so in 1938, 1939, and 1940.
The ranch properties belonging to petitioner total about 85,000 acres, *136 mostly in four ranches located in Wharton and Matagorda Counties, Texas, with some other land scattered around in three or four other counties in the state, and on all the visits of these two vice presidents they go over all the property that is accessible to them at the time, visiting all the ranches and looking at all the cattle that they can, being limited to what is accessible when it is wet weather. Each visit lasted from three, four, or five days to occasionally a month, and they stayed on these visits right at the ranch headquarters at Pierce, Texas, where all of the books and records of the corporation are kept, and they would go over the accounts, correspondence, and the business activity occurring since their previous visit.
Between visits the two vice presidents keep in close touch with the operations of the corporation through correspondence, telegraph and telephone and receive weekly and monthly reports. They comment upon the reports and make suggestions for the operation of the ranch, frequently requesting additional or more detailed information as to some item such as cattle sales or rice sales. The monthly reports made to the two vice presidents contain a current*137 balance sheet showing the financial condition of the corporation at the time and in detail all receipts and disbursements during the month, the oil income and cattle income, and everything in connection therewith. Nearly every week letters and telegrams pass to and from the vice presidents and there are occasional telephone calls, and two or three times a year Hutchins goes to Chicago to consult with them. Whenever any matter is pending like an oil lease he either goes to Chicago to see them or they go to the ranch.
At the annual meeting the matter of employees and wages was discussed and while the pay of day labor was not referred to them, the two vice presidents were consulted about the salaries paid to foremen and other employees of that type; also at the annual meeting the program for the coming year is discussed with them. They are consulted about the planting of crops and information is sought from them about the prices of rice and cotton and whether to hold or sell the ranch's products.
With respect to oil activities and oil developments, the two vice presidents have been consulted many times. Mrs. Runnells and Mrs. Armour are both more or less familiar with the oil business. *138 Before any of the oil leases were made they looked into them and analyzed them, and the leases were worked over three or four times before they *883 were satisfactory. Hutchins went to Chicago with them, Mrs. Runnells made the appointment to meet a representative of the Texas Co. to look into petitioner's oil activity, and Mrs. Armour had the meeting place arranged and was also present at the time of the trade.
In 1938 Hutchins suggested that Mrs. Armour be paid $ 6,000 per year and that Mrs. Runnells and Pierce Withers be paid $ 3,000 each, but Mrs. Armour refused to take more than $ 4,500. The salaries of Mrs. Armour and Mrs. Runnells were fixed on April 15, 1938, at which time they were elected vice presidents of petitioner. Prior to 1938 neither of them received or requested a salary, although they performed duties for petitioner and received reports and letters from the business. Oil was discovered on petitioner's property in 1935 and 1936 and receipts of income from that source increased commencing with the year 1938. Pierce Withers, owning one-fourth of the capital stock, was secretary of the corporation and received a salary of $ 3,000 per annum during each of the*139 taxable years 1938, 1939, and 1940. A reasonable allowance for salaries or other compensation for personal services actually rendered the Pierce Estates, Inc., during the taxable years in question by Mrs. Runnells and Mrs. Armour was $ 2,000 each per annum.
Issue No. 3. -- The following named petitioners deducted from their respective gross incomes the following stated amounts in the years indicated as representing legal expenses paid or incurred by them incident to a lawsuit brought by these petitioners against the Danciger Oil & Refining Co. of Texas:
| Petitioner | Docket No. | Year | Amount |
| Pierce Withers | 2029 | 1938 | $ 10,245.25 |
| Pierce Withers | 2029 | 1939 | 446.99 |
| Pierce Withers | 2504 | 1940 | 20,201.97 |
| Louise K. Hutchins | 2511 | 1940 | 1/2 of 8,015.78 |
| J. F. Hutchins | 2512 | 1940 | 1/2 of 8,015.87 |
All of these amounts were disallowed by the respondent. The explanation given by the respondent for disallowing the said amounts is substantially the same in each of the proceedings, his explanation in Docket No. 2504 being as follows:
In settlement of a suit for oil and gas royalties you received in taxable year from Danciger Oil and Refining Company a gross amount from which*140 you deducted the amount of the above adjustment as legal expenses.
