455 F.2d 1028 | Ct. Cl. | 1972
Lead Opinion
delivered the opinion of the court:
This is a Federal income tax case which comes before the court after being tried by our Chief Commissioner Bennett. Following that trial, our commissioner submitted an opinion, findings of fact and recommended conclusion of law pursuant to our Rule 134(h) with which we agree in part and disagree in part. The case involves two issues; the first to 'be discussed, dealing with deductibility or nondeductibility of legal expenses under section 212 oí the Internal Revenue Code of 1954, is the part with which we disagree with our commissioner’s opinion and recommended conclusion. However, as for the second issue, we are in total agreement and will, therefore adopt that portion of Chief Commissioner Bennett’s recommended opinion.
The circumstances that led to this case are as follows. Plaintiff in this case is the son of Marie Louise Kent who was the daughter of Rodman Wanamaker. Plaintiff is one of the income beneficiaries of a testamentary trust established by Rodman Wanamaker. That trust consisted of all the shares of the capital stock of John Wanamaker Philadelphia, a retail department store in Philadelphia.
On January 17, 1957, said corporation, John Wanamaker Philadelphia, purchased 10,294 shares of its common stock from the Wanamaker Trust for the sum of $6,999,920. This sales figure when compared against the basis of the stock in the hands of the trustee produced a loss to the trust of $1,235,280. (There is no question as to the holding period nor the nature of the asset and both parties agree that as for the trust the sale was at a long term capital loss.) However, under Pennsylvania law, income beneficiaries are entitled to receive the excess, if any, of the sales price over the so-called “intact value” of the assets, to the extent such excess is attributable to retained earnings. In this case the “intact value” of the stock was the basis in the hands of the donor before being transferred to the trust upon the donor’s death. Upon the
Following the sale of said stock and by way of the Seventh Account of the Wanamaker Trust, the trustees proposed to distribute $1,022,544 to income beneficiaries as that amount required by Pennsylvania law to be distributed following the sale of part of the corpus of the trust according to the rule of appointment explained earlier. The trustees arrived at this figure by using as the “intact value” of the stock, $5,977,376 thereby producing an amount to be distributed equal to $1,022,544. However, the plaintiff in this case and his sister, along with other income beneficiaries, felt that the “intact value” of the stock was only $4,840,949.08. This value would produce an amount of money allocable to income beneficiaries in the amount of $2,158,970.92. Therefore, the income beneficiaries, including plaintiff’s sister, but not plaintiff filed objections to the Seventh Account and a law suit developed. Also in connection with the Seventh Account, a secondary dispute arose when the estate of Marie Louise Kent filed a claim for 89.337 percent of the portion of the distribution thought to be allocable to plaintiff and his sister.
In that connection it should be pointed out that in the Sixth Account, prior to the Seventh Account (obviously), the estate of Marie Louise Kent had also made claims upon the trustees. Those claims, which were made in conjunction with the estate of Mary Brown Warburton (sister of Rodman Wanamaker), were resisted by plaintiff and his sister. Plaintiff, to see that his rights were fully protected, engaged Richard K. Stevens of the Philadelphia law firm of Stradley, Ronon, Stevens and Young, while his sister’s husband, to
Following a hearing on the disputed claims pertaining to the Sixth Account, Judge Alfred L. Taxis, Jr., of the Orphans’ Court of Montgomery County, Commonwealth of Pennsylvania, denied the claim of the Warburton Estate but allowed the claim of the Kent Estate. Exceptions were taken to the decision of Judge Taxis but before further litigation could begin, a settlement was reached and the claims were satisfied. As a result of this settlement, additional income was distributable to plaintiff and includable in his taxable income for Federal income tax purposes. However, and getting back to the Seventh Account, the success in again resisting the claims of the Kent Estate in connection with the Seventh Account did not result in additional taxable income to plaintiff although the total amount distributable was increased.
The amount distributable in the Seventh Account was increased as a result of plaintiff’s (and his sister’s) successful resistance to the claims of his mother’s estate. Furthermore, their success in convincing Judge Taxis that the “intact value” was less than originally established by the trustees enabled plaintiff to receive a larger distribution than was originally scheduled. The above-noted decision by Judge Taxis followed a hearing where plaintiff was again represented by Attorney Stevens and his sister was represented by the same Mr. Latta who represented her in the Sixth Account dispute. Judge Taxis’ decision resulted in plaintiff receiving $341,359 from the trustees, no part of which was included as income on plaintiff’s Federal income tax return.
