Oldham v. Commissioner , 36 B.T.A. 523 ( 1937 )

GEORGE W. OLDHAM ET AL., EXECUTORS, ESTATE OF JAMES L. HAWLEY, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Oldham v. Commissioner

Docket No. 79699.

United States Board of Tax Appeals

36 B.T.A. 523; 1937 BTA LEXIS 695;

September 17, 1937, Promulgated

---

Pending settlement of a will contest, the court appointed a curator of decedent's estate as provided by West Virginia law. The curator's duties were to conserve the assets of the estate until the executor qualified. Decedent left a large and complicated estate, valued at $2,000,000, and a $25,000 fee was paid the curator for services rendered. This fee was allowed as an administrative expense in determining decedent's net estate, but was disallowed as a deduction in determining the income of the estate for 1932, the year in which it was paid. Held, the fee was not an ordinary and necessary expense incurred in carrying on a trade or business, and therefore was not deductible from the estate's income for that year, since it was paid for services rendered in administering the estate.

Robert J. Riley, Esq., for the petitioners.

John D. Kiley, Esq., for the respondent.

---

MILLER

This case arises on respondent's determination of a deficiency of $7,200.42 in petitioner's income tax for the calendar year 1932. The only matter in issue is whether respondent property disallowed a proposed deduction of $25,000 claimed on account of fees paid the curator of the estate for services rendered by him following the death of the testator and pending the appointment of the present executors; a deduction for the amount of the same fees having been allowed the estate previously in the computation of its Federal estate tax.

FINDINGS OF FACT.

James L. Hawley, a resident of Wheeling, West Virginia, died on Novemver 13, 1930, leaving an estate of approximately $2,000,000, about three-fourths of which consisted of stocks and bonds and one-fourth of improved real estate. The decedent left two wills, one dated May 15, 1903, and the other August 2, 1930. Both wills were lodged with the clerk of the County Court of Ohio County, West Virginia, for probate; the earlier will was admitted to probate and the proponents of the other appealed to the Circuit Court of Ohio County. To conserve the estate, therefore, pending the outcome of this litigation, the county court appointed the Wheeling Bank & Trust Co. as curator of the estate, under certain provisions of West Virginia law; the company duly qualified on November 20, 1930, and assumed its duties. The company continued in this capacity until the 1903 will was finally approved and executors under it appointed and qualified. The curator turned over to them all the assets about October 20, 1932. Before turning over the assets, however, and on the same date, it deducted from them the amount of $25,000 as curator's fees and $6,000 as curator's attorneys' fees.

The curator's duties consisted in conserving, but not distributing, the estate. The bank's trust officer set aside a room in the bank for the purpose of handling the estate's business, and devoted a great deal of his personal time, much more than was ordinarily customary, to its affairs. The curator's services included procuring desirable tenants for the various shops, rooming houses, and other buildings belonging to the estate, painting and repairing them, preparing tax returns and paying taxes, making new leases, seeing that the property was properly covered by insurance, conferring with heirs and representatives of heirs, and collecting rents. During the curatorship no assets were bought or sold by the estate. The cash on hand at the beginning of the curatorship was $60,904.99. The gross receipts of the estate for the period of the curatorship were $200,393.50. Upon the completion of these services in August 1932, the curator presented a bill to the commissioner of accounts of Ohio County for $46,000 compensation, but this sum was allowed only in part, $25,000 to the company as its curator's fee and $6,000 to the company's counsel as professional fees. This was the result of a compromise between the company and the executors. The amounts so paid were in full compensation for the curator's services from November 1930 until after August 1932, and were a reasonable charge for the services rendered.

The company, while acting as curator, on November 12, 1931, filed on behalf of the estate a return for Federal estate tax purposes which shows a deduction of $106,703.06 claimed in respect of "Curator's commission, estimated, including attorney fees and court costs." The amount so claimed was an estimate of what the fees would finally be, based on 5 percent of the gross estate at its appraised value. On February 17, 1932, the local revenue agent, in his report to the Commissioner, recommended the disallowance of the total amount claimed, since it was merely an estimate and no part had been paid. On February 23, 1932, the company, as curator, through its trust officer, protested this action to the revenue agent. The curator's duties are defined thus in the protest:

* * * The curator's principal duties are to preserve the estate until an executor can qualify, with incidental power to sue for and recover and receive debts due the decedent, and generally to do all things necessary for the protection of the estate.

