
    FRANK STONE LOYD AND J. EASLEY EDMUNDS, JR., EXECUTORS UNDER THE WILL OF GRACE STONE KELLER, DECEASED v. THE UNITED STATES
    [No. 91-56.
    Decided July 12, 1957]
    
      
      Mr. Edward. 8. Graves for the plaintiffs. Messrs. Ed-munds, Whitehead, Baldwin & Graves were on the brief.
    
      Mr. David B. Frazer, with whom was Mr. Assistant Attorney General Charles K. Biee, for the defendant. Mr. James P. Garland was on the brief.
   Jones, Chief Judge,

delivered the opinion of the court:

This is an action for the recovery of income taxes alleged to have been illegally assessed against plaintiffs, executors of the estate of Grace Stone Keller, in the amount of $59,693.79 for the year 1953. The sole issue presented is whether the executors of an estate can properly deduct litigation expenses incurred in prosecuting a suit to have a residuary trust declared void and the trust property paid into the estate. The applicable sections of the Internal Kevenue Code of 1939 are section 162 and section 23 (a) (2) which follow:

Sec. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that * * *
Sec. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses.—
4: $ $ $ $
(2) Non-trade or non-business expenses. — In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

The facts which are not in dispute and which have been stipulated to by the parties are as follows:

Grace Stone Keller was the daughter and sole heir at law of Mary Peck Stone who died February 3, 1945, leaving a will which created a trust of her residuary estate with the income to go to Mrs. Keller during her lifetime. On her death the income was to be paid at the discretion of the Stone trustees to the First Christian Science Church of Lynchburg, Virginia. Mrs. Keller, who was also one of the executors of her mother’s estate and one of the trustees of the aforementioned trust, was paid and received the income of the trust until the time of her death on August 7,1948.

As far back as April 1945 the executors of the Stone estate were advised that there was doubt as to the validity of the provision in Mrs. Stone’s will benefiting the church since it apparently violated statutory provisions relating to gifts for religious purposes. No court action was taken during Mrs. Keller’s lifetime, however.

Since it was neither possible for the Stone executors or trustees to properly administer and distribute the residuary estate of Mrs. Stone, nor for the plaintiffs to properly administer and distribute the assets of Mrs. Keller’s estate without obtaining an answer to the question of the validity of the grant made to the church, the plaintiffs in this action instituted suit in the Virginia courts on August 29, 1949, to obtain a determination of that question. Decision was rendered in the trial court and after appeal was finally modified and affirmed by the Supreme Court of Appeals of Virginia on December 3,1951. A decree was entered, holding that, pursuant to the Code of Virginia, the gift to the church was void except as to the difference between $100,000 and the intangible property held by the church trustees. Maguire v. Loyd,, 193 Va. 138, judgment affirmed on rehearing, 194 Va. 266. The property of the Stone estate in excess of that to which the church was entitled was subsequently delivered to the executors of Mrs. Keller’s estate in 1953. The market value of the property at the time of delivery to plaintiffs was $472,563.31. There was also delivered to plaintiffs accumulated income which at the time of delivery amounted to an additional sum of $114,378.50. The parties agree that this income is all reportable in the year 1953.

Litigation expenses incurred in the court proceedings here-inbefore referred to amounted to a total of $145,021.14, of which sum $118,519.99 was paid to counsel for the plaintiffs herein and $26,501.15 was paid to the counsel for the Stone executors and trustees. None of these expenses were claimed as deductions under section 812 (b) for Federal estate tax purposes and there is no dispute as to estate taxes, all problems relative thereto having been resolved.

As the result of a request by the plaintiffs for a ruling on the question here involved, the Internal Revenue Service decided that only such part of the litigation expenses of $145,-021.14 as was attributable to the recovery of income was deductible for income tax purposes and that the remainder should be added to the basis of the capital assets on the theory that this portion of the expenses is classified as expenses of asserting or defending title to property and is in the nature of a capital expenditure. The plaintiffs’ income tax for 1953 was so calculated, with the resultant tax of $59,693.79 being paid by plaintiffs on June 15,1954. No tax would have been due at all if the entire amount of the litigation expenses were allowed as a deduction. Plaintiffs filed a claim for refund on June 24,1954, alleging the litigation expenses were fully deductible. The claim was denied by the revenue service by registered letter dated January 5, 1955, and suit was thereafter instituted in this court on February 21, 1956.