It is held that legal expenses incurred by you incident to a law suit with the Danciger Oil & Refining Company of Texas and deducted in your income tax return in the amount of $ 20,201.97 for the taxable year 1940, are capital expenditures and hence not deductible from your gross income as ordinary and necessary business expenses.
*884 Petitioner Pierce Withers is an individual residing at Pierce, Wharton County, Texas. The returns for the years involved were filed with the collector for the first district of Texas at Austin.
Petitioners J. F. and Louise K. Hutchins are husband and wife, residing at Pierce, Wharton County, Texas. Their separate returns for the year 1940 were filed on a community property basis with the collector for the first district of Texas at Austin.
Under date of August 25, 1932, Pierce Withers and others assigned certain mineral leases which they owned to the Danciger Oil & Refining Co. of Texas for $ 35,000 out of the lessee's 7/8 interest "in the oil or other minerals produced," plus $ 1,500,000 out of 5/48 "of all oil and other minerals produced," and thereafter a 1/24 overriding royalty*141 "on all minerals * * *." Wells were drilled in accordance with the assignment, which were high pressure gas wells with a relatively small proportion of white liquid.
The $ 35,000 payment provided for in the assignment was paid out of production, and thereafter a dispute arose between the parties over the method of calculating the payment of the $ 1,500,000 out of production, and also as to the method of production, that is, whether the wells should have been produced through separators and the settlement be made on the basis of the liquid as well as the gas. The controversy arose when a casinghead gas plant was constructed on the property involved, and the operator refused to make further payments until the method of settlement which was in dispute should be agreed upon.
While the controversy was going on, suit was filed on behalf of the assignors in the form of trespass to try title in order that a lis pendens could be placed on record to prevent a transfer of the leases. The statutory form of suit followed stated that the plaintiffs were in possession and the defendants unlawfully ejected them from possession, and now unlawfully withhold the possession from them, all of which*142 was a fiction, as at that time there was no controversy over the assignors' interest in the gas in place.
The defendants, in an answer, contended that none of the assignors were entitled to any payments out of gas and that they had made a mistake when they paid the $ 35,000 originally, as the assignment dated August 25, 1932, did not by express terms mention gas as a source of payment and no oil was produced from the property, only gas and a small quantity of watery white distillate. This was a new question not theretofore involved in the dispute.
The trial court disposed of this new question raised by the defendants by an exception, and an order was entered on the exception holding that the said assignment dated August 25, 1932, "as a matter of law, did include gas as a source of payment, in that the word 'minerals', in Texas, included gas, as a matter of law."
*885 The dispute was thereafter settled by agreement dated September 4, 1940, which was induced by the court's ruling on the exception, and the agreement was approved by judgment of the court on October 3, 1940. The judgment of the court provided, among other things, as follows:
It Is Therefore Ordered, Adjudged and*143 Decreed by the Court as follows:
(1) The said assignment of Pierce Withers, et al to Danciger Oil & Refining Company of Texas, dated 25th August, 1932, and recorded as above stated, should be and the same is hereby construed to require, and does require, the payment of said respective sums of $ 35,000 and $ 1,500,000, in the proportions stated in the said assignment, such payments to be out of all minerals that have been or may be produced from the land covered by the said leases under the provisions thereof, and that the said 1/24th overriding royalty interest is also payable out of all such minerals.
(2) That the Plaintiffs Pierce Withers, J. F. Hutchins, * * * do have and recover of and from the Defendant Danciger Oil & Refineries, Inc., the sum of $ 67,500 representing the balance due from the production to 1st September, 1940 to apply on said $ 1,500,000 payment, and that said Plaintiffs recover of said Defendant all costs in this behalf expended.
