Macy v. Commissioner

Valentine E. Macy, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. J. Noel Macy and Elena Kohler Macy, Petitioner, v. Commissioner of Internal Revenue, Respondent Macy v. Commissioner Docket Nos. 27152, 27153 United States Tax Court 19 T.C. 409; 1952 U.S. Tax Ct. LEXIS 24; December 10, 1952, Promulgated *24 Decisions will be entered under Rule 50. The father of the petitioners died in March 1930 leaving a will in which he named the petitioners and a cousin, Carleton Macy, as executors of the will and as trustees of three residuary trusts provided for in the will. Early in April 1930 the three duly qualified as executors and trustees. At and prior to his death the decedent was engaged in the making of investments in and in directing, supervising, promoting and developing various enterprises, which in turn were variously engaged in financing, real estate operations, the publication of daily and weekly newspapers, and in other activities. For many years Carleton, and for a number of years the petitioners, had been closely associated with the decedent in handling the affairs of the various enterprises in which he was interested. After their qualification as executors and trustees, the petitioners and Carleton continued the operation of the various enterprises and directed and supervised their activities. In 1936, the residuary trusts were set up and distributions were made thereto in that and subsequent years. In May 1942, the petitioners and Carleton filed their first and final*25 accounting as executors covering the period from April 1930 to February 1942, and their intermediate accountings as trustees covering the period from January 1936 to February 1942. Because of certain transactions arising in the course of the continued operation of the various business enterprises and because of the action of the petitioners and Carleton with respect to other matters relating to their administration of the estate and the handling of the trusts, numerous objections to their accountings were filed on behalf of certain infants who were contingent beneficiaries. At the conclusion of protracted hearings on the objections a settlement thereof was effected whereby the petitioners and Carleton, in 1945, paid to the trusts a total of $ 1,025,000. Of that amount, petitioner Valentine E. Macy, Jr., paid $ 325,000 and petitioner J. Noel Macy paid $ 400,000. The amounts so paid by the respective petitioners were disallowed by the respondent as deductions in their 1945 income tax returns. Held, that the duration and scope of the activities of the petitioners as executors and trustees in the conduct and continued operation of the various business enterprises was sufficient*26 to constitute these activities the conduct of business and that the amounts paid by the petitioners in settlement of the objections to their accountings constituted ordinary and necessary business expenses deductible under section 23 (a) (1) (A) of the Internal Revenue Code. William H. Hall, Esq., for the petitioners. Rigmor O. Carlsen, Esq., for the respondent. Turner, Judge. TURNER *410 The respondent has determined deficiencies in income tax against the petitioners for 1945 as follows: Docket No. Deficiency Valentine E. Macy, Jr 27152 $ 112,999.67 J. Noel Macy and Elena Kohler Macy 27153 284,172.29 *27 The issue presented is whether the respondent erred in disallowing deductions of $ 325,000 and $ 400,000 taken in the returns of Valentine E. Macy, Jr., and J. Noel Macy, respectively, and representing payments made by them in settlement of claims against them for liability for surcharge as executors of the will of their father and as trustees of three trusts created by the will out of the residuary portion of their father's estate. FINDINGS OF FACT. Part of the facts have been stipulated and are found accordingly. Valentine E. Macy, Jr., at all times material herein was, and now is, a resident of the State of New York. He filed his income tax return for the calendar year 1945, which was prepared on the cash receipts and disbursements basis, with the collector of internal revenue for the second district of New York. J. Noel Macy and Elena Kohler Macy are husband and wife. They filed their joint income tax return for the calendar year 1945, which was prepared on the cash receipts and disbursements basis, with the collector of internal revenue for the second district of New York. On March 21, 1930, V. Everit Macy died testate and a resident of Westchester County, New York. He was*28 survived by his sons, Valentine E. Macy, Jr., and J. Noel Macy, sometimes herein referred to as the petitioners, and his daughter, Edytha Macy Lewis (now Mickles). The decedent's will was admitted to probate in the Surrogate's Court of Westchester County on April 2, 1930, and on that day letters testamentary were issued to Valentine E. Macy, Jr., J. Noel Macy, and Carleton Macy, a cousin of the decedent, who were named as *411 executors in the will. Also on the same day, April 2, 1930, letters of trusteeship were issued to the same persons as trustees of trusts created in and by the residuary clauses of the decedent's will. After directing in his will that his executors pay all his debts and funeral expenses as soon after his death as might be convenient and practicable the decedent made various specific bequests of money and other personal property to his children and others, and devised certain realty to a cousin of his. By paragraph Tenth of his will the decedent directed that all inheritance or succession taxes that might be levied on the foregoing legacies should be paid out of his residuary estate, so that the respective legatees should receive their legacies in full *29 and without deduction or charge for taxes. By paragraph Eleventh of his will the decedent directed his executors to divide the residuary portion of his estate into three equal portions. By subdivision I (a) of that paragraph he gave his son, Valentine, one-third of one of said portions and gave the remaining two-thirds of such portion to his executors in trust to pay over the net income therefrom to Valentine during his life with the proviso that when he attained 35 years of age one-fourth of the principal of the trust should be paid over to him and the balance thereof to remain in trust until his death. Upon the death of Valentine, whether before or after attaining the age of 35 years, the principal of the trust then in the hands of the executors, acting as trustees, was to be paid over to the descendants of Valentine per stirpes but if there should be none such descendants then living, then to the descendants of the decedent per stirpes. By subdivision II (a) of paragraph Eleventh the decedent made a like provision for his son, J. Noel. By subdivision III (a) of paragraph Eleventh the decedent gave his daughter, Edytha, one-third of one of the three equal portions of his*30 residuary estate, and gave the remaining two-thirds of such portion to his executors in trust to pay over the net income therefrom to Edytha during her life. Upon her death the principal of the trust then in the hands of the executors, acting as trustees, was to be paid over to the descendants of Edytha per stirpes but if there should be none such descendants then living, then to the descendants of the decedent per stirpes. The foregoing three trusts are sometimes hereafter referred to as the "residuary trusts." By paragraph Twelfth of his will the decedent provided that the executors named therein might deliver and as trustees might receive, as a part or all of the principal of the trust funds, any securities of which the decedent died possessed at their respective values on the date of his death but that any such delivery in kind should be made proportionately between the various trust funds. However, an exception was made to that requirement in that the decedent directed that any shares of stock in, or securities or obligations of, any newspaper *412 publishing corporation or corporations of which the decedent died possessed might be apportioned to that one-third*31 portion of his residuary estate set apart for J. Noel and might be used in payment of the part of said portion that he was entitled to outright, or might be included in the trust created with respect to the balance of said portion. The trustees were authorized to hold, as a part of the trust funds, or any of them, any securities so delivered to them by the executors, or in their discretion might sell the same and reinvest the proceeds. Paragraph Twelfth also empowered the trustees to sell at public or private sale, at such time or times as they might choose, for cash or partly for cash and partly on credit, and upon such other terms and conditions as to them should seem best, and to exchange or lease any and all real estate of which the decedent should die seized. With respect to the decedent's residence property known as "Chilmark" the paragraph provided that if the decedent was seized of it at the time of his death "it is my wish that my Executors be not under any compulsion to sell said property within any limited period or under unfavorable conditions, and, to that end, I direct that my Executors may have five years from the date of my death within which they may sell and dispose*32 of said property, in whole or in part, and as their discretion dictates, without liability or responsibility to anyone claiming under my will by reason of such delay." Paragraph Twelfth further provided that any dividend received by the trustees on shares of stock held by them as a portion of any trust estate, which was payable in shares or assets of the distributing corporation, or in securities of any other corporation, should be held by the trustees as a part of the principal of the trust and should not be distributed, in whole or in part, as income. Paragraph Twelfth also authorized the trustees either to exercise rights to subscribe attributable to shares of stock held by them as a part of the corpus of any trust estate, or to sell such rights, but the shares or securities purchased under the exercise of the rights or the proceeds of sale of such rights were to be added to the principal of the trust estate. The trustees were also given uncontrolled discretion to consent to the reorganization or consolidation of any corporation, or to the sale of the property of any corporation, any of the stocks, bonds, notes, or other securities of which were held by them in the trusts. They*33 were also given uncontrolled discretion to exercise options or make conversions with respect to stocks, bonds, notes, or other securities held by them at any time in the trusts. Paragraph Thirteenth of the will provided as follows: For convenience in the administration of any trust vested in my Executors, I direct that the signature of any one of them, on behalf of the trust estate, to any check, stock certificate or other instrument shall be sufficient to bind *413 the trust estate; and any depositary of the funds of the trust estate shall be fully protected in honoring the check of such Trustees signed by any one of them. For such purpose also I direct that any shares of stock held for the account of any trust fund may be registered in the name of any one of the persons specifically named herein as executors, and that any one of said persons specifically named may have access alone to any safe deposit box containing securities or assets of my estate, or of any trust fund herein created. * * * In 1931 the petitioners and Carleton Macy as executors filed a Federal estate tax return for the decedent's estate showing a gross estate of approximately $ 36,317,000, a net estate of*34 approximately $ 31,221,000, a Federal estate tax of approximately $ 5,597,000 against which they took a credit of approximately $ 4,478,000 for estate, inheritance, legacy, or succession taxes, leaving $ 1,120,000 as the amount of Federal estate tax payable. In 1938 or 1939 the correct Federal estate tax was finally determined at approximately $ 1,073,000 on which net interest of approximately $ 188,000 was paid because the tax was not paid until during the period September 20, 1933, through April 30, 1935. New York transfer and estate taxes finally determined about 1938 amounted to approximately $ 4,720,000. With respect to the New York estate tax, interest in the amount of approximately $ 431,000 was paid since payment of such tax was not made until during the period June 30, 1933, through March 20, 1935. A transfer tax of approximately $ 550 was paid to the State of North Carolina with interest of approximately $ 40 because of delay in payment. Valentine became 35 years of age on April 28, 1933, and J. Noel became of a like age on December 24, 1935. Although letters of trusteeship were issued to the petitioners and Carleton Macy on April 2, 1930, there was no distribution *35 of any part of the residuary portion of the decedent's estate, and the three "residuary trusts" were not