Beyond the general broad provisions and powers of a curator for the protection and preservation of the estate, the said fiduciary really holds the property as a custodian until an executor can qualify and take charge, and only such executor can perform the duties of actual distribution and closing of the estate. * * *

In this same communication and protest of February 23, 1932, the curator stated its opinion that the amount claimed "as a deduction for general administration expenses and costs is too little", and continued:

* * * The administration expenses that will ultimately be deductible will necessarily be very large because in the administration, settlement, and handling of an estate such as the James L. Hawley's, involved in the complexities of a long litigation, there are items of curator's commissions and fees, curator's attorney's fees, executor's commissions and fees, executors' attorneys' fees, and a possible liability for at least some part of the ultimate costs, including perhaps some counsel fees, in connection with the actual Will contest.

On July 15, 1932, the Commissioner issued his formal 30-day notice to the curator, disallowing "curator's commissions and attorneys' fees", in the sum claimed, for the reason that no evidence had been submitted that they had been paid or would be paid in accordance with Treasury Department regulations. The curator's counsel, Edwin F. Kline, replied to the Deputy Commissioner by a letter, on July 21, 1932, and referred therein to "The administration expenses, which will include probate matters, curator's commissions, attorneys for curator, executors' commissions, attorneys for executors, and the usual administrative costs and expenses incidental to settlement of the estate * * *." And a few days later, on August 1, 1932, the curator wrote to the Deputy Commissioner formally protesting various determinations, among others the disallowance of "$106,703.06 as an estimated amount for ultimate fiduciary commissions, attorneys' fees and court costs, that is, general administration expenses"; continuing:

This protest is made by said curator in order that there may be saved and preserved unto the executors who shall hereafter qualify under one of the Wills of said James L. Hawley, deceased, and unto said estate, the right to obtain the benefit of all the ultimate available deductions for the aforesaid administration expenses, of every kind and character, including fiduciary commissions to curator, executors, the fees of their respective counsel, probate expenses and any costs and expenses that may be borne by said estate in connection with the existing Will Contest proceedings, as well as all other items of expense in connection with the administration and settlement of said estate * * *.

Thereafter, the Commissioner, on October 27, 1932, wrote to the revenue agent, referring to the "curator's commissions" and $106,703.06 as the "amount claimed" as such, and inquiring whether the revenue agent could "consistently, after a reinvestigation, recommend an amount which * * * will be allowed by the Court and paid?" On December 2, 1932, the revenue agent replied to the Commissioner, stating that the curator, before turning over the assets to the executors, had taken as "commissions" $25,000 and paid its attorneys $6,000; that these were the only commissions paid and that both items would be "approved." It was also pointed out that the executors had paid out $40,000 in attorneys' fees. Thereupon, on January 4, 1933, the Commissioner mailed to the curator a final notice of deficiency, in which this statement is made:

Your protest relates to the following items:

* * *

Deductions
Curator's commission and attorneys' fees	$106,703.06			** $46,000.00

It appears these amounts have been paid and will be approved by the court.

* * *

your protest is sustained.

A recomputation was made and a deficiency of $189.99 in estate tax determined. No protest thereto was made by the executors. A claim for refund, however, was filed by them on October 26, 1934. This claim made this pertinent statement:

The Federal Estate Tax return of the Estate of James L. Hawley, Deceased was filed by the Wheeling Bank and Trust Company of Wheeling, W. Va. as Curator of said Estate.

Due to the fact that, at the time the Estate Tax Return was filed, the court had not determined the statue [sic: status?] of the James L. Hawley estate, and therefore no fees or commissions of any kind had been paid. The Curator, in an effort to secure at least some credit for these items on the return, estimated a total of $106,703.06 for Fees and Commissions. (See Item H-Schedule L; Deductions on Federal Estate Tax Return).

No amount was fixed or could be fixed at that date for commissions and fees, and the Curator estimated a flat five (5) percent of the total preliminary estate return which amounted to $2,134,061.21.

