Livingood v. Commissioner

CHARLES J. LIVINGOOD, EXECUTOR OF THE WILL OF MARY M. EMERY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Livingood v. Commissioner Docket No. 40899. United States Board of Tax Appeals 25 B.T.A. 585; 1932 BTA LEXIS 1504; February 23, 1932, Promulgated *1504 Held that attorney fees incurred in connection with a proceeding in court to partition certain properties and in other matters growing therefrom were not deductible as ordinary and necessary expenses paid or incurred in carrying on a trade or business. John H. More, Esq., for the petitioner. Arthur H. Fast, Esq., for the respondent. VAN FOSSAN *585 On August 9, 1928, the respondent notified the petitioner of deficiencies in the income taxes of Mary M. Emery, deceased, for the years 1924 and 1925, amounting to $57,497.70 for the year 1924 and $22,722.73 for the year 1925. This proceeding was brought for the redetermination of these deficiencies. The issues are (1) whether or not the respondent erred in disallowing all deductions for contributions made by the taxpayer in the years 1924 and 1925; (2) whether or not the respondent erred in disallowing as a deduction from gross income for 1925 the amount of certain attorneys' fees paid by the taxpayer in that year. An issue as to the constitutionality of section 208(c) of the Revenue Act of 1924 has been withdrawn by the petitioner. In the notice of deficiencies mailed to the petitioner*1505 by the respondent the latter made the following statement in connection with his disallowance of any deduction on account of the decedent's contributions during the taxable years: Inasmuch as losses resulting from the sale or exchange of capital assets are deductible under section 214 of the Revenue Acts of 1924 and 1926 and enter into computation of the net loss that is deductible under section 206 of the Revenue Acts of 1924 and 1926 it follows that such losses can not be excluded in computing the net income for the purpose of determining the amount of charitable contributions that are deductible under section 214(a)(10) of the Revenue Acts of 1924 and 1926. In connection with the disallowance by him of the deduction from gross income for 1925 of the amount of attorneys' fees hereinbefore *586 referred to, the respondent, in the notice of deficiencies, stated, among other things, that he held that the legal fees in question were not ordinary and necessary business expenses and therefore are not deductible from gross income. The parties entered into a written stipulation of facts, reserving therein the right to introduce other and further evidence not inconsistent with*1506 the facts stipulated. FINDINGS OF FACT. Included in the facts stipulated were the following material facts: On March 14, 1925, the taxpayer filed an income-tax return covering the calendar year 1924, and on March 15, 1926, the taxpayer filed an income-tax return covering the calendar year 1925. The contributions made by the petitioner for the calendar years 1924 and 1925 are of a nature specified as allowable deductions under section 214(a)(10) of the Revenue Act of 1924. These contributions amounted to $140,000 for the year 1924 and to $90,433.34 for the year 1925. The ordinary net income of the taxpayer for the calendar year 1924, without reflecting any deductions for contributions, is $769,143.38. The taxpayer's capital net loss for the calendar year 1924 is $854,671.71. The taxpayer's ordinary net income for the calendar year 1925, without reflecting any deduction for contributions or for disputed attorneys' fees, is $482,509.11. The capital net loss of the taxpayer for the calendar year 1925 is $520,198.03. The ordinary net income stated by the taxpayer in computing the tax for the year 1924 was $647,051.12. The ordinary net income of the taxpayer as adjusted*1507 by the respondent in computing the deficiency in tax for 1924 was $769,143.38. The ordinary net income stated by the taxpayer for the purpose of computing the tax for the year 1925 was $385,187.41 and the ordinary net income as adjusted by the respondent in computing the deficiency in tax for the year 1925 was $482,509.11. The ordinary net income used by the respondent in computing the deficiency for each of the years in question is without any deduction for contributions. In determining the total tax for each of the taxable years the respondent computed the normal tax and surtax on the ordinary net income, adjusted without deduction on account of contributions, and from the total so computed deducted 12 1/2 per centum of the capital net loss for the respective years. The amount of disputed attorneys' fees in the calendar year 1925 is $16,203.53. From the pleadings and the evidence we find the following additional facts: *587 The petitioner is the duly qualified executor of the last will of Mary M. Emery, deceased, who died on October 11, 1927. Thomas J. Emery, the husband of Mary M. Emery, deceased, was in equal partnership for many years with J. J. Emery, his*1508 brother, under the partnership name of Thomas M. Emery Sons. The business was a continuation of a business established by Thomas M. Emery, who had been engaged in the making of tallow candles, stearic acid and other by-products. After the death of Thomas M. Emery his sons not only continued the business founded by him, but also engaged in real estate operations, and during the course of such operations acquired large real estate and security holdings in Cincinnati, Ohio, and other large cities of the United States. Upon the death of Thomas J. Emery, son of the