Opinion ID: 1505106
Heading Depth: 1
Heading Rank: 2

Heading: Carrying on Business.

Text: Not all outlays authorized by the administering court or required by statute are deductible from the gross estate for estate tax purposes. Instances of such non-deductible outlays are commissions to trustees where the executors happen to be the trustees of a portion of the property subject to administration for some purposes (Bretzfelder v. Commissioner, 2 Cir., 86 F.2d 713, 714) and State inheritance taxes where such are levied on the privilege of receipt by individual legatees (United States v. Kombst, 286 U.S. 424, 426, 52 S.Ct. 616, 76 L.Ed. 1201; Leach v. Nichols, 285 U.S. 165, 168, 169, 52 S.Ct. 338, 76 L.Ed. 681; New York Trust Co. v. Eisner, 256 U.S. 345, 350, 41 S.Ct. 506, 65 L.Ed. 963, 16 A.L.R. 660)  the basis of these decisions being that such expenditures are not for the benefit of the estate as a whole (New York Trust Co. v. Eisner, supra, 256 U.S. at page 350, 41 S.Ct. at page 507, 65 L.Ed. 963, 16 A.L.R. 660) but affect only individual beneficiaries or are not such as are necessary to wind up administration of the estate and affect the estate as a whole. Bretzfelder v. Commissioner, supra, 86 F.2d at page 714. Whether expenses of carrying on a business by an estate during administration are deductible has never been judicially determined. The nearest approaches to such determination are the surmise of this court that such might be true (Refling v. Burnet, 8 Cir., 47 F.2d 859, 860) [1] and a dictum that activities of such a taxpayer as an executor, if carried on for the purpose of earning profits may become sufficient to constitute the doing of business. Ames v. Commissioner, 8 Cir., 49 F.2d 853, 855. However, both of these cases determined that the ordinary processes of liquidation carried on by the executor of an estate are not such activities as constitute trade or business (Ames v. Commissioner, supra, 49 F.2d at page 854); that the execution of his trust by the executor of an estate in the ordinary way of gathering in, administering upon, and distributing the assets should not be so construed (Id., 49 F.2d at page 855); and that the functions or activities of an executor in liquidating and administering upon an estate do not constitute trade or business regularly carried on as used in the taxing Acts. Refling v. Burnet, supra, 47 F.2d at page 861. In both the Refling and Ames cases the determinations were that the expenses there involved were administration expenses because arising in the ordinary activities of an executor administering an estate. Unless the expenses here involved arose otherwise, those cases control. That matter must be resolved before we reach the existence of a situation requiring discussion of the question of the legal results of an executor carrying on a business. The facts are undisputed. The business of decedent had been dealing in mining properties. For some years prior to death, he was practically retired, owning certain mineral properties and real estate. He had no business office nor office employees. He kept no business records except a check book and his papers were in three or four different places. His estate consisted very largely of real estate. This real estate consisted of some 1,500 separate parcels located in six counties in Minnesota, in three counties in Wisconsin and in one county of North Carolina. Except the North Carolina land, the remainder was mostly lands having potential or speculative mineral prospects located mainly on the Cuyuna Range. There was a fox farm. There were stocks and bonds and about $6,000 cash. There were debts (including a claim for United States income taxes) of about $78,800. It serves no useful purpose to trace in detail the difficulties, revealed in the evidence, attending the working out of various items of this property but some things of a general character may be noted. The evidence is clear that much effort was necessarily expended in locating the assets, ascertaining the condition of title and determining the character (mineral) of these many and scattered parcels of land. The Board found that the estate consisted mostly of assets which are not readily distributable, real estate, mining leases, etc.; and that the mineral properties were not generally salable until some mining company was ready to take them, and the price would largely depend on what was offered. There was not sufficient cash and liquid assets to pay the debts and funeral expenses. There were several sizable items which required much effort and time to work out. [2] In short, the clear picture is of an estate where there were unusual difficulties in ascertaining the assets and their nature and very unusual difficulties in disposing of the bulk of the assets with any expedition. In its very nature, this