The Government in its brief cites many cases to sustain its position that the expenditures made by plaintiffs in excess of that portion attributable to the recovery of income were capital expenditures, hence not deductible, and should be added to the basis of the principal property received. The Government also relies on section 39.23 (a)-15 (k) of Treasury Regulations 118 promulgated pursuant to section 23 (a) (2) of the 1939 Internal Revenue Code. That section follows:

§ 39.23 (a)-15. nontrade or nonbusiness expenses.
jfc sf: H* ‡ %
(k) Expenditures incurred in defending or perfecting title to property, in recovering property (other than investment property and amounts of income which, if and when recovered, must be included in income), or in developing or improving property, constitute a part of the cost of the property and are not deductible expenses. Attorneys’ fees paid in a suit to quiet title to lands are not deductible; but if the suit is also to collect accrued rents thereon, that portion of such fees is deductible which is properly allocable to the services rendered in collecting such rents. Expenditures incurred in protecting or asserting one’s rights to property of a decedent as heir or legatee, or as beneficiary under a testamentary trust, are not deductible. * * *

In respect to this regulation the Government’s position apparently relates only to the last quoted sentence. It argues that the litigation costs paid by the taxpayers to acquire the corpus of the trust established under Mrs. Stone’s will were expenditures incurred in asserting one’s rights to property of a decedent as heir or legatee, and as such are not deductible expenses. In other words, the Government contends that for the purposes of this regulation the executors of the deceased’s estate are to be put on the same footing as the deceased prior to death.

The plaintiffs, on the other hand, rely chiefly on the Supreme Court case Trust of Bingham v. Commissioner, 325 U. S. 365 (1945), and § 39.23 (a)-15 (i) of Treasury [Regulations 118 also promulgated under section 23 (a) (2) of the 1939 Internal Eevenue Code, and which was written into the regulations after and as a result of the Bingham decision. Section39.23 (a)-15 (i) follows:

Eeasonable amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including, fiduciaries'1 fees and expenses of litigation., which are ordinary and necessary in connection with the performance of the duties of administration are deductible umder this section [Section 23 (a) (2) of the 1939 Internal Eevenue Code], notwithstanding that the estate or trust is not engaged in a trade or business, except to the extent that such expenses are allocable to the production or collection of tax-exempt income. [Italic ours.]

Plaintiffs also rely on several cases cited to prove their proposition that litigation expenses incurred by a fiduciary should be considered deductible expenses and not capital items in this type of situation. They make much of the fact that all of the cases cited by defendant involve an individual taxpayer seeking to deduct litigation expenses while the bulk of the cases plaintiffs cite involve the same type of expense incurred by a fiduciary of one kind or another and that these cases show a greater liberality for permitting a fiduciary to deduct the expenses rather than requiring capitalization. Plaintiffs feel this distinction between a fiduciary and an individual taxpayer is vital.

Whether or not the substance of the various cases cited by the parties indicates a valid distinction between fiduciaries and individuals so as to permit a deduction to the fiduciary in a situation where the individual taxpayer would not be so entitled, we will not decide. Nevertheless, we feel for the reasons outlined below that the expenses of litigation here put in issue are fully deductible for income tax purposes and that the plaintiff is entitled to a refund for the year 1953 in the amount claimed.

The cases cited by the parties and above referred to do, in the aggregate, however, seem to have an underlying principle to determine deductibility in this type of situation; to wit, if the primary purpose of the litigation which gave rise to the expense was title, then the expenditure is capital in nature and must be capitalized; if the aspect of title is only incidental to the primary purpose of the litigation, then the expense is deductible as such and need not be capitalized.

