Bingham Trust v. Commissioner of Internal Revenue

• Decision Date: 04 June 1945
• Docket Number: No. 932,932
• Citation: 65 S.Ct. 1232,325 U.S. 365,89 L.Ed. 1670,163 A.L.R. 1175
• Parties: BINGHAM'S TRUST v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

325 U.S. 365

65 S.Ct. 1232

89 L.Ed. 1670

BINGHAM'S TRUST

v COMMISSIONER OF INTERNAL REVENUE.

No. 932.

Argued April 27, 1945.

Decided June 4, 1945.

[Syllabus from pages 365-367 intentionally omitted] Mr. Arthur A. Ballantine, of New York City, for petitioners.

Mr. Ralph F. Fuchs, of Washington D.C., for respondent.

STONE, Chief Justice.

Petitioners are the trustees of a testamentary trust created for a term of twenty-one years under the will of Mary Lily (Flagler) Bingham. The testatrix bequeathed to the trustees the residue of her estate, including a large number of securities. The trustees were empowered in their discretion to sell any of the property held in trust (except certain securities of two companies designated as the 'principal properties'), to invest and reinvest the proceeds and the income from the trust fund, and to use the proceeds and the income for the benefit of the principal properties and for the 'maintenance, administration or development of the said principal or subsidiary properties.' The trustees were to pay specified amounts annually to certain legatees. When the niece of the testatrix reached a certain age, she was to receive from the trust a specified amount in cash or securities. At the end of twenty-one years, the trustees were directed to pay other legacies, and to distribute the remainder of the fund in equal parts to a brother and two sisters of the testatrix.

In 1935 petitioners paid the bequest to the niece partly in securities. The Commissioner assessed a deficiency of over $365,000 for income tax upon the appreciation in value of the securities while they were in petitioners' hands. In contesting unsuccessfully this deficiency, petitioners paid out in the year 1940 approximately $16,000 in counsel fees and expenses. In that year, also, petitioners paid out about $9,000 for legal advice in connec- tion with the payment of one of the cash legacies, and in connection with tax and other problems arising upon the expiration of the trust and relating to the final distribution of the trust fund among the three residuary legatees.

The question is whether these legal expenses, paid in 1940, are deductible from gross income in the computation of the trust's income tax, as 'non-tradec or 'non-business' expenses within the meaning of § 23(a)(2) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code § 23(a)(2). That section, added by § 121 of the Revenue Act of 1942, and made applicable to tax years 'beginning after December 31, 1938,' § 121(d), 26 U.S.C.A.Int.Rev.Acts, authorizes the deduction of '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 property held for the production of income.' Section 162 of the Code, so far as now relevant, makes § 23(a)(2) applicable to the income taxation of trusts.

Petitioners, in their income tax return for 1940, took deductions for the legal expenses. The Commissioner disallowed the deductions and assessed a tax deficiency, and petitioners filed the present suit in the Tax Court to set aside the assessment. That Court, after finding the facts as we have stated them, found that the trust property was held for the production of income; tha all the items in question were ordinary and necessary expenses of the management of the trust property; and that the fees and expenses for contesting the income tax deficiency assessment were also for the conservation of the trust property. It therefore concluded that all were rightly deducted in calculating the taxable net income of the trust. 2 T.C. 853.

On the Government's petition for review, the Court of Appeals for the Second Circuit reversed. Com'r v. Kenan, 145 F.2d 568. We granted certiorari, 324 U.S. 835, 65 S.Ct. 861, on a petition which asserted as grounds for the writ that the decision of the Court of Appeals departed from the principles laid down in Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248, governing review of decisions of the Tax Court, and that the decision conflicted in principle with Commissioner v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171, and Kornhauser v. United States, 276 U.S. 145, 48 S.Ct. 219, 72 L.Ed. 505.

The Court of Appeals left undisturbed the Tax Court's findings that the questioned items were ordinary and necessary expenses for the management or conservation of the trust property, but it held that the fees for contesting the tax deficiency were nevertheless not deductible under § 23(a)(2). It thought that the expenses of contesting the income tax had nothing to do with the production of income and hence were not deductible as expenses 'for the production of income' within the meaning of the statute. The court also thought that these expenses were not deductible, because they were paid in connection with property held by the trustees 'ready for distribution' (145 F.2d 570), and hence not 'for the production of income.' Similarly it held that the fees for professional services rendered in connection with the payment of legacies and the distribution of the trust fund, were not expenses relating to the management of property held for the production of income, since they were rendered after the trust term had expired and when the property was ready for distribution.

