1. The questions whether, on the facts found by the Tax Court,
expenses incurred by trustees in contesting an income tax
deficiency assessment and in winding up the trust after its
expiration are deductible under § 23(a)(2) of the Internal Revenue
Code as expenses for the "management . . . of property held for the
production of income," are clear-cut questions of law, the decision
of which by the Tax Court does not foreclose their decision by the
Circuit Court of Appeals or this Court, although their decision by
the Tax Court is entitled to great weight. P.
325 U. S.
371.
2. There was no error of law in the Tax Court's determination,
upon the facts found, that expenses incurred by trustees in
contesting an income tax deficiency assessment and in winding up
the trust after its expiration were deductible under § 23(a)(2) of
the Internal
Page 325 U. S. 366
Revenue Code as expenses for the "management . . . of property
held for the production of income," and reversal by the Circuit
Court of Appeals on the ground that such expenses were not "for the
production of income" and not for the management of "property held
for the production of income" within the meaning of that section
was unwarranted. Pp.
325 U. S. 373,
325 U. S.
376.
3. The trust properties did not cease to be "held for the
production of income" even though, as the trust term reached its
expiry date, the trustees were under a duty to distribute the
property among the remaindermen. P.
325 U. S.
373.
4. Section 23(a)(2) is comparable and
in pari materia
with § 23(a)(1), authorizing the deduction of business or trade
expenses. P.
325 U. S.
373.
5. The costs of distribution of the corpus of the trust were
expenses of a function of "management" of the trust property quite
as much as were expenses incurred in producing the trust income. P.
325 U. S.
375.
6. References in the House Committee Report accompanying the
bill which became the Revenue Act of 1942, and in Treasury
Regulations 103, § 19.23(a)-15, to the nondeductibility of
administrators' and executors' expenses incurred in the
administration of the estate of the decedent, including those of
distributing assets to the beneficiaries, do not require by analogy
that the trustees' distribution expenses here in question be deemed
nondeductible. P.
325 U. S.
375.
7. Section 23(a)(2) does not restrict deductions to those
litigation expenses which alone produce income; on the contrary, by
its terms, and in analogy with the rule under § 23(a)(1), the trust
may deduct litigation expenses when they are directly connected
with or proximately result from the enterprise -- the management of
property held for production of income.
Kornhauser v. United
States, 276 U. S. 145. P.
325 U. S.
376.
8. To the extent that Treasury Regulations 103, § 19.23(a)-15
purports to deny deduction of litigation expense unless it is to
produce income, and to the extent that it departs from the rule of
Kornhauser v. United States, it conflicts with the meaning
and purpose of § 23(a)(2), and is unauthorized. P.
325 U. S.
377.
145 F.2d 56 reversed.
Certiorari, 324 U.S. 835, to review the reversal of a decision
of the Tax Court, 2 T.C. 853, which set aside the Commissioner's
determination of a deficiency in income tax.
Page 325 U. S. 367
MR. CHIEF JUSTICE STONE delivered the opinion of the Court.
Petitioners are the trustees of a testamentary trust created for
a term of twenty-one years under the will of Mary Lily (Flagler)
Bingham. The testatrix bequeathed to the trustees the residue of
her estate, including a large number of securities. The trustees
were empowered in their discretion to sell any of the property held
in trust (except certain securities of two companies designated as
the "principal properties"), to invest and reinvest the proceeds
and the income from the trust fund, and to use the proceeds and the
income for the benefit of the principal properties and for the
"maintenance, administration, or development of the said principal
or subsidiary properties." The trustees were to pay specified
amounts annually to certain legatees. When the niece of the
testatrix reached a certain age, she was to receive from the trust
a specified amount in cash or securities. At the end of twenty-one
years, the trustees were directed to pay other legacies, and to
distribute the remainder of the fund in equal parts to a brother
and two sisters of the testatrix.