Following the above-noted disputes and their resolutions, plaintiff paid, in 1959, the law firm of iStradley, Ronan, Stevens and Young, $7,’537.18. In 1960, plaintiff paid the same law firm $7,500; both sums being paid for legal services rendered in connection with the disputes over the Sixth and Seventh Accounts. Of the sums noted, $7,518':59 is allocable to the Seventh Account and a like amount is allocable to the Sixth Account. In addition to those amounts paid directly to
As for the expenses in relation to the Sixth Account, the defendant does not question the deductibility, under section 212(1) of the Internal Revenue 'Code of 1954, of the legal expenses incurred 'by plaintiff. However, as to those legal expenses incurred in relation to the Seventh Account, defendant strenuously objects to the deduction of the $7,518.59 paid to his attorney and the $12,000 paid to his sister. The defendant’s objections are on the grounds that said expenses of the Seventh Account were related to and in connection with the disposition of a capital asset and, therefore, not deductible under section 212. Plaintiff contends otherwise; he feels that the expenses of counsel are deductible under section 212(1) or section 212(2) but primarily under section 212(2) as an expenditure made for the management, conservation, or protection of income-producing property.
In addition to the legal expenses noted above, plaintiff also paid the law firm of Stradley, Ronon, Stevens and Young, $5,181.48 in 1959 and $5,000 in 1960 for legal services in connection with divorce proceedings involving plaintiff. These expenses were not deducted, in whole or in part, by plaintiff on either his 1959 or 1960 tax return. However, following an audit of those returns, the Internal Revenue Service allowed plaintiff a deduction of $500. Plaintiff now claims, and is supported therein by the testimony of A. Stuard Young, Jr., a partner in the law firm of Stradley, Ronon, Stevens and Young, that one-third of the total expense paid in connection with the divorce (% of $10,181.48=$3,393.83) is directly related to tax matters and therefore deductible.
I
In resolving the parties’ differences over the deductibility of the legal expenses incurred in connection with the Seventh Account, section 212 of the Internal Eevenue Code must be closely considered. That section provides:
Sec. 212. EXPENSES FOR PRODUCTION OF INCOME.
In the case of 'an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
for the production or collection of income;
for the management, conservation, or maintenance of property held for the production of income; or (2
in connection with the determination, collection, or refund of any tax. (3)
Moreover, and as will be explained in detail hereafter, we must also consider the relevancy and consequences of the trust and the action of the trustees. This brings into play section 662(b) which provides:
(b) Character of Amounts. — The amounts determined under subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the estate or trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income as the total of each class bears to the total distributable net income of the estate or trust unless the terms of the governing instrument specifically allocate different classes of income to different beneficiaries. In the application of the preceding sentence, the items of deduction entering into the computation of distributable net income (including the deduction allowed under section 642(c)) shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary or his delegate. * * *.
To resolve the problem we must first dispose of those items that tend to clutter the path to resolution. First and foremost, it should be understood that the court will treat plaintiff’s claim as though it is based primarily on section 212(2) and not also on section 212(1). While this was not the treatment given by Chief Commissioner Bennett, in our opinion plaintiff’s case must stand or fall on section 212(2) because section 212(1) will not support the deduction. While this may be an arguable point and worthy of consideration, it is our opinion that Keg. 1.212-1 (a) (1) (i) adequately disposes of this contention since it is conceded that the income collected, for which these expenses were incurred, is not required to be included in income for Federal income tax purposes. Moreover, and again differing with the opinion of our commissioner, we are of the opinion that Commissioner v. Burgwin, 277 F. 2d 395 (3rd Cir. 1960) is in point on this matter and the distinctions offered by plaintiff are only distinctions without a difference. Furthermore, we are of the opinion that this case presents an even stronger set of circumstances against deduction of the legal expenses under section 212(1) than did Burgwin. In Burgwin, the taxpayer could not deduct her legal expenses incurred to obtain certain stock which was acquired by the trust in a nontaxable exchange arising out of a tax-free corporate reorganization. The
Note also at this preliminary stage that our main concern is with the Seventh Account and not the Sixth Account. The defendant has conceded that the Sixth Account involved a different set of facts which are not relevant to their position as to the Seventh Account. It is not questioned that the Sixth Account involved a dispute over the distribution of ordinary income which was not produced by the sale of any capital asset. That fact alone has a significant difference which will be explained in detail hereafter. For the present, however, it should be noted that the Sixth Account and the expenses pertaining thereto are no longer questioned by defendant, nor does the treatment afforded those expenses conflict with the treatment urged by defendant for expenses of the Seventh Account.
