McMillan v. Commissioner ( 1931 )

LUCIE MCMILLAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McMillan v. Commissioner

Docket No. 45993.

United States Board of Tax Appeals

22 B.T.A. 870; 1931 BTA LEXIS 2051;

March 20, 1931, Promulgated

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Held, that a $50,000 contribution made by the petitioner, the widow of William Northrup McMillan and legatee under his will, for the purpose of effecting a final settlement of the estate of William McMillan, the father of William Northrup McMillan, who was a legatee under his father's will, is not deductible from gross income, either as an item of expense or as a loss.

Philip Nichols, Esq., for the petitioner.

Bruce A. Low, Esq., and L. H. Rushbrook, Esq., for the respondent.

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SEAWELL

The Commissioner determined a deficiency in income tax for the year 1927 in the amount of $2,241.19.

The only issue is whether or not the petitioner is entitled to deduct from her gross income, either as an expense item or a loss, the sum of $50,000 paid or contributed by her in the manner and for the purpose set out in our findings of fact.

FINDINGS OF FACT.

The petitioner is a resident of Nairobi in the Colony of Kenya, East Africa.

William McMillan died November 15, 1901, leaving a will by which he devised and bequeathed the whole of his estate of the value of approximately $8,000,000 to his wife, Eliza McMillan, his son, William Northrup, and William K. Bixby, as trustees, to pay the income (after payment of his debts) in equal shares to his widow and his son, during their lives, the survivor to take the whole income. Provision was made for the issue of the son, but if the son died without issue, upon the death of the testator's widow, the principal of the entire trust fund was to be divided pro rata among the heirs of the testator's two brothers.

Eliza McMillan died January 16, 1915, and William Northrup McMillan died March 22, 1925, without issue.

William Northrup McMillan, before his death, purchased the contingent remainders of several of the legatees under the will of William McMillan. The value of such remainder interests at the date of William Northrup McMillan's death was approximately $2,000,000.

After the death of William Northrup McMillan suit was instituted by certain remaindermen against William K. Bixby, the surviving trustee under the will of William McMillan, for an accounting, claiming that the trustee between 1901 and 1925 had made payments to William Northrup McMillan as income of large amounts of the corpus of his father's estate. This suit was settled by agreement, the trustee waiving all claim for compensation for his services and being discharged as such trustee by proper court order. However, before attorneys for the remaindermen would consent to the entry of the decree discharging the trustee, they insisted that a fund of $600,000 be raised and paid over to them or to the remaindermen whom they represented. The petitioner, practically the sole heir of her husband, William Northrup McMillan, was requested and earnestly urged to contribute toward the raising of the $600,000 fund, being told she might get nothing from her husband's estate if the remaindermen prevailed in their contentions. She, by her attorney in fact, Clinton E. Bell, on February 14, 1927, transmitted a check for $50,000 to the St. Louis Union Trust Company, Executor of the estate of William Northrup McMillan, stating in the letter inclosing the same:

* * * This check represents the contribution of Lady McMillan to the fund of $600,000.00, to be used by John H. Holliday in effecting a final settlement of the William McMillan trust estate. The enclosed check is to be used by you in making up the $600,000.00 total checks to be delivered to Mr. John H. Holliday and by him disposed of in accordance with his letter of even date herewith, addressed to Messrs. Thompson & Thompson, copy of which you have. [Lady McMillan mentioned is the same person as the petitioner herein.]

The letter of "even date" referred to provided for the disposition of the various checks aggregating $600,000 and in its last paragraph stated:

If decrees satisfactory to all the parties in interest are not approved and entered in said cases pending in the Circuit Court of the City of St. Ouis, selating to the settlement of the William McMillan estate, I will return these checks to the St. LouisUnion Trust Company so that said Company may return to each of the parties contributing to make up said total of $600,000.00 his proportionate amount thereof.

The petitioner herein was not, so far as the evidence shows, a party to the cases referred to relating to the settlement of the William McMillan estate.

There was no distribution of the corpus of the William McMillan estate prior to the distribution made subsequent to the final settlement effected after the payment of the $600,000 to or for the benefit of the remaindermen as heretofore indicated.

OPINION.

SEAWELL: The petitioner contends that the Commissioner erred in his determination that she is not entitled to deduct from her gross income as an expense item or as a loss the sum of $50,000 paid or contributed by her in the manner and for the purpose stated in our findings of fact.

The question in issue arises under the Revenue Act of 1926, and the applicable provisions thereof relating to deductions for expenses incurred and losses sustained in the taxable year read in part as follows:

SEC. 214. (a) In computing net income there shall be allowed as deductions:

(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *

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(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;

(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a nonresident alien individual only if the profit, if such transaction had resulted in a profit, would be taxable under this title. * * *

The claim or demand to satisfy which the $600,000 fund was raised and to which the petitioner contributed $50,000 was against the surviving trustee of the William McMillan estate for moneys paid to certain life tenants during the years 1901 to 1925, the husband of the petitioner being one of such life tenants.

The $50,000 claimed as deductible was not an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business, nor is it shown to have been a loss incurred in trade or business, the evidence failing to show that the petitioner was carrying on any trade or business. Petitioner, not being shown to have been engaged, in the taxable year, in any trade or business, can not claim the said item as deductible under either said section 214(a)(1) or section 214(a)(4). ; . Was the $50,000 contribution, made for the purpose shown, a loss sustained during the taxable year and not compensated fro by insurance or otherwise and incurred in a transaction entered into for profit, though not connected with a trade or business, as provided for in section 214(a)(5) of the Revenue Act of 1926?

The petitioner was not being sued; no judgment was pending against her, and no legal liability required her to contribute $50,000 to relieve the trustee of the William McMillan estate from his liability for erroneous or improper discharge of his duties as said trustee. What she did was done voluntarily and for what she and her counsel conceived to be, and apparently was, for her best interests, she being the widow and practically the sole beneficiary under the will of William Northrup McMillan, deceased, who had acquired the interests of various remaindermen under the will of his father. The letter inclosing her $50,000 check stated it represented her "contribution" to the $600,000 fund to be used "in effecting a final settlement of the William McMillan trust estate." If the settlement were not effected, the amount of the check was to be returned to her.

If the "contribution" is viewed as a gift, it would not, of course, be deductible either as an expense or as a loss. If viewed in the light of a payment made in settlement of litigation or threatened litigation and to make good her right and title to the remainder interests purchased by her deceased husband, the payment would not be a deductible loss.

The authorities relied on by petitioner are not applicable to the facts in the instant case. The contribution made by petitioner is not deductible as an expense nor as a loss and the respondent committed no error in refusing to allow same as such.

Judgment will be entered for the respondent.