Court Opinion

ID: 8594345
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:06.731682+00
Date Added: 2024-06-11T16:54:48.342060
License: Public Domain

SkeltoN, Judge,
concurring in part and dissenting in part:
I do not agree with that part of the majority opinion on the first issue in which it held that the $19,518.59 the plaintiff paid for attorney fees in connection with the Seventh Account litigation was not deductible by him under Section 212 of the Internal Revenue Code. I agree with the decision of Chief Commissioner Bennett that they were deductible under Section 212 for all of the reasons stated in his written opinion.
Here the plaintiff was an income beneficiary of a trust. His principal source of income consisted of distributions from the trust. The amount of these distributions depended on what proportion of the proceeds of the sale of the stock was allocable to income, as opposed to corpus, under the laws of Pennsylvania. That was the basis of plaintiff’s suit and the origin of the controversy. The plaintiff undertook by the suit to increase the amount to be distributed to him as income by the trustees and he was successful. Under these circumstances, the requirements of the “origin and character” test as to the deductibility of legal expenses as enunciated by the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), were fully met. The suit was not connected with the actual sale of the stock, as the trustees had already sold it, but was related solely to the collection of income and to the management, conservation or maintenance of property held for the production of income.
As our chief commissioner pointed out, the plaintiff was not seeking any new title or any new properties. He was already an income beneficiary and was only seeking to enforce his rights to a proper distribution of income under Pennsylvania law. This was certainly an effort “for the production or collection of income” as contemplated by Section 212(1) of the Code, and thereby deductible. The legal expenses here were not incurred as expenses or costs of the dis*250position of a capital asset, as the majority holds, but rather expenses or costs with reference to the distribution or collection of the proceeds derived from the sale of a capital asset. The sale of the stock was not made by the plaintiff. The trustees had already sold it. The expenses involved here were connected solely with how much would be distributed to plaintiff. Accordingly, the expenses were not of a capital nature and are not required to be capitalized, rather than deducted as an expense.
In Frederick E. Rowe, 24 T.C. 382 (1955), the Tax Court held that legal expenses in a will contest were paid to conserve or maintain property held for the production of income (the interest of a vested remainderman) and were not expenses to acquire, defend or perfect title. This is analogous to the situation here where the legal expenses were incurred to conserve or maintain property held for the production of income (i.e., plaintiff’s right to receive proper distributions). For these reasons, plaintiff is entitled to deduct his legal expenses under Section 212 (2) of the Code.
In the case of Stella Elkins Tyler, 6 T.C. 135 (1946), the Tax Court held that attorneys’ fees paid in connection with a will contest filed to determine the amount of annual income payable to the life tenant taxpayer of a testamentary trust was an expense for the collection of income within the meaning of Section 23(a)(2) of the Internal Revenue Code of 1939 (the predecessor of Section 212(1) and (2) of the 1954 Code), and deductible. Here, the legal expenses paid by plaintiff increased his distributive share from $1,022,544 to $2,158,910.92. This was not a new or different interest which he acquired, but merely a proper distribution of funds already in the hands of the trustees. The Tyler case seems to be directly in point. In both that case and our case, the legal expenses that were incurred were directly connected with income that was distributable to an income beneficiary of a trust. Under the authority of Tyler, the plaintiff is entitled to deduct these legal expenses under Section 212(1) of the Code.
The case of Commissioner v. Burgwin, 271 F. 2d 395 (3d Cir. 1960) relied on by the government and by the majority, *251is distinguishable from our case for all of tbe reasons pointed out by our chief commissioner, with which I agree. I will not repeat them here.
The majority opinion rationalizes that the legal fees here were incurred in 'connection with the sale or disposition of a capital asset. It appears to have reached this result by reasoning that the money involved came from the sale of the stock previously made by the trustees and had such sale not been made the money would not have been on hand. From this premise, it proceeds .by a “conduit” theory to connect plaintiff’s legal fees with the sale previously made by the trustees. I think this goes too far. It could just as easily be argued that plaintiff’s legal fees were related by the “conduit” theory to the original purchase of the stock by the trustor, because his purchase of it made possible the later sale by the trustees which resulted in the acquisition of the money in their hands for distribution. One argument is about as logical as the other. In my opinion, neither is correct.
Accordingly, I would approve and adopt Chief Commissioner Bennett’s opinion as to the first issue and hold that plaintiff is entitled to deduct Ms legal expenses under Section 212(1) and 212(2) of the 1954 Code of Internal Kevenue.
