McKee v. Commissioner

*430 These proceedings are for the redetermination of income tax for the years 1922, 1923, and 1924. The amounts in controversy are for:

1922	$4,205.67
1923	5,280.42
1924	7,124.78
Total	16,610.87

The petitioner asserts the Commissioner erred (a) in holding that the payment made by the petitioner April 13, 1922, to Agnes M. Holmes constituted a personal expense, and therefore was not an allowable deduction for income-tax purposes; and (b) in failing to hold that said payment constituted either (1) an ordinary and necessary expense incurred by her in the prosecution of her business, to wit, that of owner and manager of property; or (2) that the said *431 payment was made in perfecting title to property, and as such constituted a part of the cost*2392 of the property.

The material facts are stipulated.

FINDINGS OF FACT.

The petitioner is the widow of Charles H. McKee, late of Pittsburgh, Pa. Her residence is 4215 Bigelow Boulevard, in that city.

The gross value of the estate of the decedent for estate-tax purposes was determined to be $1,634,250.14. The net value of the estate as finally determined by the respondent was $1,487,661.50.

In 1917 the said Charles H. McKee suffered a nervous breakdown, from which his recovery was slow. He was very fond of his niece, Agnes E. Holmes, until she eloped with and married her cousin. Thereafter, for a long period of time, said McKee apparently had no affection for her, nor would he have anything whatever to do with her husband. Nevertheless, on July 13, 1918, the said McKee executed a will under which, besides providing liberally for his wife, he bequeathed to his niece certain bonds formerly belonging to her mother, the proceeds of a residence at 5454 Stanton Avenue, Pittsburgh, and the sum of $25,000. He also created a trust fund of $150,000 for her benefit.

On April 15, 1919, the testator revoked his will dated July 13, 1918, and its two subsequent codicils. On*2393 May 9, 1919, he wrote a holograph will which is, in terms, as follows:

Be it remembered that it is my will that at my death my wife, Clara A. McKee, in case she survives me, shall have and be entitled to all my estate.

See my signature hereto this 9th day of May, 1919.

Charles H. McKee

In the fall of 1919 the testator suffered another serious breakdown, and his condition gradually became worse until, on April 16, 1921, he died. The above holograph will was duly probated before the register of wills of Allegheny County, Pennsylvania, and letters of administration, c.t.a., were issued to the petitioner April 21, 1921.

Shortly after the death of said Charles H. McKee, the said Agnes E. (or M.) Holmes indicated her intention to contest the validity of decedent's last will and testament, principally on the grounds of mental incapacity and undue influence. For this purpose she retained attorneys who were able to secure substantial evidence tending to show mental incapacity during at least one or two periods in the years from 1918 to 1921. After prolonged negotiation between the representatives of the petitioner and of Agnes M. Holmes, it was finally agreed in 1922 that the*2394 petitioner would pay to the claimant the amount of $225,000 in complete settlement of any and all claims that said Agnes M. Holmes had or might have against the estate of the decedent, or the petitioner as administratrix or as an individual.

*432 On April 10, 1922, a check for $25,000, and on April 13, 1922, a check for $207,304.86, was drawn by "Clara A. McKee, Administratrix," to the order of "Clara A. McKee." These checks, in the total amount of $232,304.86, were endorsed by petitioner and deposited by her to the credit of her personal account in the First National Bank at Pittsburgh, the bank upon which they were drawn. On April 13, 1922, she drew a check for $225,000 on her personal account, which was certified by the above bank, to the order of "Reed, Smith, Shaw & Beal, Attys for Agnes Morrison Holmes," and under date of April 14, 1922, she received the quitclaim deed agreed upon as above, in which the expressed consideration was one dollar.

It is in the stipulation that the next of kin to the decedent, other than his wife, the petitioner, was the claimant Agnes M. Holmes, his niece and the daughter of his only sister. In the event that Charles H. McKee had died*2395 intestate or his will were set aside, the claimant Agnes M. Holmes would have been entitled to one-half of his estate under the intestate laws of the Commonwealth of Pennsylvania; his widow, the petitioner, being entitled to the other one-half thereof.

OPINION.

LOVE: On the facts we must hold against the petitioner on both of her contentions and find for the respondent, though not upon the grounds advanced by either of the contestants. Counsel for the respondent has not favored us with a brief, but from the record it appears that the payment of $225,000 was held to be a personal expense and therefore not deductible under the provisions of the law. Petitioner contends that it was either an ordinary and necessary expense of her business as "owner and manager of property," or that it was an outlay of capital and as such that it should be added to the cost of the property acquired.

We do not believe that the amount of $225,000 constituted an expense of any kind, either business or personal; nor do we believe that it was a capital expenditure, or that petitioner acquired any property by the transaction. Rather, we think, it was a giving up, a relinquishment, of a part of*2396 what petitioner had assumed had come to her, but was found to have a seriously clouded title, a part of which she relinquished in order to secure a clear title to the remaining part. It is admitted that the attorneys for the claimant were able to secure substantial evidence tending to show mental incapacity on the part of the testator during at least one or two periods in the years from 1918 to 1921. We are not called upon to decide the mental condition of the testator on May 9, 1919, when he wrote the holograph will; nor to speculate upon the outcome of a suit, had the validity of the will been attacked in the courts. Obviously, the issue *433 was in grave doubt in the minds of the petitioner and her legal advisers; so grave, indeed, that after prolonged negotiations between the representatives of the parties, it was deemed the better part of wisdom voluntarily to relinquish and yield up a very material part of the estate, rather than to test the issue at law. It is through these considerations that we arrive at the conclusion that this $225,000 does not constitute an expense of any kind on the part of the petitioner, nor an outlay of capital for tangible or intangible*2397 value received; but that it was a return by the petitioner to the claimant of such part of the estate in dispute as became clearly the claimant's by agreement between the parties. It is perhaps not without significance that the consideration in the quitclaim deed is $1, not $225,000.

Judgment will be entered for the respondent.