Fayen v. Comm'r of Internal Revenue

• Decision Date: 30 June 1960
• Docket Number: Docket No. 68428.
• Citation: 34 T.C. 630
• Parties: CARL F. FAYEN AND ESTATE OF NANCY P. FAYEN, DECEASED, ROBERT W. T. PURCHAS, ADMINISTRATOR, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

34 T.C. 630

CARL F. FAYEN AND ESTATE OF NANCY P. FAYEN, DECEASED, ROBERT W. T. PURCHAS, ADMINISTRATOR, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 68428.

Tax Court of the United States.

Filed June 30, 1960.

Arthur L. Nims III, Esq., and Ross B. Abrash, Esq., for the petitioners.

Arthur Pelikow, Esq., for the respondent.

In 1953 Carl F. Fayen, the sole trustee and life-income beneficiary of the Carl F. Fayen Trust, paid $4,664.37 into the principal of said trust in compromise of surcharge proceedings filed by the guardian ad litem for the remaindermen of the trust. Held, that petitioner is not engaged in carrying on a trade or business as trustee. His claim for deduction under section 23(a)(1) (A), I.R.C. 1939, is accordingly denied. Held, further, that said payment in settlement of the surcharge suit is not an expense incurred in the collection or production of income and hence not deductible under section 23(a)(2).

MULRONEY, Judge:

The respondent determined a deficiency in income tax against petitioners for the year 1953 in the amount of $1,366.10. Petitioner Carl F. Fayen was the trustee and life beneficiary of a trust and the only issue in the case is whether the amount of $4,664.37 which he paid into the principal of the trust, pursuant to a judicial settlement of a surcharge suit brought by remaindermen of the trust, is an allowable deduction under section 23(a)(1)(A) or section 23(a)(2), I.R.C. 1939.¹

FINDINGS OF FACT.

The stipulated facts are found accordingly. Carl F. Fayen (hereinafter sometimes referred to as petitioner) and Nancy P. Fayen were husband and wife during the year 1953 and they filed their joint Federal income tax return for said year with the district director of internal revenue at Richmond, Virginia. Nancy died and the only reason her estate and the administrator thereof, Robert W. T. Purchas, of Philadelphia, are involved in this proceeding is by virtue of the joint return which decedent filed with her husband.

Petitioner's father, Frederick George Herman Fayen, died a resident of New Jersey on July 7, 1930. His will appointed his wife, Minnie, and his two sons, George and petitioner, and a bank (later discharged) as executors of his will and trustees of certain trusts created by the will. The will placed the residuary estate in trust with income to be paid to Minnie for life and upon her death the trust property was to be divided into two equal portions, one to be held in trust for George and the other to be held in trust for petitioner Carl, with the net income therefrom to be payable to George and Carl during their lives with remainder over to their children.

Minnie Fayen died December 29, 1943, and on March 6, 1945, the Orphan's Court of Essex County, New Jersey, confirmed division of the trust corpus into two equal parts as suggested by the surviving trustees. Each part was to be held in trust with George the life beneficiary of one trust and petitioner the life beneficiary of the other. The court also approved the resignations of Carl as cotrustee of the George S. Fayen Trust and George as cotrustee of the Carl F. Fayen Trust. This left petitioner Carl as sole trustee of a trust with assets of a market value of approximately $437,731 in 1945, of which he was the life beneficiary, with remainder over to his children.

The Fifth paragraph of the Frederick George Herman Fayen will provided, in part, as follows:

I empower my said Executors and Trustees to sell any or all of my real estate at their discretion, and to give good and sufficient deeds therefor, and to make leases of the same for such consideration and upon such terms as they shall deem to the interest of my estate; including the power to take, purchase money mortgages in part payment for any real estate sold by them.

I authorize my Executors and Trustees to continue any investment of my estate which I may leave at my death, and I direct that in making investments they shall not be limited to the class of securities prescribed by law for Trustees, but may invest in such good sound dividend paying stocks or interest bearing bonds, but preferably in First Mortgages on Montclair and environs real estate, as they may reasonable (sic) believe to be provident investments for my Estate, and I direct that they shall not be held responsible for loss arising without neglect or fault on their part.

On March 1, 1950, petitioner filed an intermediate accounting of his administration of the Carl F. Fayen Trust, with the Essex County Court, Probate Division, of New Jersey. The accounting covered the period from March 6, 1945, to November 30, 1949. Petitioner requested an allowance of $4,055.30 as commissions on the corpus of the trust fund, representing 1 per cent of $322,007.99, the amount of cash and securities taken over, plus $83,522.95 profits realized.

