Trust of Bingham v. Commissioner

Mary Bingham left a testamentary trust in her will. The trustees received the residue of her estate and could sell trust property (1) to invest and reinvest proceeds and income from the trust fund, (2) to use proceeds and income to support securities from two companies, and (3) for maintenance, administration, and development of those two companies or their subsidiaries. Annual payments went to certain beneficiaries, and Bingham’s niece was to receive a certain amount of cash or securities at a certain age. At the end of 21 years, other beneficiaries were to be paid, and the remainder was to be divided between three siblings of Bingham. In 1935, the trust (plaintiff) paid the scheduled bequest to Bingham’s niece partly in securities. The Commissioner of Internal Revenue (the commissioner) (defendant) found a deficiency of over $365,000 in income taxes for appreciation of securities while they were held by the trust. The trustees paid about $16,000 in legal expenses in 1940 to contest that determination, ultimately losing. They also paid about $9,000 for legal expenses in regard to one of the payments made, tax issues and final distribution of the trust. When the trust filed its income taxes, both sets of legal fees were deducted as non-trade or non-business expenses. Under the relevant statute, deduction was allowed for ordinary and necessary expenses either a) for collecting or producing income or b) for managing, conserving, or maintaining property held to produce income. The commissioner disallowed the claimed deductions and found another deficiency. The trust filed suit in tax court, which held that the fees were rightly deductible. The Court of Appeals for the Second Circuit reversed, and the trust appealed to the Supreme Court, which granted certiorari. The government argued both that the expenses in connection with the distribution of the trust monies did not qualify as a deduction, as the purpose of the expenses was neither to produce income nor to maintain property to produce income but only to devolve the trust, and that the expenses were not related to property then being held in the trust. The trust argued that the expenses fit within the statutory allowances.