I concur in the remainder of the majority opinion.
ColliNS, Judge, joins in the foregoing opinion concurring in part and dissenting in part.
EINDINGS OE FACT
The court, having considered the evidence, the report of Chief Trial Commissioner Marion T. Bennett, and the briefs and arguments of counsel, makes findings of facts as follows:
1. Plaintiff is Gurnee Munn, Jr., of Palm Beach, Florida.
2. Plaintiff filed his federal income tax returns for the years 1959 and 1960 with the District Director of Internal Kevenue at Jacksonville, Florida. In computing his income tax liabilities for those years he took deductions for certain attorneys’ fees and costs in the amounts of $27,537.18 for 1959 and $5,000 for 1960.
3. Upon 'an audit of said tax returns for 1959 and 1960, the Internal Kevenue Service (hereinafter referred to as the *252Service) disallowed in full tbe deductions described in finding 2 for attorneys’ fees and costs. However, plaintiff was allowed an additional deduction in the amount of $500, which represented a portion of certain attorneys’ fees and costs paid by plaintiff in 1959 in connection with divorce proceedings.
4. In part as a result of the disallowance of the aforementioned deductions taken by plaintiff for the years 1959 and 1960, the Service asserted additional deficiencies in the amount of $22,902.01 for 1959 and $4,176.05 for 1960, which plaintiff paid together with accrued interest thereon.
5. Plaintiff filed claims for refund with respect to such payments. On October 4, 1966, the Service notified plaintiff of its disallowance of his claim for refund for 1959 and 1960.
6. (a) Plaintiff is the son of Marie Louise Kent (formerly Marie Louise Munn), who was the daughter of Kodman Wanamaker. Rodman Wanamaker died on March 9, 1928. In the third paragraph of his will, dated October 6, 1923 (hereinafter referred to as the will), Rodman Wanamaker established a trust (hereinafter referred to as the Stock Trust) consisting of all the shares of the capital stock of John Wanamaker Philadelphia. The will directed that the difference between the net annual profits of John Wanamaker Philadelphia and an amount to be paid into a sinking fund (also created by the will) should be divided equally among Rodman Wanamaker’s three children.
The will also provided that on the death of any of his children, that child’s share would be divided into two parts, one part of which would be equally divided among the then living children of the deceased child. The other part was to be accumulated for “The John Wanamaker Free School of Artisans.”
The twentieth paragraph of the will provided that the amount of the annual distribution to the children of Rod-man Wanamaker under the third paragraph of the will was to be not less than $100,000 each, unless the annual profits of the business did not warrant it.
(b) An agreement (hereinafter referred to as the Family Agreement) dated January 26, 1931, was entered into be*253tween the parties interested in the estate of Rodman Wanamaker. It provided, inter alia, that payment out of the distributions of John Wanamaker Philadelphia would be made in the following order of priority:
(1) the sum of $100,000 to be paid to each of the children of Rodm’an Wanamaker and upon the death of a child, to such persons lawfully entitled to his or her share;
(2) to the persons described in the eighth through the eleventh paragraphs of the codicil of August 5, 1927, the sums described as annuities; and
(3) the balance in equal shares to the children of Rodman Wanamaker and to those lawfully entitled thereto in the event of the death of any of said children.
7. Marie Louise Kent, who is named in the third paragraph of the will as Marie Louise Munn, died on October 16, 1955. At that time, under the terms of the will and the Family Agreement, plaintiff, as a grandchild of Rodman Wanamaker, became an income beneficiary of the Stock Trust. Plaintiff and his sister, Fernanda Munn Kellogg, were, under the terms of the will, entitled to divide between themselves one-half of their mother’s one-third interest in the distributions from the Stock Trust. Thus, after the death of his mother, plaintiff had a one-twelfth income interest in the residual income of the Stock Trust and a one-quarter interest in his mother’s right to a yearly $100,000 payment.
8. Upon the filing of the Sixth Account of the trustees of the Stock Trust and the first supplement thereto, which was listed for audit on November 7,1955, the estate of Mary Brown Warburton (deceased sister of Rodman Wanamaker) made claim upon the trustees for payment out of income of the trust for unpaid arrearages for the years 1932, 1933, and 1934, in the total amount of $300,000, due Mary Brown Warburton as an annuitant under the will of Rodman Wanamaker. The Warburton estate also claimed $18,904.14, representing the balance of her current annuity accruing to the date of her death in 1954.