The Government argues that for an expense to be deductible as an expense paid or incurred for the management, conservation, or maintenance of property held for the production of income, the statute, section 23 (a) (2), quoted above, requires the property to be held, by the taxpayer at the time the expense is incurred and since plaintiffs in this case did not hold the property at that time, title was the primary purpose of the litigation. It is the defendant’s position that plaintiffs first had to be awarded title before they could distribute it to the heirs of Mrs. Keller. It contends, therefore, that both under the statute and the cases the expense in question is nondeductible.

We feel, however, that so long as the expense is reasonable and “ordinary and necessary” and is directly connected with or proximately results from the conduct of the business of the estate it is deductible, notwithstanding the fact that the property was not actually held at the time suit was instituted. While the executors in this case did not actually hold the property at that time, under Virginia law they were entitled to the property and title was actually in them since Mrs. Stone’s death, irrespective of the fact that there was some confusion and little clarity in the minds of the executors of both estates. The status of the property was as it was ultimately determined to be.

The Supreme Court in the Bingham decision, cited supra, a case in which the fiduciary plaintiff sought to deduct expenses incurred in a suit for the refund of income taxes, supports this view wherein, at page 373, it states as follows:

* * * Such expenses need not relate directly to the production of income for the business. It is enough that the expense, if “ordinary and necessary,” is directly connected with or proximately results from the conduct of the business * * * Section 23 (a) (2) thus treats the trust as an entity for producing income comparable to a business enterprise, and like § 23 (a) (1) permits deductions of management expenses of a trust, even though the particular expense was not an expense directly producing income.

At page 376 the Court went on to say:

* * * by its terms and in analogy with the rule under §23 (a) (1), the business expense section, the trust, a taxable entity like a business, may deduct litigation expenses when they are directly connected with or proximately result from the enterprise — the management of property held for the production of income.

Thus, the Court in effect held that expenses incurred in attempting to recover property in which the fiduciary taxpayer’s right to possess is disputed, are expenses incurred in the management, conservation or maintenance of property held for the production of income. While the Bingham decision dealt only with a trust, it would apply with equal force to an estate.

It seems clear then that it is not imperative that the property actually be currently held by the fiduciary, the executor or the trustee, when suit is instituted so as to permit deducti-bility under section 23 (a) (2). As stated above, if the expense is reasonable and “ordinary and necessary” and is directly connected with or proximately results from the conduct of the business (of the estate or trust or any other fiduciary business) it is deductible.

That the expenses in question in this case are reasonable is not disputed. That they are ordinary and necessary can easily be seen in that it would have been impossible for the plaintiffs to properly administer the deceased’s estate, that is, to gather and distribute all of the assets thereof, without first obtaining the answer to the question of validity of the grant to the church. A fortiori, the executors had a duty to do what they did. The executor of an estate must collect, inventory, and distribute all the property of that estate. To willfully or negligently fail in this duty would subject the executor to the possibility and probability of a suit for mismanagement of the estate. Such would have been highly probable in this case since there was doubt as to the validity of the gift to the church as far back as 1945. The expenses in question, therefore, are ordinary and necessary expenses and proximately result from the business, and we so hold.

Moreover, considering the case strictly from the standard followed by the several cases cited by plaintiffs and defendant and referred to above, that is, what was the primary purpose of the litigation, we must still reach the same conclusion. The primary purpose, or at least the motivating force, of the litigation was not the question of who had title to the property, rather it was that the proper distribution of the estate’s assets could not have been had without a prior determination by the court of the validity of the gift.

In any event, we feel that the problem presented by this case is actually answered by the Commissioner’s own regulation. Section 39.23 (a)-15 (i) of Treasury Begulations 118, quoted above, states that “Seasonable amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including fiduciaries' fees and expenses of litigation, which are ordinary and necessary in connection with the performance of the duties of administration are deductible '* * [Italic ours.] As we have noted previously, the expenses in suit were ordinary and necessary in connection with the performance of the executors’ duties of administration of the estate and, therefore, are entitled to be deducted under the express language of the Commissioner’s own regulations interpreting the applicable section of the statute.

