Court Opinion

ID: 4476352
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:58.698441+00
Date Added: 2024-06-11T14:53:54.028332
License: Public Domain

OPINION. Tyson, Judge: The parties have stipulated that $184,874.62 of the expenses in question were ordinary and necessary expenses paid 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, and respondent, on brief, concedes that such amount is deductible. We accordingly hold that those expenses are deductible from petitioners’ gross income. The question is then presented as to whether the other expenses of $25,867.31 are also deductible from petitioners’ gross income. Petitioners’ first contention is that under item ninth of the will they, as trustees, were carrying on the business of the maintenance, administration, and development of the properties of the hotel, railway, and subsidiary companies, stocks and bonds of which companies were owned by them, the amount thereof and their proportions of the totals outstanding not being shown; that the expenses were incurred and paid in that business; and that those expenses are consequently deductible under section 23 (a) (1) of the Internal Revenue Code or that subsection as carried forward into section 121 of the Revenue Act of 1942. Petitioners make no argument that they were carrying on a business of any other character. There is nothing in the record showing in what activities, if any petitioners were engaged with reference to the maintenance, administration, or development of the properties of the hotel, railway, and subsidiary companies, and there is also nothing in the record to show that the petitioners participated, directly or indirectly, in the management of any of those companies or their properties. We are therefore unable to say that the trustees were engaged in the carrying on of the business of the maintenance, administration, or development of such properties, as contended by petitioners. In reaching this conclusion we have not overlooked that part of the stipulation of facts stating that the expenses were paid by the trustees “pursuant to the powers conferred on them by Item Ninth * * * of said will.” The trustees were empowered by item ninth to sell, invest, and reinvest, and to use the income and increment, and to mortgage, pledge, and exchange properties, for the purpose o'f maintaining, administering, or developing the principal properties; but the amounts here in question, as shown by our findings and as itemized in the stipulation, clearly were not expended in the exercise of any of these powers. In this situation we are not bound by the conclusion contained in the part of the stipulation quoted above and that portion must be disregarded in determining whether the trustees were engaged in the carrying on of the business of the maintenance, administration, or development of the principal properties of the hotel, railway, and subsidiary companies, as contended by the petitioners. Ernst Kern Co., 1 T. C. 249, 265; William Ernest Seatree, 25 B. T. A. 396; affd., 72 Fed. (2d) 67; T. K. Harris Co., 38 B. T. A. 383; affd., 112 Fed. (2d) 76. Assuming however that the trustees were engaged in carrying on the business of the maintenance, administration, and development of the properties of the hotel, railway, and subsidiary companies, it is clear that none of the $25,867.31 expenses was incurred or paid for the purpose of the carrying on of that business. All of it was incurred and paid in connection with the payment of legacies and distributions from the estate by the trustees to the benefiiciaries entitled thereto and the expiration of the trust, as is shown in our findings and the itemization of those expenses in the stipulation of facts. We are of the opinion, and so hold, that the expenses of $25,867.31 were not expenses incurred and paid in carrying on a trade or business within the provision of section 23 (a) (1) of the Internal Revenue Code or of that subsection as carried forward into section 121 of the Revenue Act of 1942, as contended by petitioners. Since the determination of the deficiency herein Congress has enacted section 121 of the Revenue Act of 1942, retroactively amending section 23 (a) of the Internal Revenue Code,1 and that section sis amended applies to the taxable year here involved. Therefore, there remains the question of whether the expenses we are considering are deductible under that amendment. Section 121, supra, is applicable to the income of a trust such as the one here involved. (Secs. 161 and 162, Internal Revenue Code.) Petitioners contend alternatively that, if the expenses were not incurred and paid in the carrying on of a business, they were paid- and incurred as a “nontrade or nonbusiness expense” within that provision of section 23 (a) (2) of the Internal Revenue Code as added by section 121 (a) of the Revenue Act of 1942, which allows deductions for expenses “paid or incurred * * * for the management, conservation or maintenance of property held for the production of income.” They concede, on brief, that the expenses involved had no connection with the “production or collection of income” as those words are used in section 23 (a) (2). There is no dispute over whether the claimed deductions were ordinary and necessary expenses. Respondent, on brief, concedes that the trust property was “held for the production of income” as those words are used in section 23 (a) (2), supra, but contends that nevertheless the expenses involved were not incurred or paid for managing, conserving, or maintaining the property so held, because, he argues, the expenses