The status of the estate was in litigation for some lengh of time in order to determine the true last will and testament of the deceased. This litigation was discussed in a protest dated February 23, 1932, filed with the Internal Revenue Agent in Charge at Huntington, W. Va.

The claim then continued with an itemization of "actual cash expenditures" and "additional costs to be paid" totaling $215,366.17, in which "executors' commissions" paid before January 1, 1934, were put at $25,000 and executors' commissions paid between January 1 and July 1, 1934, at $12,000, and further executors' commissions were estimated at $25,000, and then followed this statement:

Note that this amount ($215,366.17) does not include $25,000.00 paid the Curator nor $6,000.00 paid Curator's attorneys.

On June 4, 1935, the Commissioner informed the executors of the rejection of their claim for a refund of $1,955.93 of estate tax, as to any excess over $1,333.43, the amount allowed in the certificate of overassessment issued under date of March 11, 1935, the allowance made in the latter, so far as pertinent here, being explained as follows:

This certificate of overassessment results from the allowance of additional executors' commissions, attorneys' fees and miscellaneous administration expenses paid by the executors. On the evidence of record, no deduction can be allowed at this time for unpaid executors' commissions, attorneys' fees and debts of decedent.

Net estate as shown in Bureau letter dated January	4, 1933	$1,839,493.29
Adjusted executors' commissions and curator's commission	$62,500.00
Curator's commission allowed	25,000.00
Additional executors' commissions		37,500.00
Adjusted attorneys' fees	$70,109.78
Attorneys' fees allowed	46,000.00
Additional attorneys' fees		24,109.78

Because of the partial rejection by the Commissioner of the claim for executors' commissions, the executors reopened the matter, and asked for a refund on the basis of their figures.

In the meantime, on March 15, 1933, the executors filed the estate's income tax return for 1932, claiming as a deduction "Curator's commission, $25,000.00."

The Commissioner, on January 31, 1934, sent petitioner a deficiency notice, and, in respect of the curator's commission claimed, made this statement:

Total income received while the curator was administering the estate from 11-13-30 to 8-31-32, $200,393.50 at 5% the maximum commission allowed by the State of W. Va--- $10,019.68

There was claimed as a deduction $25,000.00 for administering the estate. This was for taking care of the income and preserving the estate. Therefore only the amount in connection with the income is allowed which is computed on the maximum rate allowed under the law.

The $25,000.00 was paid the Wheeling Bank & Trust Co., October 20, 1932, as Curator.

The duties of the curator are practically the same as an Executor or Administrator except he cannot make a distribution or sell real property.

In the final deficiency notice of February 25, 1935, from which the present appeal lies, the Commissioner disallowed the full amount of the curator's fees, stating in part:

In this case the duties of the curator were confined to the protection of the corpus and to the collection of income until such time as the executors were authorized to assume their duties. There has been no allocation of the fee of $25,000.00 between administration expenses and the collection of income and other necessary operations of the estate. In view of this fact the entire amount of $25,000.00 must necessarily be considered an administration expense and is disallowed.

It was the general practice of the Bureau of Internal Revenue, at the time of this controversy, to treat curators' commissions in the same manner as executors' commissions.

OPINION.

MILLER: ^{*707 it is necessary to distinguish between services rendered for purposes of administration, and services rendered for the purpose of carrying on a business and producing income for the estate.}

The facts upon which the question turns are briefly summarized as follows: The decedent died, domiciled in West Virginia, on November 13, 1930, leaving an estate of about $2,000,000 and two wills. Immediately a controversy arose in the county court as to which will was valid. On November 20, 1930, the court appointed the Wheeling Bank & Trust Co., "curator", as provided in such circumstances by West Virginia law. *708 fee for its services; this was compromised, and the flat sum of $25,000 for its services throughout the whole period was agreed to, allowed by the county commissioner of accounts, and paid in October 1932; whereupon, it surrendered the estate's assets to the executors. This sum of $25,000 is the curator's commission now in question.