Also, we feel that section 39.23 (a)-15 (k) to the extent relied on by defendant is inapposite. Plaintiffs in this case are not the heirs or legatees under a will nor are they the beneficiaries under a trust. Plaintiffs are the executors of the heir, thus, necessarily on a different footing than the heir itself. An executor is bound to act and is motivated in his every action, as well as limited in the extent of his actions, by his fiduciary duty.

Moreover, part of that same subsection (k) specifically excludes investment property from the provisions ascribing nondeductibility to legal expenses incurred in defending or perfecting title. All of the property here involved was investment property. Thus, subsections (i) and (k) of section 39.23 (a)-15 by their specific language exempt expenses of the nature here in suit from the nondeductibility provisions.

We conclude and hold, therefore, that all of the litigation expenses here put in question are fully deductible as expenses in offsetting income of plaintiffs for the year 1953 and they are entitled to judgment in the amount of $59,693.79, plus interest as provided by law.

It is so ordered.

Laramore, Judge; Madden, Judge; Whitaker, Judge; and Littleton, Judge, concur.

FINDINGS OF FACT

The court makes findings of fact, based on the stipulation of the parties, the briefs, and argument of counsel as follows:

1. Plaintiffs, as executors of the estate of Grace Stone Keller, bring this proceeding to recover $59,693.79, with interest, paid on June 15,1954, by the Keller estate as Federal income taxes for the calendar year 1953.

2. Grace Stone Keller was the daughter and sole heir at law and distributee of Mary Peck Stone, who died February 3, 1945, leaving a will which provided in part as follows:

FIFTEENTH: I give, devise and bequeath all of the rest, residue and remainder of my estate, both real and personal, and wheresoever situated, which I may own or be entitled to dispose of at the time of my death, to my Trustees, hereinafter named, in trust nevertheless, for the following uses and purposes:
M. L. P. S.
(a) To collect, receive, invest and reinvest the same and to pay the net income therefrom to my daughter,
GRACE STONE KELLER, during the term of her life.
(b) Upon the death of my said daughter, GRACE STONE KELLER, to pay said net income to, or in the absolute discretion of my said Trustees, to expend said net income for the benefit of the FIRST CHRISTIAN SCIENCE CHURCH OF LYNCHBURG, VIRGINIA. All income paid by my said Trustees to, or expended by them for the benefit of, the FIRST CHRISTIAN SCIENCE CHURCH OF LYNCHBURG, VIRGINIA, shall be used exclusively for one or more of such purposes as are exempt from inheritance or transfer taxes under the laws of the United States and the State of Virginia.

3. Walter N. Maguire, Guy Parkhurst Estes, and Mrs. Keller qualified as executors and trustees under the will of Mrs. Stone. In March 1946, they transferred to themselves as trustees the bulk of Mrs. Stone’s residuary estate. Prior to February 28, 1950, the balance of Mrs. Stone’s residuary estate was transferred to the trustees.

4. The income from this trust was paid to Mrs. Keller up to the date of her death on August 1, 1948. Thereafter, income was received and held without distribution by the Stone trustees.

5. The property composing the Stone residuary estate held by the Stone executors and trustees, and subsequently by the plaintiffs, consisted at the time of delivery to the plaintiffs of the following, having the market values respectively indicated :

