McDowell v. Ribicoff

• Decision Date: 16 June 1961
• Docket Number: No. 13386.,13386.
• Citation: 292 F.2d 174
• Parties: Anna J. McDOWELL v. Abraham A. RIBICOFF, Secretary of Health, Welfare and Education, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

292 F.2d 174 (1961)

Anna J. McDOWELL v. Abraham A. RIBICOFF, Secretary of Health, Welfare and Education, Appellant.

No. 13386.

United States Court of Appeals Third Circuit.

Argued February 10, 1961.

Decided June 16, 1961.

Ronald A. Jacks, Washington, D. C. (George Cochran Doub, Asst. Atty. Gen., Chester A. Weidenburner, U. S. Atty., Morton Hollander, Atty., Department of Justice, Washington, D. C., on the brief), for appellant.

Virginia Barton Wallace, Philadelphia, Pa. (White & Williams, Philadelphia, Pa., on the brief), for plaintiff-appellee.

Before BIGGS, Chief Judge, and STALEY and HASTIE, Circuit Judges.

BIGGS, Chief Judge.

This is an appeal by the Secretary of Health, Education and Welfare from a summary judgment in favor of the plaintiff, Anna J. McDowell. The issue presented is whether the court below erred in reversing the final decision of the Secretary that Mrs. McDowell's earnings as executrix of her aunt's estate did not constitute income derived from a trade or business and, therefore, were not "net earnings from self-employment" within the meaning of Section 211(a) of the Social Security Act, 42 U.S.C.A. § 411(a). The facts relevant to the question whether the plaintiff was engaged in the business of being an executrix are undisputed. They may be summarized as follows:

The plaintiff's aunt, Elizabeth M. Hunter, who had lived with the plaintiff for more than 25 years, died testate on June 9, 1955 leaving an estate valued at $123,284.05. The plaintiff arranged for Miss Hunter's burial and, without the aid of counsel, effected probate of her will and was appointed executrix of her estate. As executrix, the plaintiff marshalled and distributed the assets. These consisted of a $4,000 mortgage on property owned by the plaintiff's husband, $877.94 in declared dividends, rights to $624.50 in income-tax refunds and various "blue chip" securities valued at $117,781.61. Miss Hunter left no real property or personal effects. Miss Hunter had had no trade or business and there was none to be carried on or disposed of.

The plaintiff was the principal beneficiary of the estate. Under the will she was entitled to securities with a total value of $47,604.00 and, in addition, her husband's $4,000 mortgage was cancelled. Cash bequests totalling $11,950 went to 23 other beneficiaries including 16 gifts of $200 each to grandnieces and nephews. The plaintiff and two of her sisters were the residuary legatees and divided among them securities valued at $49,812 in equal shares.

During the two years of her administration the plaintiff with the aid of an attorney, an accountant and, on occasion, a broker, performed the following specific acts and continuing activities on behalf of the estate:¹ assembling and preparing an inventory of the assets most of which consisted of stocks with a readily ascertainable market value; selling stocks to obtain cash for the payment of taxes and specific legacies, and for the satisfaction of debts amounting to $194.86; exercising discretion as to which of the securities to sell; reinvesting some of the proceeds in a single $14,000 United States Treasury note; paying 18 legacies to the parents of minors, instead of retaining them in trust; preparing and filing federal estate and income tax returns; determining and paying Social Security Taxes owed by the decedent; making distribution of legacies; keeping various records; preparing refunding agreements and accounts.