founder of the business, his estate, including his share in the partnership of Thomas M. Emery Sons, was left to his widow, Mary M. Emery, now deceased. Upon the death of J. J. Emery his estate, including his share in the partnership was left in trust to the Girard Trust Company. For some time thereafter Mary M. Emery and the Girard Trust Company, as trustee, continued to operate the properties on an equal partnership basis. In 1924 and 1925 the decedent, Mary M. Emery, was approximately 81 years of age. She was devoting most of her time to charitable and philanthropic work and contemplated giving most of her property*1509 to charities by her will. At that time the interest of J. J. Emery, deceased, was actually managed on behalf of the Girard Trust Company by John J. Emery, a young man of about 32 years of age. Mary M. Emery desired to consolidate her interest so that she could devote her capital and income to charitable and philanthropic work and could more easily dispose of her capital by will. The Girard Trust Company on the other hand and the beneficiaries of the trust established by the will of J. J. Emery desired to change the method of management of their properties by placing them in a separate group. It was therefore agreed by Mary M. Emery and the Girard Trust Company to partition the property and dissolve the partnership. It was stipulated at the hearing by counsel for the parties that the partition of the property was consummated by the following general method: The Girard Trust Company formed a corporation called Thomas Emery Sons, Incorporated, and entered into an agreement with it to convey to it, subject to the approval of the court, all the property in which it held an undivided interest with Mrs. Emery, in return for the transfer to it of all the stock of the corporation, *1510 and Mrs. Emery entered into an agreement with the corporation to transfer her undivided interest except twelve parcels and the corporation agreed to transfer to her the undivided interest in these twelve parcels which it was to receive from the Girard Trust Company. The Girard *588 Trust Company then filed suit in the probate court of Hancock County, Maine, the domicile of J. J. Emery, deceased, and in the Common Pleas Court of Hamilton County, Ohio, to secure the permission of the court to carry out these transactions. The will of J. J. Emery by which the Girard Trust Company had been appointed trustee of his estate contained the following provision: Exclusive of the sum set apart in special trust for my children I direct my trustee to hold, invest and to keep invested and manage according to his discretion and judgment all the remaining real and residue of my estate both real and personal with authority to change investments when, in his judgment, necessary and expedient and to sell and convey real estate or any part thereof and no purchaser shall be required to see to the application of the purchase money. Upon making the agreement with the Girard Trust Company for*1511 partition of the property, as hereinbefore stated, the decedent, Mary M. Emery, engaged counsel in New York and Cincinnati to act for her in connection with the execution of the agreement. Proceedings were brought by the Girard Trust as petitioner in the State of Ohio and the State of Maine to secure approval of the proposed partition. In its petition to the court in the State of Ohio the petitioner stated that it desired to secure a construction of the will by the court as authority "to convey the premises herein referred to in the manner hereinbefore set forth so as to protect this petitioner, the plaintiff in the premises, and give perfect title to the real estate thus conveyed." Both the Common Pleas Court in the State of Ohio and the Probate Court in the State of Maine approved the transaction. Fees in the amount hereinbefore stated were paid by Mary M. Emery to her counsel in New York and Cincinnati for their services in connection with the partition of property effected as aforesaid. After the properties were partitioned they continued to be managed by Thomas Emery Sons, Inc. Mary M. Emery, now deceased, then caused the organization of an Ohio corporation (without profit) *1512 known as the Thomas J. Emery Memorial, for the purpose of continuing the charities and philanthropies in which she was interested. By her will this corporation was named as residuary legatee for charitable purposes. OPINION. VAN FOSSAN: The first issue for consideration is whether or not the respondent erred in disallowing for each of the taxable years any deduction on account of contributions which, as stipulated, were of the character specified in section 214(a)(10) of the Revenue Act of 1924. *589 It appears from the stipulated facts that the decedent's contributions amounted to $140,000 in 1924 and for the year 1925 were $90,443.34. In each of those years the amount of decedent's capital net losses exceeded the amount of her ordinary net income. The respondent computed the deficiency in each year by a calculation based on an amount of net income which did not reflect any deduction on account of decedent's contributions in the respective years. The facts disclose that while the respondent held in effect that the decedent had no net income in either of the taxable years in question from which any amount on account of contributions was deductible, nevertheless, *1513 he computed a large net taxable income for each of the said years. The contributions on account of which no deduction was allowed were of the character specified in section 