1939 BTA LEXIS 1083">*1083 1. Held, an item of $10,000 paid by the guardian of the property of an infant on account of legal services rendered to the guardian over a period of years by a law firm of which the guardian was a member was for personal services and not deductible as a business expense.
2. Held, the deductions available to an infant taxpayer under guardianship are the same as those allowed an adult.
39 B.T.A. 43">*43 This proceeding was brought for the redetermination of petitioner's income tax liability for the year 1933 in the sum of $2,376.44.
The question presented is whether the taxpayer, an infant, may deduct from gross income a fee of $10,000 paid by her guardian in 1933 to a firm of lawyers, the payment being out of the income of the ward and made under the authority of an order of the Surrogate's Court having jurisdiction over the property and affairs of the ward.
FINDINGS OF FACT.
Thomas B. Gilchrist is the sole surviving general guardian of the property of Gloria Laura Morgan Vanderbilt, an infant. The ward, in1939 BTA LEXIS 1083">*1084 the year 1925, by reason of the death of her father, Reginald C. Vanderbilt, became absolutely entitled to receive, under the will of her grandfather, Cornelius Vanderbilt, a very considerable estate.
By reason of the fact that the ward's mother was not of legal age and could not act as the guardian of the property so inherited, a petition was filed in the Surrogate's Court of the County of New York, State of New York, asking for an appointment of a general guardian of the property of the ward, and, on September 17, 1925, a decree was issued, appointing George W. Wickersham as general guardian of the infant's property with limitations, and the letters of guardianship were duly issued on September 18, 1925. Thereafter, on April 26, 1926, all limitations were removed and the letters of guardianship were made full and complete. On December 27, 1933, by decree of the Surrogate's Court, Gilchrist was appointed general guardian of the property of the infant in conjunction with Wichersham and letters of guardianship were duly issued to him on that day. Wickersham acted as the sole guardian of the property from the date of his appointment until December 27, 1933. From that date until1939 BTA LEXIS 1083">*1085 the date of his death on January 25, 1936, he 39 B.T.A. 43">*44 acted in conjunction with Gilchrist as general guardian of the property. Gilchrist has acted continuously as such guardian from the date of his appointment on December 27, 1933, until the present time; first, from the date of his appointment until January 25, 1936, in conjunction with Wickersham and later as the sole general guardian.
In 1926 Wickersham, as guardian, received on behalf of his ward, cash and securities on account of principal in the amount of $1,454,101.10 and additional cash which represented accrued income amounting to $68,385.29. In 1927 Wickersham received an additional $1,000,000 in cash on account of principal, and in 1928 the sum of $35,465.76. Wickersham, as guardian at the end of the year 1928 held, on behalf of his ward, principal and accumulated interest amounting to $2,624,160.52 and at the end of 1929, $2,675,570.07. By the end of the year 1932 the estate had increased to $2,830,276.26, and by the end of 1933 the estate amounted to $2,870,807.89.
The management of the ward's property, over the seven years in question, was concerned with the proper investment of her estate, the collection1939 BTA LEXIS 1083">*1086 of income, the investigation of her financial needs, and the supervision of the expenditures for her benefit, and was conducted by Wickersham with the aid of his partner, Gilchrist, and the assistance of numerous members of the legal and business staffs of the law firm. A complete set of books was kept by accountants under the supervision of a certified public accountant.
Members of the legal and business staff of the law firm were engaged with business of the estate on 117 different days in 1926 and 145 different days in 1927, without regard to whether it was strictly of a legal or business nature. Of the 145 days referred to for 1927, 74 of them comprehended work done on those days by members of the firm's business staff.
The investments and general financial control of the ward's property were dealt with by the guardian with the advice and assistance of Gilchrist and Edward J. Hancy, who is an associate of the law firm and who has made a business of investment securities. Advice was also obtained from Wood, Struthers & Co., Dillon Read & Co., and Eldridge & Co.