The plaintiff received commissions for her services as executrix in the sum of $3,000 in 1955 and in the sum of $2,000 in 1956. In 1956 and 1957 she paid "social security tax" on these commissions. The plaintiff is now over 65 and has applied for old-age insurance benefits. Her claim was denied by the Bureau of Old Age and Survivors Insurance of the Social Security Administration, Department of Health, Education and Welfare, on the ground that the commissions received were not earnings derived from carrying on a trade of business. After a hearing at which the plaintiff testified and introduced documentary evidence relating to her position as executrix, a referee of the Social Security Administration reversed the Bureau's decision. The Appeals Council, on its own motion, reversed the referee and reinstated the Bureau's decision, reasoning that, "In the instant case, the claimant was a nonprofessional fiduciary who had acted in that capacity in estates of relatives in two previous isolated instances over a 25 year period. The estate consisted almost entirely of sound securities and there was no trade or business among the assets. This was a relatively simple estate to administer and there were no extensive management activities required of the claimant. The claimant had but to pay the few bills of the estate, receive dividends while she acted, distribute the estate, and see that taxes were paid. Within about seven months after the claimant was appointed executrix, all of the beneficiaries, except the residuary legatees had been paid. It appears that all tax matters concerning the estate had been taken care of by March 2, 1957, less than twenty-one months after she was appointed and at that time the estate was ready to be closed."

This action was commenced in the court below pursuant to Section 205(g) of the Act, 42 U.S.C.A. § 405(g), which provides for review by a United States district court of final decisions of the Secretary. The court reversed the decision of the Appeals Council upon its finding that the "plaintiff in serving as executrix of the estate of Elizabeth M. Hunter was engaged in carrying on a trade or business, within the meaning of the Social Security Act and her remuneration constituted net earnings from self-employment." No opinion was handed down but judgment was entered in accordance with the finding. It is from this judgment that the Secretary appeals.

Section 211(a) provides that "The term `net earnings from self-employment' means the gross income * * * derived by an individual from any trade or business carried on by such individual * *." Subsection (c) of Section 211 provides that "The term `trade or business', when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in Section 162 of the Internal Revenue Code of 1954² * * *." Section 162(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 162(a) provides: "(a) In general. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *." Thus, to determine whether the plaintiff was in the "trade or business" of being an executrix we must determine whether she would have been allowed to deduct all the ordinary and necessary expenses paid or incurred in the taxable year in carrying on her activities as executrix of the Estate of Elizabeth M. Hunter, pursuant to Section 162.

The Internal Revenue Code itself does not define the phrase "trade or business". Nor has any court formulated an explicit definition. On the contrary, it has been stated that "To determine whether the activities of a taxpayer are `carrying on a business' requires an examination of the facts in each case." Higgins v. Commissioner, 1941, 312 U.S. 212, 217, 61 S.Ct. 475, 478, 85 L.Ed. 783. Broader criteria have been suggested. For example, it is generally agreed that to constitute a trade or business an activity must be initiated and carried on with the good faith intention of making a profit. See, e. g., International Trading Co. v. Commissioner, 7 Cir., 1960, 275 F.2d 578; Doggett v. Burnet, 1933, 62 App.D.C. 103, 65 F.2d 191, 194. In addition, it is frequently stated that "`* * * carrying on any trade or business', within the contemplation of § 162 involves holding one's self out to others as engaged in the selling of goods or services." Deputy v. DuPont, 1940, 308 U.S. 488, 499, 60 S.Ct. 363, 369, 84 L.Ed. 416; White's Will v. Commissioner, 3 Cir., 1940, 119 F.2d 619, 621. The Supreme Court has held that an individual engaged in investing and reinvesting his own assets is not engaged in carrying on a trade or business. Higgins v. Commissioner, supra. Similarly, a trust or an estate is not carrying on a trade or business where the activities of the trustee or executor are confined to safeguarding and managing a fund of stocks and bonds and making safe investments and reinvestments. City Bank Farmers Trust Co. v. Helvering, 1941, 313 U.S. 121, 61 S.Ct. 896, 85 L.Ed. 1227; United States v. Pyne, 1941, 313 U.S. 127, 61 S.Ct. 893, 85 L.Ed. 1231. The question whether an executrix is engaged in the trade or business of being an executrix is, of course, not necessarily related to whether the particular estate that she is administering is engaged in carrying on a trade or business. Wallace's Estate v....