* * * *
As a result of the judgment of the court, payments under the assignment dated August 25, 1932, were made to petitioners in 1940. The amounts of these payments are not in dispute.
It was stipulated orally at the hearing of these*144 proceedings that the legal expenses paid by petitioners as attorneys' fees, court costs, or other legal expenses in connection with the foregoing litigation were:
| 1938 | 1939 | 1940 | |
| Pierce Withers | $ 10,245.25 | $ 466.99 | $ 15,055.38 |
| J. F. and Louise K. Hutchins, jointly | 8,015.78 |
Issue No. 4. -- The adjustment to petitioner Louise K. Hutchins' net income for the year 1940 which resulted in an assignment of error raising issue No. 4 was explained by the respondent in a statement attached to the deficiency notice as follows:
(e) This adjustment represents disallowance of your deduction for radium given to doctors in Wharton, Texas. Such contributions are held not to be charitable organizations as defined in Section 23 (o), Internal Revenue Code, and are therefore disallowed.
During the year 1940 petitioner Louise K. Hutchins, out of her own individual funds, expended the sum of $ 1,593.70 to purchase a quantity of radium. This radium was turned over to Drs. Rugley and Blassingame. These two doctors had offices at Wharton, Texas, and were building a hospital at that place. The radium was to be used by them in treating the cases of poor people who came to them *886 *145 and were unable to pay for treatment. The two doctors agreed to do the medical work free in all these cases. They reported to her each year the patients they had treated. The radium was accepted by the doctors as a trust to administer for the benefit of the poor and needy of the community.
OPINION.
We shall consider the issues in the order previously stated.
Issue No. 1. -- In its returns for the years 1938, 1939, and 1940, petitioner Pierce Estates, Inc., claimed a basis for cattle which were either sold or which died during those years of $ 39,180, $ 45,220, and $ 41,140, respectively. These cattle had been acquired by petitioner at the time of its incorporation in 1929 from the four grandchildren of Abel H. Pierce, deceased, by the issuance of shares of stock to them. Petitioner concedes that the basis originally claimed was too high and now contends that the basis for such cattle which were either sold or which died during the taxable years was their fair market value on September 23, 1929, which the parties have stipulated was $ 25,290, $ 26,280, and $ 37,785, respectively. The respondent determined and contends that the basis for such cattle is zero. The explanation*146 of his determination is in our findings.
The applicable statute for the year 1938 is the Revenue Act of 1938 and the applicable statute for the years 1939 and 1940 is the Internal Revenue Code. Section 113 (a) (8) and section 112 (b) (5) of both statutes are identical are are printed in the margin. 1*148 Also section 112 (b) (5) of the Revenue Act of 1928 is identical with that printed in the margin. In Helvering v. Cement Investors, Inc., 316 U.S. 527">316 U.S. 527, *887 the Supreme Court, in considering section 112 (b) (5) of the Revenue Act of 1936, which is identical with section 112 (b) (5) set out in the margin, supra, said: "If a transaction meets the requirements of section 112 (b) (5), the basis of the property in the hands of the acquiring corporation is the same as it would be in the hands of the transferor. Section 113 (a) (8)." In the instant proceedings the parties agree that the transactions here meet the requirements of section 112 (b) (5) and that under section 113 (a) (8) the basis of the cattle in question is the same as it was in the hands of the transferors when they transferred the cattle along with other property to the petitioner*147 in September 1929 in exchange for petitioner's capital stock. The parties disagree as to what the basis was in the hands of the transferors in September 1929. At that time the Revenue Act of 1928 was in effect. The material provisions of section 113 of the Revenue Act of 1928 are in the margin. 2
*149 The respondent contends that the decedent, Abel H. Pierce, by his will created a testamentary trust; that at some time prior to March 1, 1913, the administration of the decedent's estate ceased and the executors from then on until August 5, 1929, acted in the capacity of trustees of the trust; that the beneficiaries of the trust, who were the four grandchildren of the decedent and who are referred to above as the transferors, acquired their interests in the properties of the estate at the date of decedent's death, or in any event prior to March 1, 1913; and that, since the cattle in question were not in existence on March 1, 1913, or prior thereto, and since all the costs of raising such cattle had been deducted as expenses in the income tax returns of the trust prior to the distribution in kind of all the assets of the trust on August 5, 1929, there was no basis remaining in the distributees to be transferred *888 to petitioner Pierce Estates, Inc., on September 23, 1929. The respondent cites as controlling Maguire v. Commissioner, 313 U.S. 1">313 U.S. 1.