set up until January 1936. Thereafter other distributions were made to the trusts each year to and including February 5, 1942. Beginning in January 1936 and continuing through February 5, 1942, distributions from the residuary portion of the estate were made to the petitioners and their sister, Edytha, under subdivisions I (a), II (a), and III (a), respectively, of paragraph Eleventh of the decedent's will. In 1932 J. Noel was divorced from his wife. About that time and in January of that year he entered into a trust agreement whereby he agreed to assign, and pursuant thereto later in 1932 assigned, one-fourth of all principal that he might be entitled to receive in cash or in securities legal for the investment of trust funds in the State of New York whether as residuary legatee or as commissions as executor or testamentary trustee under the will of the decedent. In 1932, Valentine E. Macy, Jr., was divorced from his wife. Thereafter their daughter, Edith Carpenter Macy, born about 1927, usually spent her summers with her father and the remainder of the time with her mother. *36 In 1939 the former wife remarried and went to Italy to *414 live, taking the daughter with her. As a result of a proceeding instituted in August 1941 in the Surrogate's Court of Westchester County, on behalf of the daughter, Valentine, J. Noel, and Carleton Macy were ordered to file an accounting as executors and trustees under the will of the decedent. On May 28, 1942, they filed in the Surrogate's Court a first and final account of their proceedings as executors and intermediate accounts of their proceedings as trustees covering, in the case of the executorship, the period from April 2, 1930, to February 17, 1942, and in the case of the trusteeships the period from January 1936 to February 17, 1942, together with a petition praying for a judicial settlement of said accounts. On July 7, 1942, the Surrogate appointed a special guardian to represent the nine infants, children of Valentine, J. Noel, and their sister, Edytha, and contingent beneficiaries of the "residuary trusts," who were parties to the accounting proceeding. Since at the time the accounting proceedings were instituted Edith Carpenter Macy was residing in Italy the accounting parties were required to serve *37 a citation upon the Alien Property Custodian. On December 15, 1942, the special guardian filed an intermediate report with the Surrogate's Court. On April 19, 1943, he filed with the court a second report and objections to the accounts of the accounting parties. Thereafter, on May 20, 1943, he filed with the court a third report and further objections to said accounts. On April 1, 1943, the Alien Property Custodian filed a notice of appearance in the accounting proceeding on behalf of Edith Carpenter Macy and on April 19, 1943, filed with the court on her behalf objections to the accounts of said executors and trustees. Thereafter, on May 24, 1943, he filed supplemental objections to said accounts. On June 28, 1943, the Surrogate Court appointed a referee to examine the accounts and objections to hear and determine all questions and to report to the court, subject to confirmation or modification by the court. The hearings before the referee on the trial of the issues raised by the objections commenced on July 7, 1943, and ended on December 19, 1944. For approximately eight months of that period hearings were held several times a week. In addition to making, in the main, the same*38 objections made by the special guardian the Alien Property Custodian made other objections. The objections as presented to the Surrogate Court related to matters involving about $ 18,000,000. However, during the course of the proceeding the special guardian as well as the Alien Property Custodian with the consent of the Surrogate Court, withdrew some of their objections. Only those not withdrawn are considered herein. During his lifetime the decedent made investments in various business enterprises and also invested in real estate. For a number of years prior to his death he engaged in the development and promotion *415 of various business enterprises and also acted as executor of several estates and trustee of a number of trusts. In 1917, as well as during the latter part of his life, the decedent's health was bad. In view of this and in order to consolidate in one holding company his interests in various business enterprises so as to facilitate their operation, management and further financing a corporation known as Hudson Company was organized by the decedent. Also in 1917 the decedent created three trusts for the benefit of his wife until her death, and thereafter, *39 respectively, his three children and certain remaindermen, and sometimes hereafter referred to as the "1917 trusts." The decedent, his wife, and Carleton were the original trustees. Following the death of the decedent's wife in 1925, Valentine was appointed a trustee in 1926 in her place. Upon the decedent's death in 1930 J. Noel was appointed a trustee to take his place and thereafter he, Valentine, and Carleton continued as trustees. The funds of each trust at the time of creation approximated $ 1,200,000 in value, and consisted of securities of corporations whose stock was closely held. At the time the decedent organized Hudson Company and created the trusts it was his expectation that the petitioners would become associated with Hudson Company after their graduation from college. Valentine entered the decedent's office in 1923. He devoted his full time thereto, familiarizing himself with the activities and problems of the various enterprises in which the decedent was interested, including Hudson Company and certain real estate companies. In 1924 he became a director of Hudson and vice president in 1925 or 1926. He had been a stockholder of the company since reaching his majority*40 in 1919 when he purchased stock in it for $ 160,000 with funds, the greater part of which he had inherited and the remainder of which had been given to him on his twenty-first birthday by his father. Prior to the decedent's death, J. Noel and Edytha acquired stock in Hudson with funds which, in part, had been inherited and, in part, had been received as gifts from the decedent. Early in 1924 the decedent owned stock in a corporation which published a newspaper known as "Yonkers Statesman" and was desirous that J. Noel start in the newspaper business. In January 1924, J. Noel began working for the "Yonkers Statesman," a daily paper, and thereafter worked in all departments of that publication. This employment continued until in the spring of 1926 when, as a step in a plan for establishing a group or chain of newspapers in Westchester County, the decedent bought three other daily papers known as "Tarrytown Daily News," "Ossining Citizen-Sentinel," and "Port Chester Daily Item." A portion of the purchase price of the *416 three papers was furnished by J. Noel. About the time of the acquisition of the three papers a corporation known as Westchester County Publishers, Inc., sometimes*41 hereafter referred to as Westchester Publishers, was organized. The three papers and the decedent's stock in the corporation which published the "Yonkers Statesman," were transferred to it for stock, a part of which was issued to J. Noel. J. Noel became president of the newly formed corporation, which in 1929 acquired for cash three additional daily papers, "Mt. Vernon Argus," "New Rochelle Standard Star," "Mamaroneck Times," and five weekly papers. The price paid for the chain was in excess of $ 1,500,000. In 1929 all of the papers in the chain were operating at a profit except the "Yonkers Statesman." The latter, due to competition from another paper in Yonkers, operated at a loss. Shortly after Westchester Publishers was organized, and in 1926 or 1927, J. Noel became a director of Hudson Company. Prior to the decedent's death he organized Hathaway Holding Corporation as a holding company for his various real estate interests. At the time of his death, Hathaway owned all the stock in Deed Realty Company which in turn owned all the stock in Chilmark Park Realty Corporation. Hathaway also owned the controlling interest in Hewlett Bay Company. Deed Realty Company was organized*42 by the decedent in 1904 and its principal business at that time was making mortgage loans and holding real estate which was not being actively developed. Hewlett Bay Company was organized by the decedent in 1907, and owned real estate at Hewlett Park on Long Island. At one time it owned about 700 acres of land. To the date of the decedent's death, it had made sales totaling about $ 2,500,000 and at that time had about 260 acres left. Deed Realty Company took mortgages on much of the land sold by Hewlett. The decedent owned a property known as "Chilmark" situated in Westchester County which he occupied as a residence and which consisted of more than 325 acres. In the early or middle 1920's he decided to sell off a portion of the acreage as part of a development. For that purpose, he organized Chilmark Park Realty Corporation and transferred a portion of the acreage to it, retaining the remainder, about 273 acres, until his death. At, and for some time prior to, the decedent's death, Valentine was an officer and a director of Deed Realty Company and Hewlett Bay Company, and continued as such after decedent's death. During his lifetime, the decedent maintained a large office *43 in New York City, from which he handled the properties which he owned and from which he also supervised and directed the affairs of those corporations controlled by him. The names of a number of such corporations, including Hudson Company and Hathaway Holding Corporation, appeared on the door of the office and also were shown in the directory of the building where the office was situated as being located *417 in the decedent's office. Valentine, J. Noel, and Carleton Macy continued to maintain the office after the decedent's death. The decedent's gross estate of approximately $ 36,317,000, as reported for Federal estate tax purposes, consisted of real estate of a value of about $ 900,000, mortgages, notes, cash, and miscellaneous property of about $ 813,000 and stocks and bonds of about $ 34,604,000. Of the latter amount the principal items were the decedent's stock holdings in Chilmark Company returned at a value of approximately $ 16,373,000, Hudson Company at $ 7,788,000, Vacuum Oil Company at $ 1,773,000, Standard Oil Company of New York at $ 1,625,000, Hathaway Holding Corporation at $ 1,467,000, and Westchester Publishers at $ 1,400,000. At the time of his death the decedent*44 owned all the stock, 1,000 shares, of Chilmark Company which constituted the largest single asset of his estate. The assets of this corporation consisted almost, if not entirely, of stock in various Standard Oil Companies and other oil companies. The executors dissolved the corporation and on November 29, 1932, took over its assets in dissolution. An objection made to the accounting of the executors with respect to this item was their conduct in the matter of the shrinkage of the assets of Chilmark Company from an inventory value of approximately $ 16,373,000 as of the date of the decedent's death to approximately $ 6,447,000 on the date of the liquidation of the corporation. While the value of the assets at the time so taken over is not disclosed the accounting shows that a loss in excess of $ 4,500,000 was sustained on the sale of the assets over the period from June 1933 to November 1940. On March 17, 1930, the directors of Chilmark Company declared a dividend of $ 160 per share payable April 1, 1930, to stockholders of record on March 26, 1930. In their accountings the executors and trustees treated the dividend of $ 160,000 as income. This was objected to on the ground *45 that the amount constituted corpus of the decedent's estate. At the time of the decedent's death the stock of Hudson Company and that of Hathaway Holding Corporation were owned as follows: Shares in Shares in Hathaway Hudson Holding Company Corporation (total (total number number of shares of shares outstanding outstanding 92,190) 921.9) Decedent 69,350 693.5 Valentine E. Macy, Jr 2,200 [22] J. Noel Macy [870] 8.7 Edytha Macy Lewis [950] 9.5 Valentine E. Macy, Jr. Trust Fund (1917) 6,250 62.5 J. Noel Macy Trust Fund (1917) 6,250 62.5 Edytha Macy (Lewis) Trust Fund (1917) 6,320 63.2 92,190 921.9 *418 In addition to his stockholdings in various other corporations the decedent owned at the time of his death 14,000 shares of preferred stock in Westchester Publishers. By reason of the decedent's ownership of this stock and since he owned approximately 75 per cent of the stock in Hudson Company which owned 14,600 shares of the preferred stock and 3,400 shares of common stock (no dividends having been paid on the preferred, that stock then had the only voting rights) in Westchester Publishers, the decedent had voting control of the *46 