Court Opinion

ID: 9650731
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:50:41.577106+00
Date Added: 2024-06-11T18:12:25.743455
License: Public Domain

SANBORN, Circuit Judge
(dissenting).
My understanding is that the Tax Court holds that a fiduciary, entitled to compensation for his services, who settles a dispute with the beneficiaries of his trust over his management of the trust estate, can, in his income tax return, take a deduction for the amount paid in settlement; that § 23 (a) (1) authorizes the taking of such a deduction by a professional fiduciary, and that § 23(a) (2) authorizes the deduction in the case of a casual fiduciary.
It is true that if the taxpayer’s payment to the beneficiaries of his trust in the instant case is to be taken as an admission that he had mismanaged the trust estate and was obligated to make restitution, this case cannot be distinguished from the case of Commissioner of Internal Revenue v. Heide, 2 Cir., 165 F.2d 699. Apparently what is held in that case is that a casual fiduciary who has mismanaged a trust estate and is liable to make restitution, cannot take a deduction for what he pays in settlement of his liability, because the expense is avoidable, the fiduciary is to blame for it, and it is not such an expense as was intended to be covered by § 23 (a) (2). But in the instant case the Tax Court has made no finding that the taxpayer mismanaged the trust estate, and, obviously, this Court may not find or assume that he did. A compromise of a dispute does not establish the rights or liabilities of the parties to it, but merely puts an end to their controversy. See Waltz v. Ellinghouse, 8 Cir., 165 F.2d 596, 601-603 and cases cited.
The taxpayer here, as an administrator, participated in the conduct of a family business belonging to the estate of the head of the family, who had, apparently, successfully built and managed the business. As is not unusual in such situations, the conduct of the trust estate ended in a family row in which the taxpayer, as a fiduciary, was involved. He bought his way out. The cost to him of the settlement grew out of his activities as a fiduciary, entered into *238for the production of income but which resulted in a substantial loss.
In Trust under the Will of Bingham v. Commissioner, 325 U.S. 365, 373, 374, 65 S.Ct. 1232, 1237, in reversing the Court of Appeals of the Second Circuit, which had ruled that certain expenses of trust management (held by the Tax Court to be deductible) were not deductible under § 23 (a) (2), the Supreme Court said:
“ * * * Section 23(a) (2) is comparable and in pari materia with § 23(a) (1), authorizing the deduction of business or trade expenses. Such expenses need not relate directly to the production of income for the business. It is enough that the expense, if 'ordinary and necessary,’ is directly connected with or proximately results from the conduct of the business. Kornhauser v. United States, supra, 276 U. S. [145], 152, 153, 48 S.Ct. 219, 72 L.Ed. 505; Commissioner [of Internal Revenue] v. Heininger, supra, 320 U.S. [467], 470, 471, 64 S.Ct. [249], 252, 88 L.Ed. 171. The effect of § 23(a) (2) was to provide for a class of non-business deductions co-extensive with the business deductions allowed by § 23(a) (1), except for the fact that, since they were not incurred in connection with a business, the section made it necessary that they be incurred for the production of income or in the management or conservation of property held for the production of income. McDonald v. Commissioner, supra, 323 U.S. [57], 61, 62, 66, 65 S.Ct. 96, 97, 98, 100 [89 L.Ed. 68, 155 A.L.R. 119]; and see H.Rep. No. 2333, 77th Cong., 2d Sess., pp. 46, 74-76; S.Rep. No. 1631, 77th Cong., 2d Sess, pp. 87, 88.”
This language would seem to justify the conclusion of the Tax Court in the instant case that a casual fiduciary may take the same deductions under § 23(a) (2) that a professional fiduciary may take under § 23 (a) (1).
Whether the items of expense in suit here were of a character which could properly be deducted by a professional fiduciary under § 23(a) (1), and therefore by a casual fiduciary under § 23(a) (2), was, I think, a question for the Tax Court, under Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248. Since I can find nothing irrational or illogical in the Tax Court’s conclusion that a professional fiduciary and a casual fiduciary stand upon an equal footing so far as the taking of deductions under § 23 (a) is concerned, and that expenses such as those in suit are deductible, I would affirm.