Rice v. Commissioner

*749 On April 10, 1941, report by Division No. 15 was promulgated in this proceeding. On motion of respondent, the Chairman, pursuant to the authority contained in section 1118(b), Internal Revenue Code, directed that the report be reviewed by the Board. Upon such review the following report was adopted in lieu of the one promulgated April 10, 1941.

*750 The Commissioner has determined a deficiency in petitioner's income*1279 tax liability for the year 1935 of $1,485.93. The deficiency results from certain adjustments made by the Commissioner in petitioner's income tax return for 1935. These adjustments were as follows:

Unallowable deductions and additional income:

The petitioner, by appropriate assignments of error in the petition, contested adjustments (a), (b), and (f). At the hearing, petitioner abandoned his assignments of error with reference to (a) and (b) and pressed only his assignment of error as to adjustment (f).

With reference to adjustment (f), petitioner contends that in 1934 he was appointed executor of a large estate, from which he received substantial compensation for his services, and that, in carrying out his duties as executor for compensation, he was carrying on a trade or business and it became necessary for him to secure assistance, for which in the taxable year he paid out of his own funds $3,350, and that such amount is deductible as ordinary and necessary business expenses.

FINDINGS OF*1280 FACT.

Petitioner is an individual, with his principal place of business in Boston, Massachusetts.

The petitioner in 1934 was an investment banker in Boston, a partner in White, Weld & Co., and in that year was made executor of the estate of Horatio Hathaway, one of his customers, who died in that year leaving an estate of about $1,500,000.

He had never been an executor before and he solicited the aid of J. Thomas Baldwin, who was employed in the office of White, Weld & Co. and had been employed in a large trust company for many years and also had been engaged in the real estate business, was a member of the bar, and had had experience in handling estates as executor and trustee.

A talk took place between petitioner and Baldwin in which it was agreed that Baldwin would help petitioner because of his experience and petitioner's lack of experience, and because petitioner was sommtimes in New York or called away on other business. It was also agreed at this time between them that Baldwin would be paid a fair fee by petitioner for whatever work he did.

In accordance with the arrangement, Baldwin worked with petitioner through 1934 and 1935 on various problems connected with*1281 the estate. He helped petitioner in determining the valuation and proper method of disposal of shares of stock in two large closed or semiclosed *751 corporations, the Mount Hope Finishing Co. and the Hathaway way Mills. In this work Baldwin used experience gained from analytical work which he habitually did for White, Weld & Co. Baldwin also helped in straightening out various trusteeships which decedent Hathaway held for members of his family and which had been run in an informal way that required research in correcting them. Baldwin also helped on disposition of various parcels of real estate in New Bedford, Canton, and Padanarum (South Dartmouth) and Fall River, Massachusetts, and made trips to the properties for appraisal and other purposes. Baldwin helped in compiling the inventory and in general assisted petitioner when he was present and also took petitioner's place when he was absent in consultations with attorneys for the estate and others who had business with the estate. For these services petitioner paid Baldwin in 1934 the sum of $2,000 and in 1935 the sum of $3,000. These items were put in Baldwin's income tax return as business income. Petitioner received*1282 $15,000 in 1934 and $15,000 in 1935 for his services as executor of the Hathaway estate.

Petitioner also employed his stenographer, Miss Brennan, to help him with the estate work, as the estate office was in another part of town and it was convenient to have some work done in his own office. He paid Miss Brennan $350 in 1935. The amounts which petitioner paid Baldwin and Miss Brennan were paid for actual services rendered to petitioner as executor and were reasonable in amount for the services performed.

In acting as executor of the estate of Horatio Hathaway and carrying out the numerous transactions connected therewith for the compensation pensation named in our findings above, petitioner John Preston Rice was carrying on a trade or business during the taxable year which was additional to and not connected with his principal business of investment banker.

OPINION.

BLACK: Section 23(a) of the Revenue Act of 1934 provides:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

(a) EXPENSES. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *

*1283 Undoubtedly, petitioner's principal business was that of investment banker, as a partner in the firm of White, Weld & Co. However, in 1934 Horatio Hathaway, an old customer of petitioner, died and left an estate valued at approximately $1,500,000, and petitioner was named as executor of the estate in decedent's will. Petitioner qualified as executor of the estate. His duties as executor did not require *752 all of his time and he continued his duties as a member of the firm of White, Weld & Co.

