Hutchings v. Commissioner

EMMA BURT HUTCHINGS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hutchings v. Commissioner Docket No. 37900. United States Board of Tax Appeals 20 B.T.A. 1227; 1930 BTA LEXIS 1949; October 10, 1930, Promulgated *1949 1. Fee paid to counsel in a will contest and settlement thereof is not deductible from gross income. (Marion Stone Burt Lansill et al.,17 B.T.A. 413.) 2. Attorney fee, paid in the defense of a suit claiming the right to receive one-half of the net proceeds of leased lands in which the petitioner owned an undivided one-sixth interest, is not a deductible expense where the suit was not directly connected with or proximately resulted from petitioner's business. (Kornhauser v. United States,276 U.S. 145.) 3. Amount paid for attorney fees and expenses in the preparation of petitioner's income-tax return disallowed as a deduction. Ward Loveless, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. ARUNDELL *1228 Proceeding for the redetermination of a deficiency in income tax for the years 1924 and 1925 in the respective amounts of $547.01 and $469.31. The errors alleged and not waived at the hearing are the failure of the respondent (1) to allow as a deduction in 1924 and 1925 attorney fees amounting to $3,246.58 and $19,089.82, respectively, and (2) to allow as a deduction in*1950 1925 the sum of $152.91 paid to an attorney for services rendered and expenses incurred in the preparation of her income-tax return for 1924. The facts were stipulated. FINDINGS OF FACT. The petitioner's father, Wellington R. Burt, of Saginaw, Mich., died March 2, 1919, leaving a large estate, consisting principally of stock and bonds and valuable iron ore lands in Mesaba Range, Minn. Surviving him as his only heirs at law were his four children and the descendants of two deceased children. The testator's surviving children promptly attacked the validity of the will in the probate court of Saginaw County, Michigan, on the grounds that the accumulations provided for therein were contrary to law and that the testator lacked testamentary capacity. The case was certified to the Circuit Court of Saginaw County and after it had been virtually prepared for trial in that court, a compromise agreement was executed on July 1, 1920, among the heirs at law, other legatees (those two groups being all the legatees whose rights were affected), the trustee and executor, and the cotrustee. The compromise agreement provided, among other things, as follows: All unleased lands in the*1951 State of Minnesota, belonging to said estate, particularly described in Schedule 1 hereto attached, and all proceeds derived therefrom after January 1st, 1920, if any, shall be the absolute property of the parties of the first part [heirs at law of testator], to be held by them respectively in six equal undivided interests, with full power to dispose of the same. The one-sixth interest represented by the three (3) children of Charles W. Burt, deceased, to be held by them in equal undivided interests. All the estate's Minnesota lands now under lease, hereinafter particularly described, the ore therein, and the Estate's interest in the leases thereon shall - subject to the rights of said party of the third part [executor and trustee], described in Section 6 of this agreement - and all the proceeds from ore mined thereon or otherwise derived from said land after January 1st, 1920, shall likewise (subject to the said above mentioned rights of said party of the third part) be the *1229 absolute property of the said parties of the first part and be owned and held by them in six (6) equal undivided shares as above stated, with full power to dispose of the same, subject only to*1952 the above described rights of the party of third part. Section 4 obligates each of the heirs to pay his proportion of Federal and State estate taxes and the succeeding section makes provision for the payment of the charges in the first instance by the executor or trustee out of specified funds of the estate. SECTION 6. To secure the payment to said party of the third part of the indebtedness described in Section 5 of this Agreement, said party of the third part and its Co-trustee George B. Morley, and their successors in trust shall be vested with the legal title in trust to all of the estate's Minnesota leased lands described in Section 3 of this Agreement and the ore therein (subject to the lessee's right therein) with the right to sell the same in the manner and form, and under the conditions hereinafter described, and with the right to modify the existing royalty leases or to make new royalty leases, in the manner and under the conditions hereinafter described, and with the right to collect, apply and distribute the royalties accruing on any and all of said leases (or the proceeds of sale, in case a sale is made), in the manner hereinafter described. Said party of the third*1953 part shall, during the continuance of the existing leases described in Section 3 of the Agreement, collect the royalties accruing thereon, and shall, after deducting its own compensation and disbursements as in Section 8 of this Agreement provided, retain therefrom sufficient to pay and apply the same in paying the interest and any matured installments of indebtedness described or mentioned in Section 5 of this Agreement and distribute and pay over the balance to the parties of the first part, their heirs, representatives and assigns, quarterly - as said royalties are received - in accordance with their individual rights therein. * * * Said party of the third part, by and with the written consent of four-sixths in interest of the parties of the first part, their heirs, representatives or assigns, in said leased land and the ore therein, is hereby empowered and obligated to make and execute an agreement with either of the lessees, their successors or assigns, of the existing leases of the leased Minnesota lands described in Section 3 of this Agreement, whereby such lessees may have a longer time to remove the ore situated therein. No such extension of such lease or leases shall be*1954 made beyond January 1, 1975. * * * Said party of the third part is further vested with all powers of managing said leased land and ore, and all other powers necessary or needful to enable it to execute all or any of the foregoing powers, and to preserve and protect its security, and to safeguard the rights of said parties