The infant's mother did not have sufficient financial resources to provide for the support of the infant. The1939 BTA LEXIS 1083">*1087 guardian of the property, therefore, made frequent investigations of the financial condition of the mother in order to determine the amount of income which could be properly withdrawn from time to time for the ward's support. Throughout the period involved the guardian of the property superintended all payments out of the income for his ward's support and maintenance. During the years 1925 and 1926 the guardian, either personally or by his immediate assistants, was in frequent contact 39 B.T.A. 43">*45 with the attorneys for the trustees of the estate of the ward's grandfather and attended to the details of having the securities belonging to the ward turned over to the guardian. Frequent conferences concerning the right of the guardian to receive securities which were not "legal investments" were had with the surrogate. Conferences were had with investment experts as to the advisability of retaining certain investments in the infant's estate. The guardian supervised the reinvestment of the funds and passed judgment on the legality of such investments. The guardian represented the ward in the judicial settlement of the accounts of the trustees under the will of Cornelius Vanderbilt and1939 BTA LEXIS 1083">*1088 examined such accounts with the purpose of determining the total assets and the portion to which his ward was entitled.
In 1926, 13 lots of securities were sold by the guardian, having an aggregate face value of approximately $870,500 and 14 lots of securities were purchased of a face value of approximately $900,000. In 1927, 14 lots of securities were sold for a total consideration of $1,029,756.04 and there were purchases and sales during all of the succeeding years.
The guardian annually consulted with the surrogate with respect to the allowance made to the mother for the maintenance of the ward. In order to determine the amount to be recommended to the surrogate for this purpose it was necessary for the guardian to keep in close touch with the mother and with other members of the mother's family and with the ward. It was the guardian's duty to make a careful examination of itemized statements of experts furnished by the mother in order that they might be used to support the application for allowances. In each year, with such information as a basis, the guardian made application to the surrogate for a maintenance allowance for his ward. During the years from 1926 through1939 BTA LEXIS 1083">*1089 1933 there was a regular allowance granted of $48,000 per year, payable in monthly installments to the ward's mother. Additional payments in excess of this sum for emergencies and unusual situations were also made and passed upon by the guardian.
The guardian prepared and filed with the surrogate annual accounts setting forth in detail all of the transactions with respect to the ward's property in accordance with the law of the State of New York.
Under the laws of the State of New York, it was the guardian's duty to protect and preserve the infant's property and to use it for the benefit of the infant under the direction of the court having jurisdiction.
Bills and charges against the estate handed to the guardian had to be examined to determine whether they were proper charges against the estate.
39 B.T.A. 43">*46 The guardian participated in litigation concerning construction of the will of Cornelius Vanderbilt because it involved the share belonging to the infant.
In 1926, at the suggestion of the mother, the guardian presented for the consideration of the surrogate the question as to the propriety of using income of the ward's estate for the purpose of paying premiums on1939 BTA LEXIS 1083">*1090 life insurance policies to be taken out for the benefit of the ward on the life of the mother. The surrogate denied an application to this end and an appeal was taken with the consent of the surrogate to determine this question. The appellate court sustained the surrogate. This was a prolonged matter involving conferences with the surrogate and negotiations with several insurance companies as well as the above mentioned litigation.
The guardian devoted time to the selection of a bonding company to furnish his bond in order that advantageous rates could be procured. The guardian's bond exceeded $2,000,000. Bonds were also taken out when the securities of the infant were moved from one safe deposit vault to another.
During the period in question the firm of Cadwalader, Wickersham & Taft received fees for specific legal services rendered. Among the services for which compensation was paid were representing the infant in the proceeding brought for the construction of certain provisions of the will of her grandfather, Cornelius Vanderbilt, the fee being allowed by the court in that proceeding and not paid out of the infant's estate; representing the infant in the accounting1939 BTA LEXIS 1083">*1091 proceedings of the Trustees under the will of Cornelius Vanderbilt, the fee here being likewise allowed by the court in that proceeding and not paid out of the infant's estate; representing the guardian in the proceedings for the purpose of obtaining leave to use certain sums of the estate's funds to pay premiums on life insurance policy, on the life of the infant's mother for benefit of the infant, a total fee of $3,500 payable from the infant's estate being paid on account of the proceeding and other legal services; routine legal matters and other services in connection with tax returns for the estate, the appointment of the guardian, and the filing of his annual accounts, for all of which approximately $4,000 was paid from the infant's estate.
