## Facts

- A testamentary trust was created to operate for a fixed 21-year term and was funded mainly with marketable securities.
- Trustees were authorized to sell and reinvest trust assets and were required to make periodic distributions to beneficiaries and distribute the remaining corpus to remaindermen at the end of the term.
- In 1935, trustees made a scheduled distribution to a beneficiary partly in appreciated securities.
- The Commissioner assessed an income-tax deficiency against the trust based on appreciation in distributed securities, and trustees incurred legal fees to contest the deficiency.
- Trustees also incurred legal expenses related to implementing distributions, addressing related tax questions, and winding up and distributing the trust at the end of its term.
- On the 1940 return, trustees deducted these legal fees as nonbusiness expenses under Internal Revenue Code § 23(a)(2); the Commissioner disallowed the deductions and asserted an additional deficiency.

## Issues

1. Whether deductibility of the trustees’ legal expenses under § 23(a)(2), on the Tax Court’s facts, presents a legal question subject to appellate review.
2. Whether legal fees incurred (a) to contest an income-tax deficiency against the trust and (b) to wind up and distribute the trust at the end of its term are deductible under § 23(a)(2) as “ordinary and necessary” expenses for managing property held for the production of income.

## Decision

- The Supreme Court reversed the court of appeals and reinstated the Tax Court’s allowance of the deductions.
- Classification of the expenses under § 23(a)(2) was a “clear-cut” legal question; the Tax Court’s determination was entitled to weight but did not bar appellate review.
- The Court held the challenged legal fees were deductible because they were sufficiently connected to the trustees’ management of property held for income production.
- Trust property did not stop being “held for the production of income” merely because trustees had a duty to distribute it as the trust term ended.
- Expenses of final distribution could qualify as management expenses of the trust property.

## Legal Principles

- Whether an expense falls within § 23(a)(2) is a legal characterization based on statutory meaning, even if it depends on underlying factual findings.
- Under § 23(a)(2), a trust may deduct ordinary and necessary expenses paid or incurred for managing, conserving, or maintaining property held for the production of income.
- Deductible expenses are not limited to those that themselves generate income; litigation expenses are deductible when directly connected with or proximately resulting from managing income-producing property.
- Costs associated with orderly distribution of trust corpus at the end of the trust term may constitute expenses of management where the property remains held and administered for income production until distribution is completed.
- § 23(a)(2) is construed in parallel with the business-expense provision, allowing nonbusiness taxpayers to deduct analogous management-related expenses.

## Conclusion

The Court held that trustees may deduct, under § 23(a)(2), legal fees incurred to contest an income-tax deficiency and to carry out end-of-term distributions when those expenses are directly connected with or proximately result from managing property held for the production of income, and it treated the classification of such expenses as a reviewable question of law.


Trust of Bingham v. Comm’r, 325 U.S. 365 (1945)