1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

T.C. Memo. 1996-207

UNITED STATES TAX COURT

ROBERT JOSEPH LOOBY and M. PATRICIA LOOBY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10791-94. Filed April 30, 1996.

Robert Joseph Looby and M. Patricia Looby, pro sese.

Thomas S. DiLeonardo, for respondent.

MEMORANDUM OPINION

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7443A(b) and Rules 180, 181, and 182.1
- 2 -

 

2The parties stipulated petitioners' tax returns for 1990,

1991, and 1992, as well as the amounts of legal fees in each

year. In a separate paragraph the parties stipulated that the

fees for the 3 years totaled $30,095.07, an apparent error in

addition.

Respondent determined deficiencies in petitioners' Federal

income tax for the years 1990, 1991, and 1992 in the amounts of

$1,358, $4,209, and $2,072, respectively. The sole issue for

decision is whether petitioners are entitled to deductions under

section 212 for legal fees paid during the years 1990, 1991, and

1992. 

Most of the facts have been stipulated and are so found. 

The stipulation of facts and attached exhibits are incorporated

herein by this reference. At the time the petition in this case

was filed, petitioners resided in Tucson, Arizona. References to

petitioner are to M. Patricia Looby. 

Background

In the statutory notice sent to petitioners in this case,

respondent disallowed for the years 1990 through 1992, itemized

deductions taken by petitioners for legal fees totaling

$29,915.07.2

The will

Petitioner's mother, M. Doris Casey (decedent), died leaving

a will on February 16, 1982. The will directed that debts,

funeral expenses, and the expenses of settling the estate be paid

by the executors as soon as practicable. The will made specific
- 3 -

 

3Mark Hyland and Sharon Hyland, adult children of coexecutor William F. Hyland.

bequests of cash on hand in two savings accounts to petitioner

and her sister, respectively, and monetary bequests of $25,000

each to two family members3 and a friend. The "rest, residue and

remainder" of the estate was to be divided between petitioner

(25%), her sister (25%), and a trust (50%) to be created by the

executors for the benefit of the children of petitioner and her

sister.

In her will, the decedent named her brother-in-law,

William F. Hyland (Hyland), and Patrick J. Scinto (Scinto) as 

co-executors of her estate. The co-executors were granted broad

power to administer and distribute the estate, including the

power to sell, lease, invest and reinvest all or part of the

decedent's estate, "real, personal and mixed".

The estate

Along with the previously mentioned savings accounts, and

miscellaneous personalty, the estate included 4 parcels of real

property that were disposed of as follows: (1) The decedent's

personal residence in Bronxville, New York, was sold by the

executors on February 23, 1983; (2) a vacant lot in Yonkers, New

York, was sold by the executors on May 18, 1983; (3) commercial

property in Mobile, Alabama, was sold by the executors in May of

1985; and (4) commercial property in Chicago, Illinois, was sold

by the executors on October 31, 1986. 
- 4 -

 

4At her death, decedent owned two of the four outstanding

shares of Huber-Kettell Corporation. The two other shares were

owned by Mark W. Hyland and Sharon Hyland. 

 

5In State Court documents stipulated by the parties, Mark W.

Hyland and Sharon A. Hyland are identified as owning or

controlling Nationwide Properties, Ltd.

 

6Estate of M. Doris Casey, Surrogate's Court File No. 816-

1982.

The estate also held 50-percent stock ownership4 in a close

corporation, which owned parcels of real estate. In September of

1986, the executors advised petitioner that the corporate stock

would be "transferred". In late December of 1986, there was a

disposition of the stock by the executors. As a result of this

disposition, certain assets of the corporation were acquired by

Nationwide Properties Ltd., a close corporation owned or

controlled by children5 of co-executor, Hyland.

Petitioner's lawsuits

On or about November 1, 1986, the beneficiaries of the

estate of M. Doris Casey filed a "PETITION FOR REMOVAL OF

EXECUTORS AND TRUSTEES" in the Surrogate's Court of the State of

New York, in Westchester County.6 Following a statement of

facts, the State court petition for removal contains seven

allegations, six of which assert that the executors engaged in

self-dealing and paid excessive fees out of the estate. One of

the seven allegations is that the sale of the Chicago property

was mismanaged, resulting in a lawsuit against the estate's
- 5 -

 

7File No.0816-1982.

 

8The prayer for relief on this issue asks for a return of

the "Loss incurred in sale of Chicago property" of $24,420.

beneficiaries, and that the executors failed to collect past due

rent on the property of approximately $80,000.