latter corporation. J. Noel also owned 250 shares of the preferred stock and 8,350 shares of common stock in the latter corporation. At the time of the decedent's death the Hudson Company also owned 6,200 shares of stock in Alabama Fuel & Iron Company, 4,115 shares of preferred stock and 600 shares of common stock in Rocky River Coal & Lumber Company, 19,800 shares of preferred and 5,055 shares of common stock in Millwood Corporation, 975 shares of preferred and 1,170 shares of common stock in American Kerament Corporation, 500 shares of class A stock and 625 shares of class B in Wildman Petroleum Corporation, 500 shares of preferred and 1,000 shares of common stock in Blue Diamond Service Corporation, and 6,880 shares of common stock (the controlling interest) in Chilton Pen Company, Inc. J. Noel owned 1,000 shares of stock in Alabama Fuel & Iron Company, $ 23,000 of 5 per cent bonds due in 1951 of Rocky River Coal & Lumber Company, 60 shares of class A stock and 75 shares of class B stock in Wildman Petroleum Corporation. Valentine owned 325 shares of preferred and 390 shares of common stock in American Kerament Corporation, 280 shares of class A stock and 350 shares of class *47 B in Wildman Petroleum Corporation, and 800 shares of common stock in Chilton Pen Company, Inc., which latter corporation was indebted to him in the amount of $ 25,000 on a loan. The business of Hudson Company was supervising, coordinating, directing, and financing the various corporations in which it was a stockholder. Rocky River Coal & Lumber Company owned in excess of 50,000 acres of coal lands in Tennessee. At the time of the decedent's death, it was operated as a lumber company and had sales of approximately $ 1,000,000 annually. The company went into bankruptcy in 1935, but Hudson's investment survived the bankruptcy. Millwood Corporation operated 20 to 30 subsidiary cotton and woolen mills located in eight or nine states and conducted a mill machine business in China, Japan, and the Philippines. In 1940 Hudson Company sold at a loss its stock in Millwood to the president of that corporation. The businesses in which Alabama Fuel & Iron Company, American Kerament Corporation, and Wildman Petroleum Corporation were engaged are not disclosed. The business activities of Blue Diamond Service Corporation and Chilton Pen Company, Inc., will be covered later. *419 At the*48 time of the decedent's death, there were owing to Hudson Company on loans to the following named parties the indicated amounts: Decedent $ 75,000 Deed Realty Co 420,000 Westchester County Publishers, Inc 153,000 Westchester Newspapers Securities Corporation 259,200 Chilton Pen Co., Inc 215,000 Hewlett Bay Co 60,000 Rocky River Coal & Lumber Co 21,000 Total $ 1,203,200 At the same time, Hudson Company owed to the following parties on loans the amounts indicated: Edytha Macy (Lewis) Trust $ 15,000 J. Noel Macy Trust (1917) 15,000 Westchester Newspapers, Inc 35,000 Chilton Pen Co., Inc 170,000 Total $ 235,000 The Corporations in which Hudson Company owned stock or to which it had made loans, or both, as shown above, comprised the principal companies in which Hudson was interested. During the periods covered by the accountings filed by the executors and trustees, the estate of the decedent made loans of substantial sums to Hudson Company which in turn not only made loans to or investments in the stock of corporations to which it had previously made loans or in which it had acquired stock, but also made loans of large sums to the petitioners in *49 their individual capacity. The petitioners individually purchased assets of the decedent's estate and in a number of instances assets of the estate were sold to corporations in which they were officers and directors. Throughout the period covered by the accountings of the executors and trustees the petitioners and Carleton Macy were officers of Hudson Company and comprised three of the possible five members of its board of directors. In April 1930, Hudson Company sold to Valentine at par ($ 100) 4,000 shares of the preferred stock which it owned in Westchester Publishers and in the same month sold to J. Noel 2,329 shares of the common stock it owned in that corporation. This purchase gave J. Noel the ownership of 10,679 of the 12,000 shares of outstanding common stock of Westchester Publishers. Between April and October 1930, Hudson Company sold to J. Noel at par 6,950 shares of the preferred stock it owned in Westchester Publishers. By the end of 1936, all of the foregoing shares of preferred stock had been sold back to Hudson Company at par, $ 1,095,000, but J. Noel Macy *420 retained the common stock he had purchased from Hudson Company. During the period of ownership*50 of the foregoing preferred stock by the petitioners and the periods covered by the accountings, Hudson Company made net additional loans of $ 1,199,500 to Westchester Publishers so that the indebtedness owing to Hudson Company had been increased from $ 153,000 at the time of the decedent's death on March 21, 1930, by $ 1,199,500, or to $ 1,352,500 on the date of the accountings, February 17, 1942. The $ 1,352,500, plus $ 1,095,000, the amount paid by Hudson Company in the purchase of the above-mentioned shares of preferred stock from the petitioners, resulted in Hudson Company having an investment in, and loans to, Westchester Publishers of a total of $ 2,447,500 at the date of the accountings. In 1939 Westchester Publishers began the publication of a new newspaper in White Plains, the county seat of Westchester County. In the early part of 1941 an offer was made to Westchester Publishers to sell to it a competing newspaper in White Plains. The offer was limited to a 3-day period. In order to enable Westchester Publishers to accept the offer and finance the purchase the petitioners, as individuals, made a temporary loan to it of $ 200,000, with the understanding that the loan *51 would be repaid as soon as a bank loan could be arranged. A loan of $ 200,000 was arranged by Westchester Publishers repayable in installments extending into December 1943 but the loaning bank required that all loans to that company by Hudson Company, and by the petitioners and their sister, individually, be subordinated to the bank's loan. On May 12, 1941, the directors of Hudson Company authorized the subordination of its loans to Westchester Publishers in the amount of $ 1,352,500 to the bank loan. With the bank loan the petitioners were repaid their temporary loan. Hudson Company's loans totaling $ 1,352,500 to Westchester Publishers remained unpaid on December 31, 1943. The accountings with respect to the Hudson Company's loans to, and investment in the preferred stock of, Westchester Publishers, were objected to on the ground that the loans had been made by a corporation controlled by the executors and trustees to a corporation controlled by one of their number individually, that the earnings history of the borrowing corporation (Westchester Publishers) was such that it was doubtful that the loans could be repaid from earnings for many years, that by reason of the subordination*52 such loans in effect had been frozen until after December 1943, and that the book value of the preferred stock was only about $ 19 a share indicating that the investment therein of $ 1,095,000 was of little or no value. At the time of the decedent's death Chilton Pen Company, Inc., sometimes herein referred to as Chilton Pen, had outstanding 12,800 shares of stock (common) of which 6,880 were owned by Hudson *421 Company and 800 by Valentine. At the same date Carleton Macy had made, or was committed to make, an investment of $ 250,000 in Chilton Pen. In addition to being indebted to Hudson Company on loans in the amount of $ 215,000 and having owing to it by Hudson Company an amount of $ 170,000 on loans, Chilton Pen was indebted to Valentine in the amount of $ 25,000 on loans. Chilton Pen was organized about 1928 by the decedent and Valentine to manufacture and sell a fountain pen with a new type of mechanism which was believed to have great potentialities. It operated until the beginning of World War II when it was closed down. Subsequently it was liquidated at a complete loss. During the 10-year period following decedent's death Chilton Pen had total sales in excess *53 of $ 1,000,000 and in one year they approximated $ 250,000. Throughout the existence of the corporation Valentine was a director and at one period was president and at another period was treasurer. At the time of the decedent's death the Hudson Company carried on its books at cost, 10 cents per share, its investment in the 6,880 shares of stock in Chilton Pen. In April 1930, shortly after the decedent's death, Valentine purchased from Hudson Company at 10 cents per share, or $ 688, the 6,880 shares of stock it owned in Chilton Pen. As a part of the transaction he also purchased at face value the indebtedness of $ 170,000 owing by Hudson Company to that corporation and assumed the payment of the indebtedness owing by that corporation to Hudson Company, $ 215,000 less a payment of $ 5,000 made on March 25, 1930, or $ 210,000. Thereupon he became the owner of 7,680 of the 12,800 outstanding shares in Chilton Pen. By March 1931, Chilton Pen had been reorganized and prior preferred stock of a par value of $ 490,000 issued to Valentine in payment or other disposition of loans by him to the corporation of a like amount. Upon completion of the reorganization Chilton Pen had no outstanding*54 indebtedness. During the years 1931 through 1936 Chilton Pen operated at a loss and on December 31, 1936, its liabilities exceeded its assets by more than $ 385,000. Beginning on November 10, 1936, Hudson Company made loans to Chilton Pen, one of which was for $ 248,000 on December 23, 1936. The following day, December 24, 1936, Valentine sold his prior preferred stock in Chilton Pen to Hudson Company for $ 490,000. Hudson Company continued to make loans to Chilton Pen so that on February 17, 1942, the date of the accountings, Chilton Pen owed Hudson Company $ 279,500. The balance sheets of Chilton Pen at December 31, 1941, showed assets of only $ 33,631.42, exclusive of good will and patent rights, and liabilities of $ 987,664.80. At no time did Hudson Company ever derive any income from its loans to or investment in Chilton Pen. *422 Upon the death of the decedent the petitioners and their sister each individually received approximately $ 500,000 in cash as the proceeds of life insurance policies on the decedent's life. Their purchases of stock in, or securities of, Chilton Pen and other corporations were a method by which they made their cash available to Hudson Company*55 or the decedent's estate so that readily marketable assets would not have to be sold to raise cash. Such purchases were made with an understanding that they could be reversed at any time on the same basis that they were made. The accountings so far as they involved Hudson Company's investment in the prior preferred stock of, and loans to, Chilton Pen were objected to on the ground "that the attempted development of an enterprise such as the one in question was speculative, improvident and beyond the proper limits of discretion of fiduciaries and because of the personal interest of one or more of the Executors in Chilton, it involved the question of divided loyalty." In an endeavor to improve the appearance of its pens and increase their salability, Chilton Pen developed a patented process for inlaying metals on plastics. The process had a use in other fields besides the pen business. In 1937 the petitioners and Carleton Macy caused Plastic Inlays, Inc., sometimes referred to as Plastic Inlays, to be organized to take over the patents and develop their use in other fields, which today include the automobile, radio, and television fields. On account of the war, Plastic Inlays ceased*56 operations early in 1942 but resumed them in 1945 and has continued in business. In so far as Plastic Inlays was involved, the accountings were objected to on the ground that Hudson Company had purchased the entire issue of capital stock of Plastic Inlays for $ 130,000 of which amount $ 123,500 was used by Plastic Inlays to purchase from Chilton Pen certain patents which Chilton Pen continued to carry on its balance sheet as its patents; that at no time had Plastic Inlays made a profit and on June 30, 1941, its operating deficit was $ 189,174.41; that on February 17, 1942, its outstanding and unpaid indebtedness to Hudson Company on loans was $ 210,000 and its latest available balance sheet (June 30, 1941) showed total assets of only $ 35,898, aside from patents and a small account receivable ($ 4,124); and that the launching of a new enterprise such as this was speculative, improvident, and beyond the proper limits of discretion of fiduciaries, and because of the personal interest in Chilton Pen of one or more of the executors and trustees the question of divided