In 1935, petitioners paid the bequest to the niece partly in
securities. The Commissioner assessed a deficiency of over $365,000
for income tax upon the appreciation in value of the securities
while they were in petitioners' hands. In contesting unsuccessfully
this deficiency, petitioners paid out in the year 1940
approximately $16,000 in counsel fees and expenses. In that year,
also, petitioners paid out about $9,000 for legal advice in
connection
Page 325 U. S. 368
with the payment of one of the cash legacies, and in connection
with tax and other problems arising upon the expiration of the
trust and relating to the final distribution of the trust fund
among the three residuary legatees.
The question is whether these legal expenses, paid in 1940, are
deductible from gross income in the computation of the trust's
income tax, as "non-trade" or "non-business" expenses within the
meaning of § 23(a)(2) of the Internal Revenue Code. That section,
added by § 121 of the Revenue Act of 1942, and made applicable to
tax years "beginning after December 31, 1938," § 121(d), authorizes
the deduction of
"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."
Section 162 of the Code, so far as now relevant, makes §
23(a)(2) applicable to the income taxation of trusts.
Petitioners, in their income tax return for 1940, took
deductions for the legal expenses. The Commissioner disallowed the
deductions and assessed a tax deficiency, and petitioners filed the
present suit in the Tax Court to set aside the assessment. That
Court, after finding the facts as we have stated them, found that
the trust property was held for the production of income; that all
the items in question were ordinary and necessary expenses of the
management of the trust property, and that the fees and expenses
for contesting the income tax deficiency assessment were also for
the conservation of the trust property. It therefore concluded that
all were rightly deducted in calculating the taxable net income of
the trust. 2 T.C. 853.
On the Government's petition for review, the Court of Appeals
for the Second Circuit reversed. 145 F.2d 568. We granted
certiorari, 324 U.S. 835, on a petition which asserted as grounds
for the writ that the decision of the
Page 325 U. S. 369
Court of Appeals departed from the principles laid down in
Dobson v. Commissioner, 320 U. S. 489,
governing review of decisions of the Tax Court, and that the
decision conflicted in principle with
Commissioner v.
Heininger, 320 U. S. 467, and
Kornhauser v. United States, 276 U.
S. 145.
The Court of Appeals left undisturbed the Tax Court's findings
that the questioned items were ordinary and necessary expenses for
the management or conservation of the trust property, but it held
that the fees for contesting the tax deficiency were nevertheless
not deductible under § 23(a)(2). It thought that the expenses of
contesting the income tax had nothing to do with the production of
income, and hence were not deductible as expenses "for the
production of income" within the meaning of the statute. The court
also thought that these expenses were not deductible, because they
were paid in connection with property held by the trustees "ready
for distribution," and hence not "for the production of income."
Similarly it held that the fees for professional services rendered
in connection with the payment of legacies and the distribution of
the trust fund, were not expenses relating to the management of
property held for the production of income, since they were
rendered after the trust term had expired and when the property was
ready for distribution.
The Government makes like arguments here. In addition, it urges
that the expenses in connection with the distribution of the trust
fund were not expenses of management of the trust property held for
the production of income, but only expenses relating to its
devolution, and that the expenses are not deductible under §
23(a)(2) because there was no proximate relationship between the
expenses when paid and the property then held in trust.
We think that these objections to the deductions fail to take
proper account of the plain language of § 23(a)(2),
Page 325 U. S. 370
and the purpose of the section as disclosed by its statutory
setting and legislative history, and that, notwithstanding the
weight of the Tax Court's decision against them, they raise
questions of law reviewable by the Circuit Court of Appeals and by
this Court.
The requirement of § 23(a)(2) that deductible expenses be
"ordinary and necessary" implies that they must be reasonable in
amount and must bear a reasonable and proximate relation to the
management of property held for the production of income.
See H.Rep. No. 2333, 77th Cong., 2d Sess., p. 75; Sen.Rep.
No. 1631, 77th Cong., 2d Sess., p. 88. Ordinarily questions of
reasonableness and proximity are for the trier of fact, here the
Tax Court.
Commissioner v. Heininger, supra, 320 U. S. 475;
McDonald v. Commissioner, 323 U. S.
