Opinion
Docket No. 33558.
1952-05-12
FREDERIC A. SEIDLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
David Beck, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
Held: Amounts expended in defending and settling suits brought to set aside a trust of which petitioner was trustee and remainderman, were not deductible by petitioner as expenses and losses incurred in trade or business or as nonbusiness expenses or losses incurred in a transaction entered into for profit. David Beck, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
The respondent determined deficiencies in income taxes against the petitioner as follows:
+--------------------+ ¦Year ¦Deficiency ¦ +------+-------------¦ ¦1946 ¦$474.68 ¦ +------+-------------¦ ¦1947 ¦4,949.16 ¦ +--------------------+
The issue in this proceeding is whether amounts expended in litigation and settlement of a controversy are deductible under the provisions of section 23 of the Internal Revenue Code.
FINDINGS OF FACT.
Frederic A. Seidler, the petitioner, residing in Jersey City, New Jersey, filed his income tax returns on the cash receipts basis for the years 1946 and 1947 with the collector of internal revenue for the fifth district of New Jersey. Petitioner was engaged in the export business and was also interested in the sale and management of real estate. Louise G. Oswald, a first cousin of the petitioner, inherited an estate of approximately $200,000 upon the death of her husband, Carl Oswald, in March 1941. She attempted to commit suicide and was confined to a hospital. Petitioner introduced a lawyer, Felix Forlenza, to his cousin while she was in the hospital and the lawyer was instrumental in avoiding publicity. Upon the insistence of Louise Oswald, Felix Forlenza became her attorney in connection with the estate left to her. Upon her discharge from the hospital, Louise Oswald returned to petitioner's home. Forlenza collected rental payments on property included in the estate and advised Louise Oswald to give the petitioner a power of attorney in order that he might handle her affairs. A power of attorney was executed by Louise Oswald in favor of the petitioner on July 15, 1941. The petitioner never took any action under this power of attorney. Louise Oswald was desirous of having the petitioner completely manage her estate and Forlenza drafted a trust agreement with the petitioner as trustee and remainderman which was executed by Louise Oswald on August 15, 1941. There was no provision in the trust for revocation by Louise Oswald. The petitioner had earlier declared that he was not interested in becoming a party to a revocable trust. Forlenza discussed the trust agreement with the petitioner and explained to him that he would be entitled to commissions as a matter of law and would also be remainderman. The petitioner required Forlenza to look after the details of the undertaking, and upon this basis petitioner then accepted the agreement. The petitioner's motive in accepting the trust was to obtain the corpus of the trust as remainderman. If he had not been sole remainderman of this trust of a value of $200,000, he would not have accepted the position of trustee.
The trust property which was productive of income consisted of 16 pieces of real estate, seven mortgages, bonds, and stocks. The petitioner, as sole trustee, was to invest the property and to pay Louise Oswald $75 a week out of the net rents and income of the trust after deducting administration commissions, charges, and expenses. Petitioner, as trustee, could pay Louise Oswald more of the income and also could make payments out of principal as he thought advisable for her comfort and support. Income not paid to the beneficiary was to be added to the trust. The petitioner could resign as trustee and appoint a successor. Upon the death of Louise Oswald the corpus of the trust was to be paid to petitioner, or, if he was not living, as he directed by will. One or two houses and some land were sold by the petitioner and some common stocks were replaced with Government bonds.
Forlenza continued to collect rents, the petitioner undertaking the other aspects of management of the trust. The petitioner, who acted as trustee from August 1941 to December 1942 never received any trustee's commissions. After the commencement of litigation he sought no commissions and executed an affidavit to that effect.
On August 24, 1942, a suit was initiated in the Court of Chancery of New Jersey by Charles C. Trelease, next friend of Louise Oswald, seeking to set aside the trust agreement on the grounds of incompetency upon the part of Louise Oswald and fraud and undue influence upon the part of the petitioner. The Court of Chancery held, on October 9, 1944, that Louise Oswald was not incompetent and that petitioner had not been guilty of fraud or undue influence. This decision was appealed to the Court of Errors and Appeals of New Jersey which unanimously reversed the determination of the lower court and held, on April 19, 1945, that Louise Oswald did not understand the effect of the trust, that she did not have adequate independent advice, and that the trust deed was not fair, open, and voluntary. On May 20, 1946, the appellate court held that Louise Oswald was entitled to a reconveyance of all her property and an accounting. The petitioner had resigned his trusteeship in December 1942 and a substitute had been appointed. Louise Oswald objected to the accounting made by petitioner and sought to surcharge Seidler in the amount of $35,000 and expenses and damages, and $35,000 for legal expenses. The expenses and damages included claims for rents unaccounted for, expenses in revesting title to property in herself, court costs, counsel fees, and damages for entering into contracts for the sale of realty. The issues were stipulated and submitted to the Court of Chancery of New Jersey. On April 18, 1947, an agreement was entered into by Louise Oswald and petitioner settling all the issues in controversy.