The Government makes like arguments here. In addition it urges that the expenses in connection with the distribution of the trust fund were not expenses of management of the trust property held for the production of income but only expenses relating to its devolution; and that the expenses are not deductible under § 23(a)(2) because there was no proximate relationship between the expenses when paid and the property then held in trust.

We think that these objections to the deductions fail to take proper account of the plain language of § 23(a) (2), and the purpose of the section as disclosed by its statutory setting and legislative history; and that notwithstanding the weight of the Tax Court's decision against them, they raise questions of law reviewable by the Circuit Court of Appeals and by this Court.

The requirement of § 23(a)(2) that deductible expenses be 'ordinary and necessary' implies that they must be reasonable in amount and must bear a reasonable and proximate relation to the management of property held for the production of income. See H.Rep. No. 2333, 77th Cong., 2d Sess., p. 75; Sen.Rep. No. 1631, 77th Cong., 2d Sess., p. 88. Ordinarily questions of reasonableness and proximity are for the trier of fact, here the Tax Court. Commissioner v. Heininger, supra, 320 U.S. 475, 64 S.Ct. 254, 88 L.Ed. 171; mcDonald v. Commissioner, 323 U.S. 57, 64, 65, 65 S.Ct. 96, 99; see Commissioner v. Scottish American Inv. Co., 323 U.S. 119, 65 S.Ct. 169. And even when they are hybrid questions of 'mixed law and fact,' their resolution, because of the fact element involved, will usually afford little concrete guidance for future cases, and reviewing courts will set aside the decisions of the Tax Court only when they announce a rule of general applicability, that the facts found fall short of meeting statutory requirements. Dobs n v. Commissioner, supra, 320 U.S. 502, 64 S.Ct. 247, 88 L.Ed. 248; Commissioner v. Estate of Bedford, 325 U.S. 283, 65 S.Ct. 1157; cf. Paul, 'Dobson v. Commissioner,' 57 Harv.Law Rev. 753, at 828—832, 836, 837. But whether the applicable statutes and regulations are such as to preclude the decision which the Tax Court has rendered, is, as was recognized in Dobson v. Commissioner, supra, 320 U.S. 492, 493, 64 S.Ct. 242, 88 L.Ed. 248, a question of law reviewable on appeal. See also Commissioner v. Heininger, supra, 320 U.S. 475, 64 S.Ct. 254, 88 L.Ed. 171.

Here the decision of the Court of Appeals was that the expenses were not deductible because they were not for the purpose of producing income or capital gain, and because the trust property, being ready for distribution, was no longer held for the production of income. The terms of the trust, the nature of the property, and the duties of the trustees with respect to it, were all found by the Tax Court and are not challenged. The questions whether, on the facts found, the expenses in question are nondeductible, either because they were not to produce income or because they were related to the management of property which was not held for the production of income, turn in this case on the meaning of the words of § 23(a)(2), 'property held for the production of income.' They are therefore questions of law, decision of which is unembarrassed by any disputed question of fact or any necessity to draw an inference of fact from the basic findings. See Commissioner v. Scottish American Inv. Co., supra. They are 'clear cut' questions of law, decision of which by the Tax Court does not foreclose their decision by appellate courts, as in other cases, Dobson v. Commissioner, supra, 320 U.S. 492, 493, 64 S.Ct. 242, 88 L.Ed. 248, although their decision by the Tax Court is entitled to great weight. Dobson v. Commissioner, supra, 320 U.S. 501, 502, 64 S.Ct. 246, 247, 88 L.Ed. 248, and cases cited; cf. Medo Photo Supply Corp. v. Labor Board, 321 U.S. 678, 681, 682, n. 1, 64 S.Ct. 830 832, 88 L.Ed. 1007, and cases cited.

Since our decision in the Dobson case we have frequently reexamined, as matters of law, determinations by the Tax Court of the meaning of the words of a statute as applied to facts found by that court.¹ A question of law is not any the less such because the Tax Court's de- cision of it is right rather than wrong. Whether or not its decision is 'in accordance with law' is a question which the statute, Int.Rev.Code, § 1141(c)(1), 26 U.S.C.A.Int.Rev.Code, § 1141(c)(1), expressly makes subject to appellate review. Congress, when it thus authorized review of questions of law only, was not unaware of the difficulties of such a review of the decisions of a tribunal, which decides...