The statute (sec. 303(a)(1), Revenue Act of 1926) provides that administration expenses may be deducted from the value of the gross estate in determining the value of the net estate for estate tax purposes. See also Treasury Regulations 70, art. 32. Treasury Regulations 77, art. 282 *710 Ordinarily the fees and commissions of executors, administrators, attorneys, and other representatives of estates are regarded as administration expenses and are applied against the gross estate in determining the estate tax. Ordinarily such fees and commissions are not allowable as deductions in determining the net income of the estate. William W. Mead et al., Executors,6 B.T.A. 752">6 B.T.A. 752, 757; Leonard Holden Vaughan, Coexecutor,10 B.T.A. 140">10 B.T.A. 140; Charles B. Power et al., Executors,11 B.T.A. 1313">11 B.T.A. 1313; Ethel P. Hunt et al., Executrices,12 B.T.A. 396">12 B.T.A. 396; James C. Ayer et al., Trustees,26 B.T.A. 9">26 B.T.A. 9, 12; John A. Loetscher et al., Executors,14 B.T.A. 228">14 B.T.A. 228.

Where, however, such fees or commissions are paid for services rendered exclusively in carrying on the affairs of the estate as a business, rather than in preparing it for settlement and distribution, such payments constitute ordinary and necessary expenses and may be deducted for income tax purposes. Grace M. Knox et al., Executors,3 B.T.A. 143">3 B.T.A. 143; William W. Mead et al., Executors, supra;George W. Seligman, Executor,10 B.T.A. 840">10 B.T.A. 840; Henrietta Bendheim,8 B.T.A. 158">8 B.T.A. 158; Charles Lesley Ames, Executor,14 B.T.A. 1067">14 B.T.A. 1067; Margaret B. Sparrow,18 B.T.A. 1">18 B.T.A. 1; Florence Grandin,16 B.T.A. 515">16 B.T.A. 515; Estate of William G. Peckham,19 B.T.A. 1020">19 B.T.A. 1020, 1023; Chicago Title & Trust Co. et al., Trustees,18 B.T.A. 395">18 B.T.A. 395; H. Alfred Hansen, Executor,6 B.T.A. 860">6 B.T.A. 860.

Frequently, the facts of particular cases do not lend themselves to easy determination of the character of such expenses. Most solvent estates, such as the one in the instant case, are going concerns, producing income; though it be no more than interest from a savings account, a bond or a promissory note, or rent from a farm or dwelling house. The normal and usual activities of the representative of the estate include the collection of such income, the paying of debts and taxes, the making of repairs, the execution of leases, the placing of insurance, in order to prepare the estate for distribution. The fact that such activities also constitute the ordinary incidents of carrying on business does not constitute the expenses thereof expenses which may be charged against income if they are a part of a normal and usual process of administration.

The test most frequently used to distinguish between the two types of expenses is whether the estate has been or is required to be kept intact beyond the period usually necessary for administration. If the process of administration goes forward in normal course, and distribution and settlement are completed within a usual and reasonable time, the expenses of the representatives of the estate are regarded as administration expenses. Leonard Holden Vaughan, Coexecutor, supra;Charles B. Power et al., Executors, supra;Ethel P. Hunt et al., Executrices, supra;H. Alfred Hansen, Executor, supra;Estate of William G. Peckham, supra, p. 1023. On the other hand, in cases where, according to the provisions of the will or testamentary trust, it is necessary to continue the estate intact over a period of years, and to carry on its affairs as a business in the interim, the fees and commissions paid to representatives of the estate for such services constitute expenses, deductible for income tax purposes. William W. Mead et al., Executors, supra;H. Alfred Hansen, Executor, supra;Florence Grandin, supra.And where the will went further and, in addition to providing for the creation of a trust to run for a long period of time, provided for the payment to the executors of annual salaries out of the income of the estate, in lieu of fees, commissions, and compensations provided by law, it was held to be apparent that such payments were intended to be applied to the carrying on of a business and were properly chargeable against income. Grace M. Knox et al., Executors, supra;Thomas H. Franklin et al., Executors and Trustees,11 B.T.A. 148">11 B.T.A. 148.