Upon application duly made to the surrogate it was ordered that the guardian pay Cadwalader, Wickersham & Taft the sum of $10,000 for legal services rendered by them to the guardian for the period ended December 31, 1932. This was in addition to the above mentioned fees and was for routine "legal services [which] have been necessarily rendered in connection with the administration of the estate" and included services necessary in connection1939 BTA LEXIS 1083">*1092 with substantiating the applications to the surrogate for the authorization of the expenditure of money for the support, education, and maintenance of 39 B.T.A. 43">*47 the ward. The services rendered for this purpose consisted of conferences and correspondence with the mother of the ward while she was in this country and in France; visits to the ward and investigation of the conditions affecting her life; contact with physicians and surgeons attending the ward during the period of her illness and consultation with them relative to the desirability of places of sojourn for the improvement of her health; consultation with the mother relative to precautions for protection of the ward; arrangements with private detectives for guarding and protecting the ward; investigation of circumstances and conditions affecting the ward while in Europe; discussions relative to the accounts and manner of expending money on behalf of the ward; conferences with the mother relative to desirability of terminating the ward's residence abroad and taking up residence in this country; consideration of the suitability of various apartment houses as a home for the ward; examination of the lease and the leasing of premises1939 BTA LEXIS 1083">*1093 for a home for the ward; purchase of an automobile for the use of the ward and engaging services of a chauffeur; arrangements for the ward's enrollment in a private school and consultations as to the arrangement for her education while temporarily sojourning on Long Island; arranging for the transfer of furniture and furnishings from the Paris to the New York residence of the ward; supervising the furniture through the customs; supervising decoration of the home leased for the ward; subleasing the house during the ward's absence; examining a list of securities of the estate and consultation with accountants relative to the securities.
The annual income from the property belonging to the infant was as follows:
| 1926 | $36,230.06 |
| 1927 | 112,093.76 |
| 1928 | 106,878.81 |
| 1929 | 109,589.91 |
| 1930 | $111,943.83 |
| 1931 | 113,678.38 |
| 1932 | 116,537.87 |
| 1933 | 113,768.96 |
Wickersham, as guardian of the property, by the authority of the surrogate, made the following disbursements for the care and benefit of the infant:
| 1926 | $55,740.34 |
| 1927 | 79,625.47 |
| 1928 | 63,897.42 |
| 1929 | 58,180.36 |
| 1930 | $58,225.01 |
| 1931 | 58,829.82 |
| 1932 | 68,867.81 |
| 1933 | 73,227.3 3 |
The guardian's1939 BTA LEXIS 1083">*1094 commissions are governed by law and for the years 1927 to 1932 were as follows:
| 1927 | $1,918.01 |
| 1928 | 1,710.66 |
| 1929 | 1,680.90 |
| 1930 | $1,704.63 |
| 1931 | 1,727.80 |
| 1932 | 1,870.36 |
In the Federal income tax return for the year 1933, filed by Wickersham as guardian of the infant, there was claimed as a deduction 39 B.T.A. 43">*48 on account of legal expenses the sum of $10,000. This claimed deduction was disallowed by the Commissioner.
OPINION.
VAN FOSSAN: In this case petitioner seeks to deduct as a business expense an item of $10,000 paid by the guardian of her property, with court approval, on account of legal services rendered to the guardian over a period of several years by a law firm of which the guardian was a member. On brief counsel for petitioner states his position to be that "the taxpayer was in business through her guardian. Therefore, the expense was an ordinary and necessary business expense and a proper deduction from gross income under the provisions of section 23(a) of the Revenue Act of 1932."
The respondent relies strongly on 1939 BTA LEXIS 1083">*1095 , and .
We may observe at the outset that we do not interpret , to hold that in no case may an infant, acting through a guardian, be engaged in business. The case involved only a single item or activity. The Court stated: "The ward was not engaged in any business. So far as appears the same thing is true of the guardian." (Italics supplied.) We understand this to mean only that under the facts there present it did not appear that the guardian was engaged in business, presumptively on behalf of the infant. Instances are conceivable in which an infant, through a guardian, might be engaged in business.
The Supreme Court in the Van Wart case, however, stated two propositions of law that have application here: (1) A guardianship is not a taxable entity; and (2) the ward, not the guardian, is the taxpayer.
The fact that the guardianship is not a taxable entity destroys any parallelism between this case and the cases involving trusts relied on by petitioner. (1939 BTA LEXIS 1083">*1096 ; .)