In reference to the legal expenses pertaining to the Seventh Account heretofore set forth, the plaintiff has gone to great lengths to explain to this court how and why they are deductible under section 212(2). It was not an easy task and plaintiff performed admirably. Nevertheless, it is our opinion that this issue cannot be decided upon the basis urged upon us by plaintiff. That is, plaintiff has labored strenuously to convince this court that this issue should be decided on the assumption that the sale of capital assets by the trust was sufficiently unrelated to the expenses incurred by plaintiff so that those expenses should be treated separately. If we could accept such a proposition there would be no need
The cases principally relied upon by plaintiff developed his case along the line of the “origin and character” test to determine the deductibility or nondeductibility of the legal expense. United States v. Gilmore, 372 U.S. 39 (1963). With that test as his basic premise the argument for deductibility was developed with the assistance of such cases as Frederick E. Rowe, 24 T.C. 38:2 (1955) and Stella Elkins Tyler, 6 T.C. 135 (1946) to show that when a trust beneficiary incurs legal expenses in an action to settle disputes over the exact portion of distributions to be received, those expenses are incurred for the management, conservation or maintenance of property held for the production of income rather than for acquisition or disposition of property or expenses of defending or perfecting his interest in property. Those cases, along with others of a similar nature, provided a more than adequate basis upon which plaintiff could build his case. However, the one distinguishing element from the cases cited and this plaintiff’s case is that here there was the sale of a capital asset. This factor leads to our opinion that for whatever reason plaintiff felt he was incurring the expenses related to the Seventh Account, they cannot be divorced from the sale of the capital assets. It cannot be disputed that without the sale of stock there would have been no reason to instigate the legal action for collection of the proceeds of that sale. This factor, in our opinion, makes the cases of Woodward v. Commissioner, 397 U.S. 572 (1970) and United States v. Hilton Hotels, 397 U.S. 580 (1970) more in point on the question here presented than those of Rowe or Tyler, supra.
In the Supreme Court cases that Court settled the question as to deductibility or nondeductibility of legal expenses under section 212 when those expenses are incident to the sale of a capital asset. The question was resolved by their holding that when such expense is incurred in the process of acquisition
Plaintiff has also argued, as noted earlier in relation to the two parts of our problem, that the sale occurred at the trust level and that, therefore, the expenses incurred by the beneficiary are not sufficiently connected so as to taint the expenses with the color of the sale. While it is true that said sale did occur at the trust level, we feel that the conduit principles of the taxation of trusts are broad enough to effectively characterize the collection expenses of the beneficiaries with the same classification as the asset sold by the trustee. Indeed, because of section 662(b) there would be little doubt as to the characterization of these expenses if the circumstances were slightly altered so that the stock was sold at a price over and above its basis to the trust. If such were the case, plaintiff would undoubtedly seek the advantages of section 662(b) so as to characterize the proceeds distributed to him as capital gain. Furthermore, and if such were the case, there would be little doubt that the legal expenses incurred in collecting the full amount to which he would be entitled would be applied in reduction of that gain. Reg. 1.652(b)-3. (On this point, sec, Munson v. McGinnes, 283 F. 2d 333 (3rd Cir. 1960. It is the logical extension of the above described example that the legal expense in this case be treated on equal
We can see no legal distinction when dealing with the classification of legal expenses incurred in relation to the sale of a capital asset between expenses incurred when the sale is at a loss, for tax purposes, as opposed to expenses incurred when the sale is at a gain. We are sure that section 662(b), while appearing to concern itself only with matters of classification of the distributions coming to the beneficiary from the complex trust also addresses itself to corresponding deduction items which are also passed along from the trust to the beneficiaries. For example, under section 662(b), if the trust earned tax-exempt income during the year and thereby incurred expenses to earn that income, the conduit principle of section 662(b) would not only allow the beneficiary to exclude from his