                         T.C. Memo. 1997-55



                       UNITED STATES TAX COURT



ESTATE OF CLARA D. BAIRD, DECEASED, FLEET TRUST COMPANY, WILLIAM
 C. BAIRD, AND BARBARA B. GROETZINGER, CO-EXECUTORS, Petitioner
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5726-95.                Filed January 30, 1997.



     Sherman F. Levey, Peter Oddleifson, and Eric R. Paley,

for petitioner.

     Theodore R. Leighton, Mark A. Ericson, and Theresa G.

McQueeney, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    By notice dated January 17, 1995, respondent

determined a deficiency in petitioner's estate tax of

$118,709.31.   All section references are to the Internal Revenue
                                 - 2 -

Code in effect as of the date of decedent's death, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

After concessions, the sole issue for decision is whether

petitioner, pursuant to section 2053(a)(2), is entitled to deduct

from the gross estate $368,100 paid for attorney's fees.     We hold

that petitioner is so entitled to the extent stated herein.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.      At

the time of her death, on May 26, 1991, Clara D. Baird (decedent)

resided in Brighton, New York.    At the time the petition was

filed, the Estate of Clara D. Baird (petitioner) had a mailing

address in Rochester, New York; Fleet Trust Company (Fleet), the

corporate executor, had its principal place of business in

Rochester, New York; and co-executors William C. Baird and

Barbara B. Groetzinger resided in Rochester, New York, and

Virginia Beach, Virginia, respectively.

     In 1983, decedent retained the services of Harris, Beach, &

Wilcox (HBW), a Rochester law firm, to prepare her estate

planning documents.   HBW's trust and estate practice had an

excellent reputation in the local community.     Peter Oddleifson,

an HBW partner, represented decedent.    Mr. Oddleifson graduated

from Harvard Law School in 1957 and had many years of trust and

estate experience.    On June 23, 1983, decedent executed her will.

Decedent executed a codicil to the will on January 18, 1984, and

a trust agreement on December 21, 1984.      The will provided that
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Security Trust Company of Rochester (currently Fleet), Mr. Baird,

and Ms. Groetzinger would serve as co-executors.   Mr. Baird and

Ms. Groetzinger are decedent's children and the residuary

legatees under the will.

     On May 26, 1991, at the age of 98, decedent died.    The

executors, in accordance with decedent's instructions, retained

HBW to provide all necessary legal services for petitioner.

Shortly after the decedent's death, Mr. Baird, Ms. Groetzinger,

Mr. Oddleifson, and Mr. David Lyddon (vice president and trust

officer of Fleet) met to review the assets of the estate and

discuss anticipated expenses of administration.    These expenses

included the estate's obligation to satisfy all outstanding

liabilities, pay executor's commissions, pay attorney's fees, and

fund the trust created by decedent's will.

     At the meeting, Mr. Lyddon produced a schedule estimating

the value of the gross estate and the expenses of administration.

Mr. Lyddon prepared the schedule the day decedent died.    Based on

an estimated gross estate of $17,000,000, the schedule estimated

that each executor would receive a statutory commission of

$374,000.   The schedule also estimated that HBW would be paid

$374,000 in attorney's fees.   The estimate of attorney's fees was

consistent with the community practice that attorney's fees

approximate a single executor's commission.
                                - 4 -

     On February 24, 1992, petitioner's Federal estate tax return

was filed.    On the return, petitioner valued the gross estate at

$17,181,224.41.   The estate consisted of the following assets:




     Assets                               Value at Date of Death

     Real estate                               $215,000.00
     Stocks and bonds                        16,257,550.34
     Mortgages, notes, and cash                 244,550.28
     Other miscellaneous property               119,930.14
     Transfers during decedent's life           344,193.65
                                            $17,181,224.41

On the return, petitioner claimed deductions from the gross

estate of $368,100 for attorney's fees and $1,104,300 (3 x

$368,100) for executor's commissions.

     On January 25, 1993, and May 11, 1993, Mr. Oddleifson filed

affidavits in support of the requested attorney's fees with the

Monroe County Surrogate's Court.   Both affidavits provided in

pertinent part:

          The terms of the retainer agreement are to provide
     all required legal services for the estate at a fee to
     be determined in line with the local custom and
     practice of the Monroe County community and subject to
     the approval of the Monroe County Surrogate.

          The amount requested for compensation for legal
     services rendered to the Estate is $368,100 based upon
     an estate valued at $17,181,000. This amount includes
     all services rendered and to be rendered up to and
     including the settlement of the decree and
     distribution.

The May 11, 1993, affidavit stated that HBW had performed

approximately 229 hours of work on behalf of the estate through
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April 30, 1993.    This included approximately 30 hours of work

performed in connection with the sale of decedent's residence

which was specifically devised to Ms. Groetzinger.    Also included

was approximately 11 hours of work performed to obtain advance

payment of executor's commissions of $184,500 each to Mr. Baird

and Ms. Groetzinger.    On May 24, 1993, the Monroe County

Surrogate issued a Decree of Judicial Settlement allowing the

entire $368,100 in requested attorney's fees.