estate had to be carefully nursed along unless it was to be sacrificed. While the Board found that the expenses incurred in its operation are more in the nature of ordinary expenses rather than those of an administrative nature, there is no basis in the evidence for such a finding. The expenses intended by the Board are salaries    paid to office help, engineers retained regularly in the various mining ventures and fees    paid to lawyers and accountants on a retainer basis. All of these expense items were in connection either with the preservation or protection of the estate or with the proper course of its administration. With one seeming but unreal exception, all transactions were for collection and protection of the estate or for realization on the assets. That exception was in certain dealings in securities. Among the assets were certain stocks. The executor, under authority of the court, sold and bought stocks. The purpose of these transactions is stated in the preamble of the authorizing order as follows: Whereas, said executors by the terms of the will of said decedent and the prior order of this court are authorized to sell said stocks, or any part thereof; and it further appears that it is for the best interest of said estate that portions of said stocks be sold from time to time and the proceeds reinvested in common stocks listed on accredited exchanges which in the judgment of said executors afford at least equal security to the estate, to the end that said list of stocks may be more properly diversified. The Board found that: Pursuant to this authorization petitioner as executor sold securities in 1933 in the amount of $70,114.13, and equally substantial amounts in subsequent years. Trading was done on margin, as well as by outright purchases. Up to December 31, 1937, the total profits from such trading amounted to $55,526.02. Trading was carried on by petitioner for the purpose of realizing as much income as possible to cover operating costs and help discharge the cash bequests, and petitioner was the only employee of the estate devoting any time to it. While investments of cash in the hands of an executor are, ordinarily, not proper, yet circumstances and situations govern. Where there is statutory authority, power given in a will, or an extended administration, investments are permissible under orders of court. Villard v. Villard, 219 N.Y. 482, 114 N.E. 789, 793; In re Clark's Will, 165 Misc. 801, 1 N.Y.S.2d 629, 632; In re Ayvazian's Estate, 153 Misc. 467, 275 N.Y.S. 123, 136; Fidelity Union Trust Co. v. Lowy, 123 N. J.Eq. 90, 196 A. 369; Zlevor v. Tice, 64 N.D. 626, 255 N.W. 470, 473; In re Giese's Estate, 64 N.D. 636, 255 N.W. 474; In re Eakins' Estate, 64 Mont. 84, 208 P. 956, 959; In re Gehring's Will, 179 Wis. 589, 192 N.W. 36, 38; 24 C.J. 71, § 492; 21 Am.Jur. 526, § 264. Where, as here, the situation is more that of a change in securities for the protection of the estate, the reason for such power in an executor is even stronger. 21 Am.Jur. 528, § 270. This estate, because of the character of most of the assets, requires prolonged administration. This stock dealing was both to protect the estate by diversifying the securities therein and to earn money to pay debts, carry on administration and aid distribution. It was clearly in direct line with administration. Moreover, it was of relatively small scope  the traded securities being only about one-half of the total securities in the estate and the total securities being less than one-third of the total assets of the estate. The situation comes well within the reasoning of Refling v. Burnet, supra, where expenses of an executor were held not to be business expenses although part of the activities of the executor consisted of the investment of the proceeds of liquidation of certain assets, 47 F.2d at page 859. We must conclude that there was here no carrying on of business apart from the ordinary administration of the estate. This conclusion on the fact situation makes unnecessary any examination of the legal question which would arise were the executor carrying on a business in the true sense of the Revenue Act. Both the Board and the Commissioner emphasize that the activities of the executor were essentially the same as the testator. From this situation, the conclusion is drawn that the executor was carrying on a business in a taxing sense. This does not follow. If there is a tax difference between the activities of an orderly administration and the carrying on of business by an executor, such is not measured by the prior activities of the testator. The gauge is whether certain activities of the executor are not such as properly fall within the duties of the executor in the collection and protection of the assets, the discharge of obligations, and the distribution of the residue.