taxable income the tax-exempt income so distributed, but it would also require that the direct expenses incurred by the trust in relation to the tax-exempt income, not be deducted by the beneficiary. See. section 662(b) and Eegs. 1.662(b)-l and 1.652(b)-B. This is in keeping with section 265 for taxpayers in general and furthers the basic principles of the conduit rules in that while there may be two separate entities for tax purposes, there is only one tax to be apportioned between the trust and its beneficiary. Therefore, and in our case, even though the expense incurred was not suffered by the trustee, there is little doubt that if it had been so incurred, it would have been shipped through to the beneficiaries as an expense directly related to the sale of capital assets and treated accordingly. Consequently, and in furtherance of the conduit principles of trust taxation, .together with respect for the realities and substance of the entire transaction, we refuse to separate this expense from the sale of the Wanamaker stock. In so doing, on this issue, we must hold for the defendant and dismiss plaintiff’s petition to the extent noted. This is the opposite result of that arrived at by our commissioner on this issue; however, as to the second major issue in this case, as well as that pertaining to the Sixth Account, we are in full agreement with our commissioner and, therefore, adopt that por
II
The second issue is whether plaintiff is entitled to deduct more than $500 under section 212(8) of the 1954 Internal Eevenue Code with respect to the $10,181.88 he paid in attorneys’ fees primarily in connection with his divorce proceedings.
Plaintiff contends that one-third of the $10,181.38 in question is deductible under section 212(3) of the 1954 Internal Eevenue Code and Treas. Eeg. § 1.212-1 because the sum pertains to services and advice relating to tax matters.
Defendant concedes that $500 of the $10,181.38 in question is allocable to the “determination, collection, or refund of any tax,” and thus is deductible. However, defendant argues that as to any sum in excess of $500 plaintiff has not met his burden of proof, and, therefore, his claim must be denied. In the alternative, defendant in its brief urges that no more than 11 percent (or $1,119.95) is deductible.
A. Stuard Young, Jr., a partner in the law firm of Stradley, Eonon, Stevens & Young, who spends between one-third and one-half of his time on tax work, testified that about one-third of the $10,161.38 in question related to tax matters. Mr. Young prepared plaintiff’s federal income tax return for 1959, and, although he tried to take all deductions which plaintiff was entitled to, he did not deduct any portion of the sum in question. However, the deductions originally claimed are irrelevant. It is the deductions to which plaintiff is entitled that are controlling.
Mr. Young did not perform the services represented by the amount in controversy. Mr. Young’s testimony was based upon a review of his firm’s files made when plaintiff’s returns were being audited in 1962 and 1963. Unforkmately, Lewis Stevens, who performed the services in question, is deceased and he did not keep time records. Mr. Young did not recall whether he actually discussed the deductibility of the fees at issue with Mr. Stevens in 1959, but Mr. Young testified that normally he would do so and he did recall discussing plaintiff’s affairs with Mr. Stevens and was aware of his bill.
Plaintiff offered the bill in question in evidence as well as the law firm’s ledger sheets dealing with plaintiff’s account for the years 1959 and 1960. While it is impossible to ascertain exactly what portion of the fees in question are alloca-ble to tax matters from an examination of these documents, such an examination indicates that Mr. Young’s allocation may be extremely conservative.
Defendant is correct in its position that the burden of proof is upon the plaintiff-taxpayer to establish entitlement to a refund of moneys paid in a suit for refund of taxes. Lewis v. Reynolds, 284 U.S. 281 (1932) ; David v. Phinney, 350 F. 2d 371 (5th Cir. 1965), cert. denied, 382 U.S. 983 (1966). However, plaintiff, in the present case, has adduced evidence which indicates that one-third of the bill in question relates to tax matters. Obviously, some portion of the bill related to tax matters. Defendant, in attempting to rebut plaintiff’s evidence, merely asserts that plaintiff’s allocation is unreasonable, but offers no evidence to show that Mr. Young made his allocation in bad faith or erroneously and offers no evidence to show that its own allocation is correct. Defendant’s evidence merely indicates that all of the fee in question is not allocable to tax matters, which plaintiff concedes, and that some of the services performed on behalf of plaintiff were not of a complex nature.