loyalty was involved. Blue Diamond Service Corporation, sometimes referred to as Blue Diamond, was engaged in making ready-mixed*57 mortar and cement for use in the building industry. Due to the decline of business in the building industry the corporation had difficulty in meeting payments *423 on mortgage indebtedness incurred in 1929 in connection with the acquisition of additional operating facilities and in the latter part of 1931 Hudson Company loaned it $ 10,000 to pay off a bank loan. Blue Diamond's business continued to decline until in the early part of 1933 the corporation reached the point where it could not continue operating without additional financial assistance. At that time Hudson Company acquired a controlling interest in the corporation and from then until September 1935 made additional loans to it totaling about $ 110,000. In September 1935 Hudson Company refused to make any further loans to the corporation and it thereafter in that year went into bankruptcy. The accountings were objected to on the ground that with respect to Hudson Company's loans to Blue Diamond, the last of which (stated to be in the total amount of $ 121,800) was made about a month preceding Blue Diamond's adjudication as a bankrupt, 90 per cent of the total was written off by Hudson Company in November 1935 as*58 worthless and the remainder written off in December 1937, and that such loans were speculative and improvident. In their accounting the executors reported the sale on April 7, 1930, by the estate of the decedent to Hudson Company of the following shares of stock at the indicated gain over the value at which such stocks were inventoried in the estate: Gain 3,500 shares Chase National Bank $ 2,625.00 12,000 shares Standard Oil Co. of New York 67,500.00 2,170 shares Title Guarantee & Trust Company 6,781.25 These sales were objected to on the ground that they were made to a corporation which was controlled by the estate or the executors and of which they were officers or directors. The executors showed in their accounting the purchase on April 25, 1930, by the decedent's estate from Hudson Company of the following named securities at the indicated amounts and the subsequent sale thereof on the indicated dates or period for the amounts indicated and at the losses shown: Purchase Date or period sold price $ 100,000 Philadelphia & Reading Coal & Iron Co. 6% bonds, due 3/1/49. $ 106,500.00 Oct. 1934 to Feb. 1936 $ 100,000 Seaboard All Florida Railway Co., 6% bonds due 8/1/35. 67,000.00 Dec. 1931 $ 330,000 Seaboard Air Line Railway Co., 6% bonds, due 9/1/45 240,000.00 Oct. to Dec. 1931 Total *59 Selling Loss price shown $ 100,000 Philadelphia & Reading Coal & Iron Co. 6% bonds, due 3/1/49. $ 38,155.29 $ 68,344.71 $ 100,000 Seaboard All Florida Railway Co., 6% bonds due 8/1/35. 786.25 66,213.75 $ 330,000 Seaboard Air Line Railway Co., 6% bonds, due 9/1/45 10,043.75 230,856.25 Total $ 365,414.71 The accounting was objected to on the ground that the losses were sustained on securities purchased from a corporation controlled by *424 the estate or the executors and of which they were officers or directors. With respect to the railway securities further objection was made on the ground that the transaction represented the continuance of a participation acquired by the decedent prior to his death in two syndicates managed by Dillion, Reed & Company for dealing in securities connected with the Seaboard Airline Railway Company, and that such continuance was an unwarranted speculative venture. Two related objections made to the accountings were with respect to interest payable to and payable by Hudson Company. One objection was that Valentine and J. Noel had not paid interest of $ 75,790.88 for 1936 on loans that had been made to them *60 individually, by Hudson Company. The other objection was to the payment to them by Hudson Company from January 1937 to February 1942 of interest of $ 160,866.02 on loans from them, individually, to it. The grounds on which these objections were based were that upon the purchase on December 24, 1936, by Hudson Company of 4,900 shares of Chilton Pen prior preferred stock for $ 490,000 and 500 shares of Westchester Publishers preferred stock for $ 50,000 from Valentine, and 6,950 shares of Westchester Publishers preferred stock for $ 695,000 from J. Noel, or for a total of $ 1,235,000, Valentine and J. Noel repaid to Hudson the loans owing by them, individually, to it in the amount of $ 1,285,000; that on January 8, 1937, Hudson repaid a loan of $ 1,350,000 owing by it to the decedent's estate; that the estate then distributed $ 1,120,000 as income to Valentine and Noel who then, individually, loaned $ 1,250,000 to Hudson; that if Hudson had used the $ 1,235,000, with which it purchased the stocks from Valentine and Noel, to pay on its loan from the decedent's estate, the latter would have been able to make the income distribution referred to, and Valentine and Noel could have repaid*61 the loans owing by them, individually, to Hudson and would not have then become creditors of Hudson but would have retained ownership of the stock which they sold to Hudson; and that accordingly the interest paid in the amount of $ 160,866.02 was unnecessary and need not have been incurred. The failure of the petitioners to pay interest to Hudson Company for 1936 came about in the following manner: In previous years Valentine and J. Noel had charged Hudson only 4 per cent on the loans they, individually, had made to it while on the loans they, individually, had obtained from it they had paid it 6 per cent. Concluding that they had been paying Hudson a higher rate of interest than they should have and rather than go back and adjust the interest so paid in the various years they decided that by paying no interest to Hudson for 1936 there would be effected a proper readjustment of the interest which they had theretofore paid. As heretofore set forth the executors of the decedent's will and the trustees of the "residuary trusts" were in 1930 and afterwards *425 also the trustees of the three "1917 trusts." An objection made to their accountings as executors and trustees was that*62 over the period from January 1931 through September 1937 the three "1917 trusts" had made loans to Hudson totaling $ 235,000 at 6 per cent interest on which total interest of $ 21,189.05 was paid by Hudson; that the loans were made at times when the trustees of the "1917 trusts" were the executors and trustees under the decedent's will, were directors and officers of Hudson and in control of its operations; that it did not appear that there was any reason for Hudson to have obtained the loans or that it gained anything by the payment of the interest; and that if Hudson had needed money it could have borrowed elsewhere at a rate of interest lower than 6 per cent. In their accounting for the three "residuary trusts" the petitioners and Carleton Macy, as trustees, showed that on May 27, 1937, each of the trusts loaned Hudson Company $ 100,000 at 2 per cent interest; that the loan by the trust for Edytha Macy Lewis was repaid in full by June 14, 1937, and that those by the trusts for Valentine and J. Noel were repaid in full by July 21, 1937; that on September 29, 1937, and October 1, 1937, the trust for Valentine loaned Hudson $ 25,000 and $ 50,000 respectively, at 4 per cent interest, *63 the total of which, $ 75,000, remained unpaid on February 17, 1942; that during the period September 29, 1937, through December 6, 1938, the trust for J. Noel loaned Hudson a total of $ 225,000 at 4 per cent interest of which $ 75,000 remained unpaid on February 17, 1942; and that on the foregoing loans Hudson paid the trusts to December 31, 1941, interest totaling $ 26,177.25. With respect to these loans the accountings were objected to on the ground that the interest so paid was income to the respective trusts and as such was distributed to the life tenants (the petitioners and their sister); that it did not appear that there was any reason for Hudson to have obtained the loans or that it gained anything by the payment of said interest. Hudson Company was originally organized with an authorized capital stock of $ 10,000,000 consisting of 100,000 shares of a par value of $ 100 each. On January 6, 1937, and while Hudson had outstanding the same number of shares as at the time of the decedent's death, 92,190, the corporation was recapitalized at $ 9,219 by a reduction of the number of shares to 9,219 and a reduction of the par value to $ 1 per share. The amount by which the capital*64 stock was so reduced, $ 9,209,781, was, by the terms of the amendment to Hudson's charter, to be transferred from capital to surplus. In the accounting for the decedent's estate the executors showed that in the years 1930, 1935, and 1937, the estate received dividends from Hudson totaling $ 323,902.98. In the accounting for the three "residuary trusts" it was shown that in the years 1937 and 1939 the trusts received dividends from Hudson totaling $ 25,415.83. The accountings were objected *426 to on the ground that these distributions totaling $ 349,318.81 were paid from principal and therefore were liquidating dividends, which, in the accountings, should have been treated as corpus and not as income. In their accounting the executors of the decedent's estate reported the receipt on March 15, 1935, of 4,506-50/75 shares of stock in Mission Corporation as an ordinary dividend on 84,500 shares of stock owned by the estate in Standard Oil Company of New Jersey. The market value of the Mission Corporation stock on the date of its receipt plus the gain realized in excess thereof on the sale of the stock three days later or a total of $ 43,849.86 was treated in the accounting as*65 income. Such treatment was objected to on the ground that the amount should have been treated as principal because the transactions occurred about five years after the death of the decedent and when the executors were practically acting in the capacity of trustees and that the decedent's will had provided with respect to the "residuary trusts" that dividends of such character should be treated as principal. In their accounting the executors reported the payment of a total of $ 23,559.55 as New York State income taxes for the years 1931 through 1940, and allocated $ 21,616.60 of that amount to income and $ 1,942.95 to principal. They also reported the payment of Federal income taxes for the same years of a total of $ 105,329.42, of which they allocated $ 92,042.43 to income and $ 13,286.99 to principal. The allocations were objected to on the ground that the New York State income taxes should have been allocated $ 22,073.40 to income and $ 1,486.15 to principal, that the Federal income taxes should have been allocated $ 103,809.67 to income and $ 1,519.75 to corpus, and that accordingly in the accounting a total of $ 12,224.04 had been incorrectly charged to principal. The executors*66 reported in their accounting the receipt on June 13, 1930, of interest in the amount of $ 123.33 for the period November 1, 1929 to June 13, 1930, on $ 5,000 par value of City Club of New York 4 per cent bonds due November 1, 1940, and owned by the decedent at the time of his death. They also reported the receipt on June 2, 1930, of $ 75 as "dividends" for the period November 15, 1929 to May 15, 1930, on $ 2,500 par value on National Employment Exchange 6 per cent Certificate of Contribution owned by decedent at the time of his death. The accounting was objected to on the ground that the $ 75 was interest and not dividends as reported and that $ 52.50 of that amount and $ 77.77 of the $ 123.33 or a total of $ 130.27 constituted principal and not income as shown in the accounting. As heretofore noted, the petitioners and their sister were each beneficiaries of life insurance policies on the decedent's life to the extent of approximately $ 500,000 each. In the Federal estate tax return *427 filed by the executors for the decedent's estate it was stated that there was no insurance on the life of the decedent receivable either by the estate or others than the estate. The accounting*67 of the executors was objected to on the ground that in the determination of the Federal estate tax insurance on the life of the decedent in the amount of $ 460,000 ($ 500,000 less exemption of $ 40,000 allowed by law) was included in the gross estate, that a tax of $ 16,423.70 was paid thereon and charged to the residuary estate instead of having been collected from the beneficiary or beneficiaries of the insurance since the decedent's will provided for the payment from the residuary estate of the inheritance or succession taxes on only certain designated specific legacies among which life insurance was not included. The accounting of the executors was objected to on the ground that during decedent's lifetime he created a trust known as the Westchester Welfare Trust, the principal of which, on the death of the decedent, passed