were proximately, caused, not by such holding of the property, but by its-dsitribution, and states more particularly that the management of the property of a trust does not embrace any act pertaining to the distribution or “settling up” of the trust estate. The litigation in 40 B. T. A. 824, and 114 Fed. (2d) 217, arose in connection with property held for the production of income which the petitioners were managing, and, while the expenses of that litigation were paid as a result of the payment by petitioners as trustees of a bequest of $5,000,000 to Louise Clisby Wise, the sole purpose and object of the litigation and the proximate cause of the expenditure were to relieve the estate from the payment of the deficiency in income tax determined by the Commissioner, which was the subject matter of the litigation. The effort of petitioners in seeking, through this litigation, to give such relief to the estate was, in our opinion, obviously a factor in the conservation, management, and maintenance of the property of that estate, concededly held for the production of income, since in resisting the imposition of the tax the trustees were performing the required duty of protecting and defending the trust property in their hands against any claim or lien for the tax. Even if, on the facts presented, it could fairly be said that the distribution of the $5,000,000 bequest was the proximate cause of the expenses paid, in connection with the litigation, those expenses would then be essentially of the same character as those other expenses which are immediately hereinafter- considered and would be deductible as expenses paid for the “management” of the property for the same reasons. We hold that the expenses of the litigation are deductible from petitioners’ gross income under section 23 (a) (2) of the Internal Revenue Code as added by section 121 of the Revenue Act of 1942. As to the balance of the controverted expenses, amounting to $9,427.35, we are of the opinion that they are also deductible from the gross income of petitioners under the same statute. The subject matter with regard to which those expenses were incurred and paid involved problems arising out of the payment of a bequest to the University of North Carolina, the expiration of the trust, and distribution of its assets to the legatees, and such payment and distribution were made by the trustees as directed by the will and as a part of their duties in managing the trust property. That those expenses incidental and necessary to the payment of the University of North Carolina legacy and the “settling up” of the trust estate through distribution of its property held here by the trustees for the production of income are deductible under section 23 (a) (2) of the Internal Revenue Code as added by section 121 (a) of the Revenue Act of 1942 is, in our opinion, clear; since one, if not the most, vital duty imposed upon those trustees was to make proper distribution of such property, and in making it they were performing one of the principal functions of the management of such property, since until that property reached the hands of the legatees and distributees the trustees were in complete control of it, and thus its management. “Management” is the act of managing; the manner of treating, directing, carrying on, or using, for a purpose; conduct; administration; guidance; control. (Webster’s New Int. Diet.) The expenses were incurred and paid prior to the distribution and while the property still remained in the hands and in the complete control of the trustees. This is not a case where the expenses in question were paid in the course of the administration of the estate and where the expenses would be deductible from the gross estate for estate tax purposes rather than from gross income. In the first place the trust here was a long term trust to endure for 21 years from September 23,1916, and that the expenses in question were not incurred or paid in the course of the administration of the estate is further demonstrated by the facts that the first payment of a legacy (the one to Louise Clisby Wise) with respect to which the expenses of the suit above mentioned were incurred and paid was in 1935; that the payment of the other legacy, to the University of North Carolina, with respect to which other of these expenses were incurred and paid, was made at or about the time of the expiration of the trust; and that the balance of the expenses of $25,867.31 was incurred and paid in connection with and as a result of' the expiration of the trust and delivery of its assets to the legatees. We conclude that the expenses paid in connection with the payment of the legacy to the University of North Carolina, the expiration of the trust, and the distribution of the assets of the trust estate were “for the management, * * * of property held for the production of income” and we hold that the amount so expended is deductible from gross income of petitioners within the purview of section 23 (a) (2) of the Internal Revenue Code as added by section 121 (a) of the Revenue Act of 1942. Reviewed by the Court. Decisions will be entered for the petitioners.   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.— “CD 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, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business: and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. ******* “(2) Non-trade or non-business expenses. — In the case of an individual, all 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 properey held foi the production of income.” [[Image here]]