Petition for review from the United States Board of Tax Appeals.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
The petitioners herein are the trustees under the will of Carl Hicks White. They appeal from a decision of the Board of Tax Appeals determining an income tax deficiency for the year 1935.
The testator died on March 20, 1933, a resident of New Jersey. He left an estate of almost one million dollars, consisting largely of intangibles although there were two parcels of real estate in Vermont. The will was admitted to probate in the City of New York and on January 7, 1935, pursuant to a decree of the Surrogate's Court, the executors delivered to the petitioners, as trustees, the residuary estate which then had a value of about three-quarters of a million dollars. The principal asset of the estate is approximately 8,500 shares of the capital stock of Health Products Corporation, a New Jersey corporation. The estate also owns all of the capital stock of Sunnyside, Inc., a Vermont corporation having its principal place of business at Bennington, Vermont.
Various paragraphs of the will set up trusts, gave specific lagacies and made provisions for the use of the testator's real estate. There was an ambiguity among the directions contained in he several paragraphs. Therefore, shortly after the trustees qualfied, a petition was filed by them in the Surrogate's Court of New York praying the "determination and advice of this Court as to the validity, construction, and effect of the disposition of property * * * of such will". All of the interested parties appeared and the court rendered a decree holding all of the trusts and bequests valid and directing that the expenses of the proceeding, totalling $11,420.70, be paid from the principal of the estate. This sum included attorney's fees and costs of the trustees and also attorney's and guardian's fees and costs of certain legatees. It was paid by the trustees from income, although charged to the principal of the trust fund, on the ground that the immediate payment from the principal would have entailed a sacrifice of the assets.
The petitioners contend that they may take the costs of these proceedings as a deduction on the ground that they are engaged in a business as managers of this trust estate and that the cost of the proceedings was an ordinary and necessary expense incurred in the carrying on of that business. Revenue Act of 1934, c. 277, 48 Stat. 680, § 23(a), 26 U.S.C.A. Int.Rev.Code, § 23(a) (1). With certain exceptions not here involved, the act treats a trust estate as an individual taxpayer. 26 U.S.C.A. Int.Rev.Code, section 162; Treasury Regulations 86 Art. 162-1. The government argues that the management of this trust estate does not constitute a business and, even if it does, the cost of the litigation was not related to the business activity of the trust. The Board of Tax Appeals did not decide whether the trust was engaged in a business, but held that the proceeding to construe the will was not related to questions of management of the trust estate but involved only distribution of assets among the various legatees.
We are confronted, therefore, with the question whether the trustees, in the management of this trust estate, are engaged in a business within the meaning of the Revenue Act. The language of the statute itself gives no definition which we may automatically apply to a set of facts and find from such application an authoritative answer. Nor has the Supreme Court of the United States given us a formula by which varying sets of facts may be resolved. In Deputy v. du Pont, 1940, 308 U.S. 488, 499, 60 S. Ct. 363, 369, 84 L. Ed. 416, Mr. Justice Frankfurter in a concurring opinion joined in by Mr. Justice Reed stated that "' * * * carrying on any trade or business', within the contemplation of § 23 (a), involves holding one's self out to others as engaged in the selling of goods or services". As will appear from the facts stated below the activities of these trustees fall far short of meeting such a test. In the absence of binding authority on the precise point the problem appears, like many others in the law, to be one the answer to which is being marked out by a process of inclusion and exclusion so frequently found where the courts deal with distinctions based on degree rather than kind.
In this case the activity of the trustees was found by the Board of Tax Appeals to be as follows, 40 B.T.A. 664, 668:
"The income of the trust amounts to about $60,000 per annum, of which the petitioners are required to invest and reinvest about $40,000 per annum. Up to the present time the investments made by the petitioners amount to approximately $200,000, which are chiefly in stocks and bonds, although the petitioners have made some real estate loans in New Jersey. The petitioners are constantly selling and buying stocks and bonds and it is necessary for them to keep in constant communication with each other in this respect and to have investment counsel. The petitioners are required to do some things in connection with the trust almost every day and to make trips to New York and Washington several times during each year. Petitioners have also been required to make several trips to Bennington, Vermont, to attend to the matters of the estate there, including the properties of Sunnyside, Inc., all of the capital stock of which is owned by the trust. Petitioner Huston Thompson is president of Sunnyside, Inc. In connection with the properties located at Bennington, Vermont, the petitioners have been required to employ an attorney there to look after titles and to attend the meetings of the board and supervise generally the work of Sunnyside, Inc.
"The chief asset of the estate consists of approximately 8,500 shares of the stock of the Health Products Corporation, located at Newark, New Jersey. Petitioner Stephen H. Tallman is a member of the board of directors of this corporation and is required to attend its meetings, and both of the petitioners attend its stockholders' meetings and constantly get reports in that connection which are checked by them. Among the things the petitioners were required to do during the year 1935 in connection with the Health Products Corporation stock was to confer with the other heavy stockholders and decide the question of whether the stock should be put on the market, which one of the petitioners strenuously resisted. The interests of the petitioners in the stock of the Health Products Corporation require their constant attention.
"The petitioners are also required to give their attention to the memorial funds set up by the will of the decedent, requiring constant communication with the attorneys for the memorial funds to keep them advised as to investments, and petitioners make annual reports to those attorneys in this connection."
Do such activities constitute carrying on of a business? It seems now to be clear that the investing and reinvesting of assets, either by an individual for himself or by trustees on behalf of a trust estate, is pretty definitely determined not to constitute the carrying on of business. Thus Judge Learned Hand says in Bedell v. Commissioner, 2 Cir., 1929, 30 F.2d 622, 624: "Most men who have capital change their investments, and may speculate all the time; we should hardly call this a business, though the line is undoubtedly hard to draw." Judge Patterson in the same Circuit in Higgins v. Commissioner, 2 Cir., 1940, 111 F.2d 795, 796, says: "By the common speech of men, a person who does nothing beyond looking after his own investments and receiving the income from them is not conducting a trade or business." The same rule has been applied to the investing and reinvesting of a trustee on behalf of an estate. In City Bank Farmers Trust Co. v. Commissioner, 2 Cir., 1940. 112 F.2d 457, 458, it appeared that the duties of the trustee in a given trust consisted generally in causing its investment company to review each year its securities comprising the corpus; selling securities and reinvesting the proceeds in other stocks and bonds; collecting interest and dividends; paying expenses of the trust; distributing income to beneficiaries; keeping books of account; rendering statements to the interested parties for preparing and filing income tax returns. The court said: "We hold that in caring for the trust estate the trustee was like an individual engaged in investing his funds in stocks and bonds and that such a person cannot be regarded as engaged in business and, therefore, is not entitled to be allowed any deduction for expenses incurred in investing and supervising." To the same effect, see the clear and helpful discussion by the court in Miller v. Commissioner, 9 Cir., 1939, 102 F.2d 476 (also a trustee case) and Kane v. Commissioner, 2 Cir., 1938, 100 F.2d 382.
Kales v. Commissioner, 6 Cir., 1939, 101 F.2d 35, 39, 122 A.L.R. 211 seems to look the other way, although the court did not detail all the taxpayer's activities, but characterized them as "extensive, varied, continuous and regular". This decision was distinguished by the Ninth Circuit in the Miller case and differed with by the Second Circuit in Higgins v. Commissioner, supra. It seems to us clear that it is the consensus of judicial opinion, in which we concur, that the process of supervising the investment of one's own estate, or an estate in which one acts as trustee for ...