In Carpenter v. United States, 168 Ct. Cl. 7, 338 F. 2d 366 (1964), this court held attorney fees arising out of divorce and separation proceedings which are concerned with the tax consequences flowing from such proceedings are deductible under section 212(3) of the 1954 Internal Kevenue Code and Treas. Keg. § 1.212-1 (1). In Gary enter the attorney who performed the services relating to the divorce allocated 70 percent of his $10,031.21 fee to services and advice to the tax
In the present case, the review of the records pertaining to plaintiff’s bill was made prior to the time a claim for refund was filed by a partner of the attorney rendering the services in question. In addition, all of the services rendered were not made in connection with divorce and separation proceedings, but all clearly have significant tax consequences flowing therefrom. Thus, the distinguishing characteristic between the present cases and the Carpenter case is the percentage of the attorneys’ fees allocable to tax matters, which is significantly higher in the Carpenter case than in the present case.
In George v. United States, 193 Ct. Cl. 535, 434 F. 2d 1336 (1970), as in the instant case, the tax problems were entangled with other matters surrounding a divorce action but the portion of fees reasonably allocable to legal expense for tax advice and counsel was held to be deductible for income tax purposes. What is reasonable turns upon the facts of a given case and must be measured by the best available evidence of the extent and value of the tax advice. Such evidence may be opinion evidence giving an allocation derived from reliable records of services performed. Matthews v. United States, 191 Ct. Cl. 674, 425 F. 2d 738 (1970).
For the foregoing reasons, it is concluded that plaintiff has met its burden of proof in establishing his right to deduct one-third of the bill of Stradley, Bonon, Stevens & Young dated August 18, 1959. Furthermore, the court concludes as a matter of law that plaintiff is entitled to recover the amount of tax plus interest wrongly assessed and paid by reason of the defendant’s refusal to allow him to deduct from gross income $15,518:59 in legal expenses for the trustees’ Sixth Account, and $2,893.83 in legal expenses pertaining to tax advice as to divorce and other matters. However, as for the $19,518.59 in 'legal expenses for the Seventh Account, the court concludes that plaintiff is not entitled to deduct those expenses and, therefore, dismisses plaintiff’s petition to that
Concurrence in Part
concurring in part and dissenting in part:
I do not agree with that part of the majority opinion on the first issue in which it held that the $19,518.59 the plaintiff paid for attorney fees in connection with the Seventh Account litigation was not deductible by him under Section 212 of the Internal Revenue Code. I agree with the decision of Chief Commissioner Bennett that they were deductible under Section 212 for all of the reasons stated in his written opinion.
Here the plaintiff was an income beneficiary of a trust. His principal source of income consisted of distributions from the trust. The amount of these distributions depended on what proportion of the proceeds of the sale of the stock was allocable to income, as opposed to corpus, under the laws of Pennsylvania. That was the basis of plaintiff’s suit and the origin of the controversy. The plaintiff undertook by the suit to increase the amount to be distributed to him as income by the trustees and he was successful. Under these circumstances, the requirements of the “origin and character” test as to the deductibility of legal expenses as enunciated by the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), were fully met. The suit was not connected with the actual sale of the stock, as the trustees had already sold it, but was related solely to the collection of income and to the management, conservation or maintenance of property held for the production of income.
As our chief commissioner pointed out, the plaintiff was not seeking any new title or any new properties. He was already an income beneficiary and was only seeking to enforce his rights to a proper distribution of income under Pennsylvania law. This was certainly an effort “for the production or collection of income” as contemplated by Section 212(1) of the Code, and thereby deductible. The legal expenses here were not incurred as expenses or costs of the dis
In Frederick E. Rowe, 24 T.C. 382 (1955), the Tax Court held that legal expenses in a will contest were paid to conserve or maintain property held for the production of income (the interest of a vested remainderman) and were not expenses to acquire, defend or perfect title. This is analogous to the situation here where the legal expenses were incurred to conserve or maintain property held for the production of income (i.e., plaintiff’s right to receive proper distributions). For these reasons, plaintiff is entitled to deduct his legal expenses under Section 212 (2) of the Code.