57,
323 U. S. 64-65;
see Commissioner v. Scottish American Inv. Co.,
323 U. S. 119. And
even when they are hybrid questions of "mixed law and fact," their
resolution, because of the fact element involved, will usually
afford little concrete guidance for future cases, and reviewing
courts will set aside the decisions of the Tax Court only when they
announce a rule of general applicability, that the facts found fall
short of meeting statutory requirements.
Dobson v.
Commissioner, supra, 320 U. S. 502;
Commissioner v. Estate of Bedford, 325 U.
S. 283;
cf. Paul, "
Dobson v.
Commissioner," 57 Harv.Law Rev. 753 at 828-832, 836, 837. But
whether the applicable statutes and regulations are such as to
preclude the decision which the Tax Court has rendered is, as was
recognized in
Dobson v. Commissioner, supra, 320 U. S.
492-493, a question of law reviewable on appeal.
See
also Commissioner v. Heininger, supra, 320 U. S.
475.
Here, the decision of the Court of Appeals was that the expenses
were not deductible because they were not for the purpose of
producing income or capital gain, and because the trust property,
being ready for distribution, was no longer held for the production
of income. The
Page 325 U. S. 371
terms of the trust, the nature of the property, and the duties
of the trustees with respect to it were all found by the Tax Court,
and are not challenged. The questions whether, on the facts found,
the expenses in question are nondeductible either because they were
not to produce income or because they were related to the
management of property which was not held for the production of
income turn in this case on the meaning of the words of § 23(a)(2),
"property held for the production of income." They are therefore
questions of law, decision of which is unembarrassed by any
disputed question of fact or any necessity to draw an inference of
fact from the basic findings.
See Commissioner v. Scottish
American Inv. Co., supra. They are "clear cut" questions of
law, decision of which by the Tax Court does not foreclose their
decision by appellate courts, as in other cases,
Dobson v.
Commissioner, supra, 320 U. S. 492,
320 U. S. 493,
although their decision by the Tax Court is entitled to great
weight.
Dobson v. Commissioner, supra, 320 U. S.
501-502, and cases cited;
cf. Medo Photo Supply
Corp. v. Labor Board, 321 U. S. 678,
321 U. S.
681-682, n. 1, and cases cited.
Since our decision in the
Dobson case, we have
frequently reexamined, as matters of law, determinations by the Tax
Court of the meaning of the words of a statute as applied to facts
found by that court.
* A question of
law is not any the less such because the Tax Court's decision
Page 325 U. S. 372
of it is right, rather than wrong. Whether or not its decision
is "in accordance with law" is a question which the statute,
Int.Rev.Code, § 1141(c)(1), expressly makes subject to appellate
review. Congress, when it thus authorized review of questions of
law only, was not unaware of the difficulties of such a review of
the decisions of a tribunal which decides questions both of law and
of fact. But Congress did not dispense with such review.
Hence, the statute does not leave the Tax Court as the final
arbiter of the issue whether its own decisions of questions of law
are right or wrong. That can only be ascertained upon resort to the
prescribed appellate process by a consideration of the merits of
the point of law involved, and by its decision at the conclusion of
the process, not before it begins. The fact that the Court of
Appeals below, while accepting the Tax Court's findings of fact,
has nevertheless reversed its decision, would seem not to leave the
question of law decided so free from doubt that the mandate of the
statute could rightly be disregarded on any theory. If review were
to be denied in this case, it would be difficult to say that any
construction of a taxing statute by the Tax Court would be subject
to appellate review.
We turn to the first ground for reversal relied on by the Court
of Appeals -- that the property was held for distribution, and no
longer for the production of income. The fact that the trustees, in
the administration of the trust, were required to invest its corpus
for the production of income and to devote the income to the
purposes of the trust establishes, as the Tax Court held, that the
trust property was held for the production of income during the
stated term of the trust. The decisive question is whether the
property ceased to be held for the production of income because, as
the trust term reached its expiry date, the trustees were under a
duty to distribute the property among the remaindermen.