George H. Renton, as guardian ad litem for petitioner's sons, remaindermen of the Carl F. Fayen Trust, filed exceptions to the aforesaid accounting, and requested that the trustee (petitioner herein) be surcharged in the amount of $64,973.94 (later reduced to $54,306.16 by an amended exception) for losses and depreciation alleged to have been sustained by reason of securities sold at a loss and securities which had depreciated below their purchase price. As grounds for the exceptions taken it was alleged (a) that the trustee's primary concern in making investments had not been to preserve the value of the corpus of the trust estate; ‘rather he has jeopardized its preservation in an endeavor to increase income or corpus'; (b) that he had speculated with the property in his charge; (c) that he had failed to diversify the investments, having invested less than 5 per cent in bonds and cash, 1 1/2 per cent in preferred stocks, and 93 1/2 per cent in common stocks; and (d) that the stocks enumerated were not of the character ‘prescribed by law for Trustees' or ‘good sound dividend paying stocks' which the will of Frederick George Herman Fayen had authorized the trustee to invest in. The guardian for the contingent remaindermen filed exceptions to a smaller number of investments. The trustees of the George S. Fayen Trust, the other trust created by subdivision II, paragraph Third, of Frederick Fayen's will, joined in these exceptions.

The issues in the accounting proceeding were settled during the hearing on the exceptions. The court approved the settlement and on January 8, 1952, entered a judgment in accordance therewith, directing Carl F. Fayen, as life beneficiary and trustee, from income to be received by him from the trust, to reimburse and pay into the principal of the trust the amount of $10,045, at least one-half of the said amount to be paid on or before December 31, 1952, and the remainder on or before December 31, 1953. Subject to the payment of such amount, the trustee's account covering the period from March 6, 1945, to November 30, 1949, was ‘in all things allowed as reported.’ The claim for trustee's commissions was waived as part of the settlement. Petitioner was credited with undistributed income of $716.25 which reduced the amount to be paid by him from $10,045 to $9,328.75. The court further directed that certain allowances be made by the trustee from the principal of the trust for guardian ad litem and attorney's fees and costs, including a counsel fee and reimbursement for disbursements to the attorneys for the trustee, Carl F. Fayen. The last paragraph of the judgment states:

7. As part of the foregoing settlement, all of the excepted securities remaining in the hands of Carl F. Fayen, as trustee as aforesaid, shall be sold with all convenient speed.

In the year 1952 petitioner paid into the trust the sum of $4,664.37, and in 1953 he paid into the trust the balance due, or $4,664.37, thereby satisfying his liability under the consent judgment.

During the period 1945 through 1949, and during the year 1953, petitioner was a manufacturer's representative selling technical and industrial material to utility companies. In the process of representation petitioner traveled to various cities and was away from home approximately 15 to 20 weeks in 1953 and for even longer periods during the years 1945 to 1949. Petitioner also owned a farm of about 613 acres at Leesburg, Virginia, which he managed and on which he worked.

During the year 1953 petitioner devoted an average of 13 hours per week to the management of the Carl F. Fayen Trust. He worked on the trust at least some part of each day during the average week. He subscribed to and read, in connection with his activities as trustee, numerous financial and business magazines. During 1953 petitioner made three trips to New York during which he consulted with Jorgenson, a stockbroker and partner in Haydock, Schreiber and Company, concerning the trust investments. His time spent in managing the trust during the average week was as follows: 10 hours per week reading investment services and 3 hours per week writing letters and making telephone calls, traveling to consult a stockbroker, and consulting with a stockbroker. In 1953 petitioner paid $297 for subscriptions to investment services.

Petitioner bought and sold securities for the following number of trading days during the period set forth below:

+---------------------------+
                ¦    ¦         ¦    ¦Total  ¦
                +----+---------+----+-------¦
                ¦Year¦Purchase ¦Sale¦trading¦
                +----+---------+----+-------¦
                ¦    ¦         ¦    ¦days   ¦
                +----+---------+----+-------¦
                ¦1945¦11       ¦11  ¦19     ¦
                +----+---------+----+-------¦
                ¦1946¦12       ¦8   ¦17     ¦
                +----+---------+----+-------¦
                ¦1947¦6        ¦4   ¦8      ¦
                +----+---------+----+-------¦
                ¦1948¦7        ¦5   ¦11     ¦
                +----+---------+----+-------¦
                ¦1949¦10       ¦9   ¦13     ¦
                +----+---------+----+-------¦
                ¦    ¦46       ¦37  ¦68     ¦
                +---------------------------+
                

In his administration of the trust during the period from March 6, 1945, to November 30, 1949, petitioner made 50...