Petitioner contends that the decedent by the terms of his will never intended to and did not create*150 a testamentary trust; that the decedent by the terms of his will created an independent executorship under the laws of Texas; that the administration of decedent's estate and the independent executorship continued unbroken until August 5, 1929, when the property was distributed in kind to the beneficiaries; and that the basis of the property in question was under section 113 (a) (5) of the Revenue Act of 1928 the fair market value thereof at the time of the distribution in 1929. The parties agree that, if petitioner is correct in these contentions, then petitioner is entitled to $ 25,290 as a basis for the property in question for 1938; $ 26,280 for 1939, and $ 37,785 for 1940.
We agree with respondent that a testamentary trust was created under the decedent's will. We also agree with petitioner to the extent that an independent executorship was also created and qualified as such in March 1901, but we do not agree with petitioner that this independent executorship continued until the assets were distributed in 1929, 28 years after administration was begun. Article 3436 of Vernon's Annotated Texas Statutes provides:
Any person capable of making a will may so provide in his will *151 that no other action shall be had in the county court in relation to the settlement of his estate than the probating and recording of his will, and the return of an inventory, appraisement and lists of claims of his estate.
The decedent made such a provision in paragraph fourth of his will. But we think that from the provisions of the will, especially those set out in our findings, it is too plain to be disputed that the decedent also intended to create a testamentary trust, which trust under direction No. 3 was to continue for five years after the decedent's youngest grandchild attained the age of 25 years. Article 863 of Regulations 74 provides:
Art. 863. Decedent's estate during administration. -- The "period of administration or settlement of the estate" is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. Where an executor, who is also named as trustee, fails to obtain his discharge*152 as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. * * *
The parties have stipulated that the executors and/or trustees, following the probate and record of the will, took no action in the county court except to return an inventory, appraisement of the assets of, and *889 a list of, the claims against the estate; that all debts of the decedent and all claims against his estate were paid or settled "within a short time" after the probate of the will; and that "shortly after the death of decedent" the executors and/or trustees settled with Hattie Pierce, wife of decedent, who had elected not to take under the will. We think that when these things were done the "period of administration or settlement of the estate" was at an end and that from there on the executors took over as trustees of the trust and continued as such until the trust terminated on August 5, 1929, which was five years after the youngest grandchild had attained the age of 25 years. Cf. Estate of J. P. Armstrong, 2 T.C. 731">2 T. C. 731;*153 Walter A. Frederich, 2 T.C. 936">2 T. C. 936.