Market Value No. of Description of <at Date of Shs. Asset Delivery

811 Allied Chemical & Dye Corporation- $59,332. 06

400 American Can Company — Common- 13, 350.00

44 American Can Company — 7% Pfd- 1,922.25

75 American Home Products Corp- 2,925.00

480 American Reinsurance Company- 18, 720.00

47 American Telephone & Telegraph Co- 7,516. 05

100 Appalachian Electric Power Co., 4% % Pfd. (old) _ $10, 525. 00

256 Atchison, Topeka & Santa Pe Ry. Co_ 25,408.00

329 Babcock & Wilcox Company_ 12,522.56

30 Bankers Trust Company of New York- 1, 650. 00

75 Bethlehem Steel Corp_ 4,148. 44

300 Bower Roller Bearing Company- 9,487.50

Market Value No. ol Description of at Date of Shs. Asset Delivery

220 Canadian Pacific Railway Company_ $7,040. 00

700 Chase National Bant of New York_ 34,650. 00

50 Chesapeake & Ohio Railroad Company_ 2,065. 63

750 Clinchfield Coal Corporation_ 26,250. 00

100 E. I. duPont deNemonrs Co., 4%% Pfd_ 11, 687. 50

181 General Electric Company- 12,671. 81

100 General Foods Corporation_ 5,387.50

59 General Motors Corp., $5 Pfd_ 7,109. 50

50 Great Northern RR Co., $6 Pfd_ 2,903.10

11.8 Harrison Rye Realty Corp., Pfd_ 472. 00

1 Harrison Rye Realty Corp., Com_ 140. 00

50 Illinois Central Railroad Co_ 4,312.50

100 National Dairy Products Corp_ 6,187. 50

124 New York Central Railroad Co_ 3, 014. 68

100 Norfolk & Western Railway Company_ 5,200. 00

5 Pacific Gas & Elec. Co., 6% 1st Pfd_ 170. 00

59 Pennsylvania Railroad Company_ 1,327. 50

150 Procter & Gamble Company_ 10,181.25

185 Public Service Electric & Gas., $1.40 Div. Pfd_ 5, 029. 69

112 Quaker Oats Company, 6% Pfd_ 16,324. 00

3 Radio Corp. of America — Com_ 79.69

50 Radio Corp. of America, $3.50 Pfd_ 3, 837. 50

75 Reading Company_ 2,428.13

25 Standard Brands, Inc_ 706.25

228 Standard Oil Co. of Calif_ 13,053.00

202 Standard Oil Co. of New Jersey_ 15,209. 75

638 J. P. Stevens & Company_ 21, 612.25

255 Socony Vacuum Oil Company_ 9,116.25

200 Southern Pacific Company_ 9,000. 00

300 Sunray Oil Company_ 6, 037. 50

25 Sunshine Hosiery Mills-Pfd. (Company liquidated in 1951 or 1952 without sufficient assets to pay creditors) _ No value

50 Texas Electric Railway Company, in liquidation.. 12.50

240 Tide Water Associated Oil- 5,595.00

100 Timken Roller Bearing Company_ 4,637.50

90 Union Carbide & Carbon Corp_ 6,513.75

648 United States Steel Corp. — Com_ 27,175.50

49 United States Steel Corp. — 7% Pfd_ 6,997. 84

Bonds

Market Value Description of at Date of Asset Delivery

$30,000 U. S. Treasury, 2%, 9-15-51/53_ $30,018.60

$1,000 U. S. Treasury, 2y2%, 12-15-63/68_ 968.75

$5,000 City of Detroit, 3%%, Ref. Ser. F, 6-1-57_ 5,287.50

Market Value Description of at Date of Asset Delivery

$12,900 City of New York Corp. Transit Unification, 3%, due 1980_ $12, 990. 30

$5,000 New England Tel. & Tel. Co., 1st Mtge., 4%%, Ser. B, 5-1-61_ 5,415. 63

$5,000 National Steel Corp. 1st Coll. Mtge., 3%, 4-1-65 (Called 7-3-52 @102)_ 5,100.00

Principal cash_ 16,506.38

Income cash_ 49, Oil. 22

Total Market value as of dates of delivery to plaintiffs of stocks, bonds and cash_$586,941. .81

During the time between Mrs. Keller’s death and the time when the property was delivered to the plaintiffs, the following changes were made by the Stone trustees, other than sales of certain fractional shares or stock rights from time to time:

Stone Trustees' Principal Account

1949 — $5,000 National Steel Corp. 1st Coll. Mtge, 3% 4-1-65, sold to Income Account.

1949 — $5,000 New England Tel. & Tel. 1st Mtge., 4y2%, 5-1-61, sold to Income Account.