9. With respect to the same accounting, a claim was made on the trustees by the estate of Marie Louise Kent for arrearages in the amount of $100,000 and for a balance of *254$25,000 for tlie year of ber death. (1955), arising out of the Family Agreement of January 26,1931, relating to the estate of Rodman Wanamaker and related trusts.
10. Under d'ate of November 26,1955, plaintiff sent Lewis Stevens of the law firm of Stradley, Ronon, Stevens & Young a telegram authorizing Mr. Stevens to represent him in all Wanamaker and personal affairs. Plaintiff authorized Richard K. Stevens of the law firm of Stradley, Ronon, Stevens & Young to resist the claim of the estate of Mary Brown Warburton against the income of the trust.
11. A hearing on such claims was held before Judge Alfred L. Taxis, Jr., in the Orphans’ Court of Montgomery County, Commonwealth of Pennsylvania. On May 9, 1956, Judge Taxis entered a memorandum opinion with respect to the Sixth Account and the first supplement thereto, denying the claim of the estate of Mary Brown Warburton and allowing the claim of the estate of Marie Louise Kent. No objection was made to the Kent claim for current income on a prorated basis to date of death. The opinion does not indicate whether any objections were made with respect to the Kent claim for $100,000 arrearages.
12. After exceptions were filed, the claims of the War-burton and Kent estates were settled by the parties. The Warburton estate was allowed $109,904.14 in satisfaction of its claims of $318,904.14. Thus, the settlement resulted in the Warburton estate giving up $209,000 of its claim, with a concomitant increase in the income available to pay income beneficiaries. As a result of the settlement, additional income was distributable to plaintiff and includable in his taxable income for federal income tax purposes.
13. The principal asset of the Stock Trust is shares of stock of John Wanamaker Philadelphia, a Pennsylvania corporation, which operates a retail department store in Philadelphia. On January 17,1957, John Wanamaker Philadelphia purchased 10,294 shares of its own common stock from the Stock Trust at a total purchase price of $6,999,920, resulting in a long-term capital loss to the trust of $1,235,280.
14. The Seventh Account of the Stock Trust was called for audit on April 7,1958. Of the sale proceeds of the John *255Wanamaker Philadelphia stock, the trustees proposed to distribute $1,022,544 to the income beneficiaries, pursuant to the Pennsylvania rule of apportionment. Under Pennsylvania law, the rule of apportionment was that the life tenants should receive the excess, if any, of the sale price of the stock, held as trust corpus, over the “intact value,” to the extent such difference is covered by retained earnings. Several income beneficiaries other than plaintiff, but including plaintiff’s sister, Fernanda M. Kellogg, filed objections to the trustees’ allocation between principal and income, claiming that $2,158,970.92 should be apportioned to income. In addition, the Kent estate claimed 89.337 percent of that portion of the proceeds of the stock sale that was apportionable to the “Kent line” of income beneficiaries. Plaintiff, together with his sister, resisted the claim of the Kent estate and contended that the entire amount apportionable to the Kent line was distributable to them. Plaintiff retained Richard K. Stevens to defend against the claim of the Kent estate.
15. On August 1, 1958, Judge Taxis entered 'an adjudication to the Seventh Account of the trustees modifying their allocation of the sale proceeds of the stock by increasing the amount allocable to income to $2,158,970.92, out of the total proceeds of $6,999,920. He also rejected the claim of the Kent estate to 89.337 percent of the amount apportionable to income which was to be distributed to the Kent line.
16. Plaintiff reported no additional income in his federal income tax return with respect to the amount of $341,359 paid to him by the trustees as a result of Judge Taxis’ adjudication on August 1,1958.
17. In 1959, plaintiff paid the sum of $7,537.18 to Stradley, Ronon, Stevens & Young for legal services rendered in connection with the above-described litigation and costs. In addition, plaintiff paid $7,500 to Stradley, Ronon, Stevens & Young in 1960 for such services. Such amounts were fair, reasonable, and customary for the extent and nature of the services rendered on behalf of plaintiff. Of those amounts, $7,518.59 is allocable to the Sixth Account and $7,518.59 is allocable to the Seventh Account.
18. Cuthbert Latta, a Philadelphia attorney then with the *256firm of Barnes, Dechert, Price, Myers & Bhoads, was engaged by Francis L. Kellogg to represent the interests of his wife, Fernanda M. Kellogg, in connection with the Sixth and Seventh Accounts of the trustees of the Stock Trust. Insofar as Mr. Latta was concerned, he was acting as counsel for Mrs. Kellogg and not for Mr. Munn in connection with the Sixth and Seventh Accounts.
