Reilly v. Comm'r of Internal Revenue (In re Estate of Reilly)

• Decision Date: 19 February 1981
• Docket Number: Docket No. 5117-78.
• Citation: 76 T.C. 369
• Parties: ESTATE of PETER W. REILLY, DECEASED, LAWRENCE K. REILLY, EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

76 T.C. 369

ESTATE of PETER W. REILLY, DECEASED, LAWRENCE K. REILLY, EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 5117-78.

United States Tax Court

Filed February 19, 1981.

In litigation between the petitioner and the decedent's widow (who was a beneficiary under decedent's will) relating to the ownership of certain property transferred to her by the decedent prior to his death, the State court approved a compromise agreement which required that petitioner pay the widow's attorneys' fees. Held, petitioner may deduct these fees as (1) administration expenses, under sec. 2053(a)(2), I.R.C. 1954, either as attorneys' fees of a beneficiary pursuant to sec. 20.2053-3(c)(3), Estate Tax Regs., or as a cost of administration or (2) as a payment made in settlement of a claim against the estate, pursuant to sec. 2053(a)(3), I.R.C. 1954. John H. King, for the petitioner.

Daniel P. Ehrenreich, for the respondent.

OPINION

TANNENWALD , Judge:

Respondent determined a deficiency of $18,392.26 in petitioner's Federal estate taxes. Concessions having been made by both parties, the sole issue remaining is whether attorneys' fees are deductible under section 2053 ¹ when paid by an estate but incurred by the decedent's widow.

All of the facts in this case have been stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioner is the Estate of Peter W. Reilly, deceased, by its executor, Lawrence K. Reilly. The decedent died testate on April 16, 1974. The estate tax return was timely filed with the Internal Revenue Service Center at Andover, Mass. Lawrence K. Reilly resided in Wellesley, Mass., at the time the petition was filed.

Marion D. Reilly (Mrs. Reilly) was the decedent's wife at the time of his death. She was also the life beneficiary of a testamentary trust created by the decedent's will which, except for $5,000 and decedent's tangible personal property, was given all of the decedent's property. The remainder interest in the testamentary trust was given to the decedent's four children, namely, Peter W. Reilly III, Lawrence K. Reilly, Grace R. Conway, and Ann L. Gervais.

After the decedent's death, litigation ensued between Mrs. Reilly, Lawrence K. Reilly, individually and as petitioner's executor, Peter W. Reilly III, individually and as a named trustee of the aforesaid testamentary trust, the Union National Bank, as a named trustee of said testamentary trust, and Grace R. Conway and Ann L. Gervais. That litigation involved:

(a) Ownership of certain marketable securities transferred by the decedent to himself and Mrs. Reilly in joint ownership in October 1971.

(b) Ownership of 8,000 shares of Courier Corp. common stock transferred by the decedent to Mrs. Reilly in July 1972.

(c) The validity of a gift made by decedent to Mrs. Reilly in July 1972 consisting of the proceeds of the sale of certain shares of Newco, Inc.

(d) Ownership of a Lowell Five-Cent Savings Bank savings account established in the joint ownership of the decedent and Mrs. Reilly in December 1972.

(e) Ownership of real property located in York County, Maine (the Drake Island property), transferred by decedent to himself and Mrs. Reilly in joint ownership in January 1973.

(f) The status of certain inter vivos trusts established by the decedent in May 1973 and the ownership of certain property held thereunder.

(g) Decedent's mental state at the times of the transfers listed above, and whether the decedent was subjected to undue influence at the time of the transfers.

(h) The propriety of Lawrence K. Reilly's being executor of the decedent's estate and of Peter W. Reilly III's being a trustee of the testamentary trust.

(i) The failure of the trustees of the testamentary trust to make distributions to Mrs. Reilly pursuant to its provisions.

(j) Payment of attorneys' fees.

(k) Certain tax liabilities of the decedent.

The litigation took the form of (1) an action by Mrs. Reilly against the previously named persons in the Superior Court of Middlesex County, Mass., for a declaratory judgment that she was entitled to sole title and ownership of the marketable securities (see item (a) above) and the Drake Island property (see item (e) above), and to remove Peter W. Reilly III as cotrustee of the testamentary trust and (2) an action by Lawrence K. Reilly, as executor of decedent's estate, against Mrs. Reilly in the Probate Court of Middlesex County, Mass., asking for a restraining order, an accounting for property which she held or controlled and which belonged to the estate, and a declaration that various transactions between her and the decedent be declared null and void. The litigation was settled prior to any trial, and a formal compromise agreement was executed by all the parties and filed in, and approved by, the Middlesex County Probate Court. The action in the Middlesex County Superior Court was dismissed.