Page 325 U. S. 373
It is true that expiration of the trust operated to change the
beneficiaries entitled to receive the income of the trust property,
from those entitled to the income during the term of the trust to
the remaindermen. But the duty of the trustees to hold and conserve
the trust property, and, until distribution, to receive income from
it, continued. The property did not cease to be held for the
production of income because, upon the expiration of the trust and
until distribution, the trustees were under an additional duty to
distribute the trust fund, or because the trustees, upon
distribution, were then accountable to new and different
beneficiaries, the residuary legatees, both for the principal of
the fund and any income accumulating after the expiry date. To
exclude from the deduction privilege expenses which the Tax Court
has held to be expenses of management of the trust, on the ground
that the trust fund, upon the expiration of the trust, ceased to be
"held for the production of income" would be to disregard the Tax
Court's findings of fact and the words of the statute, and would
defeat its obvious purpose.
Nor is there merit in the court's conclusion that the expenses
were not deductible because they were not for the production of
income. Section 23(a)(2) provides for two classes of deductions --
expenses "for the production . . . of income" and expenses of
"management, conservation, or maintenance of property held for the
production of income." To read this section as requiring that
expenses be paid for the production of income in order to be
deductible is to make unnecessary, and to read out of the section,
the provision for the deduction of expenses of management of
property held for the production of income.
There is no warrant for such a construction. Section 23(a)(2) is
comparable and
in pari materia with § 23(a)(1),
authorizing the deduction of business or trade expenses. Such
expenses need not relate directly to the production of income for
the business. It is enough that
Page 325 U. S. 374
the expense, if "ordinary and necessary," is directly connected
with or proximately results from the conduct of the business.
Kornhauser v. United States, supra, 276 U. S.
152-153;
Commissioner v. Heininger, supra,
320 U. S.
470-471. The effect of § 23(a)(2) was to provide for a
class of nonbusiness deductions coextensive with the business
deductions allowed by § 23(a)(1), except for the fact that, since
they were not incurred in connection with a business, the section
made it necessary that they be incurred for the production of
income or in the management or conservation of property held for
the production of income.
McDonald v. Commissioner, supra,
323 U. S. 61-62,
323 U. S. 66,
and see H.Rep. No. 2333, 77th Cong., 2d Sess., pp. 46,
74-76; S.Rep. No. 1631, 77th Cong., 2d Sess., pp. 87-88.
Since there is no requirement that business expenses be for the
production of income, there is no reason for that requirement in
the case of like expenses of managing a trust, so long as they are
in connection with the management of property which is held for the
production of income. 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
the trust even though the particular expense was not an expense
directly producing income. It follows that all of the items of
expense here in question are deductible if, as the Tax Court has
held, they are expenses of management or conservation of the trust
fund, whether their expenditure did or did not result in the
production of income.
The Government contends that the expenses incurred in connection
with the distribution of the corpus of the trust to legatees are
not deductible, because they are not expenses of managing income
producing property, but expenses in connection with the devolution
of the property. If the suggestion is correct, it would follow that
expenses incurred in distributing the income of the trust
Page 325 U. S. 375
to the income beneficiaries are likewise not deductible, since
the distribution of income is also a devolution of trust property.
But the duties of the trustees were not only to hold the property
for the production of income and to collect the income, but also,
in administering the trust, to distribute the income and the
principal so held from time to time, and the remainder of the
principal at the expiration of the trust. Performance of each of
these duties is an integral part of carrying out the trust
enterprise. Accordingly, as the Tax Court held, the costs of
distribution here were quite as much expenses of a function of
"management" of the trust property as were expenses incurred in
producing the trust income, and, if "ordinary and necessary," they
were deductible.