19. On December 26,1958, and January 31, 1959, the law firm of Barnes, Dechert, Price, Myers & Bhoads rendered bills to Mrs. Kellogg in the amount of $20,000 each, for the services provided with respect to the Sixth and Seventh Accounts. Of the total of $40,000, the sum of $16,000 is alloca-ble to services rendered in connection with the Sixth Account and $24,000 for the Seventh Account. The charges were fair and reasonable.
20. Sometime prior to December 26, 1958, and after the completion of the Sixth Account, Francis L. Kellogg suggested to plaintiff that he might reimburse Mrs. Kellogg for a portion of the fees to be paid by her for the services provided by Mr. Latta in connection with the Sixth and Seventh Accounts of Stock Trust because of the identity of their interests. The discussions over the plaintiff’s reimbursement of Mrs. Kellogg began when it became apparent that the complexity of the litigation and the time expended by Mr. Latta were going to result in a large bill from his firm for the legal services provided. Plaintiff agreed to reimburse Mrs. Kellogg for 50 percent of the fee for Mr. Latta’s services and did so by check on January 28, 1959.
21. Of the $20,000 paid by plaintiff to Mrs. Francis L. Kellogg as reimbursement for the bill of Barnes, Dechert, Price, Myers & Bhoads, $8,000 is allocable to the Sixth Account and $12,000 is allocable to the Seventh Account.
22. In addition to the above attorneys’ fees plaintiff paid to Lewis M. Stevens, $5,181.48 during the year 1959 and $5,000 during the year 1960 for legal services rendered primarily in connection with divorce proceedings involving petitioner.
23. Plaintiff, in his federal income tax returns for 1959 and 1960, did not claim any deductions with respect to the *257payment for legal services described in finding 22. As shown in finding 3, on andit, plaintiff was allowed an additional deduction of $500 in connection therewith for the year 1959. In his claim for refund, plaintiff claimed that one-third of the above fees ($3,393.83) should be allowed as deductions because the payments related to tax matters.
24. A. Stuard Young, Jr., a partner in the law firm of Stradley, Eonon, Stevens & Young, testified with regard to the bill for services rendered by the late Lewis M. Stevens (hereinafter referred to as the Stevens bill). He confirmed the estimate that one-third of the Stevens bill related to tax matters on the basis of complexity of the work done although numerically speaking about one-fourth of the items pertained to tax matters. Mr. Young prepared the plaintiff’s federal income tax return for the year 1959. In preparing plaintiff’s tax return, Mr. Young discussed Mr. Munn’s affairs with Lewis M. Stevens, and he was aware of the Stevens bill. After reviewing all of plaintiff’s bills and records and consulting with Mr. Stevens, Mr. Young deducted attorneys’ fees relating to income tax services provided by Stradley, Eonon, Stevens & Young and fees relating to the protection of income-producing property but did not deduct any portion of the Stevens bill. He tried to take all deductions to which plaintiff was entitled.
25. Mr. Young first reviewed the Stevens bill in 1962 or 1963, when a tax audit of plaintiff’s 1959 and 1960 income tax returns was being conducted. Mr. Young had performed some services in connection with plaintiff’s affairs, chiefly tax work, beginning in 1957. The period encompassed by the Stevens bill was for the period November 1955 to October 1957, with most of the services having been performed prior to July 1957. Mr. Young’s review of the Stevens bill was not based upon personal knowledge of the services performed, but upon a review of the firm’s files.
CONCLUSION OK LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff *258is entitled to recover tlie amount of tax plus interest wrongly-assessed and paid by reason of tbe defendant’s refusal to allow bim to deduct from gross income $15,518.59 in legal expenses for tbe trustees’ Sixth Account, and $2,893.83 in legal expenses pertaining to tax advice as to divorce and other matters. However, as for tbe $19,518.59 in legal expenses for tbe Seventh Account, tbe court concludes that plaintiff is not entitled to deduct those expenses and, therefore, dismisses plaintiff’s petition to that extent. Tbe amount of recovery will be determined in subsequent proceedings under Eule 131(c).
In accordance with tbe opinion of tbe court, a stipulation of tbe parties and a memorandum report of tbe commissioner as to tbe amount due, it was ordered on May 19, 1972 that judgment for plaintiff be entered for $19,451.21, plus statutory interest as provided by law.