The petitioner paid $15,000 in settlement of the litigation and surcharges. A lump sum payment of $10,000 was made on April 18, 1947. The $5,000 balance was to be paid in weekly installments of $100 each beginning July 1, 1947. Between and including July 1, 1947, to December 30, 1947, the petitioner paid $2,700 in weekly checks.
During 1946 the petitioner spent $1,659.51 in payment of court and printing costs and legal expenses incident to the trust litigation. During 1947 the petitioner paid $5,000 in counsel fees in connection with the aforementioned litigation. The petitioner was not reimbursed for any of the payments or expenses.
The petitioner's business income fluctuated from year to year and declined during the period of litigation. In 1946 the petitioner claimed deductions of $1,659.51 as costs of litigation. A deduction of $17,700 was taken in 1947.
OPINION.
VAN FOSSAN, Judge:
The sole issue is whether the petitioner may deduct, under the provisions of section 23 of the Internal Revenue Code,
the amounts of $1,659.51 as litigation expenses in 1946 and $17,700 spent in 1947, which latter figure represents settlement payments of $12,700 and $5,000 in counsel fees paid in connection with the trust litigation.
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; * * *
It is petitioner's contention that the amounts expended were ordinary and necessary trade or business expenses under section 23(a)(1)(A). It is sufficient to note upon this point that the petitioner was not in the business of acting as a trustee, there being no evidence that he ever so acted either prior to this occasion or subsequent thereto. He received no fees or commissions while acting in the capacity of a trustee and when the litigation commenced he stated he wanted none. This single instance of acting as a trustee was too isolated and too incidental to be considered a trade or business carried on by petitioner. Willoughby H. Stuart, Jr., 32 B.T.A. 574, affd. 84 F.2d 368; Estate of Hyman Y. Josephs, 12 T.C. 1069.
Nor were the payments ordinary and necessary expenses incurred in the taxpayer's business of exporting or engaging in real estate transactions. Robert Edward Kleinschmidt, 12 T.C. 921. The litigation expenses were incurred in attempting to protect and retain his personal interest in the corpus of the trust. Petitioner's connections with the grantor of the trust had no relation to his exporting and real estate business. The expenses are not deductible under section 23(a)(1)(A). It follows also that the petitioner is unable to deduct these amounts as losses under section 23(e)(1) wherein the trade or business requisite is the same.
Turning to the other provisions of section 23, I.R.C., and examining petitioner's contention that the sums paid were losses incurred in a transaction entered into for profit, though not connected with his trade or business, as specified in section 23(e)(2), albeit the petitioner undertook the fiduciary obligations of trustee to obtain for himself the corpus of the trust, and would not have done so unless he was assured of receiving such corpus, we cannot hold that this transaction was entered into for profit, as contemplated by the statute.
Petitioner argues, in effect, that when he gave assent to becoming a trustee he entered into a transaction for profit, namely, the acquisition for himself of the trust corpus, this notwithstanding the fact that an hour later he could have, under the terms of the agreement, withdrawn as trustee and appointed his successor without affecting his right to such corpus. Although the word ‘profit‘ is capable of proper usage in an infinite variety of situations, the word, when used, must not be taken from the context and must be defined in relation to its usage in the particular case. We cannot bring ourselves to hold that in the factual background of this case the situation comes within the concept of the word ‘profit‘ as used in section 23(e)(2). Petitioner invested nothing and gave up nothing. In our opinion, the word is used to denominate a situation where there has been an investment of capital or labor with the hope of an accruing increment of value, a gain attributable to the employment of such capital or labor. We would define the word ‘profit‘ here in the ordinary every day meaning of the term, and, so defined, it does not fit the present situation, as construed by petitioner. See Heiner v. Tindle, 276 U.S. 582; Weir v. Commissioner, 109 F.2d 996; and Jones v. Commissioner, 152 F.2d 392. As stated in Edgar M. Carnrick, 21 B.T.A. 12, 22, ‘ * * * The reasonable intendment of restricting non-business transactions resulting in losses to such as were entered into for profit is that, since the intended profit would be taxable, the losses suffered instead should be deductible. * * * ‘ The acquisition of the trust corpus by a remainderman upon the death of the life beneficiary is not a taxable gain or profit to him. Section 22(b)(3), I.R.C. Any loss should be treated in the same manner as the acquisition of profits. The litigation was not entered into by petitioner for profit and the expenditures must be denied deduction as losses. See, also, National Engraving Co., 3 T.C. 178.
Petitioner's final contention is that the expenditures were ordinary and necessary nontrade or nonbusiness expenses incurred for the management, conservation or maintenance of property held for the production of income under section 23(a)(2), I.R.C. The statute, however, contemplates situations where the property is so held for the production of income for the taxpayer himself. Whatever income accrued in this case was payable, not to the petitioner but to the life beneficiary, to the extent of $75 per week, with the balance, if any, being added to the trust corpus. Since the property interest was not held by petitioner for the production of income for himself, petitioner must be denied deduction of the expenses incurred.
Decision will be entered for the respondent.