Trust U/W of Mary Lily (Flagler) Bingham v. Comm'r of Internal Revenue, Docket No. 109384.
| Decision Date | 08 October 1943 |
| Docket Number | Docket No. 109384. |
| Citation | 2 T.C. 853 |
| Parties | TRUST U/W OF MARY LILY (FLAGLER) BINGHAM, MESSRS. WILLIAM R. KENAN, JR., AND LAWRENCE C. HAINES, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Under the facts, certain legal and miscellaneous expenses paid by petitioners held to be deductible from gross income as ‘Non-Trade or Non-Business Expenses‘ under section 23(a)(2) of the Internal Revenue Code as added by section 121 of the Revenue Act of 1942. A. Roberts MacMannis, C.P.A., for the petitioners.
Thos. H. Lewis, Jr., Esq., for the respondent.
The respondent determined a deficiency in income tax against the petitioners for the calendar year 1940 in the amount of $160,815.10. The issue presented is whether the respondent erred in disallowing certain expense deductions taken by petitioners on their income tax return for that year.
The proceeding has been submitted upon the pleadings and a stipulation of facts. The stipulated facts not set forth are included herein by reference, except as hereinafter noted in the opinion.
At all times since prior to January 1, 1940, the petitioners were the duly qualified and acting trustees of a trust created by the will of Mary Lily (Flagler) Bingham, hereinafter mentioned. Their principal office was in New York, New York. They filed their income tax return for the taxable year with the collector of internal revenue for the second district of New York. Their books and accounts have always been kept on a cash basis and the income tax return filed by them for the taxable year was filed on the same basis.
Mary Lily (Flagler) Bingham died on July 27, 1917. By her will, which was dated September 23, 1916, and duly probated in August 1917, she appointed two individuals as executors and trustees and, after providing for a certain devise of real estate and certain specific bequests of jewelry, provided for the conveyance to the trustees of all the residue of the property, real and personal, of which she should die seized and possessed. The will provided for the payment by the trustees to various parties of at least $536,000 in cash legacies and for the delivery by the trustees to various other parties of 40,250 shares of Standard Oil Co. stock. All those beneficiaries were to receive their legacies as soon as compatible with the due administration of the estate and the carrying out of the testator's wishes with reference to the hotel and railroad properties mentioned in item ninth of the will hereinafter set out. The will further provided for the payment of $200,000 annually to a niece of the testator until that niece attained the age of 40 years, when she was to be paid the lump sum of $5,000,000, if compatible with the interest of the estate as determined by the trustees. The will also provided that the trustees should pay $75,000 annually to the University of North Carolina during the continuance of the trust and at the expiration thereof should pay to the university such a sum in cash as would produce an annual income of $75,000.
Item ninth of the will provided as follows:
All the rest and residue of my estate including all lapsed bequests or devises, shall be held for the term of twenty-one years from the date of this will by my said Trustees in trust for the maintenance and administration and development of the Florida East Coast Railway and the Florida East Coast Hotel properties (which are hereinafter called ‘Principal properties‘) and the properties held by subsidiary Companies. And to that end, my said Trustees shall have power to sell any of my said residue estate, except the stocks and bonds of said ‘principal properties,‘ to invest the proceeds of such sales and the income and increments of all my said residue estate in such securities or other properties as they may think best; to use any of the said proceeds or said income or increments for the benefit of any of said principal or subsidiary properties; to make and execute any and all obligations, and all pledges and mortgages of any of my said residue estate except the stocks and bonds of the said principal properties, which may be necessary for the purposes of the maintenance, administration or development of the said principal or subsidiary properties; to exchange any of said properties, other than the principal properties and the stocks and bonds thereof, for any property which to them may seem desirable to be acquired for the benefit of the said principal or subsidiary properties, and continuingly to invest, sell and reinvest at such times and in such manner and in such sums and in such properties as may seem to them desirable for the purpose of carrying out the maintenance, administration and development of the said properties the primary purpose of this trust being the keeping together of the enterprise into which my beloved husband, Henry M. Flagler, put so much of his energy, ambition and life.