1950 — $5,000 City of Detroit, 3%%, Ref. Ser. P, 6-1-57, sold to Income Account.

1950 — $1,000 U. S. Treasury, 2%s, 12-15-63/68, sold to Income Account

1950 — $12,900 City of New York Corp Transit Unification, 3%, due 1980, sold to Income Account.

1950 — 12 Shares Quaker Oats Company, Pfd., sold t,o Income Account.

1950 — 50 Shares Radio Corporation of America, 3%% Pfd., sold to Income Account.

1950 — Sold 5 shares American Gas & Electric Co., Pfd.

1951 — Sold 400 shares Aspinook Corporation.

1951 — Purchased $25,000 U. S. Treasury, 1%%, bonds.

1952 — $10,000 U. S. Treasury 1% % bonds, sold to Income Account. $15,000 U. S. Treasury, 1%% bonds, sold apparently in the early part of 1953.

Stone Trustees’ Income Account

1949 — Purchased $5,000 National Steel Corp. 1st Coll. Mtge, 3%, 4-1-65, and $5,000 New England Tel. & Tel. 1st Mtge., 4%%, 5-1-61, from Principal Account.

1960 — Purchased the following from Principal Account: $6,000 City of Detroit, 3%%, Eef. Ser. P, 6-1-57; $1,000 U. S. Treasury, 2%%, 12-16-63/68; $12,900 City of New York Corp. Transit Unification, 3%, due 1980; 12 shares Quaker Oats Company, —Pfd; and, 50 shares Radio Corporation of America — 3%% Pfd.

1951 — Purchased $15,000 U. S. Treasury, 1%% bonds.

1952 — Purchased $10,000 U. S. Treasury, 1%% bonds from Principal Account.

1952 — Purchased $30,000 U. S. Treasury 2s, 9-15-51/53. $25,000 U. S. Treasury, 1%% bonds sold apparently in the early part of 1953.

Of the property transferred to the plaintiffs, the following was attributed by the Stone trustees to the income account, and the balance was attributed by them to the principal account:

50 shares Radio Corporation of America — Pfd_ $3, 837. 50

12 shares Quaker Oats Company — 6% Pfd_ 1, 749. 00

$5,000 City of Detroit, 3*4%, Ref. Ser. F, 6-1-57_ 5,287. 50

$5,000 New England Tel. & Tel. Co., 1st Mtge., 414%

Ser. B, 5-1-61- 5, 415. 63

$5,000 National Steel Corp.' 1st Coll. Mtge., 3%, 4r-l-65_ 5,100. .00

$12,900 City of New York Corp., Transit Unification, 3%, due 1980_ 12, 990. 30

$1,000 U. S. Treasury, 2%s, 12-15-63/68_ 968. 75

$30,000 U. S. Treasury, 2s, 9-15-51/53_ 30, 018. 60

Income cash_„- 49, Oil. 22

$114, 378. 50

6. In April 1945, the Stone executors were advised that there was doubt of the validity of the provision in Article Fifteen of Mrs. Stone’s will for the benefit of the Christian Science Church. However, during the life of Mrs. Keller, no court action was instituted to settle the validity of the gift to the above church.

7. Since it was not possible for the Stone executors or trustees properly to administer and distribute the residuary estate of Mrs. Stone, or for the plaintiffs properly to administer and distribute the assets of Mrs. Keller’s estate without obtaining an answer to the question of the validity of the grant made to the Christian Science Church, plaintiffs instituted proceedings in the Lynchburg Corporation Court on August 29, 1949, to obtain a final determination. The defendants in this suit were the Stone executors and trustees, and the trustees of the said church.

8. By a decree entered in August 1950, the Corporation Court held that the gift to the church was void except as to the difference between $100,000 and the intangible property held by the church trustees. Sections 57-7 and 57-12 of the Code of Virginia limit the quantity of real and personal property which may be given, and which trustees may hold, for religious purposes.

9. This decision was appealed by the defendants to the Supreme Court of Appeals of Virginia, and on December 3,1951, the judgment below was modified and affirmed, Maguire v. Loyd, 193 Va. 138. A rehearing was granted and on October 13, 1952, judgment was again affirmed, 194 Va. 266.