In the case of Stella Elkins Tyler, 6 T.C. 135 (1946), the Tax Court held that attorneys’ fees paid in connection with a will contest filed to determine the amount of annual income payable to the life tenant taxpayer of a testamentary trust was an expense for the collection of income within the meaning of Section 23(a)(2) of the Internal Revenue Code of 1939 (the predecessor of Section 212(1) and (2) of the 1954 Code), and deductible. Here, the legal expenses paid by plaintiff increased his distributive share from $1,022,544 to $2,158,910.92. This was not a new or different interest which he acquired, but merely a proper distribution of funds already in the hands of the trustees. The Tyler case seems to be directly in point. In both that case and our case, the legal expenses that were incurred were directly connected with income that was distributable to an income beneficiary of a trust. Under the authority of Tyler, the plaintiff is entitled to deduct these legal expenses under Section 212(1) of the Code.
The case of Commissioner v. Burgwin, 271 F. 2d 395 (3d Cir. 1960) relied on by the government and by the majority,
The majority opinion rationalizes that the legal fees here were incurred in 'connection with the sale or disposition of a capital asset. It appears to have reached this result by reasoning that the money involved came from the sale of the stock previously made by the trustees and had such sale not been made the money would not have been on hand. From this premise, it proceeds .by a “conduit” theory to connect plaintiff’s legal fees with the sale previously made by the trustees. I think this goes too far. It could just as easily be argued that plaintiff’s legal fees were related by the “conduit” theory to the original purchase of the stock by the trustor, because his purchase of it made possible the later sale by the trustees which resulted in the acquisition of the money in their hands for distribution. One argument is about as logical as the other. In my opinion, neither is correct.
Accordingly, I would approve and adopt Chief Commissioner Bennett’s opinion as to the first issue and hold that plaintiff is entitled to deduct Ms legal expenses under Section 212(1) and 212(2) of the 1954 Code of Internal Kevenue.
I concur in the remainder of the majority opinion.
EINDINGS OE FACT
The court, having considered the evidence, the report of Chief Trial Commissioner Marion T. Bennett, and the briefs and arguments of counsel, makes findings of facts as follows:
1. Plaintiff is Gurnee Munn, Jr., of Palm Beach, Florida.
2. Plaintiff filed his federal income tax returns for the years 1959 and 1960 with the District Director of Internal Kevenue at Jacksonville, Florida. In computing his income tax liabilities for those years he took deductions for certain attorneys’ fees and costs in the amounts of $27,537.18 for 1959 and $5,000 for 1960.
3. Upon 'an audit of said tax returns for 1959 and 1960, the Internal Kevenue Service (hereinafter referred to as the
4. In part as a result of the disallowance of the aforementioned deductions taken by plaintiff for the years 1959 and 1960, the Service asserted additional deficiencies in the amount of $22,902.01 for 1959 and $4,176.05 for 1960, which plaintiff paid together with accrued interest thereon.
5. Plaintiff filed claims for refund with respect to such payments. On October 4, 1966, the Service notified plaintiff of its disallowance of his claim for refund for 1959 and 1960.
6. (a) Plaintiff is the son of Marie Louise Kent (formerly Marie Louise Munn), who was the daughter of Kodman Wanamaker. Rodman Wanamaker died on March 9, 1928. In the third paragraph of his will, dated October 6, 1923 (hereinafter referred to as the will), Rodman Wanamaker established a trust (hereinafter referred to as the Stock Trust) consisting of all the shares of the capital stock of John Wanamaker Philadelphia. The will directed that the difference between the net annual profits of John Wanamaker Philadelphia and an amount to be paid into a sinking fund (also created by the will) should be divided equally among Rodman Wanamaker’s three children.
The will also provided that on the death of any of his children, that child’s share would be divided into two parts, one part of which would be equally divided among the then living children of the deceased child. The other part was to be accumulated for “The John Wanamaker Free School of Artisans.”