to the petitioners and their sister; that in the determination of the Federal estate tax of the decedent's estate the principal of said trust was included in the gross estate of the decedent at the amount of $ 593,135.02 on which an estate tax was paid out of decedent's estate; that the portion of the estate tax attributable to such trust principal was $ 21,177.11, *68 and that since the trust principal did not pass under the will of the decedent the tax thereon should have been paid by the trust or the beneficiaries thereof individually. In their Federal estate tax return for the decedent's estate the executors included as part of the gross estate the following bonds at the indicated values: $ 25,000 Federal Land Bank 4 1/2 per cent due 1/1/33-43 $ 24,812.50 $ 50,000 City of Yonkers, New York 4 1/2 per cent due 2/1/38 51,375.00 $ 50,000 City of Syracuse, New York 4 1/2 per cent due 6/15/32 50,625.00 $ 75,000 County of Westchester, N. Y. 4 1/2 per cent due 6/1/40 76,593.75 In their accounting the executors showed the sale on April 1, 1930, the day preceding the issuance to them of letters testamentary, at the values reported for Federal estate tax purposes, of the first two blocks of the above-mentioned bonds and $ 25,000 of the last-mentioned block to Valentine and the remainder of the above-mentioned bonds to J. Noel. Objection was made to the accounting with respect to the foregoing sales on the ground that the sales occurred prior to the appointment of executors for the decedent's estate. The executors showed in their accounting*69 the purchase by the estate of the decedent in May 1930 of a total of 700 shares of stock in General Electric Company at a cost of $ 51,654.23 and the sale of the stock in June 1930 and October 1934 for a total of $ 45,065.92, or at a loss of $ 6,588.31. They also showed the purchase by the estate in May 1930 of 1,000 shares of common stock in United States Steel Corporation at *428 a cost of $ 171,250 and the sale thereof in January 1935 for $ 39,259.20, or at a loss of $ 131,990.80. The accounting further showed the purchase by the estate in July 1931 of 2,728 shares of stock in Vacuum Oil Company at a cost of $ 119,125.20 which in August 1931 were exchanged for 6,820 shares of stock in Socony-Vacuum Corporation and that in 1933 and 1934 6,800 of the 6,820 shares along with other estate holdings in Socony-Vacuum were sold at a total loss of more than $ 305,000. Objection was made to the accounting on the ground that the foregoing losses in excess of $ 138,500 resulted from the purchase of speculative securities by the executors. While the decedent's will provided a period of 5 years from the date of his death within which the executors might sell and dispose of his homestead*70 or resident property, "Chilmark," comprising about 273 acres, without liability or responsibility to anyone claiming under the will by reason of such delay, the only sale of the property during the 5-year period shown in their accounting was that of approximately one-fifth of an acre in September 1930 to Chilmark Park Realty Corporation for $ 520. Further sales shown were of fractional parts of an acre totaling about one and three-fifths acres made in 1937, 1939, and 1941, and a sale of 17 1/4 acres made on December 31, 1941. The remainder of the property, approximately 254 acres, was shown as conveyed and delivered on February 5, 1942, to the petitioners and their sister, individually, and the trustees of the three "residuary trusts." Although the "Chilmark" property was reported in the Federal estate tax return of the decedent's estate at a value of $ 831,600, the executors in their accounting showed its "value as determined for Estate tax purposes" as $ 450,000 in their inventory. The accounting showed the total net proceeds from the foregoing sales of portions of the property as $ 45,349.41 and a loss of $ 810.60 sustained on the sales. In addition to showing losses totaling*71 $ 50,595.26 on the demolition of buildings on the "Chilmark" property from October 1937 to the end of 1940 in order to effect savings in real estate taxes, the accounting showed the payment from April 29, 1930 through January 31, 1942, of $ 180,468.15 as real estate taxes on the property, $ 30,566.51 as insurance and $ 321,146.49 for maintenance, or a total of losses and payments of $ 582,776.41. Objection was made to the accounting on the ground that the "Chilmark" property was not sold within the 5-year period provided for in the will and that losses and expenses of $ 582,776.41 were incurred by the retention of the property for more than 11 years after the decedent's death. At the time of his death the decedent owned an improved property known as "Onteora" comprising about 572 acres situated outside Onteora Park, near Tannersville, New York, and sometimes referred *429 to as the summer home of the decedent. This property was reported in the Federal estate tax return for the decedent's estate at a value of $ 63,800. In their accounting the executors showed the sale of the property at auction on June 18, 1938, for $ 10,247 and at a loss of $ 53,553. They also showed the payment*72 from April 26, 1930, to the time of sale of $ 12,318.63 as real estate taxes on the property, $ 3,003.97 as insurance, and $ 21,633.23 for maintenance, or a total of $ 36,955.83. The accounting was objected to on the ground that the loss of $ 53,553 on the sale of the property and the expenses incurred of $ 36,955.83, or a total of loss and expenses of $ 90,508.83, resulted from the retention of the property for more than 8 years after the decedent's death. The decedent died owning 100 shares of common stock in Four East Sixty-Sixth Street Corporation, which owned a cooperative apartment building situated at the same address in New York City. While the stock was reported in the Federal estate tax return at a value of $ 150,000 it was shown at a value of only $ 100,000 in the executors' accounting where it was stated that the latter amount was the value at which it was appraised for estate tax purposes. The accounting showed that in connection with the acquisition of the stock the decedent on July 1, 1929, entered into a lease on one of the apartments, that the lease expired on September 30, 1935, whereupon the executors, along with other stockholders in an attempt to preserve their*73 interests in the property, renewed the lease for the 3-year period, October 1, 1935 through September 30, 1938; that the apartment building was subject to a first mortgage of $ 960,000; that the stockholders of the corporation on May 6, 1938, authorized the conveyance of the property to the mortgagee in consideration of the corporation's release from the first mortgage liability of $ 960,000; that in conjunction therewith and as of May 1, 1938, the executors entered into an agreement with the corporation whereby they surrendered to the corporation the unexpired lease and were released of further liability; that prior to the end of 1938 the apartment building which constituted the sole asset of the corporation was surrendered to the mortgagee; that thereupon the capital stock of the corporation became valueless and on December 31, 1938, the stockholders by unanimous consent dissolved the corporation. In the accounting it was stated that after the decedent's death the executors had attempted to dispose of the stock and to lease the apartment pending disposition of the stock but were unsuccessful except for the period of 6 months from November 1, 1935 to April 30, 1936, during which*74 it was rented for a total rental of $ 7,500. In addition to showing a loss of $ 100,000 sustained on the stock of the corporation the accounting further showed that during the period the lease, as renewed, was in effect, the executors incurred and paid with respect thereto the sum of $ 24,849.54 in excess of the *430 rental of $ 7,500 received by them. The accounting was objected to on the ground that the loss of $ 100,000 was sustained on the stock in the corporation because of its retention until it became worthless and that the further loss of $ 24,849.94 resulted from the renewal of the lease as of October 1, 1935. From the time in 1924 when J. Noel went into the employ of the corporation which published the "Yonkers Statesman" until the early part of 1932 that corporation operated at a loss, such loss amounting to about $ 250,000 in 1931. During the period 1926 to 1932 there developed a "competitive fight" between the "Yonkers Statesman" and the "Yonkers Herald," a competing newspaper in Yonkers, the expenses of which overshadowed the profits of the other papers in the Westchester County chain which operated in towns in which there was no competition. Prior to the death*75 of the decedent land was purchased in Yonkers by Deed Realty Company for the purpose of erecting thereon a new building for housing the operations of the "Yonkers Statesman." In 1931 the circulation of the "Yonkers Statesman" had increased to the point where it was impossible mechanically to produce the paper in its then quarters and Deed Realty Company erected on the land a new building to house the paper. Early in 1932 the publisher of the "Yonkers Herald" sold that paper to the corporation which published the "Yonkers Statesman" for about $ 1,250,000. In March 1932 the two papers were consolidated and over the remainder of the year operated at a profit of about $ 100,000. The accountings of the executors and trustees were objected to on the ground that Deed Realty Company had erected the building at a cost of $ 372,480.83; that since completion of the building it had been occupied by the Herald-Statesman, Inc., one of the Westchester County chain of newspapers; that on June 15, 1942, the Herald-Statesman, Inc., was in arrears of rent for 10 months and in the total amount of $ 25,000; and that the investment of $ 372,480.83 was improvident and, under the circumstances, was not*76 within the scope of discretion of the executors and trustees. In their accountings for the Valentine E. Macy, Jr., and J. Noel Macy "residuary trusts" the trustees showed the purchase from various persons outside the Macy group during the months of February through June 1941 of 282 shares of 7 per cent cumulative preferred stock in White Plains Publishing Company, Inc., (a subsidiary of Westchester Publishers) at a cost of $ 23,926.75 and 283 shares of the same kind of stock at a cost of $ 23,982.25 by the trusts, respectively. The accountings were objected to on the ground that the stock was in a corporation in which one or more of the trustees were in apparent control; and that commissions were paid on the purchase of the stock; and request was made that the trustees be required to divest the trusts of the shares and to reinvest the money in proper securities. *431 In their accounting the executors showed distribution, in 1937 and 1938, to the petitioners, individually, and their sister and to the trustees of the "residuary trusts," of all the shares of stock owned by the decedent at the time of his death in Hudson Company and Hathaway Holding Corporation and 13,950 of the*77 14,000 shares of stock in Westchester Publishers, the remaining 50 shares in the latter company being shown as sold in 1937 to the petitioners, individually, and their sister. Objection was made to the accounting on the ground that losses had been sustained by the retention and distribution to the legatees of the foregoing shares which had been inventoried at the values of $ 6,357,963.17, $ 1,022,856.18, and $ 630,000, respectively, or a total of $ 8,010,819.35 but were then worthless or of little ascertainable value. In addition to showing the distribution of the shares of stock in Hudson Company and Hathaway Holding Corporation set forth in the preceding paragraph the executors showed in their accounting the acquisition on April 22, 1941, and the distribution on April 24, 1941, to the petitioners, individually, and their sister and to the trusteees of the "residuary trusts" of 1,882 additional shares in Hudson Company and 188.2 shares in Hathaway Holding Corporation. These shares were shown as having been acquired at costs of $ 814,018.26 and $ 85,981.74, respectively, totaling $ 900,000, "in connection with the settlement of the accounts of the decedent as trustee" of the "1917*78 trusts." In explanation of the acquisitions by the decedent's estate of these shares, it was stated that no previous accountings having been had with respect to the three "1917 trusts" the trustees thereof (who in 1930 and afterwards were also executors of the decedent's estate) in 1938 filed voluntary accountings from the inception of the trusts in 1917; that as to the accounting for each of the trusts there were filed on behalf of infant remaindermen objections relating to various purchases and sales of securities by the trusts the more important of which had occurred during the life of the decedent; that the ground of such objections was that such