The approved compromise agreement provided that Mrs. Reilly would retain some of the disputed property and that she would transfer the rest to a newly created trust (the Peter Reilly II Trust), which would also receive the corpus of the decedent's testamentary trust.² The Peter Reilly II trustees were directed to pay attorneys' fees as follows: $40,000 to Mrs. Reilly's counsel and $40,000 to counsel for the estate and the other “defendants/cross-complainants.”

Respondent has conceded that the attorneys' fees attributable to counsel for petitioner, et al., are properly deductible. We infer from this concession and the arguments on brief that respondent accepts that the payments for attorneys' fees made by the Peter Reilly II Trust may be treated, for the purposes of this case, as if made by petitioner—-at least, respondent does not argue otherwise.³ The only issue is whether petitioner may deduct those fees.

We start from the premise that, in order to be entitled to deduct administration expenses, an estate must satisfy a two-pronged requirement: (1) That the expenses in question are allowable under the applicable local law (see note 6 infra); (2) that, even if so allowable, the expenses meet the conditions of deductibility set forth in respondent's regulations. Estate of Posen v. Commissioner, 75 T.C. 355 (1980).⁴

With respect to the first requirement, we are satisfied that the attorneys' fees in question were both allowable and actually allowed under Massachusetts law. See Mass. Ann. Laws. ch. 204, secs. 13-18 (Michie/Law. Co-op 1969) (specifically dealing with compromises) and ch. 215, sec. 39B (specifically authorizing the Probate Court to award counsel fees (and direct their payment out of the estate) incurred by any party “in a contested proceeding in equity”). Indeed, respondent does not seriously contend otherwise, although he suggests on brief that the provisions regarding the payment of fees were “buried” in the provisions of the Peter Reilly II Trust instrument and there is “no showing that the payment was specifically brought to the attention of, and approved by, the probate court.” We think that respondent's suggestion is not well taken. The trust instrument was attached to the compromise agreement and the Probate Court found that that agreement was “just and reasonable,” as it was required by statute to do (see Mass. Ann. Laws. ch. 204, sec. 14 (Michie/Law. Co-op 1969)), authorized the executor “to adjust the controversy in accordance with the terms of said Compromise Agreement” and “ratified and approved” said agreement pursuant to the above-mentioned chapter 204, section 14. We think there is more than sufficient evidence to justify the conclusion that the expenses in question were allowable under the laws of Massachusetts.⁵

It is as to whether the attorneys' fees paid to Mrs. Reilly's counsel satisfy the requirements of respondent's regulations that the parties are at loggerheads. Petitioner argues that such fees constitute administration expenses within the meaning of section 2053(a)(2)⁶ and section 20.2053-3(c)(3), Estate Tax Regs.⁷ Respondent argues that these fees were for services unnecessary to the settlement of the estate,⁸ were primarily for the personal benefit of Mrs. Reilly, and, accordingly, are not deductible.

The critical question, as we see it, is whether the fees of Mrs. Reilly's counsel were “essential to the proper settlement of the estate” (a phrase which appears in both sec. 20.2053-3(c)(3) and sec. 20.2053-3(a), Estate Tax Regs.), taking into account that “The fact that some benefit results to the beneficiaries from an expenditure is not a reason to disallow the expense as a deduction.” See Porter, Transferee v. Commissioner, 49 T.C. 207, 225 (1967).

In essence, the litigation which gave rise to the disputed attorneys' fees involved the question whether the decedent's estate or Mrs. Reilly owned certain assets. We attach no significance to the fact that the first step in such litigation was the suit to quiet title brought by Mrs. Reilly in the Massachusetts Superior Court. The fact is that a cross-suit, asking for essentially the same relief, was brought by the decedent's executor in his representative capacity in the Massachusetts Probate Court. Thus, we do not think it can fairly be said that the situation involved nothing more than a dispute between “beneficiaries” of a decedent in which the estate merely occupied the position of a stakeholder. Cf. Estate of Dutcher v. Commissioner, 34 T.C. 918, 925 (1960).⁹

We recognize that Mrs. Reilly obtained clear ownership of a substantial portion of the assets in dispute, but this, in and of itself, is not, in our opinion, sufficient ground for denying the deduction. See Porter, Transferee v. Commissioner, supra. Moreover, we note that success or failure of a litigant is not determinative of the right to reimbursement for counsel fees from an estate. Dulles v. Johnson, 273 F.2d 362, 369-370 (2d...