The twentieth paragraph of the will provided that the amount of the annual distribution to the children of Rod-man Wanamaker under the third paragraph of the will was to be not less than $100,000 each, unless the annual profits of the business did not warrant it.
(b) An agreement (hereinafter referred to as the Family Agreement) dated January 26, 1931, was entered into be
(1) the sum of $100,000 to be paid to each of the children of Rodm’an Wanamaker and upon the death of a child, to such persons lawfully entitled to his or her share;
(2) to the persons described in the eighth through the eleventh paragraphs of the codicil of August 5, 1927, the sums described as annuities; and
(3) the balance in equal shares to the children of Rodman Wanamaker and to those lawfully entitled thereto in the event of the death of any of said children.
7. Marie Louise Kent, who is named in the third paragraph of the will as Marie Louise Munn, died on October 16, 1955. At that time, under the terms of the will and the Family Agreement, plaintiff, as a grandchild of Rodman Wanamaker, became an income beneficiary of the Stock Trust. Plaintiff and his sister, Fernanda Munn Kellogg, were, under the terms of the will, entitled to divide between themselves one-half of their mother’s one-third interest in the distributions from the Stock Trust. Thus, after the death of his mother, plaintiff had a one-twelfth income interest in the residual income of the Stock Trust and a one-quarter interest in his mother’s right to a yearly $100,000 payment.
8. Upon the filing of the Sixth Account of the trustees of the Stock Trust and the first supplement thereto, which was listed for audit on November 7,1955, the estate of Mary Brown Warburton (deceased sister of Rodman Wanamaker) made claim upon the trustees for payment out of income of the trust for unpaid arrearages for the years 1932, 1933, and 1934, in the total amount of $300,000, due Mary Brown Warburton as an annuitant under the will of Rodman Wanamaker. The Warburton estate also claimed $18,904.14, representing the balance of her current annuity accruing to the date of her death in 1954.
9. With respect to the same accounting, a claim was made on the trustees by the estate of Marie Louise Kent for arrearages in the amount of $100,000 and for a balance of
10. Under d'ate of November 26,1955, plaintiff sent Lewis Stevens of the law firm of Stradley, Ronon, Stevens & Young a telegram authorizing Mr. Stevens to represent him in all Wanamaker and personal affairs. Plaintiff authorized Richard K. Stevens of the law firm of Stradley, Ronon, Stevens & Young to resist the claim of the estate of Mary Brown Warburton against the income of the trust.
11. A hearing on such claims was held before Judge Alfred L. Taxis, Jr., in the Orphans’ Court of Montgomery County, Commonwealth of Pennsylvania. On May 9, 1956, Judge Taxis entered a memorandum opinion with respect to the Sixth Account and the first supplement thereto, denying the claim of the estate of Mary Brown Warburton and allowing the claim of the estate of Marie Louise Kent. No objection was made to the Kent claim for current income on a prorated basis to date of death. The opinion does not indicate whether any objections were made with respect to the Kent claim for $100,000 arrearages.
12. After exceptions were filed, the claims of the War-burton and Kent estates were settled by the parties. The Warburton estate was allowed $109,904.14 in satisfaction of its claims of $318,904.14. Thus, the settlement resulted in the Warburton estate giving up $209,000 of its claim, with a concomitant increase in the income available to pay income beneficiaries. As a result of the settlement, additional income was distributable to plaintiff and includable in his taxable income for federal income tax purposes.
13. The principal asset of the Stock Trust is shares of stock of John Wanamaker Philadelphia, a Pennsylvania corporation, which operates a retail department store in Philadelphia. On January 17,1957, John Wanamaker Philadelphia purchased 10,294 shares of its own common stock from the Stock Trust at a total purchase price of $6,999,920, resulting in a long-term capital loss to the trust of $1,235,280.
14. The Seventh Account of the Stock Trust was called for audit on April 7,1958. Of the sale proceeds of the John
15. On August 1, 1958, Judge Taxis entered 'an adjudication to the Seventh Account of the trustees modifying their allocation of the sale proceeds of the stock by increasing the amount allocable to income to $2,158,970.92, out of the total proceeds of $6,999,920. He also rejected the claim of the Kent estate to 89.337 percent of the amount apportionable to income which was to be distributed to the Kent line.
