Source: https://supreme.justia.com/cases/federal/us/343/118/
Timestamp: 2019-04-22 08:11:00+00:00

Document:
Under § 23(a)(2) of the Internal Revenue Code, an individual taxpayer was not entitled to deduct from his gross income, for federal income tax purposes, an attorney's fee paid for contesting the amount of his federal gift tax in the circumstances of this case. Pp. 343 U. S. 119-127.
(a) The attorney's fee was not deductible under § 23(a)(2) as an expense "for the production or collection of income." Pp. 343 U. S. 121-124.
(b) There is no adequate basis in the record in this case for holding the attorney's fee deductible under § 23(a)(2) as an incident of petitioner's "management, conservation, or maintenance of property held for the production of income." Pp. 343 U. S. 124-125.
(c) Expenses for legal services do not become deductible merely because they are paid for services which relieve a taxpayer of liability, nor because the size of the claim to which the services relate is large in proportion to the income-producing resources of the taxpayer, nor because the claim, if allowed, will consume income-producing property of the taxpayer. Pp. 343 U. S. 125-126.
(d) The result here reached is not inconsistent with 1944 Treasury Regulations, and it is in accord with specific provisions of Treasury Regulations since 1946, containing an administrative interpretation of § 23(a)(2) which is entitled to substantial weight, especially since Congress has made many amendments to the Internal Revenue Code without revising that administrative interpretation. Pp. 343 U. S. 126-127.
In a suit for a refund of federal income tax, the District Court entered judgment for petitioner. 84 F.Supp. 537. The Court of Appeals reversed. 188 F.2d 964. This Court granted certiorari. 342 U.S. 810. Affirmed, p. 343 U. S. 127.
The question here is whether, for federal income tax purposes, an individual taxpayer was entitled to deduct from his gross income, an attorney's fee paid for contesting the amount of his federal gift tax. For the reasons hereafter stated, we hold that he was not.
sued for a refund. On stipulated and uncontroverted facts, the District Court held, as a matter of law, that the payment should have been deducted, and entered judgment for petitioner. 84 F.Supp. 537. [Footnote 2] The Court of Appeals reversed. 188 F.2d 964. Because of the important statutory issue involved and petitioner's claim that this case is distinguishable from Cobb v. Commissioner, 173 F.2d 711, we granted certiorari. 342 U.S. 810.
Section 24 adds that, in "computing net income no deduction shall in any case be allowed in respect of -- (1) Personal, living, or family expenses. . . ." 53 Stat. 16, 56 Stat. 826, 26 U.S.C. § 24(a)(1). Insofar as gifts to members of a donor's family are in the nature of personal or family expenses, the donor's expenditures for accounting, legal, or other services incurred in making those gifts are of a like nature. The nondeductibility of such expenditures therefore is indicated both by the absence of any affirmative allowance of their deductibility under § 23 and by the express denial of the deductibility of all personal or family expenses under § 24.
individual taxpayer. It specifies those paid or incurred (1) "for the production or collection of income" or (2) "for the management, conservation, or maintenance of property held for the production of income." See H.R.Rep.No.2333, 77th Cong., 2d Sess. [Footnote 7] Congress might have gone further. However, neither the decision that occasioned the amendment, the Committee Reports on it, nor the language adopted in it indicates that Congress sought to make such a change of policy as would authorize widespread deductibility of personal, living, or family expenditures in the face of § 24(a)(1). Bingham's Trust v.
Commissioner, 325 U. S. 365, 325 U. S. 374; McDonald v. Commissioner, 323 U. S. 57, 323 U. S. 61-63.
that his donation of one-hird of that stock actually was not the gift he represented it to be. Petitioner does not claim that the gift itself is deductible, and, if it, as the principal item in the transaction, is not deductible, we find no adequate basis in this record for holding the related attorney's fee deductible.
II. Legal expenses do not become deductible merely because they are paid for services which relieve a taxpayer of liability. That argument would carry us too far. It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-roducing property he might have. For example, it suggests that the expense of defending an action based upon personal injuries caused by a taxpayer's negligence while driving an automobile for pleasure should be deductible. Section 23(a)(2) never has been so interpreted by us. It has been applied to expenses on the basis of their immediate purposes, rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-roducing assets by reducing his general liabilities. See McDonald v. Commissioner, supra, at 323 U. S. 62-63.
of resisting the claim, substantial uncertainty and inequity would inhere in the rule. For example, the expense of defending a personal injury suit for negligence, or a suit for alienation of affections, claiming $1,000 damages, probably would not be a deductible expense for any defendant. On the other hand, if the same plaintiff on the same facts asked for $5,000, $10,000 or $100,000 damages, and the defendant held some income-roducing property, that defendant might be permitted to deduct from his taxable income the same expense for precisely the same services as those upon which his less well-o-o neighbor would have to pay a tax in the other case. It is not a ground for defense that the claim, if justified, will consume income-roducing property of the defendant. We find no such distinction made or implied in the Revenue Act.
held by him for the production of income must be sold to satisfy an assessment for such tax liability or even though, in the event of a claim for refund, the amount received will be held by him for the production of income."
