Merians v. Comm'r of Internal Revenue

• Decision Date: 08 May 1973
• Docket Number: Docket No. 2358-71.
• Citation: 60 T.C. 187
• Parties: SIDNEY MERIANS AND SUSAN MERIANS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

60 T.C. 187

SIDNEY MERIANS AND SUSAN MERIANS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2358-71.

United States Tax Court

Filed May 8, 1973.

Robert B. Hendler, for the petitioners.

Robert N. Ginsburg, for the respondent.

Petitioners paid a fee for legal services in connection with the development and implementation of their estate plan. Held, 20 percent of such fee is allocable to tax advice.

SIMPSON, Judge:

The respondent determined a deficiency of $1,136.32 in the petitioners' 1967 Federal income tax. The only issue for decision is whether the petitioners have shown what portion of a $2,144 attorney's fee was allocable to tax advice.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Dr. Sidney Merians and Susan Merians, are husband and wife, who maintained their legal residence in Edison, N.J., at the time the petition was filed in this case. They filed their 1967 joint Federal income tax return with the district director of internal revenue, Newark, N.J.

In 1967, Dr. Merians retained a law firm to prepare an estate plan for him and his wife. The legal services provided by the firm included conferences between Dr. Merians and the attorney in charge of their account. During those conferences, the attorney prepared a worksheet with respect to the petitioners' present taxable estate. The legal services also included the preparation of wills for Dr. and Mrs. Merians, taking into consideration current requirements with respect to qualification for the marital deduction; the establishment of an irrevocable trust for the primary benefit of Mrs. Merians; the transfer to that trust of certain corporate stock; the dissolution of the corporation; and the creation of a partnership; with the trust as a limited partner; to hold the real estate which the corporation had owned. In addition, they included the creation of an irrevocable life insurance trust for the primary benefit of Mrs. Merians and the transfer of life insurance policies to such trust. In connection with the transactions concerning the life insurance trust, a conference was held, which included a second attorney. Gift tax returns were prepared by the principal attorney with respect to the transfers to the trusts.

The petitioners received a bill of $2,144 for the aforementioned legal services, based on 42.8 hours of legal services at the rate of $50 per hour. On their joint Federal income tax return for 1967, the petitioners claimed a deduction for the $2,144 which they paid to the law firm.

OPINION

The issue for decision is whether the petitioners have shown what portion of the legal fee was allocable to tax advice. They contend that the fee pertained solely to services and advice on tax matters and that it is, therefore, deductible in its entirety under section 212(3), I.R.C. 1954.¹ In his brief, the respondent admits that ‘there is probability that some of the legal fee represented services which are deductible under section 212(3), ‘ but he contends that the record is completely devoid of any evidence furnishing a basis on which to make an allocation. His position here seems to be the same as he adopted in Rev. Rul. 72-545, 1972-2 C.B. 179, in which he stated that if a reasonable basis exists for allocating a portion of the legal fee incurred in connection with a divorce proceeding to tax counsel, such portion is deductible under section 212(3). Accordingly, we consider that the respondent agrees that any portion of the legal fee which can be found to be attributable to tax advice, irrespective of its nature, is deductible and that the only issue before us is one of allocation. See United States v. Davis, 370 U.S. 65, 74 (1962).

The petitioner has the burden of proof in establishing what portion of the fee was allocable to tax advice. Arthur D. McDonald, 52 T.C. 82, 89 (1969); George L. Schultz, 50 T.C. 688, 699-700 (1968), affirmed per curiam 420 F.2d 490 (C.A. 3, 1970). In attempting to meet such burden, the petitioners rely on the testimony of the attorney in charge of their account. He testified that he did a ‘great deal of tax work,‘ that the estate plan which was adopted was based on his recommendations, and that such recommendations were made ‘for tax implications only.’ The attorney further testified that ‘The discussions with respect to his (Dr. Merians') death and where the property would go was five minutes. He wanted it to go to his wife and children.’ The attorney also testified that he spent 2 hours in preparing Dr. Merians' will ‘as an instrument of the conveyance and the balance of the time in regards to the creation of the irrevocable trust, the transfer of the property from the corporation into the trust, stock, preparation of the gift tax return and complete analysis of the estate.’

