Summary
In Bagley v. Commissioner, 8 T.C. 130, 135 (1947), there was an expenditure for legal advice to review proposed estate plans.
Summary of this case from Luman v. Comm'r of Internal RevenueOpinion
Docket No. 9930.
1947-01-23
NANCY REYNOLDS BAGLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George Gordon Battle, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.
1. Fees paid by petitioner to her attorneys in the taxable year for services and advice with respect to the purchase of tax-anticipatory, interest-bearing bonds, the making of interest-bearing loans to corporate officers for the purpose of protecting petitioner's investment in the corporation, and with respect to the merits and legal aspects of plans submitted to petitioner by a firm of estate planners for the rearrangement and reinvestment of petitioner's entire estate, held to be deductible nontrade or nonbusiness expenses under section 23(a)(2), Internal Revenue Code.
2. Attorney's fees for advice with respect to the establishment of a trust for petitioner's minor daughter, and with respect to the release of certain powers of appointment which petitioner held over the corpora of trusts of which she was an income beneficiary for life, held not deductible. George Gordon Battle, Esq., for the petitioner. Elmer L. Corbin, Esq., for the respondent.
This case involves an income tax deficiency of $8,448.18 for the calendar year 1943. The year 1942 is also involved in so far as it affects computation of the tax liability for 1943 pursuant to the Current Tax Payment Act of 1943.
Respondent has now conceded that petitioner is entitled to a deduction of $1,000 for 1942 and $1,500 for 1943, representing payments made by petitioner for the preparation of her tax returns for the respective years. The parties have also agreed as to the amount of corporate distributions received by petitioner from the Kennecott Copper Co. in 1942 and 1943, and the portion thereof representing taxable dividends. The remaining issues for decision have to do with the deductibility under section 23(a)(2) of the Internal Revenue Code of attorneys' fees paid by petitioner in the amount of $6,500 for 1942 and $4,150 for 1943.
FINDINGS OF FACT.
Petitioner is a resident of Greenwich, Connecticut, and her income tax returns for 1942 and 1943 were filed with the collector of internal revenue for the district of Connecticut.
Petitioner is a member of the R. J. Reynolds family, whose family business is the R. J. Reynolds Tobacco Co.
In 1942 petitioner paid her attorneys $6,500 and in 1943 she paid them $4,150. She paid other fees to her attorney's but makes no claim that they are deductible. The professional services for which the controverted fees were paid may, for convenience, be itemized as follows:
+-------------------------------------------------------------------------+ ¦1.-Fees paid in the year 1942, for- ¦ +-------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦(a)¦Advice rendered to petitioner with regard to the nature and ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦type of securities and cash which should be set aside from ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦petitioner's property to form the corpus of a trust in favor ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦of petitioner's daughter ¦$500 ¦ +---+---------------------------------------------------------------+-----¦ ¦(b)¦Advice to petitioner with regard to the advisability of ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦purchasing substantial amounts of tax-anticipatory, ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦interest-bearing bonds ¦250 ¦ +---+---------------------------------------------------------------+-----¦ ¦(c)¦Advice to petitioner with regard to the making of ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦interest-bearing loans by petitioner ¦500 ¦ +---+---------------------------------------------------------------+-----¦ ¦(d)¦General correspondence and conferences of attorneys with regard¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦to items (a), (b) and (c) above ¦250 ¦ +---+---------------------------------------------------------------+-----¦ ¦(e)¦Advice to petitioner with regard to the merit of plans offered ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦to her by investment counsel for the rearrangement and ¦ ¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦reinvestment of her income producing property ¦5,000¦ +---+---------------------------------------------------------------+-----¦ ¦ ¦Total for 1942 ¦6,500¦ +-------------------------------------------------------------------------+
2.-Fees paid in the year 1943, for- (a) Advice to petitioner with regard to the release of certain powers of appointment held by the petitioner $4,000 (b) Disbursements in connection with services under (a) 150 Total for 1943 4,150
The circumstances concerning the first item for 1942 were the following: Upon the birth of petitioner's fourth child, Anne, in 1942, petitioner determined to create for her a trust having a corpus of a value somewhat in excess of a half million dollars and substantially identical with the trusts previously established for her other three children. She conferred with her attorneys in the matter and sought their advice with respect to what securities should make up the corpus of the trust. Substantial cash existed at that time in the other three trusts, and petitioner asked her attorneys whether it would be advisable to match the corpus of the trust for Anne with cash equal to that of the other three trusts, or whether it would be advisable to have the corpus consist entirely of securities. In the latter event, petitioner asked their advice as to whether the corpus should consist of as great a proportion of stock in the Reynolds Tobacco Co. as in the case of other trusts.
