Court Opinion

ID: 4480695
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:28.551935+00
Date Added: 2024-06-11T14:53:59.699697
License: Public Domain

Tannenwald, J., concurring: I think the use of a “primary purpose’5, test in cases of this type is inappropriate, because it implies that the subjective intent of the parties ought to be taken into account. I believe that, in the area of litigation expenses, it is “the origin and character of the claim with respect to which [the] expense was incurred” which controls. See United States v. Gilmore, 372 U.S. 39, 49 (1963). The rationale which underpins this mandate of the Supreme Court is equally applicable in determining whether an expenditure is a nondeductible capital item or a deductible expense within the purview of section 212 and in determining whether the expenditure is a nondeductible personal item or a section 212 deduction. It is significant that the widow herein did not seek to make a transfer outside the will.1 She merely renounced her rights to a specific portion of the trust in favor of the holders of the next eventual estate under the will, with a resultant gap in the testator’s dispositive directions to the trustee. The gap thus created was essentially with respect to the disposition of the income from the renounced specific portion. The fundamental question was whether that income should be paid currently to the son or the daughter or be accumulated by the trustee until the widow’s death for their benefit, or for the benefit of their issue. To be sure, if the renunciation had been held effective, the son would probably have received his share of the corpus earlier than the decedent had provided — -in all likelihood, he would attain the age of 35 while the widow was still alive. No such possibility of acquisition of corpus inured in favor of the daughter, because at all times she was only entitled to the income from her share. Concededly, the trusts for the benefit of the grandchildren might have become effective at an earlier time than specified by the testator, i.e., upon the death of the son or daughter while the widow was still living. Perhaps, also, the son and the daughter would have acquired an expanded testamentary power of appointment2 in the sense that the exercise of such power could have become effective while the widow lived, although it is far from clear that, under the will, such powers of appointment were not in fact exercisable while the widow was alive, with disposition in accordance with the terms of exercise merely postponed until her death. But these shiftings of interest in corpus were merely incidental to the basic question arising from the renunciation, i.e., who was entitled to the income currently — the trustee, on the one hand, or the son and daughter, on the other. Cf. Estate of Frederick Cecil Bartholomew, 4 T.C. 349 (1944), acq. 1955-1 C.B. 3. In tlie foregoing context, “the origin and character of the claim with respect to which [the] expense was incurred” (see United States v. Gilmore, supra) was rooted in a dispute over the right to income from a specific portion of the trust. Since there is no contention herein, apart from the dispute as to the nature of the North Carolina litigation, that the allowance to the attorneys for the trustee was not “ordinary and necessary,” I agree with the majority that the payment of such allowance constituted a proper deduction by the trustee either as an expense “for the management * * * of property held for the production of income” under section 212(2) or, conceivably, as an expense for “the production or collection of income” under section 212(1). Cf. Estate of Frederick Cecil Bartholomew, supra at 361. In predicating my analysis on the existence of a dispute over the right to income, I do not mean to imply that legal fees incurred by a fiduciary on its own behalf, in connection with other disputes involving rights to the assets subject to fiduciary administration, may not also be deductible under appropriate circumstances. I am not convinced that Manufacturers Hanover Trust Co. v United States, 312 F. 2d 785 (Ct. Cl. 1963), so heavily relied upon by respondent, is correct in applying to cases of the type involved herein the usual distinctions as to defense of title and in drawing the line between disputes under and disputes dehors the governing instrument. Cf. Loyd v. United States, 153 F. Supp. 416 (Ct. Cl. 1957); see Trust of Harold B. Spero, 30 T.C. 845, 856 (1958). In any event, that case is clearly distinguishable. The issue therein turned upon who was entitled to the trust estate upon the death of the life beneficiary — the trustee or a third party not directly interested in the trust, i.e., the grantor’s estate. In holding that the origin and character of the underlying claim involved a question of title (see 312 F. 2d at 790), the Court of Claims carefully noted (also at page 790) that— This situation is to be distinguished from