The opinion of the court was delivered by: METZNER
Plaintiff Eugene F. Suter, Jr. is suing to recover taxes paid in 1959 and 1960, claiming that he was improperly denied deductions for certain of his legal fees. These fees were expended in a successful attempt by the taxpayer to set aside his own prior renunciation of all interest in a trust created for him and to be reinstated as a beneficiary of the trust. The central issue before the court is whether such expenditures are deductible under § 212 of the Internal Revenue Code of 1954 as:
"ordinary and necessary expenses paid or incurred during the taxable year --
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax."
The will of taxpayer's father, Eugene F. Suter, left $350,000 and the residue of his estate in trust with $5,000 of the income payable to the testator's former wife Audrey as long as she lived, $600 of the income payable to the testator's sister, and the balance to the taxpayer. After Audrey's death the principal of the trust was to be distributed to the taxpayer in three installments payable on his thirtieth, thirty-fifth, and fortieth birthdays.
Shortly after turning twenty-one the taxpayer renounced all his claims to the income or principal of this trust, and his renunciation was upheld by the Surrogate's Court of New York County. In re Estate of Suter, 207 Misc. 1002, 142 N.Y.S. 2d 353 (1955).
Thereafter the taxpayer decided that he wanted his interest in the trust reinstated. On September 10, 1956 he filed a petition in the Surrogate's Court to withdraw his renunciation of the trust and to vacate the order approving it. The petition alleged that his renunciation had been the product of mental illness and that as such it was a nullity. The court-appointed psychiatrist found the taxpayer incompetent to manage his own affairs and determined that this condition existed at the time he renounced the trust.
While this petition was under advisement, the Surrogate directed that proceedings be instituted for the appointment of a committee for the taxpayer's property before the trust began making payments to him again. On October 24, 1957, the taxpayer was adjudged incompetent to manage his own affairs and a committee of his property was appointed.
The committee of the property filed its appearance in the Surrogate's Court proceeding on December 23, 1957. On February 21, 1958, the Surrogate entered a decree that the taxpayer's prior renunciation of his interest in the trust was invalid and restored him as a beneficiary of the income and as remainderman. In re Estate of Suter, 11 Misc. 2d 144, 172 N.Y.S. 2d 100 (1958). His share of the trust income was paid to the committee, which disbursed it on behalf of the taxpayer until the discharge of the committee in 1959.
In timely filed returns for 1959 and 1960, the taxpayer took deductions totaling $6,827.92 for attorney's fees paid to Sigmund Goldstein, Esq. Eighty per cent of this amount went to Goldstein for representing the taxpayer in the proceedings in the Surrogate's Court. The other twenty per cent was paid for services performed by Goldstein in the proceeding for the appointment of a committee.
In the same years the taxpayer also claimed deductions totaling $7,948.38 for attorney's fees paid to the law firm of Jillson and Jillson. It is agreed by all parties that half of this amount was paid for tax services rendered to the committee. The other half was paid in part for nontax legal services in connection with the proceedings for the appointment of the committee, and in part for services to the committee after its appointment. These services consisted primarily of filing the annual reports for the committee and paying the taxpayer's medical bills.
The Internal Revenue Service (IRS) disallowed all of these deductions. The taxpayer paid the assessed taxes under protest, filed a timely claim for a ...