In support of its contention, the Government relies upon a part
of the House Committee Report accompanying the bill which became
the Revenue Act of 1942,
see H.Rep. No. 2333, 77th Cong.,
2d Sess., p. 75, and upon Treas.Regs. 103, § 19.23(a)-15, neither
of which was mentioned by the Court of Appeals. They state that an
administrator or executor may not deduct expenses incurred in the
administration of the estate of a decedent, including those of
distributing assets to the beneficiaries. It is argued that, by
analogy, like expenses of trustees should not be deductible. But it
is to be noted that there is no such statement in the Report or
Regulations as to the distribution expenses of trustees. On the
contrary, the Regulations, § 19.23(a)-15, in dealing specifically
with expenses of trustees, provides only that their expenses of
management and conservation of the trust property held for then
production of income are deductible. And the references in the
Report to the nondeductibility of expenses of administrators and
executors were in explanation of the Congressional purpose to
prevent the specified administration expenses from being deductible
both for income and estate taxation. To accomplish that purpose
Page 325 U. S. 376
the Report recommended an amendment, which became § 161(a) of
the Revenue Act of 1942, adding § 162(e) to the Internal Revenue
Code. Section 162(e) provides, with immaterial exceptions, that
"amounts allowable under section 812(b) as a deduction in computing
the net estate of a decedent shall not be allowed as a deduction
under section 23." Here, as the Tax Court found, there is no
possibility of such a double deduction, since the expenses were not
deductible under the decedent's estate tax return.
What we have said applies with equal force to the expenses of
contesting the tax deficiency. Section 23(a)(2) does not restrict
deductions to those litigation expenses which alone produce income.
On the contrary, by its terms, and in analogy with the rule under §
23(a)(1), the business expenses 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 production of
income.
Kornhauser v. United States, supra, 276 U. S.
152-153;
Commissioner v. Heininger, supra,
320 U. S.
470-471. The Tax Court could find as a matter of fact,
as it did, that the expenses of contesting the income taxes were a
proximate result of the holding of the property for income. And we
cannot say as a matter of law that such expenses are any less
deductible than expenses of suits to recover income.
Cf.
Commissioner v. Heininger, supra.
The Government relies on Treas.Regs. 103, § 19.23(a)-15, which
provide that
"expenditures incurred . . . for the purpose of recovering taxes
(other than recoveries required to be included in income), or for
the purpose of resisting a proposed additional assessment of taxes
(other than taxes on property held for the production of income)
are not deductible expenses under this section ( § 23(a)(2) of the
Code), except that part thereof which the
Page 325 U. S. 377
taxpayer clearly shows to be properly allocable to the recovery
of interest required to be included in income."
So far as this regulation purports to deny deduction of
litigation expense unless it is to produce income, it is not in
conformity to the statute, for the reasons already stated, or with
the Regulation already mentioned, which provides that, in addition
to expenses for the production or collection of trust income,
expenses of management or conservation of trust property held for
the production of income are also deductible. To that extent and to
the extent that it departs from the rule of
Kornhauser v.
United States, supra, it conflicts with the meaning and
purpose of § 23(a)(2), and so is unauthorized.
Helvering v.
Reynolds Tobacco Co., 306 U. S. 110.
We find no error of law in the judgment of the Tax Court. Its
judgment will be affirmed, and that of the Court of Appeals
reversed.
Reversed.
*
See e.g., Security Mills Co. v. Commissioner,
321 U. S. 281,
321 U. S. 286;
Douglas v. Commissioner, 322 U. S. 275;
Commissioner v. Harmon, 323 U. S. 44;
McDonald v. Commissioner, 323 U. S.
57;
Claridge Apartments Co. v. Commissioner,
323 U. S. 141,
323 U. S. 145;
Fondren v. Commissioner, 324 U. S. 18;
Choate v. Commissioner, 324 U. S. 1;
Commissioner v. Estate of Field, 324 U. S.
113;
Webre Steib Co. v. Commissioner,
324 U. S. 164;
Commissioner v. Smith, 324 U. S. 177;
Commissioner v. Wemyss, 324 U. S. 303;
Commissioner v. Wheeler, 324 U. S. 542;
Estate of Putnam v. Commissioner, 324 U.
S. 393;
Angelus Milling Co. v. Commissioner,
ante, p.
325 U. S. 293;
Commissioner v. Estate of Bedford, ante, p.