Petitioner's attorneys held several conferences with officers of the Safe Deposit & Trust Co., Baltimore, Maryland, who were in charge of petitioner's estate and who looked after her financial affairs. As a result, conclusions were reached as to the nature of the property which should be put into the the trust. All of the securities transferred to the trust were income-producing. Under the terms of the trust the income was to be accumulated for Anne during her minority and paid over to her from her majority until her death, and if she died it was to go to her brothers and sisters. For these services, which covered a period of two or three months, petitioner paid her attorneys a fee of $500.
In 1942 petitioner had accumulated in excess of $100,000 cash in her personal savings account in the Guaranty Trust Co. of New York, and she consulted her attorneys with regard to its disposition and management. She sought their advice with regard to the merits of a plan to invest these savings in tax-anticipatory, interest-bearing bonds. As a result, the attorneys had conferences with the bank officers and with investment counsel, studied literature in connection with such bonds, and finally advised petitioner to purchase the bonds in a substantial amount, which she in fact did. For these services petitioner paid the attorneys $250.
On a trip made by petitioner to Winston-Salem, North Carolina, in 1942, she was approached by certain officers of the Reynolds Tobacco Co. who were then in financial difficulties and who asked petitioner to make them loans. Petitioner consulted her attorneys about the advisability of making the loans and with respect to what security she should obtain. The attorneys learned that, if the loans were not made, the officers might be forced to dispose of their stock and that such a flooding of the market would probably depress the value of Reynolds Tobacco stock. In order to protect her stockholdings in the tobacco company, therefore, petitioner's attorneys advised her to make the loans. Petitioner obtained from the officers their personal notes, bearing interest at 3 per cent, and in addition a second lien on the stock held by the officers. For services in this connection petitioner paid her attorneys $500.
In connection with the three services just discussed, petitioner paid her attorneys $250, charged by them for general routine correspondence and telephone conferences.
Certain friends of petitioners suggested to her in 1942 that she consult a firm of estate planners, two brothers by the name of Robinson, with regard to the planning and rearranging of her estate, so as to increase its yield, reduce taxes, etc. The Robinsons submitted to petitioner a plan, which she turned over to her attorneys for their advice as to its merits and legal aspects. Petitioner's attorneys had numerous conferences with petitioner, with the Robinsons and their attorney, with officers of the Safe Deposit & Trust Co. of Baltimore, and with others, and made a careful study of the plan proposed. As a result, they advised petitioner against accepting the plan; and subsequently the Robinsons submitted some five or six additional plans, all of which were carefully analyzed by petitioner's attorneys. Finally, a plan was worked out which was agreeable to petitioner's attorneys and which effected an extensive rearrangement of petitioner's estate and properties. Among the changes made were the creation of certain inter vivos trusts, with the income reserved to petitioner during her life, certain testamentary trusts, the cancellation of insurance policies, and the purchase of new insurance, etc. Petitioner canceled $400,000 worth of insurance which she had taken out upon the life of her husband and which the Robinsons and her attorneys considered as too expensive a type of insurance for her to carry. Petitioner's husband, who had an independent estate of his own, purchased a million dollars worth of insurance on petitioner's life. The services rendered by petitioner's attorneys in connection with the plan covered a period of several months, and for them petitioner paid a fee of $5,000.
Petitioner, her brother, and her sister were income beneficiaries under the will of their mother and under an intervivos trust established by their mother. In addition, they had powers of appointment over the trust properties. The three of them in 1943 discussed the matter of releasing their powers of appointment, and each of them employed counsel to consider the matter. Petitioner's attorneys found it necessary to study the laws of three different states, inasmuch as North Carolina had been the residence of petitioner's mother, Connecticut was petitioner's residence, and the trust properties were held and administered in Maryland. They also consulted with counsel practicing in each of these states, with officers of the trust company, and with attorneys for petitioner's brother and sister. If petitioner's power of appointment were released, her share of the property would, upon her death, devolve upon her children.