purchases and sales had been effected with the decedent personally, or with the estate of decedent's wife of which he was executor and sole residuary beneficiary, or with Hudson Company in which the decedent owned the majority of stock; that since there was a question as to the applicability to the purchases and sales of the rule of law against a trustee dealing with himself either directly or indirectly and upon the advice of counsel a compromise settlement was entered into with the approval of the Surrogate Court whereby the decedent's*79 estate paid the amounts set forth above and received in exchange the above-mentioned shares of stock in Hudson and Hathaway; and that as part of said settlement the trustees (Valentine, J. Noel and Carleton Macy) waived all principal commissions then due them or thereafter to become due. *432 The accountings of the executors of the decedent's estate and of the trustees of the "residuary trusts" were objected to on the ground that the $ 900,000 had been paid from the funds of the decedent's estate by the accounting parties in settlement of an action against themselves and the decedent as trustees of the "1917 trusts" for mismanagement covering 13 years during the life of the decedent and 10 years thereafter when Valentine, J. Noel, and Carleton Macy were trustees; that decedent's estate was liable for only thirteen twenty-thirds of the $ 900,000, or $ 508,695.65, and the trustees of the "1917 trusts" (Valentine, J. Noel, and Carleton Macy) were liable for ten twenty-thirds, or $ 391,304.35; that as decedent's estate was distributable eight-eighteenths to his children and ten-eighteenths to the "residuary trusts" such trusts had been damaged to the extent of ten-eighteenths of *80 $ 391,304.35, or $ 217,391.30; and that the latter amount should be restored by Valentine, J. Noel, and Carleton to the decedent's estate. In the administration of the decedent's estate and the handling of the affairs of the "residuary trusts" Valentine, J. Noel, and Carleton Macy devoted most of their time and activities to separate phases of the matters involved but consulted with each other from time to time with respect to questions of policy. For a good many years prior to the decedent's death Carleton had been associated with the decedent in the handling of his affairs generally and for more than twenty years had been associated with the decedent in the real estate development at Hewlett Bay Park. In the administration of the estate and the affairs of the trusts, Carleton attended to matters relating to real estate and the affairs of those corporations whose assets consisted largely of, or whose activities related principally to, real estate. J. Noel attended to matters involving the various newspaper corporations. In addition to being president of Westchester Publishers until early in 1941, when he went into the Army, he was president of some of its subsidiary corporations. *81 During the illness of Valentine for six or eight months in 1938 or 1939, he devoted part of his time to the activities of the estate and the trusts which Valentine had been attending to. Valentine attended to those affairs of the estate and trusts which were not attended to by Carleton or J. Noel. His activities consisted of supervision of the corporations, other than newspaper or real estate, in which Hudson Company owned stock or to which it had made loans. He received regular and detailed financial reports from those corporations at least quarterly and in some cases monthly. He studied these reports, in many instances discussed them with J. Noel and Carleton, and if the results shown in the reports were not satisfactory he suggested changes in methods of operation to the executives of such corporations. *433 In some instances he was a director of such corporations and in others he was an officer. In all instances he followed their business closely, frequently visited the offices and properties of the corporations and discussed their problems with their executives. Shortly after J. Noel went into the Army in 1941, Valentine became president of the newspaper corporations*82 and supervised their activities. Aside from his activities as executor of the decendent's estate and as trustee of the "residuary trusts," the "1917 trusts" and of other trusts hereafter considered and apart from matters relating thereto, Valentine devoted an undisclosed amount of time to several corporations or enterprises which he was developing on his own individual account and to others which were being developed by him and J. Noel individually. On an average Valentine devoted about eight hours a day, from four to six days a week, to his activities in all capacities. J. Noel and Carleton devoted about the same amount of time to their respective activities. During the years 1924 through 1929, Valentine received a total of $ 43,500 as salary from Hudson Company. During the years 1930 through 1934, he received from that company a salary of $ 10,000 a year, or a total of $ 50,000 for the period. He also received director's fees in undisclosed amounts from Hudson Company. In addition, from about 1924 until about 1935, he was a director of Millwood Corporation, a corporation in which Hudson owned a substantial amount of stock, and of the principal six of Millwood's twenty to thirty*83 subsidiary corporations. He received director's fees in undisclosed amounts from Millwood and from most of its subsidiaries of which he was a director. To the date of the accountings, February 17, 1942, he received commissions of $ 210,000 as executor of the decedent's estate. Between April 1936 and February 1942, he received $ 126,758.14 as life beneficiary of one of the "residuary trusts." For three undisclosed years, but probably after 1932, J. Noel received a salary of $ 10,000 a year from Westchester Publishers. He also received, to the date of the accountings, commissions of $ 210,000 as executor of the decendent's estate. Between April 1936 and February 1942, he received $ 126,713.62 as life beneficiary of one of the "residuary trusts." From the date of the decedent's death until 1948, Carleton Macy received salaries totaling in excess of $ 280,000 from Hudson Company, the three operating real estate corporations -- Chilmark Park Realty Corporation, Deed Realty Company 1 and Hewlett Bay Company -- and maybe one or two other corporations. Except that of the foregoing amount $ 145,600 was received from Hudson during the period *434 of the accountings, the portions*84 of such total received in the various years from the different corporations are not disclosed. To the date of the accountings, he received commissions of $ 580,000 as executor of the decedent's estate. The accountings were objected to on the ground that during the period 1930 through 1941, in addition to the commissions received as executors of the decedent's estate in the amounts stated above, Valentine had been paid $ 50,000 by Hudson Company and Carleton Macy had been paid $ 253,800 composed of $ 145,600 paid by Hudson Company, $ 98,400 by Hewlett Bay Company, $ 6,500 by Chilmark Park Realty Corporation, $ 2,500 by Deed Realty Company, and $ 800 by Deed Realty Corporation, making total payments to them of $ 303,800; that keeping watch over the fluctuations in securities and changing investments and keeping watch over the affairs of the corporations*85 controlled by the estate were not services outside of the customary duties of executors; and that there was no evidence that substantial constructive services outside of the ordinary duties of fiduciaries had been rendered. The accountings for the "residuary trusts" were further objected to, in that objection was made to all transactions between those trusts and Hudson Company or other controlled corporations or other trusts of which the trustees of the "residuary trusts" were fiduciaries. In their accounting for the estate the executors computed and showed $ 1,853,986.14 as the amount of commissions due them. They also showed that of such amount $ 1,000,000 had been paid and stated that it was their intention not to apply for any commissions in excess of the $ 1,000,000 already paid. In their accountings for the three "residuary trusts" the trustees computed and showed a total of $ 212,441.88 as the amount of commissions due them on receiving the assets of the trusts, showed no commissions due them on the income of the trusts, and stated that it was their intention not to apply either for commissions as to principal on receiving assets or for commissions as to income. The accountings*86 for the estate and the trusts were objected to on the ground that the values shown for the assets distributed by the estate to the trusts were in excess of the market values of such assets on the dates of distribution and that this rendered excessive the amounts of commissions computed and set out in the respective accountings. A further objection to the accounting of the executors was that the executors should be denied all commissions (and be required to restore to the estate the $ 1,000,000 of commissions already taken by them) because of, among other things, their failure to account for more than 11 years; their lack of care and industry in permitting the shrinkage of more than $ 13,000,000 in the value of the assets of the *435 estate; their undertaking to develop and finance speculative enterprises; their wastefulness in maintaining Chilmark, the decedent's homestead; and of their personal transactions with the corporations which they controlled as executors of the estate. After the close of the hearings before the referee the possibility of settlement was discussed. An offer was made, with the approval of the special guardian, to the petitioners and Carleton Macy that*87 if they would pay $ 1,250,000 in equal amounts to the three "residuary trusts" the objections to their accounts would be withdrawn and the proceedings closed. In view of the fact that costs of upward of $ 250,000 had already been incurred and considerable time had elapsed, and in view of the further costs that would be incurred and the indefinite time that would probably elapse before a final adjudication by an appellate court, during which time the current activities of the executors and trustees would be subject to objection, and in view of the unfavorable publicity that would result and the adverse effect it would have on the business of the real estate and newspaper corporations if the proceedings were carried to a final adjudication by an appellate court, as well as the possibility that in the end they might still be surcharged, the petitioners and Carleton made an offer of settlement which was accepted and embodied in a stipulation of settlement and compromise dated January 2, 1945. The terms of settlement provided for the payment of $ 1,025,000 to the principal of the three "residuary trusts," to be apportioned equally between them of which amount Carleton would pay $ 300,000*88 in cash, Valentine would turn over $ 325,000 of indebtedness then owing to him by Hudson Company and J. Noel would turn over $ 400,000 owing to him by Hudson. On January 26, 1945, the referee filed with the Surrogate Court his report recommending that the accountings be settled in accordance with the stipulation and stating, among other things: It was not claimed that bad faith, improper motive or dishonesty was involved in the administration of the estate and the Referee certifies to the Court that there was no evidence submitted that would justify a finding that there was bad faith, improper motive or dishonesty. By order dated February 15, 1945, the Surrogate Court confirmed the report, approved the settlement as embodied in the stipulation and directed the carrying out of the terms of the settlement. On February 16, 1945, Valentine and J. Noel transferred Hudson Company's indebtedness to them, totaling $ 725,000, to the three "residuary trusts" in equal amounts of $ 241,666.67 each. This was accomplished by having Hudson issue and deliver its 4 per cent interest bearing promissory notes in the foregoing amounts, payable to each of the trusts. On the date of said notes, February*89 16, 1945, payments *436 thereon totaling $ 125,000 were made, followed by further installment payments until payment in full on May 15, 1946. The balance of the amount of the settlement, $ 300,000, was paid by Carleton Macy in cash, part of which was used to pay a portion of the expenses of the accounting proceedings. Another of the terms of the settlement was that the 282 shares of 7 per cent cumulative preferred stock in White Plains Publishing Company, Inc., (a subsidiary of Westchester Publishers) which had been purchased for $ 23,926.75 by the trustees of the residuary trust for Valentine E. Macy, Jr., and the 283 shares of the same kind of stock purchased for $ 23,982.25 for the residuary trust for J. Noel Macy be sold to Westchester Publishers at the foregoing amounts plus all unpaid accrued