Commissioner v. Linderman , 84 F.2d 727 ( 1934 )

DAVIS, Circuit Judge.

On August 30, 1929, Mary M. Bindley was adjudicated an incompetent person by the court of common pleas of the commonwealth of Pennsylvania, and guardians were appointed of her estate. Mrs. Bindley died testate on November 13, 1929. After a controversy, her will was admitted to probate, and the respondent, Linderman, who was the executor named in the will, received letters testamentary.

Meanwhile, the guardians of Mrs. Bindley had turned over the bulk of the assets of the estate to the administrator pendente lite, but retained approximately $200,000 to cover the expenses of the guardianship. Early in 1930, the guardians paid over the balance of that sum to the administrator after deducting $51,137.18 for their compensation, the fees of their attorneys, and such other expenses as were incurred in carrying out the guardianship. Their account was filed and approved by the proper court.

The testatrix kept her books and filed her income tax return on the basis of cash receipts and disbursements. The respondent filed a return covering the taxable period from January 1 to November 13, 1929, the date of her death, as required by Treasury Regulations 74, art. 746. He included in the return a deduction from gross income of $51,137.18, which was incurred during the taxable period, but not paid out until the following taxable year, to cover the expenses of the guardianship. The Commissioner of Internal Revenue disallowed the deduction, for the reason that the sum was not paid in the lifetime of the testatrix. The Board of Tax Appeals refused to sustain the Commissioner’s determination, and ordered the allowance of the deduction in order to reflect clearly the income of the testatrix.

The gist of the argument of the Commissioner in this case is that the testatrix reported her income on the basis of cash receipts and disbursements; that the guardianship expenses while incurred in the taxable period of January 1 to November 13, 1929, were not paid until later, and hence cannot be deducted for that period.

The expenses of the guardianship cannot be carried over to the estate under the law of Pennsylvania. Appeal of Freeman, 22 Wkly.Notes Cas. 173; Act May 28, 1907, P.L. 292, § 6 (b), as added by Act April 15, 1915, P.L. 124, § 1 (50 P.S.Pa. § 962). When the guardianship ceased at the testatrix’ death, the guardians ceased to be fiduciaries, and the relationship of debt- or and 'creditor arose as to the amounts due the estate. Crowell’s Appeal, 2 Watts (Pa.) 295; 28 Corpus Juris, 1096.

When the guardianship terminated on the death of the testatrix, the expenses here involved had already been incurred, and in legal effect were paid at that time. The guardians were accountable only for a debt to the estate. The executor had nothing to do with the debts incurred during the guardianship. The guardians turned over the assets of the testatrix to the estate, retaining a sum sufficient to wind up the expenses of the guardianship. The money retained was a debt to the estate over and above the lawful charges of the guardians.

One object of the income tax laws is to reflect clearly the income to a taxpayer, and this concept naturally applies as much in favor of a taxpayer as against him.

Section 43 of the Revenue Act of 1928 (26 U.S.C.A. § 43 and note) provides: “The deductions and credits provided for in this title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.”

The Commissioner fails to recognize that there are not only two taxable periods involved here but also two taxable entities —the testatrix, by her guardians, and the executor. The executor does not assume responsibility for the expenses of the guardianship, and the guardianship ceases to exist at the death of the ward. The testatrix’ net income for the period ending with her death would not be correctly shown, unless her gross income for the period is reduced by the costs and expenses of the guardianship. The statute requires the accounting method used to “clearly reflect the income.” Section 41, Revenue Act of 1928 (26 U.S.C.A. § 41 and note). We are of the opinion that the Board did not err in allowing the deduction in this case.

In a supplemental brief, the Commissioner also raises, under rule 11 of this court, the question of whether or not the deduction of the costs of the guardianship was an ordinary and necessary business expense paid or incurred in carrying on a trade or business as defined in section 23 (a) of the Revenue Act of 1928 (26 U.S. C.A. § 23 (a) and note).

These expenses of carrying out the guardianship were not personal expenses. They were incident to the management and conservation of the assets of the testatrix. The only difference between the expense involved here and the business expense ordinarily incurred by a taxpayer is that the necessity of incurring these is imposed by law. It determines that a taxpayer is incompetent and imposes a guardianship upon him to manage his affairs. Thus the incompetent is forced into doing business by the commonwealth, and as a result the ordinary and necessary expenses of carrying out the guardianship are deductible.

The Circuit Court of Appeals for the Second Circuit held in Commissioner v. Wurts-Dundas, 54. F.(2d) 515, that attorney’s fees paid by a. guardian to establish a claim of the ward to an interest in an estate were deductible from gross income as expenses of carrying on business. A recent decision, however, by the Circuit Court of Appeals for the Fifth Circuit, is to the contrary. Commissioner v. Van Wart, 69 F.(2d) 299. While those cases may be distinguished from this on the facts involved, we agree with the decision in the WurtsLDundas Case so far as it is applicable to the facts in the instant case.

The order of redetermination of the Board of Tax Appeals is affirmed.