In distinguishing between the two types of expense, one of the text writers draws the line between "initial expenses" and "current expenses." Montgomery & Magill, Federal Taxes on Estates, Trusts, Gifts, 1936-1937, p. 39. This suggestion is supported by the decision in Estate of William G. Peckham, supra, where the will required that the estate be kept intact for six years, and the action of the Commissioner in allowing as deductions for estate purposes only those executors' commissions paid during the first three years of administration was held to be reasonable and proper. The opinion of the Board states: "The respondent takes the position that in computing the net estate there should be allowed as deductions only such fees and expenses as would be incurred and paid if the estate were administered within the time usually required for that purpose. We are of the opinion that the position of the respondent is well taken. * * * The executors herein, in addition to performing the usual duties of executors, also perform duties and services which are essentially those of trustees. The respondent has allowed as deductions in computing the net estate expenses incurred and paid up to July 29, 1927, which was more than three years after the decedent's death, and more than the period that would be required for the ordinary administration of the estate; and in view of the decisions cited we are of opinion that the additional fees, commissions, and expenses in controversy are not proper deductions in computing the net estate of the decedent, and that the respondent did not err in disallowing them."

It is apparent, upon the facts of the Peckham case, that the services performed by the executors were no more for one purpose than the other during the two periods of three years each. In fact, the final services of the executors, in distributing the estate, come within the second period. But the apportionment made by the Commissioner, although more or less arbitrary, was equitable in its result and consistent with the principle frequently enunciated by the Board concerning expenses of estates kept intact beyond the ordinary administration period.

Under such circumstances, the judgment of someone must operate and the discretion of someone must be exercised. The effect of the rule making the determination of the Commissioner prima facie correct is to uphold his judgment and his exercise of discretion, unless the petitioner successfully maintains his burden of proof by establishing clearly that the Commissioner was wrong.

Where the taxpayer has sustained his burden, and the weight of the evidence supports his determination, it has been upheld by the Board, even though it too is patently an approximation, more or less arbitrarily made. Such an example is found in the case of George W. Seligman, Executor, supra, where the petitioner's allocation of an unitemized attorney's fee of $10,000, one-half for estate tax purposes and the other half for income tax purposes, was approved. There the facts showed that the executors had sold assets of the estate, attempting to convert them into other assets of an income-producing character, and in this and other ways had gone beyond the usual and necessary process of preparing the estate for distribution in the usual and normal way.

Another suggested basis for distinguishing between administration expense and income-producing expense, is that of the temporary character of the agent representing the estate and the limited duties which he has to perform. Thus, in Thomas H. Franklin et al., Executors and Trustees, supra, the Board held that a fee paid to a temporary administrator was for services rendered in producing income from the estate during the taxable year, and hence, was deductible for income tax purposes. Where, as in the Franklin case, the services of a temporary representative are clearly identifiable as income-producing, rather than as preparing the estate for distribution in normal course, then the expenses of such services should be charged against income. But the mere fact of temporary representation of the estate, without more, is of no importance. In several cases the expenses of temporary representatives have been held to be administration expenses. James D. Bronson et al., Trustees,7 B.T.A. 127">7 B.T.A. 127; affd., 32 Fed.(2d) 112; Estate of Caroline R. Rowland,31 B.T.A. 194">31 B.T.A. 194, 196.

The Franklin case is strongly relied on by the petitioners. However, there are very substantial differences between the facts of that case and the instant one. The will which was finally admitted to probate in that case was under contest for over four years; the executors named therein were also designated as trustees; the will contemplated that the estate should remain intact for a long period and that annuities should be paid therefrom; provision was made for fees of the executors and trustees to be paid annually, in terms of certain percentages of the income of the estate; the order of the court appointing a temporary administrator directed him, among other things, "to continue and conduct all business or businesses in which the estate may be engaged or in which it may have an interest by corporate stock or otherwise"; the temporary administrator made an income tax return for the year in question, in which he deducted his fee as a charge against income for that year, together with a similar fee for his attorney; these amounts were paid for the tax year in question. None of the circumstances narrated above were present in the instant case. Even then the opinion of the Board stated, "It might very well be argued that at least some of the services of the temporary administrator and his attorneys were more properly chargeable against the corpus of the estate than against the income of the estate. However, the weight of the evidence supports the contention that the amounts paid were reasonable compensation for personal services actually rendered in preserving and maintaining the estate and in producing income from it during the year * * *." The opinion is rested upon the theory that the estate was to remain intact over a period of years and the cases relied upon were cases in which a similar continued life of the estate was contemplated.