dividends on the shares. In carrying out the terms of settlement Westchester Publishers purchased the shares from the trusts. The expenses of the accounting proceedings were borne as follows: The three "residuary trusts" each paid one-third of $ 170,091.01 which was composed of $ 90,888.55 to the special guardian, his counsel and accountants, $ 3,000 to the person who had been appointed*90 to accept service for the minor children, $ 50,000 to the referee, and $ 26,202.46 to the attorneys for the executors; in addition, the residuary trust for Valentine E. Macy, Jr., paid $ 8,408.33 to the Alien Property Custodian; and the decedent's estate paid $ 58,912.56 for attorneys' fees, expert witnesses, special accountants, etc., making a total of $ 237,411.90. In addition to acting as executor of the decedent's will, Valentine has acted as trustee of the three "residuary trusts" since they were set up in 1936, except that in 1949 he, as well as J. Noel, resigned as trustee of the residuary trust for their sister, since which time that trust has been administered by a corporate trustee. Upon ceasing to be trustees of that trust each received commissions of $ 27,946.07. Valentine also acted as trustee of the following other trusts with the indicated approximate valuations for the periods and for the commissions indicated: Approximate Commissions Name of trust valuation Period served received Edytha M. Lewis (1917) $ 1,200,000 1926-1948 Waived in 1938 Valentine E. Macy, Jr. (1917) 1,200,000 1926-present accounting J. Noel Macy (1917) 1,200,000 1926-present proceedings. Valentine Everit Macy 1927-1930 Anna R. Hurlburt 1927-1932 Margaret Aspell 1,750,000 1927-1935 $ 36,079.63 Josiah Macy Willets -- 2 trusts 1927-1940 Kate M. Ladd -- 2 trusts 1927-1945 Beulah E. Everit 1927-present Kate M. Ladd 1,750,000 1933-1945 59,211.79 Total $ 7,100,000 $ 95,291.42 *91 *437 The eight trusts of which Valentine became trustee in 1927 were created by the will of his grandmother, Caroline Macy, who died in 1898. The decedent had been trustee of these trusts since 1901 and was the sole surviving trustee thereof for a number of years prior to 1927. In that year, the decedent decided to appoint Valentine as a trustee so that in event of the death of decedent there would be a surviving trustee who was familiar with the trusts and their investments. Each of said trusts terminated with the death of the beneficiary, Beulah E. Everit being the sole surviving beneficiary. The trust for Kate M. Ladd, of which Valentine became trustee in 1933, was created by the will of his grandfather, Josiah Macy, Jr., who died in 1876. Kate M. Ladd was the decedent's sister and at the time of the decedent's death he and Walter G. Ladd, Valentine's uncle, were the trustees of this trust. Upon the completion of an accounting for the trust in 1933, Valentine was appointed trustee and for several years following the death of Walter G. Ladd served as sole trustee. Kate M. Ladd died in 1945 and all trusts for her terminated with her death. In 1948 Valentine and J. Noel*92 resigned as trustees of the "1917 trust" for their sister and since that time that trust has been administered by a corporate trustee. Of the total corpus of approximately $ 3,500,000 of the trusts to which Valentine was appointed trustee in 1927 and 1933, respectively, some $ 1,000,000 to $ 2,000,000 represented real estate mortgage loans mostly in amounts of $ 50,000 or less. These required considerable supervision by Valentine to see that taxes were paid, violations were remedied, foreclosures were properly handled, that properties purchased at foreclosure sales were rented, that rents were paid when due, and that such properties were sold when possible. Due to numerous acquisitions of foreclosed properties, there was a period of from two to three years when rents were being collected from more than one thousand tenants. Valentine has never held himself out to the public as being willing to act as trustee, nor has he ever advertised that he was willing to act as such. In addition to acting as executor of the decedent's will, J. Noel has acted as trustee of the three "1917 trusts" since shortly after the death of the decedent, except that since 1948 he has not acted as trustee*93 of that one of those trusts which was for his sister, and has acted as trustee of the three "residuary trusts" since they were set up in 1936, except that since 1949 he has not acted as trustee of that one of those trusts which was for his sister. In his 1945 income tax return Valentine took a deduction of $ 325,000 on account of the amount paid by him in effecting a settlement of the accountings of the executors of the decedent's will and trustees of the *438 three "residuary trusts." In his 1945 income tax return J. Noel took a deduction of $ 400,000 for the same reason. In determining the deficiencies the respondent held that the amounts were not deductible under any of the provisions of section 23 of the Internal Revenue Code and disallowed the deductions. In acting as executors of the decedent's estate and as trustees of the residuary trusts the petitioners were engaged in carrying on a business. OPINION. The primary contention of the petitioners is that they were engaged in the business of acting as executors and trustees and that the amounts paid by them in order to settle the contest of their accountings constituted ordinary and necessary expenses incurred in carrying*94 on business or constituted losses incurred in business within the purview of section 23 (a) (1) (A) and (e) ( 1) of the Internal Revenue Code. 2 The respondent's position is that the petitioners' activities as executors and trustees were not the carrying on of a trade or business and, assuming they were, the controverted amounts were not ordinary and necessary expenses incurred in carrying on such business. *95 In support of their contention, the petitioners point to the various trusts of which they acted as trustees in addition to being executors of the decedent's estate, and rely on the holding in John Abbott, 38 B. T. A. 1290, that one who regularly engages in the business of serving for pay as trustee and executor and incurs and pays a liability growing out of the conduct of such business is entitled to deduct as a business expense the amount so paid. The petitioners further contend that an administrator's activities in handling a single estate may be of sufficient scope and duration to constitute his being engaged in a trade or business as administrator, and urge that aside from their trusteeships their activities as executors in administering the decedent's *439 estate were such as to constitute those activities the "carrying on" of a trade or business within the meaning of section 23 (a) (1) (A). For a number of years prior to his death the decedent had been engaged in the promotion and development of various business enterprises, including real estate. Among the principal assets of his estate were his controlling stock holdings in Hudson Company, *96 Hathaway Holding Corporation, and Westchester Publishers. He had organized Hudson Company in which to consolidate his interests in a number of enterprises and to facilitate their operation, management, and further financing. It was through this corporation that he supervised, directed, and financed such enterprises. Hathaway Holding Corporation held the stocks of operating corporations which the decedent had organized to deal in real estate and related matters in which he was interested, and through Hathaway he supervised and directed these enterprises. Westchester Publishers held the stocks of corporations engaged in the publication of newspapers and related business, and through Westchester Publishers the decedent supervised and directed such enterprises. Much of the financing of the real estate and newspaper enterprises was made through Hudson Company. For many years prior to the decedent's death, Carleton Macy, and for a number of years prior thereto the petitioners, had been closely associated with the decedent in handling the affairs of the various enterprises in which he was interested. Following the decedent's death the part that the decedent had had in the supervision, *97 direction and financing of the various enterprises passed to the petitioners and Carleton as executors. What theretofore had been the ultimate and final responsibility of the decedent with respect to his interests in the various enterprises became that of the executors. Referring to the various objections made to the contested accountings, the respondent makes considerable argument to the effect that although the petitioners were extremely busy throughout the period of the administration of the decedent's estate, they were not carrying on business as executors or trustees, but as individuals, outside of their authorized fiduciary duties. Prior to the decedent's death Valentine and J. Noel had become stockholders in Hudson Company and Hathaway Holding Corporation and J. Noel had become a stockholder in Westchester Publishers. Both had become directors in Hudson. Valentine had become an officer in Hudson and an officer and director of two of the real estate companies. J. Noel had become president of Westchester Publishers. Concededly, because of their stock ownership in the foregoing corporations, the petitioners had a direct personal interest in them and their affairs. Until*98 the death of the decedent, the controlling stock interest in the corporations was in the *440 decedent. Following his death that control passed to the executors, who were in control of his entire estate. And it was as executors that the petitioners operated, managed, and directed the various corporations, businesses, and enterprises in which the decedent's estate was interested. Such being the facts, it is of no consequence whether similar or further activities, based on their direct personal interests in such corporations, businesses, and enterprises, might or might not constitute the conduct of business within the meaning of section 23 (a)(1)(A). In further support of his position that the petitioners were not engaged in business as executors, the respondent cites and relies on the decisions in City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121, and United States v. Pyne, 313 U.S. 127. These cases stemmed from and were decided on the authority of Higgins v. Commissioner, 312 U.S. 212, wherein it was held that one who merely kept records and collected interest and *99 dividends from his securities through managerial attention for his investments and did not participate directly or indirectly in the management of the corporations in which he held stock or bonds, was not engaged in carrying on business for the purpose of the allowance of deduction for expenditures incurred in such activities. In the City Bank Farmers Trust Co. case, the Supreme Court concluded that the activities of the taxpayer-trustee were not materially different from those of the taxpayer in the Higgins case, and accordingly held that the taxpayer-trustee was not engaged in carrying on business. In the Pyne case, a decedent prior to his death was a financier and investor, and employed an office manager and an average of six clerks in the conduct of his affairs. The operations of his estate continued substantially the same after his death as before, with the executors continuing to conserve the assets, as the decedent had done during his lifetime, and protecting the income. In the administration of the estate the executors incurred attorney's fees for legal and economic advice, which fees they sought to deduct as ordinary and necessary business expenses, predicating*100 their claim therefor on the contention that the tremendous size of the corpus of the estate (approximately $ 35,000,000) and the proper administration thereof constituted the operation of a business. The Supreme Court concluded that the decision in the Higgins case was applicable and that the executors were not engaged in carrying on business. In reaching that conclusion, the Court stated that the activities of executors in conserving an estate and protecting its income are the traditional duty of executors, that in the absence of evidence showing activities coming within the general acceptance of the concept of carrying on a trade or business, it cannot be said as a matter of law that an executor comes into this category merely because he conserves the estate by marshaling *441 and gathering the assets as a mere conduit for ultimate distribution, and that the determination of what constitutes carrying on business does not depend on the size of the estate or the number of people whose services are required to conserve it. However, the Court further stated that while executors who actively engage in trade and business are the exception, and not the rule, rather obviously*101 there could be clear cases where executors carry on business by continuing to operate a store, a