A complete analysis of an estate involves more than a consideration of tax consequences; in fact, it is basically concerned with transferring the client's property to the persons he wishes to receive it. The client's financial condition, the nature of his property, the extent to which he wants various persons to share in his estate, the needs and capacity of each intended beneficiary, the details of State law, and the need for flexibility are among the multitude of factors which are considered in establishing a plan to dispose of a client's wealth. Casner, Estate Planning, ch. 1 (3d ed. 1961); Holzman, Estate Planning, ch. 1 (1967); Trachtman, Estate Planning, ch. 1 (rev. ed. 1968). Although the attorney testified that the discussion as to who would be the beneficiaries of the estate was very brief, he did not testify as to the time which was spent in evaluating such factors as each beneficiary's ability to manage funds, the state of the title to Dr. Merians' property, the amount of control which Dr. Merians desired to maintain over his property during his life, Dr. Merians' present and future financial needs, the reliability of potential trustees, or the State law difficulties which might be encountered in disposing of Dr. Merians' property. It is apparent, however, that such considerations and similar ones took more than 5 minutes of the attorney's time and that they involved substantial nontax considerations. Indeed, the mere drafting of Dr. Merians' will as an ‘instrument of the conveyance’ took 2 hours, and there is no indication as to how long it took to draft the trust instruments or to arrange for the transfer of the life insurance policies and corporate stock or to dissolve the corporation and form the partnership. The testimony of the attorney that he generally spent a ‘great deal of time’ doing tax work is vague, and it clearly does not show the amount of time which he spent on tax considerations in preparing Dr. and Mrs. Merians' estate plan. We realize that in establishing the estate plan, the attorney considered the tax implications of his actions, but we cannot accept the proposition that he considered only such implications, especially since his client did not retain separate counsel for advice on the nontax aspects of the estate plan. We also recognize that in establishing an estate plan, choices made for personal nontax reasons may have tax implications, but the consideration of such implications does not convert into tax advice the advice given concerning nontax problems.

The bill for the legal services did not include an itemization of the services performed and the time spent on each activity, nor did the attorney's testimony provide such information. The petitioners' failure to provide such information makes it difficult for us to determine how much of the fee was allocable to tax advice. However, contrary to the respondent's contention, such failure does not render the record completely devoid of any evidence on which to make an allocation. We do have the attorney's testimony, and it convinces us that a significant portion of his services consisted of tax advice. Yet, because of the vagueness of such testimony and the lack of specificity, the allocation must be weighted heavily against the petitioners. We find that 20 percent of the fee was for tax advice. Cohan v. Commissioner, 39 F.2d 540, 543-544 (C.A. 2, 1930); Earl Vest, 57 T.C. 128, 149 (1971); Estate of A. P. Steckel, 26 T.C. 600, 609 (1956), affirmed per curiam 253 F.2d 267 (C.A. 6, 1958). Such amount is deductible in this case. The petitioners have not claimed that any additional amount is deductible under a section other than section 212(3), and, in any event, the evidence as to the other legal activities is insufficient to justify allowing any additional deduction.

Reviewed by the Court.

Decision will be entered under Rule 50.

SCOTT, J., concurring: While I agree with Judge Sterrett's concurring opinion, I wish to stress the importance in this case to me of the fact that respondent's concession (which is in accordance with his Rev. Rul. 72-545, 1972-2 C.B. 179, that is in my view an incorrect interpretation of section 212(3)) lulled petitioners into offering proof only as to the portion of the attorney's fees allocable to ‘tax advice.’ Had respondent not conceded the deductibility of attorney's fees paid for ‘tax advice’ in estate planning, petitioners might well have shown that some of the advice they received was such that a portion of the legal fees would be deductible under section 212(2). See Nancy Reynolds Bagley, 8 T.C. 130 (1947). Fairness would dictate that we reopen this case to permit petitioners to prove what portion, if any, of the attorney's fees they paid would be deductible under section 212(2) if we refused to accept respondent's concession which narrowed the issue for trial to one of fact. Except for the limitation of the issue tried because of respondent's concession, I would agree with Judge Quealy's dissent in this case. As pointed out by Judge Davis in his dissent in Carpenter v. United States, 338 F.2d 336, 371-372 (Ct. Cl. 1964), under the view...