On June 15, 1989, petitioner filed "OBJECTIONS TO ACCOUNT"

with the Surrogate's Court,7 praying for disallowance of fees and

commissions, and for surcharges and damages totaling over

$836,000. Petitioner's objections to the executors' accounting

for the estate may be summarized as alleging: (1) Excessive

attorney's fees were paid to four law firms; (2) self-dealing by

and excessive commissions paid to executor Hyland; (3) excessive

commissions paid to executor Scinto; (4) self-dealing on the part

of Hyland in disposing of the close corporation stock, jewelry of

the estate, and in valuing a partnership interest of the estate;

(5) excessive real estate commissions and management fees paid to

Hyland's son, Mark V. Hyland; (6) the fraudulent sale of various

parcels of realty at less than fair market value; (7) the failure

of Hyland and Scinto to establish a trust for the children of

petitioner and her sister and the executors' payment of funds

directly to the children; and (8) mismanagement of the Chicago

property causing the beneficiaries to be sued, and the executors'

settlement of the suit by conceding $24,420 in back rent.8
- 6 -

 

9Affd. sub nom. In the Matter of Mary Doris Casey, 634

N.Y.S.2d 396 (N.Y. App. Div. 1995).

 

10This amount encompasses the $29,915.07 deducted on

petitioners' return for the years 1990, 1991, and 1992.

On October 13, 1993, the Surrogate's Court issued its

decree9 in the matter of the accounting for the estate, finding

some issues in favor of and some against petitioner. The decree

further held that petitioner's efforts had benefited the estate

and that she should be reimbursed by the estate for legal fees

and litigation expenses paid to her attorneys in the amount of

$31,141.10

The parties agree that petitioners incurred the $4,855 in

legal fees claimed on their 1990 return, $17,144 of the

$17,468.01 claimed on their 1991 return and $10,577.30 in legal

fees for 1992 although they deducted but $7,444 on their return

for the year. 

Discussion

We must decide whether the legal fees incurred by

petitioners in the years 1990 through 1992 are deductible under

section 212, which provides:

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; or
- 7 -

 

11The return for 1990 indicates that legal fees were paid to

"Protect investment". Petitioners, on their returns for 1991 and

1992, deducted legal fees expended "to protect estate assets". 

(3) in connection with the determination, collection,

or refund of any tax.

Because petitioners argue that their expenditure of legal fees

was for the "protection of income"11 our focus will be on the

first two subsections of section 212.

Respondent argues that petitioners' legal expenditures were

neither for the production or collection of income nor for the

management of property held for the production of income, but

were instead to establish a right to or to perfect title to

assets passing from a decedent. It is petitioners' burden, of

course, to prove that all of the requirements of section 212 have

been met before their deductions will be allowed. Rule 142(a); 

Welch v. Helvering, 290 U.S. 111 (1933).

A taxpayer may not, under section 212, deduct legal fees

that are personal expenses. Section 262(a). Legal fees incurred

in protecting or asserting one's right to property of a decedent

as heir or legatee are not deductible. Section 1.212-1(k),

Income Tax Regs. Also well established is the principle that

amounts paid to defend or perfect title to property are

nondeductible capital expenditures. Woodward v. Commissioner,

397 U.S. 572 (1970); Kramer v. Commissioner, 46 B.T.A. 951, 958

(1942). Furthermore, amounts allocable to the production or
- 8 -

 

12See sec. 102 (gross income does not include the value of

property received by gift, bequest, devise or inheritance).

collection of income that is not includable in gross income12 are

not deductible under section 212. Sec. 1.212-1(e), Income Tax

Regs. 

Origin and character of the claim

The Supreme Court, in United States v. Gilmore, 372 U.S. 39

(1963), held that the characterization of litigation costs as

"profit-seeking" or "personal" depends on whether or not the

claim arises in connection with the taxpayer's profit-seeking

activities. Further, the Court said: the origin and character of

the claim with respect to which an expense was incurred, rather

than its potential consequences upon the fortunes of the

taxpayer, is the controlling basic test of whether the expense

was 'business' or 'personal' and hence whether it is deductible

or not under [the predecessor to section 212] * * * [United

States v. Gilmore, supra at 49].

The "origin-of-the-claim" rule is not a mechanical search

for "the first in the chain of events which led to the litigation

but, rather, requires an examination of all the facts." Boagni

v. Commissioner, 59 T.C. 708, 713 (1973). The question to be

answered is, out of what kind of transaction did the litigation

arise. Id.