The testimony is that petitioner's duties as executor of this large estate did require a considerable amount of his time and that he found it necessary to employ J. Thomas Baldwin to assist him. This was done on account of Baldwin's experience in dealing with estates in administration and trusteeship. Also he employed Miss Brennan to do clerical work which was incident to his duties as executor.

Petitioner received $15,000 for his services as executor in 1934 and $15,000 for his services in 1935. In 1935 he paid Baldwin $3,000 and Miss Brennan $350 for their services in assisting him. These payments were made from the compensation which petitioner received as executor.

*1284 On these facts petitioner contends that he was engaged in the business of being executor of a large estate, which required considerable time and responsibility, and that the $3,350 paid Baldwin and Miss Brennan represented ordinary and necessary expenses paid and incurred in carrying on a trade or business within the meaning of the applicable statute.

Respondent does not dispute that petitioner paid Baldwin and Miss Brennan the amounts in question nor that the amounts were reasonable for the services which they actually performed, but defends his disallowance of the deductions on the ground that petitioner's activities as an executor did not constitute a business within the meaning of that term as used in section 23(a) of the Revenue Act of 1934. Respondent cites Ames v. Commissioner, 49 Fed.(2d) 853, as his principal authority in support of his position. We think that Ames v. Commissioner is not controlling. In that case the estate of Charles W. Ames, deceased, was the taxpayer and the court held that an executor's mere receipt of dividends and payment of testator's contractual debts was not carrying on a trade or business.

*1285 In the instant case we do not have the question before us as to whether the estate of Horatio Hathaway, of which petitioner was an executor, was carrying on a trade or business in 1935. Our question is whether petitioner's activities as executor of the estate of Horatio Hathaway for which he earned $15,000 in 1934 and $15,000 in 1935 constituted carrying on a trade or business, and we think that question must be answered in the affirmative. See Wallace's Estate v. Commissioner, 101 Fed(2d) 604. In the latter case the court pointed out that certain cases which had held that estates which were mere passive investors were not engaged in a trade or business, were not applicable. The court distinguished that line of cases from the one which it had before it, in the following language:

But these cases do not justify the holding that an executor or trustee when he performs the duties of his position for pay is not engaged in business. The *753 distinction between the activities of an estate and the activities of the representatives of the estate are obvious. There are many capacities of a business nature in which an individual or a corporation may serve an*1286 estate in the course of liquidation; and it is common knowledge that a substantial part of the business of certain corporations consists of the services which they render as executor or trustee for a specified compensation. The Board of Tax Appeals itself in Abbott v. Commissioner,38 B.T.A. 1290, Case No. 167, has recently held that a lawyer in general practice, who derived a large part of his income for services rendered as executor or trustee, was engaged in business in so doing, and was entitled to deduct from his gross income as a business expense a sum paid to certain beneficiaries in settlement of a liability incurred in the administration of a trust. Cf. Tallman v. Commissioner,37 B.T.A. 1060, Case No. 156.

The principle enunciated in this decision is applicable in the pending case, and no distinction arises because of the fact that the taxpayer was not regularly or continuously engaged in the business of performing the services of an executor. * * *

On the same grounds as stated by the court in the foregoing opinion, we think the instant case is distinguishable from such cases as *1287 City Bank Farmers Trust Co., Trustee,39 B.T.A. 29; affd., 112 Fed.(2d) 457; affd., 313 U.S. 121; and George Vanderbilt Trust,36 B.T.A. 967. Cf. also United States v. Pyne,313 U.S. 127. Also we think we should point our that the instant case is distinguishable from cases where a taxpayer is serving as executor for some decedent relative, without compensation, and incurs certain losses or expenses in doing so. These we have held to be personal to the taxpayer rather than business expenses. See Stephen H. Tallman,37 B.T.A. 1060.