16. Plaintiff reported no additional income in his federal income tax return with respect to the amount of $341,359 paid to him by the trustees as a result of Judge Taxis’ adjudication on August 1,1958.
17. In 1959, plaintiff paid the sum of $7,537.18 to Stradley, Ronon, Stevens & Young for legal services rendered in connection with the above-described litigation and costs. In addition, plaintiff paid $7,500 to Stradley, Ronon, Stevens & Young in 1960 for such services. Such amounts were fair, reasonable, and customary for the extent and nature of the services rendered on behalf of plaintiff. Of those amounts, $7,518.59 is allocable to the Sixth Account and $7,518.59 is allocable to the Seventh Account.
18. Cuthbert Latta, a Philadelphia attorney then with the
19. On December 26,1958, and January 31, 1959, the law firm of Barnes, Dechert, Price, Myers & Bhoads rendered bills to Mrs. Kellogg in the amount of $20,000 each, for the services provided with respect to the Sixth and Seventh Accounts. Of the total of $40,000, the sum of $16,000 is alloca-ble to services rendered in connection with the Sixth Account and $24,000 for the Seventh Account. The charges were fair and reasonable.
20. Sometime prior to December 26, 1958, and after the completion of the Sixth Account, Francis L. Kellogg suggested to plaintiff that he might reimburse Mrs. Kellogg for a portion of the fees to be paid by her for the services provided by Mr. Latta in connection with the Sixth and Seventh Accounts of Stock Trust because of the identity of their interests. The discussions over the plaintiff’s reimbursement of Mrs. Kellogg began when it became apparent that the complexity of the litigation and the time expended by Mr. Latta were going to result in a large bill from his firm for the legal services provided. Plaintiff agreed to reimburse Mrs. Kellogg for 50 percent of the fee for Mr. Latta’s services and did so by check on January 28, 1959.
21. Of the $20,000 paid by plaintiff to Mrs. Francis L. Kellogg as reimbursement for the bill of Barnes, Dechert, Price, Myers & Bhoads, $8,000 is allocable to the Sixth Account and $12,000 is allocable to the Seventh Account.
22. In addition to the above attorneys’ fees plaintiff paid to Lewis M. Stevens, $5,181.48 during the year 1959 and $5,000 during the year 1960 for legal services rendered primarily in connection with divorce proceedings involving petitioner.
23. Plaintiff, in his federal income tax returns for 1959 and 1960, did not claim any deductions with respect to the
24. A. Stuard Young, Jr., a partner in the law firm of Stradley, Eonon, Stevens & Young, testified with regard to the bill for services rendered by the late Lewis M. Stevens (hereinafter referred to as the Stevens bill). He confirmed the estimate that one-third of the Stevens bill related to tax matters on the basis of complexity of the work done although numerically speaking about one-fourth of the items pertained to tax matters. Mr. Young prepared the plaintiff’s federal income tax return for the year 1959. In preparing plaintiff’s tax return, Mr. Young discussed Mr. Munn’s affairs with Lewis M. Stevens, and he was aware of the Stevens bill. After reviewing all of plaintiff’s bills and records and consulting with Mr. Stevens, Mr. Young deducted attorneys’ fees relating to income tax services provided by Stradley, Eonon, Stevens & Young and fees relating to the protection of income-producing property but did not deduct any portion of the Stevens bill. He tried to take all deductions to which plaintiff was entitled.
25. Mr. Young first reviewed the Stevens bill in 1962 or 1963, when a tax audit of plaintiff’s 1959 and 1960 income tax returns was being conducted. Mr. Young had performed some services in connection with plaintiff’s affairs, chiefly tax work, beginning in 1957. The period encompassed by the Stevens bill was for the period November 1955 to October 1957, with most of the services having been performed prior to July 1957. Mr. Young’s review of the Stevens bill was not based upon personal knowledge of the services performed, but upon a review of the firm’s files.
CONCLUSION OK LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff
In accordance with tbe opinion of tbe court, a stipulation of tbe parties and a memorandum report of tbe commissioner as to tbe amount due, it was ordered on May 19, 1972 that judgment for plaintiff be entered for $19,451.21, plus statutory interest as provided by law.