The will further provided that each of the trustees should receive compensation at the rate of $50,000 a year for services as trustee and such compensation also should cover all services which each trustee might render as executor.
At the end of 21 years from the date of the will the trustees were to divide the property then in their hands into three equal parts and transfer such parts to the testator's two sisters and brother in equal shares.
The respondent's determination of a deficiency resulted from the allowance of $210,741.93 expenses paid by petitioners in the taxable year and deducted by them from gross income in their income tax return for that year. The respondent's reason for the disallowance of these expenses was that they were not ordinary and necessary expenses incurred in carrying on a trade or business within the meaning of section 23(a) of the Internal Revenue Code. By stipulation the parties have agreed that all of the expenses originally disallowed by the respondent were ordinary and necessary expenses paid 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, save one item of $25,867.31 paid for legal fees and charges. The expenses so agreed upon are as follows:
+----------------------------------------+
¦Compensation of trustees ¦$141,369.86¦
+----------------------------+-----------¦
¦Office salaries ¦34,934.30 ¦
+----------------------------+-----------¦
¦Office supplies and expenses¦2,448.97 ¦
+----------------------------+-----------¦
¦Petty cash expenditures ¦1,722.89 ¦
+----------------------------+-----------¦
¦Office rent (net) ¦3,419.10 ¦
+----------------------------+-----------¦
¦Tax and financial services ¦498.75 ¦
+----------------------------+-----------¦
¦Miscellaneous expenses ¦480.75 ¦
+----------------------------+-----------¦
¦ ¦ ¦
+----------------------------+-----------¦
¦Total ¦184,874.62 ¦
+----------------------------------------+
Of the legal fees and charges of $25,867.31 paid by the petitioners, $16,439.96 was incurred for services rendered from August 1937 to January 1940 in contesting a deficiency of $365,687.12 in income tax asserted against the petitioners for the year 1935. This deficiency was asserted by reason of the inclusion by the Commissioner in income of alleged gains of $1,991,316.75 resulting from the partial payment in 1935 in securities of a bequest to Louise Clisby Wise of $5,000,000 under the above mentioned will. The payment was made under the provision of the will that when Louise Clisby Wise reached the age of forty, or as soon thereafter as was compatible with the interests of the estate, she was to be paid the sum of $5,000,000. When Louise Clisby Wise became forty years of age the trustees paid her $5,000,000, partly in cash and partly in securities. Some of the securities had been purchased by the trustees and some had been received by the trustees as part of the estate of the decedent at her death, which latter securities had appreciated in value during the period held by the trustees, and the respondent determined that, to the extent that the value of the securities purchased exceeded their cost and to the extent of the appreciation of the other securities, the distribution thereof resulted in capital gains taxable as specified in section 117 of the Revenue Act of 1934. In the case of William R. Kenan, Jr., et al., Trustees, 40 B.T.A. 824, we sustained the respondent's determination of the deficiency. Our decision sustaining the deficiency was appealed to the Circuit Court of Appeals for the Second Circuit. That Circuit Court, in Kenan v. Commissioner, affirmed our decision in 114 Fed.(2d) 217. The legal fees here in dispute were paid for services rendered by attorneys in connection with the proceeding there before us and in connection with the appeal therefrom. Payments to the attorneys also covered reimbursement for expenses incurred- by them in contesting the deficiency.
Of the legal fees and charges paid by the petitioners, the amount of $780.85 was for services in connection with the payment of the above mentioned legacy to the University of North Carolina and for stenographic expense incurred by the attorneys in connection with those services.
The remaining $8,646.50 of the total of $25,867.31 in legal fees and charges paid by the petitioners in 1940 was for services rendered in respect of the tax and other problems resulting from the expiration of the trust and delivery of its assets to the legatees.
The parties have stipulated that $184,874.62 of the expenses in question were ordinary and necessary expenses paid 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, and respondent,...
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