The respondent offered evidence to prove, and we have found, that it has long been the practice of the Bureau of Internal Revenue to treat curators' fees in the same manner as executors' fees, namely, to allow them as administration expenses, provided they are allowed by the law of the state and approved by the proper officers; as they were in the present case.

The duties of the curator are identical with those of the executor under the West Virginia law, except as to the actual distribution of the property of the estate. *720 must show that this estate was engaged in business during the taxable year and that the expenditures in issue were paid out in connection therewith. This they have failed to do. Their own witnesses proved that the services rendered by the curator were the usual and ordinary duties performed by executors in preparing an estate for distribution. If an executor had been appointed and acting during the period of the curatorship he would have rendered the same services and there would have been no question that the cost thereof constituted administration expenses. There was no provision in the will of James L. Hawley which required that the estate be kept intact; no trust was created; no annuities were to be paid and no annual salaries or fees; no necessity existed for awaiting better prices, or awaiting the attainment of certain ages by beneficiaries; no requirement existed for carrying on a business. The elapsed time did not extend beyond the usual and normal period for administration. As in the case of James C. Ayer et al., Trustees, supra, where the administration of the estate was delayed by a suit respecting estate tax liability, here administration was delayed by a will contest. In both cases it is obvious that the carrying on of such suits did not constitute doing business. In the Ayer case we held that the petitioner failed to show that the estate was carrying on business during the period of delay. They have failed equally in the present case. In other words, mere delay in administration does not convert administration expenses into expenses deductible from income.

In view of this conclusion it is not necessary to consider the further question of estoppel which was presented at the hearing and argued in the briefs.

Decision will be entered for the respondent.

---

Footnotes

• *. Paid to curator.

  ** Paid to attorneys. ↩

• 1. This report was prepared during Mr. Miller's term of office. ↩

• 2. West Virginia Code of 1932, § 4124, p. 1263:

  "When Curator May Be Appointed; His Duties. - The county court, or clerk thereof during the recess of the regular sessions of such court, may appoint a curator of the estate of a decedent, during a contest about his will, or during the infancy or in the absence of an executor, or until administration of the estate be granted, taking from him a bond in a reasonable penalty.

  "The Curator shall take care that the estate is not wasted before the qualification of an executor or administrator, or before such estate shall lawfully come into possession of such executor or administrator. He may demand, sue for, recover, and receive all debts due to the decedent, and all his other personal estate, and when there is a will may, or if a will be in contest shall, with respect to any real estate whereof the decedent or testator may have died seized or possessed, exercise such rights as the executor or administrator with the will annexed could exercise, including the collection of any rents and profits of such real estate and the leasing of the same for a term not exceeding the period of the curator's incumbency. Upon the qualification of an executor or administrator, such curator shall account with the executor or administrator for, and pay over to him, such estate as came into such curator's hands or for which he is liable. (Code 1849, c. 122, § 24; Code 1860, c. 122, § 24; Code 1868, c. 118, § 3; 1882, c. 84, § 23; Code 1923, c. 77, § 23.) ↩

• 3. ART. 32. Administration expenses.↩ - The amounts deductible from the gross estate as "administration expenses" are such expenses as are actually and necessarily incurred in the administration of the estate; that is, in the collection of assets, payment of debts, and distribution among the persons entitled. The expenses contemplated in the law are such only as attend the settlement of an estate by the legal representative preliminary to the transfer of the property to individual beneficiaries or to a trustee, whether such trustee is the executor or some other person. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions. Administration expenses include (1) executor's commissions; (2) attorney's fees; (3) miscellaneous expenses. Each of these classes is considered separately in Articles 33 to 35, inclusive.

• 4. ART. 282. * * * Expenses of the administration of an estate, such as court costs, attorneys' fees, and executors' commissions, are chargeable against the corpus of the estate and are not allowable deductions. * * * ↩

• 5. See footnote 2. ↩

• 6. See footnote 3. "The expenses contemplated in the law are such only as attend the settlement of an estate by the legal representative preliminary to the transfer of the property↩ to individual beneficiaries or to a trustee, whether such trustee is the executor or some other person." [Italics supplied.]