Whether the plaintiff may deduct from his individual income tax return attorney fees incurred in the preservation of his individual share of an estate.
In the case of Kornhauser v. United States, 276 U.S. 145, 48 S. Ct. 219, 72 L. Ed. 505, the plaintiff sued to recover an income tax paid by reason of the disallowance as a deduction of an attorney's fee incurred by him within the taxable year in the defense of a suit for an accounting instituted by a former partner. The defense to the suit was successful. Mr. Justice Sutherland, in upholding the right of the taxpayer to deduct as a business expense the disbursement for attorney fees, referred to various decisions of the Bureau of Internal Revenue and of the Board of Tax Appeals which permitted legal expenses to be deducted, and said (at page 153 of 276 U.S., 48 S. Ct. 219, 220, 72 L. Ed. 505): "The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated ( Appeal of Backer, 1 B.T.A. 214, 216), proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214 (a), subd. 1, of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. If the expense had been incurred in an action to recover a fee from a client who refused to pay it, the character of the expenditure as a business expense would not be doubted. In the application of the act we are unable to perceive and real distinction between an expenditure for attorney's fees made to secure payment of the earnings of the business and a like expenditure to retain such earnings after their receipt. One is as directly connected with the business as the other."
The plaintiff as a beneficiary in the instant case was in no business as was the plaintiff in the foregoing case, and for that reason the two cases are not analogous.
The plaintiff cites the case of Kottemann v. Commissioner (C.C.A.) 81 F.2d 621, wherein the taxpayer was in the employ of Julian Petroleum Corporation, and in his official capacity had done certain acts which had caused him to be indicted. He also alludes to a further case involving a criminal indictment, Commissioner v. People's Pittsburg Trust Co. (C.C.A.) 60 F.2d 187, wherein the taxpayer, as chairman of the board of directors of the Crucible Steel Company of America, signed and made affidavit to the income tax returns of that corporation. The execution of said returns in this manner was one of his many duties. The returns thus executed were deemed fraudulent by the government, with the result that the taxpayer was indicted. The plaintiffs in each of these suits incurred attorneys' fees and incidental expenses in defending these criminal cases, which they claimed as deductions in their tax returns. The courts held that the said attorneys' fees and other disbursements were not personal but constituted ordinary and necessary expenses which were deductible. Again, these situations are entirely distinguishable from the situation of the plaintiff in this case. There the courts held the expenses incurred and paid out by them to be necessary because the acts were performed by the taxpayers in carrying on their trades or businesses. That, however, is not the case at bar. Here the business of the trust had been terminated and distribution of the estate had been effected. Plaintiff was interested in preserving the status quo of the distribution purely from a personal standpoint. The expenses incurred in his defense to the action by Charles Burnham Squier were for his individual, and not his official, protection. If these expenses had been incurred in his official capacity the estate should save him harmless, and then it would be the estate's deduction, if any there should be. The court, however, is not concerned with that point, as the estate is not claiming the deduction.
Since the attorney fees were incurred in furtherance of the plaintiff's personal benefit, it follows that the case of Hutchings v. Burnet, Commissioner of Internal Revenue, 61 App.D.C. 109, 58 F.2d 514, is controlling. In that case the taxpayer joined in a suit to contest a will in which a settlement was effected. Thereafter the same taxpayer was sued in respect to the title to certain property and successfully defended the action. The legal expenses incurred in these two actions were claimed as a deduction in the taxpayer's individual return. The court, among other things, held that these expenditures affected only her personal interests in the estate and were not deductible.
The court finds further authority to support its conclusion in the case of Lindley v. Commissioner of Internal Revenue (C.C.A.) 63 F.2d 807, 808, wherein an administrator paid the taxes assessed against the estate and lost in a suit for a recovery thereof. Thereupon the petitioner joined with some of the other heirs in taking an appeal in the name of the administrator, and obtained a reversal of the judgment. The petitioner deducted the attorney fees incurred in the prosecution of her appeal. This deduction was disallowed. The court stated: "In this case, however, the petitioner was acting only to secure her own personal rights as an heir at law, even though she and the others did so in the name of the administrator."
In the instant case plaintiff was likewise acting to secure his personal rights in the estate. Accordingly, judgment will be entered for the defendant.
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