Bergin v. Commissioner

*1002 The Commissioner determined a deficiency in income tax for 1922 in the amount of $1,186.57. Said debiciency is based on an increase of $4,664.93 in petitioner's net income, due to the disallowance by the Commissioner of said amount, claimed by petitioner as a deduction for said year. This action of the Commissioner is the only error assigned. The deduction claimed represents a part of the attorneys' and trustees' fees paid for their services in the administration and settlement of a trust estate of which petitioner is one of three residuary beneficiaries.

The case is submitted on the pleadings, testimony of the petitioner and exhibits.

FINDINGS OF FACT.

The petitioner is a resident of Los Angeles, Calif.

*1994 John J. Bergin died testated January 25, 1912. He named as executors and trustees of his will Julia R. Bergin, Charles B. Bergin and Isidore B. Dockweiler. His will provided that his estate should be held in trust for a period of ten years from the date of his death or until the death or remarriage of said Julia R. Bergin, provided said death or remarriage occurred within said ten-year period. The administration of his estate by the executors was completed in 1916 and in January of that year, pursuant to a decree of the Superior Court of Los Angeles County, California, the residue of the estate *1003 passed to the trustees under the will, who were to manage the same as a trust estate, distributing certain income therefrom periodically to Julia R. Bergin, Charles B. Bergin, and Leo P. Bergin and others as directed by the will of the decedent.

Pursuant to the terms of the will of the said John J. Bergin and the decree of distribution entered in matter of his estate, the aforesaid trust terminated at midnight of January 25, 1922, and at the beginning of the 26th day of January, 1922, the title of the property in the hands of said trustees belonging to the residuary beneficiaries, *1995 Julia R. Bergin, Charles B. Bergin, and Leo P. Bergin, the petitioner, automatically vested in said residuary beneficiaries in equal undivided shares subject to costs and fees incident to the trust and its administration, the undivided two-thirds vesting in said Charles B. Bergin and Leo P. Bergin being chargeable, however, with a payment to their mother, Mary Elizabeth Bergin, of the sum of $50 a month during the remainder of her natural life.

The will of the said John J. Bergin, deceased, and the said decree entered as aforesaid, provided, among other things, that the said three trustees should take, hold, control and manage the trust property and collect the rents, issues, dividends and profits thereof during the term of the trust and they were directed and empowered under said will and said decree of distribution in the matter of the estate to pay the costs and fees of administration of the estate and the trust under said will and to pay out of the annual net rents, issues, dividends and profits of the said residue of said trust estate certain specific annuities, and then to pay the remainder of such annual net rents, issues, dividends and profits in either semiannual, quarterly*1996 or monthly installments, as might be most convenient, to Julia R. Bergin, Leo P. Bergin, and Charles B. Bergin, aforesaid.

Upon final distribution of the residuary trust estate, it was agreed between the said trustees and the residuary beneficiaries that trustees' and attorneys' fees in the aggregate amount of $20,000 should be paid from the trust estate.

Under the agreed arrangement, Isidore B. Dockweiler, for his services as one of the trustees under the will and for legal services as attorney rendered the trustees, received compensation in money and property from the trust estate to the value of $10,000. The other two trustees, Julia R. Bergin and Charles B. Bergin, received from the trust estate for their services as such trustees the sum of $10,000 between them.

One-third of the two amounts, the two totaling $20,000, paid as aforesaid, the petitioner claims as a lawful and proper deduction in his individual income-tax return for 1922.

Prior to the payments as above stated no fees of the character indicated had been taken or paid out of the trust estate.

*1004 OPINION.

SEAWELL: The evidence shows that all the attorneys' and trustees' fees as detailed in*1997 our findings of fact were paid at or after the expiration of ten years from January 25, 1912, the date of the death of John J. Bergin, the testator.

At the time of the entry of the court decree adjudging the amounts and directing the payment from the trust estate of said attorneys' and trustees' fees the three residuary beneficiaries, of which petitioner was one, became vested with the legal title to the residuary estate, subject, however, to payment of costs and the fees. The fees by agreement between the trustees and the residuary beneficiaries were fixed and determined and, under the agreement, ordered by the court to be paid out of the trust estate. It is under these circumstances that the petitioner claims as a deduction in his 1922 individual income-tax return one-third of the amount of fees paid as aforesaid. In justification of his claimed deduction, , is cited and relied on. In that case, the will of the decedent expressly provided that his executors and trustees should during the period of their service in such capacity receive as compensation a fixed annual salary in lieu of statutory fees and commissions*1998 and that such salary should be paid out of the income of the estate.

We held in said Knox case, supra, that executors and trustees are essentially employees of the estate and their compensation is one of the ordinary and necessary expenses of the estate and properly deductible from the income thereof and that there is no provision in the statutes of the State of New York or in the Federal tax laws which could be urged to defeat the carrying out of the testator's purpose set forth in his will. There is no question that the executors and trustees under the will of John J. Bergin were entitled to reasonable fees for their services as such and that such fees and proper fees for legal advice or services rendered them in the discharge of their duties might be paid out of income of the trust estate as provided in the will and be chargeable as a deductible item of expense in their tax return as such executors and trustees. But in the instant case it is not an executor or trustee that in his return as such is making claim of such fees as deductible. It is a residuary legatee and devisee who is claiming as a deductible expense in his 1922 individual income-tax return one-third*1999 of the attorneys' and trustees' fees which were paid under order of the court and with the consent of the residuary beneficiaries out of the trust estate. The costs and reasonable compensation or fees to the attorneys and trustees had to be paid, under orders of the court, out of the trust estate before the petitioner as a residuary beneficiary could acquire absolute title to one-third of the residuary estate.

*1005 The fact that the petitioner received in the final distribution of the estate a net sum or property of value less by one-third of the amount of the fees paid the attorneys and trustees than he would have received had such fees not been paid does not entitle him to the deduction claimed. No part of the fees so paid the attorneys and trustees was ever petitioner's property, whether paid before, or at the time of or after the distribution of the estate to the residuary beneficiaries, subject to such payment. Never having been the property of petitioner, he is not entitled to deduct one-third the amount of fees paid the attorneys and trustees out of the trust estate under the court's decree. In the circumstances of the instant case, such payments do not meet the*2000 test of the statute for allowance of deductions. We are of the opinion that the respondent committed no error.

Judgment will be entered for the respondent.