214(a)(10) of the Revenue Act of 1924. It was conceded by counsel for the Government that this issue had been decided adversely to his contention by the Board in , and that if that decision be adhered to it was controlling. In that case we said: It is untenable to say that for the purpose of computing a tax liability this petitioner has a net income of $113,151.98 and that at the same time she has no net income for the purpose of computing the amount allowable as a deduction for contributions. The Elkins decision represents the deliberate judgment of the Board and is controlling on the issue under discussion. The petitioner is entitled to a deduction on account of the decedent's contributions not exceeding 15 per cent of $769,143.38 for the year 1924, and 15 per cent of $482,509.11 for the year 1925. The remaining issue relates to the respondent's disallowance of certain attorneys' fees paid by the decedent in the year 1925. The question is whether*1514 or not these fees were usual and necessary expenses incurred by the decedent during the year 1925 in carrying on any trade or business as provided by section 214(a)(1) of the Revenue Act of 1924. That the decedent had been engaged in carrying on business, at least constructively, previous to the completion of the transaction hereinafter referred to is clearly disclosed by the evidence. She owned an undivided one-half interest in a business concern known as Thomas M. Emery Sons. The other undivided one-half interest was owned by the Girard Trust Company as trustee. Thomas M. Emery Sons was engaged in real estate operations as well as in other business. However, it does not necessarily follow that the attorneys' fees in question were a usual and necessary expense of carrying on any trade or business engaged in by the decedent. It appears that in 1924 and 1925 she was about 81 years of age and was devoting her activities to philanthropies, while her *590 interest in Thomas M. Emery Sons was managed on her behalf by a representative. She wished to consolidate her interests and to secure sole title to properties in which she then owned an undivided one-half interest in order*1515 that she might more easily and certainly manage them and dispose of them by will for the benefit of the philanthropies in which she was interested. At the same time the coowner of Thomas M. Emery Sons, namely, the Girard Trust Company, as trustee, desired to consolidate the management of its interest in that concern. To accomplish the desired end the agreement described in the facts was entered into by the decedent and the Girard Trust Company, as trustee, and pursuant to the agreement proceedings were initiated in the proper courts which secured approval by those courts of the conveyance by the Girard Trust Company as trustee of the properties in which it held an undivided one-half interest. The Girard Trust Company was the petitioner in the proceedings in court and the decedent was a party defendant. In the petition in one of these proceedings it was stated in substance, among other things, that the proceeding was brought to give "perfect title" to the realty to be conveyed. As a result of the agreement and court proceedings the decedent became the owner of 12 parcels of real estate of which previously she had owned only an undivided one-half interest. The attorneys' fees in*1516 question were paid by the decedent for services related to the agreement and the court proceedings. Upon the completion of this transaction the decedent caused an Ohio corporation, without profit, known as Thomas J. Emery Memorial, to be organized for the purpose of continuing the philanthropies in which she had been interested and by her will this corporation was named as a residuary legatee for charitable purposes. In our opinion it is clear that the attorneys' fees were not paid as an expense of the conduct of any trade or business which the decedent was carrying on. The transaction in connection with which the attorneys were employed was entered into by the decedent to further her own personal purposes. It does not appear that the completion of this transaction added anything to the decedent's income or was intended to add anything thereto. It is inferable from the evidence that as a consideration for the conveyance to her which resulted in the acquisition by her of the sole title to 12 parcels of realty she, on her part, conveyed assets of like monetary value, and there is no evidence that this transaction increased the total value of her assets in any degree. She was*1517 made a party defendant to the court proceedings of her own volition and the court proceedings were brought to perfect title to the property to be conveyed, a part of which was the undivided one-half interest in the parcels of realty conveyed to the decedent. The fees in question *591 were paid for services which related to what was, in effect, an exchange of some of the decedent's capital assets for other capital assets of like value. Therefore, the expenditure for attorneys' fees was not an expense of a going business, but additional cost of property. We have consistently held to the effect that fees paid for legal services, where the acquisition of capital assets or the litigation of matters pertaining to assets of a purely capital nature were involved, were capital expenditures and therefore not deductible as ordinary and necessary expenses. ; ; . For the foregoing reasons the respondent's disallowance of a deduction of the amount of attorneys' fees is approved. Decision will be entered under Rule*1518 50.