     On January 17, 1995, a statutory notice of deficiency was

timely mailed to petitioner.    Respondent disallowed $265,600 of

petitioner's claimed deduction for attorney's fees.

     As of May 30, 1996, HBW had performed 555.7 hours of work on

behalf of the estate.    This amount included 269 hours devoted to

the controversy with the Internal Revenue Service over the

subject matter of this case.

                               OPINION

     Section 2053(a)(2) allows a deduction from the gross estate

for administration expenses.    Administration expenses include

attorney's fees.    Sec. 20.2053-3(a), Estate Tax Regs.   To be

deductible under section 2053(a)(2), the administration expense

must be allowable under (1) local law and (2) the regulations.

Estate of Reilly v. Commissioner, 76 T.C. 369, 372 (1981); Estate

of Smith v. Commissioner, 57 T.C. 650, 661 (1972), affd. 510 F.2d

479 (2d Cir. 1975); Estate of Love v. Commissioner, 923 F.2d 335,

337-338 (4th Cir. 1991), affg. T.C. Memo. 1989-470.    Petitioner
                                - 6 -

bears the burden of proving its entitlement to the deduction.

Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).

I.   Local Law

       Petitioner contends that the attorney's fees are allowable

under local law because the Monroe County Surrogate's Court

issued a decree allowing the fees.      Section 20.2053-1(b)(2),

Estate Tax Regs., addresses the effect of a local court decree:

      The decision of a local court as to the amount and
      allowability under local law of a claim or
      administration expense will ordinarily be accepted if
      the court passes upon the facts upon which
      deductibility depends. * * * It must appear that the
      court actually passed upon the merits of the claim.
      This will be presumed in all cases of an active and
      genuine contest. * * * The decree will not be accepted
      if it is at variance with the law of the State. * * *

      While it appears that the court passed upon the merits of

the claim, the relevant portion of the Surrogate's Court's

opinion contains no analysis supporting its conclusion.

Therefore, it is unclear whether the opinion is consistent with

New York law.    Accordingly, we must conduct our own examination

of whether these expenses are deductible under New York law as

determined by the New York Court of Appeals.      In doing so, we

give "proper regard" to the relevant rulings of New York's lower

courts.   Commissioner v. Estate of Bosch, 387 U.S. 456, 465

(1967); United States v. White, 853 F.2d 107, 113-115 (2d Cir.

1988).
                                 - 7 -

       To be approved under New York law, requested attorney's fees

must be reasonable.     In re Potts' Estate, 209 N.Y.S. 655, 657

(App. Div.), affd. 150 N.E. 568 (N.Y. 1925).    The New York Court

of Appeals has enumerated the following factors to be considered

in determining whether attorney's fees are reasonable:    (1) The

time and labor required; (2) the difficulty of the questions

involved, and the skill required to handle the problems

presented; (3) the lawyer's experience, ability, and reputation;

(4) the amount involved and benefit resulting to the client from

the services; (5) the customary fee charged by attorneys in the

community for similar services; (6) the contingency or certainty

of compensation; (7) the results obtained; and (8) the

responsibility involved.     In re Estate of Freeman, 311 N.E.2d

480, 484 (N.Y. 1974).

       After analyzing each of the Freeman factors, we conclude

that the $368,100 in attorney's fees is reasonable under New York

law.    First, the fees received by HBW were consistent with

reasonable customary fees for similar services.    Petitioner

presented sufficient evidence to establish that in Monroe County

attorneys customarily receive fees equal to one executor's

commission for representing an estate.    The Monroe County

Surrogate's Court awarded HBW fees equal to approximately one

executor's commission.    In addition, the $368,100 fee was equal

to 2.09 percent of the gross estate.     New York courts have held

that a fee award equal to 3 percent of the gross estate is
                                - 8 -

facially reasonable.   In re Goldstick, 581 N.Y.S.2d 165, 169

(App. Div. 1992); see also In re Estate of Gates, 503 N.Y.S.2d

161, 162-163 (App. Div. 1986) (allowing fees equal to 6 percent

of the gross estate); In re Kennedy's Estate, 290 N.Y.S.2d 964,

971 (Sur. Ct. 1968) (holding that fees equal to approximately 4

percent of the gross estate are presumptively reasonable); In re

Kentana's Estate, 10 N.Y.S.2d 811, 812 (Sur. Ct. 1939) (observing

that reasonable compensation will ordinarily approximate between

5 percent of the gross estate and a single executor's

commission).

     Second, HBW's experience, ability, and reputation were

excellent.   HBW was highly regarded in the local community for

its expertise in trust and estate matters.   The partner in charge

of administering the estate, Mr. Oddleifson, was an experienced

and well-respected attorney.

     Third, the services rendered by HBW benefitted the estate by

obtaining favorable results.    Mr. Baird testified that HBW "has

done a very good job" representing petitioner, and we have no

reason to conclude otherwise.   Respondent contends that the

estate did not benefit from HBW's services, because the

litigation relating to the deductibility of HBW's fees delayed

the closing of the estate.   We reject this contention.