We agree with the respondent that the question here presented is controlled by Maguire v. Commissioner, supra. In that case the decedent died in 1903, leaving a will in which he directed his executors and trustees, among other things, to distribute the corpus of his estate in not less than ten nor more than twenty years after his death to his widow and children in certain specific proportions. In 1905 the executors were discharged by the probate court and, pursuant to the order of the court, turned over to themselves as trustees the residue of the estate. In 1923 certain personal property, a part of which had been owned by decedent and a part purchased by the trustees, was distributed to the taxpayers as beneficiaries under the will, who in turn sold both classes of property in 1930, and the question arose as to the basis to be used in the determination of the gain or loss upon the sales. The Supreme Court, after reviewing the legislative history of section 113 (a) (5), supra, held that the basis of the property owned by the decedent at the date of death was its value when received*154 by the trustees from the executors, and that the basis of the property purchased by the trustees was its cost or March 1, 1913 value, whichever was greater. In the course of its opinion the Supreme Court said:
* * * "Distribution to the taxpayer" is not necessarily restricted to situations where property is delivered to the taxpayer. It also aptly describes the case where property is delivered by the executors to trustees in trust for the taxpayer. Such distribution of the estate results in the acquisition by the taxpayer of an equitable estate under the testamentary trust. The fact that he does not then obtain possession or control, the fact that his interest is conditional or contingent, the fact that legal title may not be transferred to him until years later, are immaterial. * * *
Petitioner contends that the Maguire case is not controlling here for the reason that in that case there was a formal transfer of the estate from the executors to the same parties as trustees by order of the probate court, whereas in the instant proceedings we have no such formal transfer by order of the local probate court. We do not think that this is a material distinction. In the instant*155 proceeding the *890 decedent, acting under article 3436, supra, had provided in his will that his estate be administered independently of the probate court. It, therefore, was not necessary for the probate court to issue an order transferring the property from the independent executors to the trustees. We hold that the Maguire case controls. Cf. Helvering v. Gambrill, 313 U.S. 11">313 U.S. 11; Helvering v. Campbell, 313 U.S. 15">313 U.S. 15; Helvering v. Reynolds, 313 U.S. 428">313 U.S. 428; and Cary v. Commissioner, 313 U.S. 441">313 U.S. 441. The respondent's determination upon this issue is sustained.
Issue No. 2. -- The applicable statutes provide that in computing net income there shall be allowed as deductions "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered." Sec. 23 (a), Revenue Act of 1938 and Internal Revenue Code, as amended by sec. 121, Revenue Act of 1942. For each of the taxable years *156 1938, 1939, and 1940 petitioner paid to Mrs. Runnells $ 3,000 and to Mrs. Armour $ 4,500 for their services as vice presidents, and claimed these amounts as deductions for ordinary and necessary expenses. The respondent disallowed the entire amounts as claimed on the ground that, as stated in the deficiency notice, "there is no evidence showing that the amounts were paid for personal services actually rendered." At the hearing petitioner offered the testimony of J. F. Hutchins, who has been the manager and president of petitioner since it was incorporated in 1929. He also was manager of the properties for about four years prior to incorporation. He owns practically one-eighth of petitioner's capital stock. Hutchins testified that the two vice presidents in question were very capable women and that they actually rendered considerable personal services for the petitioner, the nature of which we have set out in our findings. We have carefully considered all the evidence in the record bearing upon the reasonableness of the two salaries in question. We do not think that it can be held that Mrs. Runnells and Mrs. Armour were what might be termed active vice presidents. They lived *157 in cities remote from the place of business of the corporation. However, they did visit the ranch several times a year and otherwise kept in close touch with its affairs and undoubtedly rendered services and advice which were of considerable value to the corporation. These services justified compensation. Cf. L. Schepp Co., 25 B. T. A. 419, 428. Based on the evidence, we have found that "a reasonable allowance for salaries or other compensation for personal services actually rendered Pierce Estates, Inc., during the taxable years in question by Mrs. Runnells and Mrs. Armour was $ 2,000 each per annum."
Issue No. 3. -- This issue involves the deductibility of certain legal expenses paid by petitioner Pierce Withers for the years 1938, 1939, *891 and 1940, and by petitioners J. F. and Louise K. Hutchins for the year 1940, in connection with the litigation referred to in our findings. The material provisions of section 23 (a) of the Revenue Act of 1938 and of the Internal Revenue Code, as amended by section 121 of the Revenue Act of 1942, are printed in the margin. 3 Petitioners contend that the facts "bring the expenditures squarely within*158 the provisions of Section 23 (a) of the 1938 Act and of the Code, in any event, as retroactively amended by Section 121 of the Revenue Act of 1942" and that "Certainly the expenditures involved here were made for the collection of income." They rely principally upon Walter S. Heller, 2 T. C. 371, now on review by the Ninth Circuit.