10. In December 1952, the Corporation Court entered a decree ordering that the property of the estate in excess of that which could be given to the church should be delivered to the executors of Mrs. Keller’s estate to be administered by them as part of the estate. Thereafter, during 1953, there was distributed to the plaintiffs the principal comprising the Stone residuary estate, having a market value at the time of delivery of $472,563.31 and income having a market value at the time of delivery of $114,378.50. There is no dispute between the parties that this income is all reportable by the plaintiffs in the year 1953 when it was received.

11. Litigation costs incurred in the said proceeding, all of which were paid out of the residuary assets, were as follows:

To Edmunds, Whitehead, Baldwin & Graves, Counsel for the plaintiffs — Fee_$117, 457.48

To Edmunds, Whitehead, Baldwin & Graves — costs_ 1, 062.51

To Wiltshire & Jones, Counsel for the Stone Executors and Trustees — Fee_ 25, 000.00

To Wiltshire & Jones — Costs- 1,501.15

Total_$145,021.14

None of these expenses were claimed as deductions under section 812 (b) of the 1939 Internal Kevenue Code for Federal estate tax purposes.

12.Upon receiving the property from the Stone fiduciaries, the plaintiffs sought rulings from the Internal Eevenue Service upon Federal estate and income tax liability. Questions involving estate tax liability have been settled and are not here involved. The questions concerning the income tax liability were discussed at conferences and in correspondence, especially in plaintiffs’ letter of June 9,1958.; Internal Eeve-nue Service letter of September 4, 1953; plaintiffs’ letter of September 8, 1953; plaintiffs’ letter of October 7,1953; and Internal Eevenue Service letter of June 15, 1954. The Internal Eevenue Service ruled that only such part of the said litigation expenses of $145,021.14 were deductible, for income tax purposes, as were attributable to the recovery of income and that the remainder thereof should be added to the basis of the capital assets received on the theory that this portion of the expenses is classified as expenses of asserting or defending title to property and is in the nature of a capital expenditure. As a result of this ruling, the plaintiffs’ Federal income tax return for 1953 reflected the following:

(a) Deductible. Portion of fees and costs expended for recovery of
income of $114,378.50_ $28,260.27
/114,378.50 v A V 586,941.81 X145’021'14)
(b) Not deductible, but to be capitalized in part.
Portion of fees and costs expended for asserting or defending title to capital assets of $472,563.31-$116, 760.87
/ 472,563.31 v _ n01 .. A V586,941.81 X14o>02:1-14/)

Pursuant to the ruling of the Internal Eevenue Service, the sum of $116,760.87 was added to the basis of said capital assets except for $4,078.39 which was attributable to the recovery of $16,506.38 principal cash included in said figure of $472,563.31.

13. The plaintiffs’ Federal income tax for 1953, ultimately calculated pursuant to the ruling of the Internal Eevenue Service and after review of said return by the service, was $59,693.79, which sum was paid on June 15, 1954.

14. If the total legal expenses of $145,021.14 had been allowed as a deduction against income, no Federal income tax would have been due for the calendar year 1953. Consequently, a claim for refund of said $59,693.79 was duly made and filed on June 24, 1954; and thereafter, by registered letter dated January 5, 1955, the Internal Revenue Service disallowed said claim for refund.

15. If Mr. J. Easley Edmunds, Jr., co-executor of Grace Stone Keller’s estate were called as a witness, he would testify as follows: No action other than the aforesaid has been had on this claim in Congress or by any Department. Plaintiffs are, and always have been, the sole and absolute owners of the claim here presented. They have made no transfer or assignment of said claim or of any part thereof or of any interest therein.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, and it is therefore adjudged and ordered that plaintiffs recover of and from the United States fifty-nine thousand six hundred ninety-three dollars and seventy-nine cents ($59,693.79) with interest at the rate of six percent per annum from the date the overassessments were paid, June 15,1954.  