Loyd v. United States, 91-56.

• Decision Date: 12 July 1957
• Docket Number: No. 91-56.,91-56.
• Citation: 153 F. Supp. 416,139 Ct. Cl. 626
• Parties: Frank Stone LOYD and J. Easley Edmunds, Jr., Executors Under the Will of Grace Stone Keller, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

153 F. Supp. 416

139 Ct. Cl. 626

Frank Stone LOYD and J. Easley Edmunds, Jr., Executors Under the Will of Grace Stone Keller, Deceased, v. The UNITED STATES.

No. 91-56.

United States Court of Claims.

July 12, 1957.

Edward S. Graves, Lynchburg, Va., for plaintiffs. Edmunds, Whitehead, Baldwin & Graves, Lynchburg, Va., were on the brief.

David R. Frazer, Washington, D. C., with whom was Charles K. Rice, Asst. Atty. Gen., for the defendant. James P. Garland, Washington, D. C., was on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and LARAMORE, Judges.

JONES, Chief Judge.

This is an action for the recovery of income taxes alleged to have been illegally assessed against plaintiffs, executors of the estate of Grace Stone Keller, in the amount of $59,693.79 for the year 1953. The sole issue presented is whether the executors of an estate can properly deduct litigation expenses incurred in prosecuting a suit to have a residuary trust declared void and the trust property paid into the estate. The applicable sections of the Internal Revenue Code of 1939 are section 162 and section 23(a) (2), 26 U.S.C.A. (I.R.C.1939) §§ 162, 23(a) (2), which follow:

"§ 162. Net income

"The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that * * *"

"§ 23. Deductions from gross income.

"In computing net income there shall be allowed as deductions:

"(a) Expenses.—

* * * * * *

"(2) Non-trade or non-business expenses. In the case of an individual, 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."

The facts which are not in dispute and which have been stipulated to by the parties are as follows:

Grace Stone Keller was the daughter and sole heir at law of Mary Peck Stone who died February 3, 1945, leaving a will which created a trust of her residuary estate with the income to go to Mrs. Keller during her lifetime. On her death the income was to be paid at the discretion of the Stone trustees to the First Christian Science Church of Lynchburg, Virginia. Mrs. Keller, who was also one of the executors of her mother's estate and one of the trustees of the aforementioned trust, was paid and received the income of the trust until the time of her death on August 7, 1948.

As far back as April 1945 the executors of the Stone estate were advised that there was doubt as to the validity of the provision in Mrs. Stone's will benefiting the church since it apparently violated statutory provisions relating to gifts for religious purposes. No court action was taken during Mrs. Keller's lifetime, however.

Since it was neither possible for the Stone executors or trustees to properly administer and distribute the residuary estate of Mrs. Stone, nor for the plaintiffs to properly administer and distribute the assets of Mrs. Keller's estate without obtaining an answer to the question of the validity of the grant made to the church, the plaintiffs in this action instituted suit in the Virginia courts on August 29, 1949, to obtain a determination of that question. Decision was rendered in the trial court and after appeal was finally modified and affirmed by the Supreme Court of Appeals of Virginia on December 3, 1951. A decree was entered, holding that, pursuant to the Code of Virginia, the gift to the church was void except as to the difference between $100,000 and the intangible property held by the church trustees. Maguire v. Loyd, 193 Va. 138, 67 S.E.2d 885, judgment affirmed on rehearing, 194 Va. 266, 72 S.E.2d 631. The property of the Stone estate in excess of that to which the church was entitled was subsequently delivered to the executors of Mrs. Keller's estate in 1953. The market value of the property at the time of delivery to plaintiffs was $472,563.31. There was also delivered to plaintiffs accumulated income which at the time of delivery amounted to an additional sum of $114,378.50. The parties agree that this income is all reportable in the year 1953.

Litigation expenses incurred in the court proceedings hereinbefore referred to amounted to a total of $145,021.14, of which sum $118,519.99 was paid to counsel for the plaintiffs herein and $26,501.15 was paid to the counsel for the Stone executors and trustees. None of these expenses were claimed as deductions under section 812(b), 26 U.S.C.A. (I.R.C. 1939) § 812(b), for Federal estate tax purposes and there is no dispute as to estate taxes, all problems relative thereto having been resolved.

As the result of a request by the plaintiffs for a ruling on the question here involved, the Internal Revenue Service decided that only such part of the litigation expenses of $145,021.14 as was attributable to the recovery of income was deductible for income tax purposes and that the remainder should be added to the basis of the capital assets on the theory that this portion of the expenses is classified as expenses of asserting or defending title to property and is in the nature of a capital expenditure. The plaintiffs' income tax for 1953 was so calculated, with the resultant tax of $59,693.79 being paid by plaintiffs on June 15, 1954. No tax would have been due at all if the entire amount of the litigation expenses were allowed as a deduction. Plaintiffs filed a claim for refund on June 24, 1954, alleging the litigation expenses were fully deductible. The claim was denied by the revenue service by registered letter dated January 5, 1955, and suit was thereafter instituted in this court on February 21, 1956.

The Government in its brief cites many cases to sustain its position that the expenditures made by plaintiffs in excess of that portion attributable to the recovery of income were capital expenditures, hence not deductible, and should be added to the basis of the principal property received. The Government also relies on section 39.23(a)-15(k) of Treasury Regulations 118 promulgated pursuant to section 23(a) (2) of the 1939 Internal Revenue Code. That section follows:

"§ 39.23(a)-15. Nontrade or Nonbusiness Expenses.

* * * * * *

"(k) Expenditures incurred in defending or perfecting title to property, in recovering property (other than investment property and amounts of income which, if and when recovered, must be included in income), or in developing or improving property, constitute a part of the cost of the property and are not deductible expenses. Attorneys' fees paid in a suit to quiet title to lands are not deductible; but if the suit is also to collect accrued rents thereon, that portion of such fees is deductible which is properly allocable to the services rendered in collecting such rents. Expenditures incurred in protecting or asserting one's rights to property of a decedent as heir or legatee, or as beneficiary under a testamentary trust, are not deductible. * * *"

In respect to this regulation the Government's position apparently relates only to the last quoted sentence. It argues that the litigation costs paid by the taxpayers to acquire the corpus of the trust established under Mrs. Stone's will were expenditures incurred in asserting one's rights to property of a decedent as heir or legatee, and as such are not deductible expenses. In other words, the Government contends that for the purposes of this regulation the executors of the deceased's estate are to be put on the same footing as the deceased prior to death.

The plaintiffs, on the other hand, rely chiefly on the Supreme Court case Trust of Bingham v. Commissioner, 1945, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670, and § 39.23(a)-15(i) of Treasury Regulations 118 also promulgated under section 23(a) (2) of the 1939 Internal Revenue Code, and which was written into the regulations after and as a result of the Bingham decision. Section 39.23 (a)-15(i) follows:

"Reasonable amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including fiduciaries' fees and expenses of litigation, which are ordinary and necessary in connection with the performance of the duties of administration are deductible under this section Section 23(a) (2) of the 1939 Internal Revenue Code, notwithstanding that the estate or trust is not engaged in a trade or business, except to the extent that such expenses are allocable to the production or collection of tax-exempt income." Italics ours.

Plaintiffs also rely on several cases cited to prove their proposition that litigation expenses incurred by a fiduciary should be considered deductible expenses and not capital items in this type of situation. They make much of the fact that all of the cases cited by defendant involve an individual taxpayer seeking to deduct litigation expenses while the bulk of the cases plaintiffs cite involve the same type of expense...