Contesting an estate tax deficiency directly benefits the estate,

because the estate's tax burden may be reduced.
                                 - 9 -

     Fourth, decedent's estate was large, and HBW undertook

significant responsibility in representing it.    The amount

involved (i.e., the size of the estate) is a significant factor

in determining whether the fees are reasonable.    See In re Estate

of Freeman, supra at 484.   Decedent's estate is valued at

$17,181,224.41.   Because the estate is large, HBW took on a great

deal of responsibility in representing it.    A mistake could have

resulted in a considerable loss to the estate and, ultimately, to

the decedent's beneficiaries.

     While the previous factors favor petitioner, there are other

factors we must consider.   First, HBW performed 555.7 hours of

service on behalf of petitioner for fees of $368,100.    Respondent

contends that such large fees are per se unreasonable, because

they are excessive when compared to the number of hours worked.

Time spent, however, is not the most important factor in

determining whether the fees are reasonable.     In re Brehm's

Estate, 322 N.Y.S.2d 287, 290 (App. Div. 1971); In re Snell's

Estate, 235 N.Y.S.2d 855, 860 (App. Div. 1962); In re Potts'

Estate, supra at 657; Estate of Gillett, 527 N.Y.S.2d 690, 691

(Sur. Ct. 1988); In re Kentana's Estate, supra.     Therefore, while

this factor favors respondent, we decline to adopt respondent's

proposed time-clock approach.

     Second, the representation of petitioner did not involve any

particularly difficult issues.    Mr. Lyddon testified that the

administration of the estate was not difficult, because Fleet
                               - 10 -

already had control in an investment management account of most

of decedent's assets.    In addition, the estate primarily

consisted of marketable securities that were converted almost

immediately into cash or cash equivalents.

      Third, the fees requested by HBW were fixed and not

contingent on the results produced.     Contingency fee arrangements

are rarely used, however, for services related to estate

administration.   Moreover, given the size and liquidity of the

estate, the collectibility of HBW's fees was never an issue.

      After a review of all the factors, we conclude that the

$368,100 in attorney's fees is reasonable under New York law.

Accordingly, we hold that the attorney's fees are allowable under

local law.   We next determine whether the fees are allowable

under the regulations.

II.   The Regulations

      The regulations provide the following requirements for the

deduction of administration expenses:

      The amounts deductible * * * are limited to such
      expenses as are actually and necessarily incurred in
      the administration of the decedent's estate * * *. The
      expenses contemplated in the law are such only as
      attend the settlement of an estate and the transfer of
      the property of the estate to individual beneficiaries
      * * *. Expenditures not essential to the proper
      settlement of the estate, but incurred for the
      individual benefit of the heirs, legatees, or devisees,
      may not be taken as deductions. * * * [Sec. 20.2053-
      3(a), Estate Tax Regs.]

"Expenses for selling property of the estate are deductible if

the sale is necessary to pay the decedent's debts, expenses of
                                - 11 -

administration, or taxes, to preserve the estate, or to effect

distribution."   Sec. 20.2053-3(d)(2), Estate Tax Regs.; see also

Estate of Posen v. Commissioner, 75 T.C. 355, 359 (1980).

     Respondent contends that the fees relating to 30 hours of

work performed in connection with the sale of decedent's

residence are not deductible, because the sale was not necessary

for the administration of the estate.     Petitioner concedes that

these services were included in the fees.     Decedent's residence

was specifically devised to Ms. Groetzinger, and it was not

necessary to sell the residence to effect the distribution.

There were sufficient liquid assets in the estate to pay the

decedent's debts.   The sale of the residence was for the sole

benefit of Ms. Groetzinger and not the estate.     Accordingly, we

hold that the fees relating to the sale of decedent's residence

are not deductible.

     Respondent also contends that the fees relating to 11 hours

of work performed to obtain advance payment of executor's

commissions for Mr. Baird and Ms. Groetzinger are not deductible,

because the advance commissions were not necessary for the

administration of the estate.    Petitioner concedes that these

services were included in the fees.      The petition filed on behalf

of Mr. Baird and Ms. Groetzinger to the Monroe County Surrogate's

Court requesting the advance payment of commissions provides that

the executors needed the commissions for personal reasons (i.e.,

to prevent them from experiencing difficulty in "the management
                                - 12 -

of their cash flows.")   The advance payment of executor's

commissions was for the sole benefit of Mr. Baird and Ms.

Groetzinger and was not necessary for the administration of the

estate.   Accordingly, we hold that the fees relating to the

payment of advance executor commissions are not deductible.

     The remaining services provided by HBW were essential to the

administration of the estate.    Accordingly, we hold that the

remainder of the fees are allowable under the regulations and,

pursuant to section 2053(a)(2), are deductible from the gross

estate.

     We have considered the other arguments made by the parties

and found them to be either irrelevant or without merit.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