When determining the origin of the claim, the Court must

consider the issues, the nature and objectives of the action, the

defenses asserted, the purpose for the legal fees, the background

of the litigation and "all facts pertaining to the entire

controversy out of which the disputed expenses arose". Morgan's
- 9 -

Estate v. Commissioner, 332 F.2d 144, 151 (5th Cir. 1964) (cited

in Boagni v. Commissioner, supra at 713); Barr v. Commissioner,

T.C. Memo. 1989-420. The line demarking deductible from

nondeductible expenditures is often shadowy and "It would be idle

to suggest that all the authorities in this field can be

reconciled." Ruoff v. Commissioner, 30 T.C. 204, 208 (1958),

revd. and remanded on other grounds 277 F.2d 222 (3d Cir. 1960).

Under her mother's will, petitioner was to receive both a

specific bequest of bank account funds and also a portion of the

"rest, residue and remainder" of the estate. 

In both the action to remove the executors and the action in

objection to the executors' accounting petitioner was acting to

protect her interest as a residuary beneficiary of the estate. 

Therefore, the origin of petitioner's claims was as a residuary

legatee, one who takes what remains, or a portion of what remains

of the estate after the satisfaction of all other gifts, charges,

losses and expenses. See In re Langdon's Will, 50 N.Y.S.2d 100

(Sur. Ct. 1943). A gift of the residue of an estate does not

dispose of any specific article of property and is payable out of

the estate in general. Application of Osterhoudt, 118 N.Y.S.2d

879, 882 (Sur. Ct. 1953); In re Ruben's Will, 115 N.Y.S.2d 228,

233 (Sur. Ct. 1952).

The character of the claims raised in both actions by

petitioner centers around allegations of excessive fees paid out

of the estate and the alleged sale of estate property at less
- 10 -

than fair market value. Petitioner's claims were aimed at

enlarging the amount of money to be ultimately distributed by the

estate. These claims are analogous to those in Grabien v.

Commissioner, 48 T.C. 750 (1967). In that case a taxpayer, who

was a residuary legatee of 50 percent of his brother's estate,

sued the executrix, alleging excessive fee payments and asking

for an accounting. We denied a deduction for the attorney's fees

paid for those actions because:

Petitioner's interest in the estate was essentially a

money claim dependent in amount on the amount of cash

in the estate after the conversion to cash of the

estate's assets and after allowance of all expenses of

administration. A mere money claim of this sort is not

property held for the production of income and

petitioner never held the property for the production

of income or otherwise until after the determination of

the Probate Court with respect to the disputed

extraordinary fees and distribution of the estate

assets. The expense here in issue is analogous to an

expense of perfecting or protecting title to property

and not deductible as an expense of managing,

maintaining, or conserving property. [Id. at 753;

citations omitted.] 

Accordingly, we find the claims pursued by petitioner in the

State court to be in essence either capital or personal in

nature.

We note that one of the allegations by petitioner in each of

her two legal actions concerns the failure of the executors, for

a period of time, to collect rent on the Chicago property and

their concession of back rent upon the sale of the property,

apparently to the lessee. Petitioners urge the Court to find
- 11 -

their circumstances to be analogous to those of the taxpayer in

Estate of Kincaid v. Commissioner, T.C. Memo. 1986-543. There,

we found that the origin and character of the claim for which

legal fees were incurred had as its source "the management and

conservation of income-producing property in which [taxpayer]

held an interest as an income beneficiary." Here, for purposes

of argument, we shall assume that some portion of petitioners'

legal fees relates to the management of income producing

property.

When a petitioner proves that some part of an expenditure

was made for deductible purposes, and when the record contains

sufficient evidence for us to make a reasonable allocation, we

will do so. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930);

Luman v. Commissioner, 79 T.C. 846 (1982). Even if we were to

agree that petitioner had a sufficient interest in the Chicago

property to support a deduction, and that a portion of the legal

fees she expended during the years 1990 through 1992, was for the

production or collection of income, or for the management of

property held for the production or collection of income, 

petitioners have failed to show (and we are unable to discern)

any supportable basis for making a reasonable allocation of fees

to the "management" of the Chicago property. 

We do not know the hourly rate, if any, charged, or the

total attorney time spent on the two lawsuits or on the

particular issue involving the Chicago property. Based on the
- 12 -

number of issues raised in the pleadings, and the amount of money

involved in the respective issues, the management of the Chicago

rental property appears to have been a minor issue. Under the

circumstances of this case, an "allocation of any portion of the

[payments] to a section 212(2) purpose would be speculative,

amounting to `unguided largesse.'" Luman v. Commissioner, supra

at 859 and cases cited therein.

Based on the entire record in this case we find that

petitioners may not deduct any portion of their expenditures for

attorney's fees in the years 1990, 1991, and 1992.

Decision will be entered for

respondent.