*159 The respondent determined that the expenditures involved were "capital expenditures and hence not deductible from your gross income as ordinary and necessary business expenses." He made no determination as to whether petitioners were or were not engaged in business. In his brief he contends that petitioners are not entitled to consideration under section 23 (a) (2), as amended, because they have not established that they were not engaged in the oil and gas business as individuals; that the expenditures were not "ordinary," as that term is used in the act; and that in any event his determination that the expenditures were "capital expenditures" should be sustained. The respondent relies principally upon article 24-2 of Regulations 101 and section 19.24-2 of Regulations 103; Farmer v. Commissioner, 126 Fed. (2d) 542, affirming on this point Central Material & Supply Co., 44 B. T. A. 282; and Jones' Estate v. Commissioner, 127 Fed. (2d) 231, affirming 43 B. T. A. 691.
The portion of both regulations relied upon by the respondent is identical and is as follows: *160 "The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a *892 deductible expense." In referring to an identical provision of Regulations 86, the Tenth Circuit, in Farmer v. Commissioner, supra, said:
This regulation finds general support in the decisions of the courts. The authorities quite generally hold that expenditures made in defense of a title upon which depends the right to receive oil and gas royalty payments are capital expenditures and not deductible as ordinary business expenses. Croker v. Helvering, 67 App. D. C. 226, 91 F. 2d 299; Murphy Oil Co. v. Burnet, 9 Cir., 55 F. 2d 17, 26; Blackwell Oil & Gas Co. v. Commissioner, 10 Cir., 60 F. 2d 257. Petitioners did more than litigate the right to receive oil royalty payments. The title to the oil and gas lease under which they received these payments depended upon the title to the land. Without title to the land they had nothing. It was therefore necessary for them to defend and establish the title to the*161 land in order to retain their interest in the oil and gas. The decision of the Commissioner and of the Board in this respect is approved.
To the same effect is Jones' Estate v. Commissioner, supra, and Moynier v. Welch, 97 Fed. (2d) 471. Cf. Bowers v. Lumpkin, 140 Fed. (2d) 927.
We think the above provision of the regulations and the cases relied upon by the respondent are not controlling in the instant proceedings. The expenditures here in question did not involve the defending or the perfecting of title to any property. The petitioners here were concededly the owners of certain leases which they assigned in 1932 to Danciger Oil & Refining Co. of Texas for $ 35,000 out of lessee's 7/8 interest "in the oil or other minerals produced" plus $ 1,500,000 out of 5/48 "of all oil and other minerals produced," and thereafter a 1/24 overriding royalty "on all minerals." The assignee after drilling certain wells paid the $ 35,000, but a dispute arose between the parties over the method of calculating the payment of $ 1,500,000, and the operator refused to make further payments until*162 the method of settlement, which was in dispute, could be agreed upon. Suit was then filed by petitioners and, while it was brought in the form of trespass to try title, the attorney who brought the suit testified that it was merely a fiction and was brought in order that a lis pendens could be placed on record to prevent a transfer of the leases. While this suit was pending the defendants, in an answer, contended that gas was not a mineral and that, since only gas and a small quantity of watery white distillate had been produced, they should not have paid the $ 35,000. This contention was disposed of by the trial court in an order wherein the court held that "the word 'minerals' in Texas, included gas, as a matter of law." That contention having been settled in petitioners' favor, a compromise was arrived at which fixed the amount of payments out of gas then due and payable, and judgment was entered accordingly. The controversy did not involve the question of defending or establishing title against an adverse claimant, but only at first the manner of computing royalty payments and, at one stage of the controversy, the right to receive any payments at all. We do not think *163 *893 it can be doubted that the expenditures in question were made for the sole purpose of collecting the income due petitioners under the assignment. We hold that the expenditures should not be capitalized, but should be treated as expenses paid in the collection of income. Cf. Walter S. Heller, supra.