As a result of the advice of petitioner's attorneys, petitioner did in fact relinquish her powers of appointment. The releases were carefully drawn with a view toward conforming to the laws of the three jurisdictions involved. The purpose of releasing the powers of appointment was to save money and to prevent the trust properties from being included in the gross estate of petitioner upon her death.
Petitioner's attorneys spent several months in connection with this matter, and for their services petitioner paid them $4,000 in 1943, plus $150 for disbursements made in connection with these services.
The fees paid by petitioner to her attorneys in connection with items (b), (c), and (e) in 1942 for advice with respect to the purchase of the tax-anticipatory bonds, the making of interest-bearing loans, and the merits of plans submitted by the Robinson brothers were ordinary and necessary expenses directly connected with the management, conservation, or maintenance of property held for the production of income. In addition, petitioner is entitled to a deduction of three-fifths of item (d), or $150, for the correspondence and telephone conferences in relation to the services under items (b) and (c).
OPINION.
ARUNDELL, Judge:
We think it clear that the fees paid by petitioner to her attorneys in 1942 for advice with respect to the purchase of tax-anticipatory interest-bearing bonds and with respect to the making of loans to the officers of Reynolds Tobacco Co. are deductible nontrade or nonbusiness expenses under section 23(a)(2) of the code,
as construed in Bingham's Trust v. Commissioner, 325 U.S. 365. See also Philip D. Armour, 6 T.C. 359. The investment of substantial amounts of accumulated cash in interest-bearing bonds constitutes an act of management of property held for the production of income. So, too, it would appear to have a direct connection with the production of income. As for the loans to the officers of Reynolds Tobacco Co., aside from their being income-producing, the petitioner's primary purpose in making them was the protection of her investment in Reynolds Tobacco stock. Certainly this constitutes an act of conservation of her income-producing property.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) EXPENSES.—(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.
We think it equally clear that the $5,000 fee paid for advice and services with respect to the plans submitted by the Robinson brothers, a firm of estate planners, is deductible. The plan finally adopted effected a substantial rearrangement and reinvestment of petitioner's entire estate of income-producing properties.
The respondent's regulations
themselves recognize the deductibility of fees for investment counsel where related to the production or collection of income, or the management or conservation of property held for such purposes, and in a number of cases we have allowed such fees. See, for example, Edward Mallinckrodt, Jr., 2 T.C. 1128; Elma M. Williams, 3 T.C. 200. In the latter case deduction was allowed for fees paid to Loomis-Sayles & Co. for services as investment counsel not specifically related to any particular transactions but to the taxpayer's investments in general throughout the taxable years. The services rendered in this case by the Robinson brothers, we think, were analogous; and surely the services of petitioner's attorneys in passing on the merits of their plans can not be differently treated. We conclude that the $5,000 fee was an expense directly connected with the management and conservation of the petitioner's income-producing properties.
Regulations 111, sec. 29.23(a)-15.
The situation, however, is quite different with respect to the fees paid in connection with the trust for petitioner's daughter Anne in 1942 and the release of powers of appointment in 1943. Petitioner contends that the advice with respect to what securities should form the corpus of the trust is an act of management or conservation. We are unable to see what possible connection with the disposition of part of petitioner's income-producing or collection of income; nor do we think that it can properly be said to have a proximate connection with the management, conservation, or maintenance of such property. As for the powers of appointment, it is true that they related to trust property of which petitioner was an income beneficiary during her lifetime. Doubtless the release of the powers was prompted by a change in the estate tax law in 1942, which would have the effect of bringing the property in the gross estate of decedent upon her death for estate tax purposes. However, had petitioner retained the powers and not exercised them, we are unable to see what effect that could have had on the income she would derive from the property during her lifetime. Petitioner urges primarily that the release of the powers constituted an act of conservation; but it seems to us that the relationship, on the evidence of record before us, between the expense incurred and the management or conservation of the property is not sufficiently proximate under the rule of the Bingham case. We conclude that neither of these expenses is within the statute under consideration, and that petitioner therefore is not entitled to deduct them.
Decision will be entered under Rule 50.