Kelley v. Commissioner ( 1938 )

JOSHUA C. KELLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HERBERT W. KELLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. FLORENCE KELLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kelley v. Commissioner

Docket Nos. 89876, 89877, 89878.

United States Board of Tax Appeals

38 B.T.A. 1292; 1938 BTA LEXIS 758;

December 6, 1938, Promulgated

---

An attorneys' fee accrued and paid in 1935 by a partnership for services involved in litigation of a tax deficiency determined against a predecessor trust, which deficiency if sustained would result in a lien against the partnership assets, held deductible by the partnership.

Joseph W. Worthen, Esq., and Erland B. Cook, Esq., for the petitioners.

Bernard D. Daniels, Esq., and John E. Mahoney, Esq., for the respondent.

---

STERNHAGEN

The Commissioner determined deficiencies of $269.76, $155.62, and $108.99 in the respective income taxes of the petitioners for 1935, by disallowing a deduction taken by their partnership of an attorneys' fee paid for contesting an income tax assessment against a predecessor trust.

FINDINGS OF FACT.

Joshua C. Kelley, Herbert W. Kelley, and their mother, E. Florence Kelley, are residents of Winchester, Massachusetts. On December 31, 1930, Joshua and Herbert, as trustees of the Union Paste Co., a Massachusetts voluntary trust organized on November 2, 1925, executed an agreement with themselves as partners and with their mother as a party in interest, which recited the parties' desire that the trust transfer its business to the partnership, and provided:

(1) The Trust hereby sells, assigns and transfers to the partnership all its assets, property, and rights.

(2) In consideration of said transfer, the partnership agrees:

(a) To pay to E. Florence Kelley on or before the twentieth day of January of each succeeding year, beginning on or before January 20, 1932, so long only as she shall live and remain unmarried and as said Joshua C. Kelley and/or Herbert W. Kelley shall conduct said business, amounts equal to twenty-five per cent (25%) of the net profits of the business during the immediately preceding calendar year, * * *.

(b) To assume and pay all the obligations of said trust other than to the holders of shares of beneficial interest therein as such.

In consenting to the transfer, the mother released the trust and the trustees from all claims "except from her rights against the partnership as evidenced by this instrument." This trust had succeeded a former partnership in the operation of the same business, and the mother's right to 25 percent of the profits had its origin in an agreement of Joshua and Herbert with their father, made in 1912, under which 25 percent of the profits of the business were to be paid to the mother during widowhood and 10 percent to the widow of a deceased son for ten years. The trust went out of business, and the partnership took over the trust assets on December 31, 1930; but no book entries were made of distribution to individual accounts. On April 21, 1932, Joshua and Herbert executed a second formal instrument, which recited that the trust had "been terminated by agreement of all parties" and that a written agreement of December 12, 1927, had provided for certain payments on the death of either of them, and concluded with their agreement to release all rights thereunder.

When the partnership took over the trust assets and liabilities in 1930, the trustees had proceedings pending before this Board for the redetermination of income tax deficiencies for 1926, 1927, and 1928. In these proceedings they were represented by attorneys with whom they had made no definite agreement about compensation for services. Counsel who drew the partnership agreement of 1930 advised Joshua C. Kelley that the trust assets received by the partnership would be subject to a lien for any tax liability adjudged, and Kelley instructed him to conduct the proceedings for the partnership. The partnership's books were kept on an accrual basis, but no reserve was set up for the attorneys' fee. A decision of the proceedings in petitioners' favor was rendered on May 15, 1933. Seven hundred and fifty dollars was advanced in that year on account of one attorney's services, most of which were rendered in connection with the litigation before the Board. The Board's decision was affirmed by the Circuit Court of Appeals for the First Circuit on December 1, 1934, , and in April 1935 a bill for an additional attorneys' fee of $4,250 was rendered to the partnership and paid.

OPINION.

STERNHAGEN: The only question presented for decision is whether the partnership was entitled, as it claims, in computing its partnership income for 1935, to the deduction of the attorneys' fee paid in that year for services in connection with the tax litigation in respect of deficiencies determined as to the predecessor trust for prior years. The partnership books and return were on an accrual basis, and it is clear that the obligation for the attorneys' fee had not become fixed or determinable before 1935 and could not be said to have accrued prior to that year. The partnership itself retained the attorneys and was directly liable for their fee for services rendered to it. As petitioners say, the partnership was largely actuated to carry on the litigation by a desire to avoid a lien upon the assets acquired from the predecessor trust which might have been held liable for the tax. Thus the circumstances are sufficiently similar to call for the same decision as has been made in ; ; ; affirmed on another point, ; certiorari denied, ; ; dismissed (C.C.A., 7th Cir.); and , wherein it was held that such attorneys' fees are properly deductible as ordinary and necessary expenses of the successor taxpayer, notwithstanding that the subject matter of the litigation is the tax of the predecessor. The respondent cites ; ; affd., ; ; ; dismissed (C.C.A., 3d Cir.); and ; affd., , but those cases all involved the right of the successor to deduct the amount of a predecessor's liability which the successor had assumed. They did not involve the deductibility of the attorneys' fees directly incurred by the successor for services in litigating such principal liabilities of the predecessor.

Following the precedents cited above, the Board holds that the partnership was entitled to deduct the $4,250 attorneys' fee, and the Commissioner's determination disallowing the deduction is reversed.

Decision will be entered under Rule 50.