325 U. S. 283;
Commissioner v. Disstex, post, p.
325 U. S. 442.
MR. JUSTICE FRANKFURTER, concurring.
This is one of those cases in which the ground of the decision
is more important than the decision itself, except to the parties.
And so, while I concur in the result, I feel bound to say that I
think the manner in which it is reached is calculated to increase
the already ample difficulties in judicial review of Tax Court
determinations. The course of our decisions since
Dobson v.
Commissioner, 320 U. S. 489,
calls for clarification and avoidance of further confusion.
In
Dobson v. Commissioner, supra, this Court
elaborately considered the special function of the Tax Court and
the very limited functions of the Circuit Courts of Appeals and of
this Court in reviewing the Tax Court. The unanimous opinion in the
Dobson case was surely a case of much ado about nothing if
it did not emphasize the vast range of questions as to which the
Tax Court
Page 325 U. S. 378
should have the final say. In making the
Dobson
pronouncement, the Court was not unaware that "questions of fact"
and "questions of law" were legal concepts around which dialectic
conflicts have been fought time out of mind. The
Dobson
opinion took for granted that they are useful instruments of
thought, even though not amenable to fixed connotations. The terms
are unmanageable and too confusing if it be assumed that, unless
they have invariant meaning, that is, unless they serve the same
purpose for every legal problem in which they are invoked, they can
serve no purpose for any problem. The contribution of the
Dobson case, one had a right to believe, was the
restriction of reviewable "questions of law" in tax litigation to
issues appropriate for review in relation to the machinery which
Congress has designed for such litigation. The Dobson case eschewed
sterile attempts at differentiation between "fact" and "law" in the
abstract. Instead, it found significance in the scheme devised by
Congress for adjudicating tax controversies whereby Congress had,
in the main, centralized in the Tax Court review of tax
determinations by the Treasury, and had made the decisions of the
Tax Court final unless they were "not in accordance with law," 44
Stat. 9, 110, 26 U.S.C. § 1141(c)(1), with the result that, as a
practical matter, only a small percentage of Tax Court decisions
gets into the Circuit Courts of Appeals, and a still smaller
percentage reaches this Court.* Therefore, the decisions of the
Circuit
Page 325 U. S. 379
Courts of Appeals, and even more so of this Court, are bound to
be more or less episodic and dependent upon contingencies that
cannot give these appellate courts that feel of the expert which is
so important for wise construction of such interrelated and
complicated enactments as those which constitute our revenue laws.
These factors, so decisive in the stream of tax litigation, weigh
heavily in apportioning functions between the Tax Court and the
courts reviewing the Tax Court. Accordingly, the vital guidance of
the
Dobson opinion was that a decision of the Tax Court
should stand unless it involves "a clear-cut mistake of law,"
320 U. S. 320 U.S.
489,
320 U. S. 502.
Considerations that may properly govern what are to be deemed
questions of fact and questions of law as between judge and jury,
or considerations relevant to the drawing of a line between
questions of fact and questions of law on appeal from a court of
first instance sitting without a jury, or in determining what is a
foreclosed question of fact in cases coming to this Court from
State courts on claims of unconstitutionality, may be quite
misleading when a decision of the Tax Court is challenged in the
various Circuit Courts of Appeals or here as "not in accordance
with law."