We have no such state of affairs in the instant case. Petitioner was serving as executor for pay and as an incident to that employment he had to encur and pay certain ordinary and necessary business expenses. We think these are deductible under section 23(a) of the Revenue Act of 1934. Upon this issue petitioner is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

HARRON, dissenting: Petitioner, himself, and through his agent Baldwin, did no more than carry out the traditional duties of an executor in*1288 managing the estate of the decedent and in carrying out the directions in the will, the terms of which are not set forth. The making of inventories, the attending of conferences, and the straightening out of trusts do not amount to carring on a business, and the disposition of some stock and real estate, ordinarily, would amount to no more than managing and preserving the estate, or carrying out the terms of the will. There appears not to have been sufficient activity in the disposition of some property in the estate to constitute *754 those transactions a carrying on of a business. Petitioner has failed, I believe, to show that he was engaged in a business as the term is used in section 23(a). The Supreme Court has made it clear in United States v. Pyne,313 U.S. 127, that estate administration per se is not a business, and has said, "Executors who engage actively in trade and business are the exception and not the rule." Therefore, petitioner must show that he did more than engage in the activities which are the "traditional duty of executors." He must show that, in addition to such activities, he engaged in more extensive activities which constitute*1289 the carrying on of a business. Furthermore, the Supreme Court has stated that the very broad definition of "business" in Flint v. Stone Tracy Co.,220 U.S. 107, 171, is not controlling in the determination of what constitues carrying on a business within the meaning of section 23(a). Higgins v. Commissioner,312 U.S. 212; United States v. Pyne, supra. Accordingly it is not determinative that petitioner received compensation for his services or that he engaged in the activities of an executor for profit. In as much as the court in Wallace's Estate v. Commissioner, 101 Fed.(2d) 604, held that an executrix was engaged in a business when she performed the duties of that appointment with intent to secure compensation therefor very largely because of the Flint v.Stone Tracy Co. case definition of business, it appears evident that the rule in Wallace's Estate v. Commissioner, supra, is no longer good law; that it has been overruled by recent decisions of the Supreme Court. I believe we should not regard the case of Wallace's Estate v. Commissioner, supra, *1290 as controlling.

The holding reached appears to be that petitioner's activities in administering the estate of the decedent, as carried on by himself and his gaent, constitute the carrying on of a business, because petitioner performed services for fees. Most executors receive fees. If administering an estate per se is not a business, under the rule of the Pyne case, the conclusion reached above is wrong. If the holding is that the petitioner's activities extended further than the traditional functions of an executor in administering and preserving the estate, so as to extend into the area of business activity, then I believe the facts here do not support the holding. There is much to indicate that the expenditures in question were made to suit the personal convenience of petitioner, who had to be away frequently. To the extent that such is true, the expenditures are personal and are not deductible. Miller v. Commissioner, 102 Fed.(2d) 476; Kane v. Commissioner, 100 Fed.(2d) 382. Petitioner was inexperienced and Baldwin, a lawyer, had experience. Baldwin's services were of value, of course. *1291 But that is not sufficient to support the claimed deduction. In the *755 Pyne case, the Court of Claims dwelt upon the fact that the executors were inexperienced and that an attorney who was engaged in business helped the executors. (See Pyne v. United States,35 Fed.Supp. 81.) The Supreme Court did not agree that the fact that the counselor to the executors was engaged in business contributed to a holding that the executors were engaged in business. Under the facts, if petitioner had paid his counselor and secretary out of funds of the estate, instead of out of his fees received from the estate, and if he had claimed diduction therefor from the estate's income in computing the estate's net taxable income, I think we would have to deny the deduction under the rule of the Pyne case. See also, Estate of Mary R. Donald,43 B.T.A. 1114; White Trust v. Commissioner, 119 Fed.(2d) 619. To say that under the facts petitioner, as an individual taxpayer, was engaged in business in doing what he did, as an executor, and, therefore, is entitled to the deduction as a business expense; but that petitioner as a fiduciary*1292 in doing what he did as executor, under the same facts, is not engaged in a business and that, therefore, the estate - a taxable entity - is not entitled to the deduction as a business expense, points out the illogic. Petitioner's burden of proof is, in my opinion, exactly the same whether he claims as a fiduciary or as an individual that his activities as executor extended into the area of business activity for purposes of a business expense deduction.

I believe petitioner has failed to show that his activities as executor extended into the area of business activity and that, therefore, he is not entitled to the deduction for the expenditures in question. Therefore, I respectfully dissent.

STERNHAGEN, VAN FOSSAN, and ARNOLD agree with this dissent.