That the ward and not the guardian is the taxpayer is important in this case in view of the fact that most, if not all, of the services involved were such as would clearly be classified as purely personal in character if they had been performed at the behest of the taxpayer personally. No segregation of purely personal activities from those of a business nature was made or attempted in the record, petitioner claiming that the expenses were all incurred as guardian of the property of the infant and are accordingly deductible. The query thus arises, Are expenses personal in character, if paid or incurred by a taxpayer directly, converted into business expenses of the taxpayer if paid or incurred indirectly through a guardian? 39 B.T.A. 43">*49 In answer to this proposition we quote from the opinion of the Circuit Court of Appeals in :
* * * An allowable expense is deductible only from the income of the taxpayer. The taxpayer's expenses incurred in carrying on a business are deductible, but1939 BTA LEXIS 1083">*1097 his personal expenses are not. As in this case the income belonged to the minor, the ward, and not to the guardian, she, and not he, was the taxpayer. The attorneys' fee was an expense of litigation which was paid out of her income. She was not engaged in any business, and therefore as to her the fee was not a business expense. If she had been of legal age and had brought the suit against the trustees of her grandfather's estate in her own right, the amount of the fee would have been a personal expense for which she would not have been entitled to any deduction from her income. ; . The fact that she was a minor makes no difference. In the matter of personal expenses, the Income Tax Law makes no distinction between a minor and an adult taxpayer; it treats them both alike. They would be treated very differently under the rule announced by the Court in the Wurts-Dundas Case [ and followed by the Board in this case. Under that rule, the cost of litigation could be deducted from the minor's personal expenses by incurring1939 BTA LEXIS 1083">*1098 it at any time before he or she came of age, whereas, as we have seen, such cost could not be so deducted in the case of an adult taxpayer; or where there were two beneficiaries of taxable income, one a minor and the other an adult, the former would but the latter would not be entitled to deduct the same sort of personal expenses. To follow such a rule would be, as it seems to us, to recognize a difference in tax liability where none was intended or authorized by the income tax law.
We concur fully in this exposition of the law.
In view of the nature of the services performed and of the fact that no segregation is made of personal from business expenses, this would seem to be dispositive of the case.
A similar conclusion is reached if we turn to the second phase of the case and assume that an infant, acting through a guardian, may be engaged in business. Under the decided cases the activities of the taxpayer acting through the guardian were not such as to entitle it to classification as a business.
The activities were of two kinds: (1) Those clearly personal in nature; and (2) those normally incident to the investment, conservation, and protection of property. Such activities1939 BTA LEXIS 1083">*1099 did not amount to the carrying on of a business by the taxpayer. In considering the question we need not inquire nor decide whether the guardian, as such, was engaged in business. We are concerned only with determining whether the taxpayer, through the guardian, was engaged in business, and in that consideration the same criteria as are pertinent in other cases are applicable.
In , the Board stated:
The sums of money handled by the petitioner are impressive as to amount, and if the size of an individual's fortune were the determining factor in the 39 B.T.A. 43">*50 question as to whether or not a trade or business is carried on, this case might well be concluded in favor of the petitioner. It is not the size of a person's fortune, however, which determines that activities in connection therewith constitute the carrying on of a trade or business, but it is the use of the fortune and the nature of the activities indulged in that are most enlightening. We know of no theory which holds that the amount involved in a transaction or in a number of transactions determines the question stated. 1939 BTA LEXIS 1083">*1100 As a matter of fact, a person of small capital most often finds it necessary to use that capital in the operation or conduct of a business in order to produce income sufficient for a livelihood, while a person of large means is much more likely to realize a sufficient income from investments which require no activities in connection with the business enterprise itself, but merely the doing of those things which are necessary from an investment point of view, that is, the collecting of the dividends or interest, and such supervision as may be necessary to shift from one investment to another when safety, security, and the yield of income suggest such a course. Such activities do not partake of the nature of the conduct of a trade or business in the ordinary sense and do not, in our opinion, fall within the meaning of section 23(a), supra.
We are of the opinion that the taxpayer was not engaged, either personally or through her guardian, in carrying on a trade or business.
Decision will be entered for the respondent.