that which would arise if a fiduciary sought to deduct expenses incurred in determining which of several potential beneficiaries was entitles, to receive trust property. [Emphasis added.] The allowances to the guardian ad litem and to the attorneys for the widow, son, and daughter present a somewhat different issue. The “origin and character of the claim” with respect to which these expenses were incurred is, of course, the same as that involved in the allowances to the attorneys for the trustee. In addition, these expenses were paid by the trustee pursuant to a court order which characterized them as “ordinary and necessary,” although, as the majority points out, this is not determinative for tax purposes. Clearly, the trustee was •entitled in the North Carolina litigation to a determination binding on all interested parties and this required representation of the minor grandchildren and unborn grandchildren, who were legally incapable ■of representing themselves. On this basis, I think the payment of the allowance to the guardian ad litem constituted an ordinary and necessary expense of the trustee and is therefore deductible under section 212. The allowances to the attorneys for the widow, son, and daughter present a more difficult question. While they were required to be parties to the litigation in order to give the trustee full protection, they were adults and consequently were in a different category with respect to the necessity of legal representation. Realistically, the allowances were incurred in an effort to acquire rights for the son and daughter by sustaining the widow’s renunciation. The foundation for the litigation was self-created, i.e., by the parties themselves, unlike the situation in Calvin Pardee Erdman, 37 T.C. 1119 (1962), where the litigation involved the original instrument itself. Both the trustee and the North Carolina court had the benefit of legal counsel acting on behalf of the trustee and the guardian ad litem, so it is hard to see how the involvement of other attorneys in the litigation benefited the trust. Indeed, the position taken by those attorneys, if successful, would have denied the trustee’s right to accumulate income. Under these circumstances, I do not think the theory that allowances to attorneys of trust beneficiaries are made to benefit the litigants, advanced in Calvin Pardee Erdman, supra,3 is applicable. Shoe Corporation of America, 29 T.C. 297 (1957), relied upon by the majority, is beside the point. In that case, the taxpayer itself recovered money in the litigation with respect to which the expenses were paid. In view of the foregoing, I am of the view that the amounts paid by the trustee as allowances to the attorneys for the widow, son, and daughter are not “ordinary and necessary expenses” of the trust. Rather, they constituted distributions for the benefit of those individuals. However, since these expenses were directed by the North Carolina court to be charged against income, they would appear to be deductible by the trust as an “amount of income * * * required to be distributed currently.”4 Sec. 661(a). On this basis, the ultimate decision of the majority in respect of these items is correct. Under the foregoing approach, the distributable income, represented by the amount of such allowances, might well be includable in the gross income of these beneficiaries under section 662, but we need not decide this issue, since neither the widow, son, nor daughter is a party to the within proceeding. For the same reason, we need not decide whether the amounts would then be deductible by them as “ordinary and necessary expenses” under section 212. Compare Marion A. Burt Beck, 15 T.C. 642, 670 (1950), affirmed per curiam 194 F. 2d 537 (C.A. 2, 1952), with Stella Elkins Tyler, 6 T.C. 135 (1946). Deennen and TietjeNS, JJ., agree with this concurring opinion.   The entire residuary estate was to be divided into equal shares for the benefit of decedent’s children, or issue of each deceased child as a group, after the widow’s death. For reasons not apparent, the will accomplished this in two bites — each trust was initially to be $100,000 under Item IV(B) and the remaining residue was then to be divided equally between the trusts under Item V.    The will gave each child a testamentary power. of appointment over his or her trust in favor of his or her spouse of issue or spouses of such issue.    We note that this case involved the deductibility by the beneficiary of expenses paid by the trustee and charged against principal. The question whether such expenses were deductible as “ordinary and necessary” by the trustee was not involved, since, under the 1939 Code, which was applicable to that case, expenses charged against principal were not deductible in determining distributable net income. See 37 T.C. at 1123.    The will provided for discretionary distributions, under certain circumstances, for the benefit of the widow and children.