Certainly all disputed questions regarding events and
circumstances -- the raw materials, as it were, of situations which
give rise to tax controversies -- are for the Tax Court to settle,
and definitively so. Secondly, there are questions that do not
involve disputes as to what really happened -- as, for instance,
what expenses were incurred or what distribution of assets was made
-- but instead turn on the meaning of what happened as a matter of
business practice or business relevance. Here we are in the domain
of financial and business interpretation in relation to taxation as
to which the Tax Court presumably is as well informed by experience
as are the appellate judges and certainly more frequently
enlightened by the volume and range of its litigation. Such issues
bring us treacherously
Page 325 U. S. 380
near to what abstractly are usually characterized as questions
of law, whether the question of division of labor in a litigation
is between judges and lay juries, or between judges of first
instance and of appellate courts when there is no difference of
specialized experience between the two classes of judges. Thus, the
construction of documents has, for historic reasons, been deemed to
be a question of law in the sense that the meaning is to be given
by judges, and not by laymen. But this crude division between what
is "law" and what is "fact" is not relevant to the proper
demarcation of functions as between the Tax Court and the reviewing
courts. To hold that the Circuit Courts of Appeals, and eventually
this Court, must make an independent examination of the meaning of
every word of tax legislation, no matter whether the words express
accounting, business, or other conceptions peculiarly within the
special competence of the Tax Court, is to sacrifice the
effectiveness of the judicial scheme designed by Congress
especially for tax litigation to an abstract notion of "law"
derived from the merely historic function of courts generally to
construe documents, including legislation. More than that. If the
appellate courts must make an independent examination of the
meaning of every word in tax legislation, on the assumption that
the construction of legislative language is necessarily for the
appellate courts, how can they reasonably refuse to consider claims
that the words have been misapplied in the circumstances of a
particular case? Meaning derives vitality from application. Meaning
is easily thwarted or distorted by misapplication. If the appellate
courts are charged with the duty of giving meaning to words because
they are contained in tax legislation, they equally cannot escape
the duty of examining independently whether a proper application
has been given by the Tax Court.
The specialized equipment of the Tax Court and the trained
instinct that comes from its experience ought to
Page 325 U. S. 381
leave with the Tax Court the final say also as to matters which
involve construction of legal documents and the application of
legislation even though the process may be expressed in general
propositions, so long as the Tax Court has not committed what was
characterized in the
Dobson case as a "clear-cut mistake
of law."
That serves as a guide for judgment even though no inclusive
definition or catalogue is essayed. The Tax Court, of course, must
conform to the procedural requirements which the Constitution and
the laws of Congress command. Likewise, in applying the provisions
of the revenue laws, the Tax Court must keep within what may
broadly be called the outward limits of categories and
classifications expressing legislative policy. Congress has
invested the Tax Court with primary -- and largely with ultimate --
authority for redetermining deficiencies. It is a tribunal to which
mastery in tax matters must be attributed. The authority which
Congress has thus given the Tax Court involves the determination of
what really happened in a situation and what it means in the taxing
world. In order to redetermine deficiencies, the Tax Court must
apply technical legal principles. The interpretation of tax
statutes and their application to particular circumstances are all
matters peculiarly within the competence of the Tax Court. On the
other hand, constitutional adjudication, determination of local law
questions and common law rules of property, such as the meaning of
a "general power of appointment" or the application of the rule
against perpetuities, are outside the special province of the Tax
Court.
See Paul,
Dobson v. Commissioner: the
Strange Ways of Law and Fact (1944) 57 Harv.L.Rev. 753, 847, 848.
Congress did not authorize review of all legal questions upon which
the Tax Court passed. It merely allowed modification or reversal if
the decision of the Tax Court is "not in accordance with law." But
if a statute upon which the Tax
Page 325 U. S. 382
Court unmistakably has to pass allows the Tax Court's
application of the law to the situation before it as a reasonable
one -- if the situation could, without violence to language, be
brought within the terms under which the Tax Court placed it or be
kept out of the terms from which that Court kept it -- the Tax
Court cannot in reason be said to have acted "not in accordance
with law." In short, there was no "clear-cut mistake of law," but a
fair administration of it.
If these considerations are to prevail, the sole question before
a Circuit Court of Appeals is whether the decision by the Tax Court
presents a "clear-cut mistake of law." There should be an end of
the matter once it is admitted that the application made by the Tax
Court was an allowable one. If a question becomes a reviewable
question in tax cases because, abstractly considered, it may be
cast into a "pure question of law," it would require no great
dialectical skill to throw most questions which are appealed from
the Tax Court into questions of law independently reviewable by the
Circuit Courts of Appeals. The road would be open to a new
insistence for increased tax reviews by this Court on certiorari.
