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Stone's Estate v. Commissioner of Internal Revenue.

November 22, 1940


Petition for Review of Decision of United States Board of Tax Appeals.

Author: Major

Before MAJOR and KERNER, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

This is a petition for review of a decision of the United States Board of Tax Appeals, entered October 25, 1939, adjudicating a deficiency in the income tax of petitioners' decedent, Ida B. Stone, for the year 1934, in the amount of $9,502.97.

Louis D. Hirsheimer, a brother of Ida B. Stone, died September 25, 1929, a resident of Cook County, Illinois. For many years prior thereto, he had been engaged in the business of buying and selling real estate mortgage bonds, farms, and other real estate, and making loans, some unsecured and others secured by farm mortgages. His estate consisted of cash, United States Government obligations, 66 different stock issues, 84 different real estate bond issues, 99 different municipal bond issues, 22 different public utility bond issues, approximately 36 different miscellaneous mortgage notes, and 28 different parcels of real estate consisting of farms and city properties. By his last will and testament, he bequeathed to various members of his family approximately $450,000, and the residuum, amounting to approximately $1,900,000, to his sister, Ida B. Stone. She and Ben Hirsheimer were appointed executrix and executor of his estate. The date for filing claims against said estate expired December 6, 1930. October 19, 1931, Ben Hirsheimer was discharged as executor, and administration of the estate was continued by Ida B. Stone until March 19, 1932, when she was discharged and the estate closed.At that time, Ida B. Stone, in addition to the property valued at approximately $1,900,000 which she received as residuary legatee, owned property in her own right valued at approximately $950,000, consisting of $450,000 in United States Government securities and $500,000 in twelve to fifteen different stock issues.

Ida B. Stone, during the administration of her brother's estate and subsequently until January 30, 1939, the date of her death, personally managed all the properties belonging to the estate and acquired by her as residuary legatee, as well as the properties previously owned by her. For such purpose she leased an office in the Field Building, furnished it, employed an auditor, stenographer and other clerical assistants. She gave her personal attention to the management of the business, sold and bought stocks and securities, wrote checks in payment of taxes, insurance and repairs on real estate, and in a general way determined the stock and equipment to be used in the operation of the farms.

A substantial portion of the farm and mortgage business conducted by Louis D. Hirsheimer appears to have been in and about Pittsfield, Pike County, Illinois. On November 6, 1931, Ida B. Stone, as surviving executrix of the estate of Louis D. Hirsheimer, was served with a notice addressed to "The Acting Executors and Trustees in the Estate of Louis D. Hirsheimer, Deceased," of a tax assessment by the taxing authorities of Pike County, Illinois, concerning alleged omitted personal property of Louis D. Hirsheimer. The assessment related to the years 1905 to 1931, inclusive, and amounted, with penalties, to over $650,000. On March 1, 1933, subsequent to the closing of the estate of Louis D. Hirsheimer, and the discharge of Ida B. Stone, executrix thereof, there was instituted in Pike County, Illinois, a proceeding against Ida B. Stone and others, for the purpose of collecting such asserted tax. In contesting this litigation, Ida B. Stone employed counsel. The suit was decided against her in the Circuit Court of Pike County, but upon appeal to the Supreme Court of Illinois, she won a favorable decision. Stone v. Board of Review, 354 Ill. 286, 188 N.E. 430. In defending this litigation, Ida B. Stone expended in the year 1934, in attorney fees and other expenses, the sum of $32,898.34. This amount was claimed as a deduction in her income tax return for the year 1934 on the theory that it was an ordinary and necessary expense incurred in connection with the business in which she was engaged. The Commissioner, sustained by the Board, held that such expenditures were not deductible, hence the assessment of the deficiency here in dispute.

Section 23(a) of the Revenue Act of 1934, c. 277, 48 Stat. 680, 688, 26 U.S.C.A. Int. Rev. Code § 23(a), so far as here material, provides:

"In computing net income there shall be allowed as deductions: * * *

"(a) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * ."

And Sec. 24(a) 26 U.S.C.A. Int. Rev. Code § 24(a) provides:

"In computing net income no deduction shall in any case be allowed in respect of -

"(1) Personal, living, or family expenses."

The contested issues may be stated as (1) Was petitioners' decedent engaged in a trade or business within the meaning of this act? and (2) Was the expense incurred in the Pike County litigation and paid during the year in question, ordinary and necessary ...

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