factory, or some other well known, well marked type of business activity. The situation here is materially different from those presented in the foregoing cases, relied on by respondent. Here the activities of the executors went beyond the mere collection of the income of the estate and conserving its assets. Upon the death of the decedent, the executors succeeded to the decedent's direction and control of a group of operating enterprises represented by Hudson Company, Hathaway Holding Corporation, Westchester Publishers, and their subsidiary companies, and as a result the executors became the directing heads of such enterprises and responsible for their operation. While each of the executors devoted the principal part of his fiduciary activities to a different group of the enterprises, they conferred regularly with each other and the three together determined the policies to be pursued with respect to each group. Their activities with respect to the various enterprises engaged a considerable amount of their time and attention over the period from their appointment on April 2, 1930, *102 to the date of their accountings, February 17, 1942, first as executors and then as trustees of the "residuary trusts" following distributions to the trusts in 1937 and 1938 of the Hudson Company, Hathaway Holding Corporation and Westchester Publishers stocks. The petitioners here were more than mere casual executors, as was found to be the case in Estate of Hyman Y. Josephs, 12 T. C. 1069. In our opinion, the scope and duration of their activities were such as to constitute those activities the carrying on of a trade or business and within the exception to the general rule, as enunciated by the Supreme Court in the Pyne case. Cf. John Preston Rice, 44 B. T. A. 749; Wallace's Estate v. Commissioner, 101 F. 2d 604. Accordingly, we have found as a fact that the petitioners, as executors, were engaged in the carrying on of a trade or business. A similar conclusion follows with respect to the activities of the petitioners as trustees of the residuary trusts. Beginning in 1936, the assets remaining in the residuary estate of the decedent were transferred to the three residuary trusts, *103 and, as those assets were so transferred, the business activities which had been carried on by the petitioners as executors of the Macy estate were thereafter conducted by them as trustees of the three trusts. There was, in fact, no break *442 in those functions and activities; prior to the transfers they were conducted by them as executors, and after the transfers, as trustees. The evidence, in our opinion, is clear on the point, and we have so found as a fact. It is next urged by the respondent that in any event the payments made by the petitioners, and here in question, were not such as to constitute them "ordinary and necessary" expenses in carrying on business within the meaning of section 23 (a) (1) (A). As authority for this proposition, he cites Commissioner v. Heide, 165 F. 2d 699, reversing 8 T. C. 314, relying particularly on the following language from the court's opinion: * * * Perhaps, when a man goes into the business of being a trustee, the occasional restoration of funds under his care made necessary because of sporadic neglect, may be "necessary expenses" incurred in "carrying on" the business. *104 That they are "incurred" in carrying it on is true enough; and, although it seems strange to think of them as "necessary," conceivably that may be permissible; such a business by hypothesis involves a number of separate trusts and some mistakes are probably inevitable. In the case at bar however, it is not enough that the expenses be incurred in carrying on the trust; it must be necessary to "the production of income," or possibly to the "management, conservation, or maintenance" of the fund, and it seems to us impossible to regard it as such. True, restoration does become necessary, once the fund has been depleted; but obviously that cannot be the test, else it would cover deliberate invasions, which nobody maintains. The depletion itself must be necessary to the production of the income, or the management of the trust, and that it cannot be, unless we hold that, when one who engages to become a trustee and fails in his duty, his failure is "necessary" to the discharge of his office; surely, it takes hardihood to suppose that, when Congress chose that word, it meant to subsidize delinquent trustees in this way. Delinquent they are; for, although they undertake no more than reasonable*105 care in the circumstances, by hypothesis they have failed even in that. The purpose of the provision, which applies to all sorts of income, is apparent; without it a person receiving income would be charged with his gross receipts, and would not be allowed to set off the expenses without which those receipts would not come to hand at all. That was an injustice comparable with charging the "amount realized" upon a capital gain and refusing to credit the "basis." But the expenses so deducted should not be within the power of the taxpayer to avoid; they should result from conditions which stand in the path of his "producing" the income at all, they should not be such as he interposes himself, as little so, when his attention has flagged as when he has been deliberately unfaithful to his trust. Recognizing, however, that the deduction claimed and dealt with in the Heide case was a deduction under section 23 (a) (2), not section 23 (a) (1), the respondent cites Bingham's Trust v. Commissioner, 325 U.S. 365, for the proposition that the two statutory provisions are "coextensive," except for the words "added to" section 23 (a) (2), and upon that basis*106 concludes that what was said in the Heide case "with respect to a trustee's duties and the meaning of 'necessary expenses' is equally applicable to section 23 (a) (1)," here under consideration. *443 While it may seem "strange," as suggested in the Heide opinion, to conclude that expenditures made by an individual in the course of his activities as an executor or trustee may be regarded as "necessary" within the meaning of section 23 (a) (1), where such activities constituted the carrying on of a trade or business, while the same or similar expenditures are not to be regarded as "necessary" within the meaning of section 23 (a) (2), to the "production of income," or to the "management, conservation, or maintenance" of the fund, the court itself limited the views expressed to the applicability of the latter section to the case before it and specifically refrained from expressing disagreement with John Abbott, supra, in which it was found and held that the activities of the taxpayer constituted the carrying on of business within the meaning of section 23 (a) (1). Furthermore, to say that an expenditure may not be regarded as "necessary" within*107 the meaning of section 23 (a) (1), even though made by a taxpayer in the conduct of the trade or business, unless it was an expenditure not "within the power of the taxpayer to avoid," must have resulted from conditions which stood "in the path of his 'producing' the income at all," and are not such conditions "as he interposes himself," could, in our opinion, result in an undue restriction of the deductibility of such expenditures contrary to the pronouncements in numerous decided cases and rulings. In Kornhauser v. United States, 276 U.S. 145, the claim was for the deduction of attorney's fees paid in the defense of a suit wherein it was charged that the taxpayer had wrongfully failed to account to a former partner for attorney's fees received during the existence of the copartnership. It was held that the fees paid in the defense of the suit were ordinary and necessary business expenses, and therefore deductible, even though it does not appear either in the opinion of the Court of Claims, which thought that the expenditure was personal and not deductible, or in the opinion of the Supreme Court, that the claim of the former partner was, or was*108 not, well founded or the expenditure one not "within the power of the taxpayer to avoid." In S. M. 4078, V-1 C. B. 226 (1926), mentioned with approval in Kornhauser v. United States, supra, a deduction described as one "which would be allowed without question" was that of "expenses incurred by a merchant in defending an action for personal injuries caused by one of his delivery automobiles." Such actions are normally based on a charge of negligence, the very essence of which is that by the exercise of reasonable care the injuries could have been avoided. In Henry F. Cochrane, 23 B. T. A. 202, it was held that an attorney was entitled to deduct as an ordinary and necessary expense incurred in carrying on a trade or business, an amount paid by him to a client in reimbursement of a loss sustained by the client as a result of the *444 negligence of the attorney in preparing an advertisement of property of the client which the client had employed him to sell. In Isaac P. Keeler, 23 B. T. A. 467, the taxpayer was a member of a partnership which transacted business with a corporation in*109 which he owned a small amount of stock. The taxpayer and certain officers of the corporation organized a new corporation, in which the taxpayer became a director and to which the partnership transferred its business. Suit was brought by the first corporation against the taxpayer and other officers for conspiring to injure it and build up a competing business. It was held that the attorney's fees paid by the taxpayer in defending the suit were ordinary and necessary business expenses. For a comparable case, in which attorney's fees were paid by a taxpayer who was an officer and director of a corporation in the defense of charges of breach of fiduciary duties, and such fees were held to be ordinary and necessary business expenses, see Hochschild v. Commissioner, 161 F. 2d 817. In Helvering v. Hampton, 79 F. 2d 358, it was held that an amount paid by a taxpayer, engaged in buying, selling, and leasing real estate, in settlement of a judgment against him and in favor of a lessee for fraud by the taxpayer in negotiating the lease, and expenses paid by the taxpayer in defending the suit constituted ordinary and necessary*110 expenses in carrying on business. In so holding, the court took the view that private wrongdoing in the course of business is not extraordinary within the meaning of the statutory provisions allowing deductions for "ordinary and necessary expenses" and concluded that even "if unethical conduct in business were extraordinary, restoration therefor is ordinarily expected to be made from the person in the course of whose business the wrong was committed." In Commissioner v. Heininger, 320 U.S. 467, the Supreme Court cited and predicated a portion of its reasoning on the holdings in S. M. 4078, Isaac P. Keeler, supra, and Helvering v. Hampton, supra. In John Abbott, supra, the taxpayer, who was regularly engaged in the business of acting as trustee and as executor, and his co-trustees loaned on various parcels of real estate sums of money in excess of the maximum amounts permitted by the trust instrument under which they were acting. Their action in this regard was made the basis of objections by the trust beneficiaries to an accounting of the trustees and*111 of a charge of breaches of trust. A settlement agreement between the trustees and the beneficiaries was entered into, whereby the trustees paid $ 17,500, of which the taxpayer paid $ 10,000, and the accounting was allowed. On authority of Kornhauser v. United States, supra, the amount paid by the taxpayer was held to be an ordinary and necessary business expense and deductible by him. On the evidence in the instant case, we have concluded and found as a fact that the activities of the petitioners as executors and trustees *445 constituted the carrying on of a business. The payments here sought to be deducted were incurred by them in the conduct of such business. The referee certified to the Surrogate Court that the contestants of the accountings of the petitioners, as such executors, and trustees, did not claim or show that there was bad faith, improper motive, or dishonesty on the part of the petitioners and Carleton Macy. They were not in any sense payments to cover willful or deliberate invasions of the trust corpus. In harmony and in keeping with the pronouncements in the cases discussed above, we conclude and hold that the payments*112 constituted ordinary and necessary expenses incurred by the petitioners within the meaning of section 23 (a)(1)(A). Decisions will be entered under Rule 50. Footnotes 1. On May 29, 1941, the name of Hathaway Holding Corporation was changed to Deed Realty Corporation and the three operating real estate corporations were consolidated with it.↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * * * * * (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. * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *↩