The intention of the Dobson case was precisely otherwise. It was to
centralize responsibility in the Tax Court, to minimize isolated
intrusions by the Circuit Courts of Appeals into the technical
complexities of tax determinations except when the Tax Court has
clearly transcended its specialized competence, and to discourage
resort to this Court in tax cases except where conflict among the
circuits or constitutional questions or a "clear-cut mistake of
law" of real importance may call for our intervention.
Let us apply these governing considerations to the case in hand.
The trustees here paid, as expenses in connection with the trust,
certain legal fees, and these charges they deducted from the gross
trust income for 1940. The Commissioner disallowed these
deductions. The legal
Page 325 U. S. 383
services concerned (1) litigation in which the trustees
unsuccessfully contested a deficiency claim based on taxable gain
to the estate, (2) payment of a legacy, and (3) problems arising
from the expiration of the trust and the disposition of its assets.
The sole question before the Tax Court was whether these fees and
charges were deductible as expenses incurred "for the management,
conservation, or maintenance of property held for the production of
income" under § 121(a) of the Revenue Act of 1942, 56 Stat. 798,
819.
Whether these payments constituted expenses "for the management
. . . of property held for the production of income" may as fairly
be said to be a question of fact -- namely, the purpose which these
payments served with relation to property held for the production
of income -- as it could said that they involve a proper
construction of what the statute means by "management" of such
property. The truth of the matter is that the problem involves a
judgment regarding the interplay of both questions -- namely, what
relation do these payments have to what may properly be deemed the
managerial duties of trustees. It is possible to transform every
so-called question of fact concerning the propriety of expenses
incurred by trustees into a generalized inquiry as to what the
duties of a trustee are, and therefore whether a particular
activity satisfied the conception of management which trusteeship
devolves upon a trustee. Such a way of dealing with these problems
inevitably leads to casuistries which are to be avoided by a fair
distribution of functions between the Tax Court and the reviewing
courts. The fact that this problem may be cast in the form of
intellectually disinterested abstractions goes a long way to prove
that its solution should be left with the Tax Court.
If the decision by the Tax Court may fairly be deemed to have
been restricted to the facts of this case, as it may, it certainly
would be an issue of "fact." But even assuming
Page 325 U. S. 384
that the "issues are broader than the particular facts
presented" by this case, the Tax Court's decision is not deprived
of finality. Yet an assumption to the contrary is at the core of
the Government's argument. Simply because the correctness of
"certain general propositions" is involved does not make the
position taken by the Tax Court a question of law. The real
question is: what is the nature of the issue upon which the Tax
Court has pronounced? If the issue presents a difficulty which it
is peculiarly within the competence of the Tax Court to resolve and
that court has given a fair answer, every consideration which led
to the pronouncement in the
Dobson case should preclude
independent reexamination of the Tax Court's disposition.
Regardless of what the question may be termed for purposes of
review, the Tax Court's determination should be accorded finality.
That the Tax Court has expressed an allowable opinion as to the
meaning and application of a tax provision, here § 121(a) of the
1942 Revenue Act, should suffice to reinstate its decision, without
opening the sluices to independent review by the Circuit Courts of
Appeals and this Court of multitudinous tax questions. Such is the
principle or rule of judicial administration which should guide
review of Tax Court determinations.
MR. JUSTICE ROBERTS and MR. JUSTICE JACKSON join in this
concurring opinion.
* As a matter of historic survival, some tax litigation still
reaches district courts throughout the country. To that extent,
there is a qualification upon the centralization of review in the
Tax Court of Treasury determinations. But the overwhelming volume
of tax litigation goes to the Tax Court. The ratio is about 6 to 1.
The fact that the district courts continue to have vestigial
jurisdiction may call for a scientific revamping of jurisdiction in
tax cases. It does not counsel against giving the fullest efficacy
to Tax Court decisions consonant with its special responsibility.
See Griswold, The Need for a Court of Tax Appeals, 1944,
57 Harv.L.Rev. 1153; Miller, Can Tax Appeals Be Centralized § 1945,
23 Taxes 303.