Court Opinion

ID: 4484856
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:01.400841+00
Date Added: 2024-06-11T14:53:45.744201
License: Public Domain

Hill, J., dissenting: We decided a like question in Estate of Edward W. Clark, III, 2 T. C. 676, contrary to the holding in the present proceeding. That case is totally ignored in the majority opinion. Clark qualified in 1915 as executor and residuary trustee under the will of one Taylor who died a resident of Philadelphia County, Pennsylvania. Clark filed his first and final account as.executor and his first account as trustee with the Orphans’ Court in 1939. In a proceeding in that year in the Orphans’ Court for the settlement of his accounts and the fixing of his commissions as such executor and trustee, the Orphans’ Court confirmed his accounts and awarded him commissions of $17,500. Included in the commissions awarded was the amount of attorneys’ fees of $1,250 paid by Clark in 1939 for legal services rendered in opposing a claim of mismanagement of the trust. Clark claimed a deduction for income tax purposes for 1939 in the amount of such attorneys’ fees. The deduction was claimed under section 23 (a) (2), Internal Revenue Code. We denied the deduction on the ground that “obviously the expense was not paid or incurred ‘for the production or collection of income.’ Clearly, also, the fees were not paid ‘for the management, conservation or maintenance of property held for the production of income’.” I submit that the instant case is not distinguishable from the Clark case. In my opinion, the Clark case was correctly decided. If so, it is obvious that the majority holding in the present proceeding is incorrect. The majority opinion is based largely on the holding in John Abbott, 38 B. T. A. 1290, and Bingham's Trust v. Commissioner, 325 U. S. 365. In the Abbott case it was held “that the petitioner’s regular business included serving for pay as a trustee and as an executor. In the course of this business and as an incident thereof he was required to pay $10,000 as a liability [for mismanagement] growing out of the conduct of the business,” and allowed the deduction of the $10,000 as a business expense. Cases cited in the Abbott opinion holding like expenses not deductible were distinguished on the ground that an isolated fiduciary activity (as in the cases cited) did not constitute a trade or business regularly carried on. It is conceded that petitioner here is not entitled to the deduction in question under subsection (a) (1) as a business expense, but the majority holds that the allowance of the deduction in question in the Abbott case under (a) (1) is authority for holding the claimed deduction allowable in the instant case under (a) (2). I think this result does not follow. Under (a) (1) the deduction is allowable if it relates generally to the business of the taxpayer, where as under (a) (2) as here involved the deduction is allowable only if it has a direct relation to the production or collection of income. Therefore, even if the decision in the Abbott case on the question there presented be accepted as sound, it is not, in my opinion, authority for the holding in the instant case. The facts here show that the $3,000 sought to be deducted grew directly'and wholly out of the claim for damages for alleged mismanagement of the trust estate. The fact that the claim for damages was being pressed in the proceeding for the settlement of petitioner’s accounts as trustee, in which one of the questions to be determined was the amount of petitioner’s compensation as such trustee, does not affect the basis of the claim for damages and does not relate it to the question of compensation allowable to petitioner. It is not controverted that petitioner was entitled to compensation as trustee and to me it appears too far fetched for serious consideration to relate a claim of damages based on alleged mismanagement of trust property to the production or collection of income to petitioner. The effect of the alleged mismanagement, if any, could only be reflected in the production or collection of income of the trusts. The claim for damages implies actionable negligence. The payment of the $3,000 in question was not made to aid petitioner in the administration of the trusts or to aid him in the production or collection of income either of the trusts or of himself individually. In fact, it was not an expense at all, but was the payment of a compensating obligation incurred for failure properly to perform his duties as a trustee. The fact that petitioner, as part consideration of the settlement of the claim for damages, agreed to forego compensation for services as trustee does not establish that such allowable compensation was minimized or that its collection was imperiled by the claim for damages. It goes to show only that the $3,000 payment was not the full measure of damages to which petitioner agreed, but that such measure included the amount of petitioner’s allowable compensation in addition to the $3,000 payment. The record does not disclose the amount of compensation claimed by petitioner or the amount allowable therefor, but whatever the amount thereof may be, the conclusion is inescapable that the claim for and payment of damages resulted entirely from the alleged mismanagement of the trust estates and did not grow out of petitioner’s claim for compensation as trustee. The case of Bingham's Trust is also cited and relied upon as supporting the conclusion in the majority opinion. In my view, that case has only a negative relevancy, if any, to the question involved here, in that it serves only to point the distinction between the trust estate as a taxable entity and the trustee thereof as an individual taxpayer in the application of the provisions of section 23 (a) (2). Furthermore, the language quoted by the majority from the Bingham case relates to that part of subsection (a) (2) which has to do with expenses of managing property held for the production of income, which part is not here involved. We are here concerned with that part of (a) (2) which relates to expenses of producing or collecting income. That case does not aid the holding for the petitioner here. As in the Clark case, I think it obvious that the amount here sought to be deducted was not an expense incurred or paid for the production or collection of income. I am, therefore, unable to concur with the majority opinion. Van Fossan and ARnold, JJ., agree with this dissent.