of the first part, their heirs, representatives and assigns, in the premises, and to insure a full compliance by any lessees, their successors and assigns, with the terms and conditions of all or any of the leases hereinbefore described or hereafter made, including the right to terminate said leases, or any of them, for any sufficient legal reason. On July 27, 1920, the court made a decree ordering the will and codicils thereto, as modified by the compromise agreement, admitted to probate, and held the said agreement to be valid and binding upon the parties thereto. No appeal was taken and the decree became final. Pursuant to this judgment of the Circuit Court, an order *1230 was subsequently entered in the probate court admitting to probate as the will of Wellington R. Burt the will and codicils thereto, as modified by the compromise agreement. *1955 The attorney who represented the heirs at law in the will contest and settlement was employed under an agreement executed on March 15, 1919, under the terms of which agreement he and his associates were to receive from said heirs as compensation for representing them, a sum equivalent to 10 per cent of the full amount received in money or property, but not in excess of $1,000,000 if the money and property received did not exceed in value $15,000,000, and if it exceeded $15,000,000 they were to receive as additional compensation 5 per cent of the value of money and property received in excess of that sum. By the terms of a supplemental employment agreement executed on October 3, 1919, the attorney was to receive 10 per cent of any sum derived by the heirs at law from the mining properties of the estate in Minnesota. On or about July 9, 1920, the heirs executed orders directing the trustee and executor of the estate to pay their attorney in the will contest and settlement thereof, the fees provided for in the employment contract of March 15, 1919, as modified by the agreement of October 3, 1919. The orders on the trustee and executor were made irrevocable by instruments executed*1956 on July 30, 1920. Pursuant to the terms of the order executed by the petitioner, the trustee and executor in 1924 paid to the attorney the sum of $3,246.58, which amount respondent refused to allow as a deduction from petitioner's gross income. At some time not stated in the stipulation suit was instituted by Henry Gamble against the petitioner, together with other heirs of the testator and the executor of the estate, for an accounting of the property received from the testator. Gamble claimed to own one-fourth of the net proceeds derived from certain leased property in Minnesota and sought to have the court adjudge to him one-fourth of the net proceeds derived from said property before the death of the testator and thereafter so long as any proceeds were received from the lands. He also sought to have a receiver appointed to take charge of the properties and distribute the proceeds. The heirs and the executor defended the suit with the result that the bill of complaint was dismissed on the ground that the alleged contract forming the basis of Gamble's claim was forgery. In 1924 and 1925 petitioner received amounts paid to her pursuant to the provisions of the compromise*1957 agreement of July 1, 1920. A portion of the amount so received was derived from the leased property concerning which the Gamble suit was instituted. In 1925 the petitioner paid as attorney fees and expenses in connection with the Gamble suit the sum of $19,089.82, which amount respondent *1231 declined to allow as a deduction in determining the amount of her income tax for 1925. Petitioner in 1925 paid the sum of $152.91 for attorney fees and expenses in connection with the preparation of her income-tax return for 1924. The respondent refused to allow the expenditure as a deduction from gross income. Petitioner kept her books and filed her income-tax returns on the cash receipts and disbursements basis of accounting. OPINION. ARUNDELL: At the hearing the petitioner waived the issue raised as to the respondent's disallowance of depletion for the taxable years in the respective amounts of $19,626.62 and $21,591.68. The deductibility of fees paid the attorney by the trustee on the orders of the petitioner and other heirs at law of the testator in years prior to 1924 under the contracts of employment was at issue in *1958 , wherein, after a full consideration of the question, the conclusion was reached that the respondent was right in refusing to allow the amounts as deductions. That decision and , reversing in part , control the issue for the year before us in this proceeding. Subsequent to the settlement of the will contest the heirs at law and the executor and trustee of the testator's estate were made defendants in a suit in which the complainant claimed the right to a portion of the proceeds of the leased lands acquired by the heirs as the result of their contest of the testator's will. The petitioner paid as attorney fees and expenses in the successful defense of the action the sum of $19,089.82, which amount she is claiming as a deduction on the theory that it is a business expense. In deciding in , that the counsel fees paid prior to 1924 under the contracts of employment were not deductible, we said that the petitioners were only "passive recipients of royalties" and held that*1959 they were not engaged in carrying on a trade or business. Nor was petitioner's situation different in 1924 and 1925. The leased ore lands out of which the suit arose were, in 1925 and prior thereto, managed by the executor and trustee of the estate for the account of the parties in interest. So far as the record discloses, petitioner merely received proceeds from properties to the operation of which she gave none of her time. The expense, like the one in , falls "within those general costs of protecting one's property for which the statute makes no allowance." Only where a suit or action against a taxpayer is directly connected with or proximately *1232 resulted from his business may a fee paid to an attorney in connection therewith be regarded as a business expense and deductible as such under section 214(a)(1). . Having concluded that the petitioner was not engaged in a trade or business, it follows that the amount expended in the preparation of her income-tax return for 1924 is not a deductible item. *1960 ; . Decision will be entered for the respondent.