We do not regard as fatal to petitioners' case the fact that they failed to prove that they were or were not engaged in the oil and gas business as individuals. If they were so engaged, the expenditures in question are deductible under section 23 (a) (1) (A), supra; and if they were not so engaged, the expenditures are deductible under section 23 (a) (2), supra.
Issue No. 4. -- Is petitioner Louise K. Hutchins entitled to deduct from her gross income for the year 1940 as a charitable contribution the amount of $ 1,593.70 which was the cost of certain radium which she gave to certain physicians for the benefit of the poor and needy? The answer to this question depends upon whether the contribution falls within the class Congress has designated as allowable deductions. The applicable statute is section 23 (o) of the Internal Revenue*164 Code, as amended by section 224 of the Revenue Act of 1939. 4
*165 Petitioner contends that, in turning this radium over to the two physicians named in our findings, who agreed to use it only for the poor and needy and also agreed not to charge for their services, she thereby made a contribution to or for the use of a "trust" or a "fund" as those terms are used in the statute. In Faulkner v. Commissioner, 112 Fed. (2d) 987, the First Circuit, among other things, said:
* * * The exemption of income devoted to charity was a liberalization of the law in the taxpayer's favor "begotten from motives of public policy" and "not to be narrowly construed". Helvering v. Bliss, 293 U.S. 144">293 U.S. 144, 150, 151, 55 S. Ct. 17">55 S. Ct. 17, 20, 21, 79 L. Ed. 246">79 L. Ed. 246, 95 A. L. R. 207.
Petitioner's husband testified that:
The radium was to be used in connection with their treating of patients who were unable to pay for such service. It was not to be used on any one else, and *894 they were not to try to collect a professional fee from those patients on which they used this radium.
Upon cross-examination petitioner's husband was asked if this arrangement with the doctors*166 was in writing, and he answered:
No, sir; she made these arrangements herself and came to me and asked if I thought they would carry it out or should they have it in writing, and I told her if she knew the doctors and trusted them, it might be a smear on them to have them write that they would do these things.
We think an oral trust was created and that it was organized and operated exclusively for charitable purposes. The respondent makes no contention that if the amount in question is allowed petitioner's total contributions would exceed the 15 percent limitation. We hold that petitioner is entitled to deduct the amount in question. Cf. Marshall Field, 26 B. T. A. 116, 124.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --
* * * *
(8) Property acquired by issuance of stock or as paid-in surplus. -- If the property was acquired after December 31, 1920, by a corporation --
(A) by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), or
(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * * *
(b) Exchanges Solely in Kind. --
* * * *
(5) Transfer to corporation controlled by transferor. -- No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.↩
2. SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property Acquired After February 28, 1913. -- The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that --
* * * *
(5) Property transmitted at death. -- If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent's estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *
* * * *
(b) Property Acquired Before March 1, 1913. -- The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be:
(1) the cost of such property (or, in the case of such property as is described in subsection (a) (1), (4), (5), or (12) of this section, the basis as therein provided), or
(2) the fair market value of such property as of March 1, 1913,
whichever is greater. * * ** * * *↩
3. SEC. 121. NON-TRADE OR NON-BUSINESS DEDUCTIONS.
(a) Deduction for Expenses. -- Section 23 (a) (relating to deduction for expenses) is amended to read as follows:
"(a) Expenses. --
"(1) Trade or business expenses. --
"(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
* * * *
"(2) Non-trade or non-business expenses. -- In the case of an individual, all of the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income."
* * * *
(d) Taxable Years to Which Amendments Applicable. -- The amendments made by this section shall be applicable to taxable years beginning after December 31, 1938.
(e) Retroactive Amendment to Prior Revenue Acts. -- For the purposes of the Revenue Act of 1938 or any prior revenue Act the amendments made to the Internal Revenue Code by this section shall be effective as if they were a part of such revenue Act on the date of its enactment.↩
4. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(o) Charitable and Other Contributions. -- In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:
* * * *
(2) A corporation, trust, or community chest, fund or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any State or Territory or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;
* * * *
to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.↩