Such a regulation is entitled to substantial weight. See Commissioner v. South Texas Co., 333 U. S. 496, 333 U. S. 501; Morrissey v. Commissioner, 296 U. S. 344, 296 U. S. 355; Fawcus Machine Co. v. United States, 282 U. S. 375, 282 U. S. 378. Since the publication of that Treasury Decision, Congress has made many amendments to the Internal Revenue Code without revising this administrative interpretation of § 23(a)(2). See Revenue Act of 1948, c. 168, 62 Stat. 110; Revenue Act of 1950, c. 994, 64 Stat. 906; Revenue Act of 1951, c. 521, 65 Stat. 452; Higgins v. Commissioner, supra, at 312 U. S. 216; Morrissey v. Commissioner, supra, at 296 U. S. 345.
"SEC 23. DEDUCTIONS FROM GROSS INCOME."
"In computing net income there shall be allowed as deductions: "
"(2) NON-TRADE OR NON-BUSINESS EXPENSES. -- In the case of an individual, 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."
(Emphasis supplied.) 53 Stat. 12, 56 Stat. 819, 26 U.S.C. § 23(a)(2).
"To construe the law as giving to the Commissioner the power to assess a taxpayer with a deficiency tax greatly in excess of what he owes and to hold that such law denies to the taxpayer the right to contest such assessment, except at his own personal expense, just isn't justice under the law. The statute in question gives the Commissioner no such power. . . ."
The tax is "levied, collected, and paid for each taxable year upon the net income of every individual. . . ." 53 Stat. 5, 26 U.S.C. § 11. "Net income' means the gross income computed under section 22, less the deductions allowed by section 23." 53 Stat. 9, 26 U.S.C. § 21.
"the now familiar rule that an income tax deduction is a matter of legislative grace, and that the burden of clearly showing the right to the claimed deduction is on the taxpayer."
Interstate Transit Lines v. Commissioner, 319 U. S. 590, 319 U. S. 593; Deputy v. Du Pont, 308 U. S. 488, 308 U. S. 493; New Colonial Ice Co. v. Helvering, 292 U. S. 435, 292 U. S. 440. Such an interpretation is not necessary here, and is not relied upon in this case. See Griswold, An Argument against the Doctrine that Deductions Should Be Narrowly Construed as a Matter of Legislative Grace, 56 Harv.L.Rev. 1142.
And see United States v. Pyne, 313 U. S. 127 (attorney's fees and other expenses of executors in caring for securities and investments not deductible); City Bank Farmers Trust Co. v. Helvering, 313 U. S. 121 (similar expenses of testamentary trustee not deductible); Van Wart v. Commissioner, 295 U. S. 112 (attorney's fee for litigation to recover income for a ward not deductible).
". . . Due partly to the inadequacy of the statute and partly to court decisions, nontrade or nonbusiness expenses are not deductible, although nontrade or nonbusiness income is fully subject to tax. The bill corrects this inequity by allowing all of the ordinary and necessary expenses paid or incurred for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Thus, whether or not the expense is in connection with the taxpayer's trade or business, if it is expended in the pursuit of income or in connection with property held for the production of income, it is allowable."
". . . The expenses, however, of carrying on a transaction which does not constitute a trade or business of the taxpayer and is not carried on for the production of income or for the management, conservation, or maintenance of property, but which is carried on primarily as a sport, hobby, or recreation are not allowable as nontrade or nonbusiness expenses."
"Expenses, to be deductible under section 23(a)(2), must be ordinary and necessary, which rule presupposes that they must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of income, or to the management, conservation, or maintenance of property held for that purpose."
Id. at 46, 75. To the same effect, see S.Rep.No.1631, 77th Cong., 2d Sess. at 87-88.
For cases resulting in the nondeductibility of legal expenses, see e.g., Croker v. Burnet, 61 App.D.C. 342, 62 F.2d 991 (en banc) (defending suit to have taxpayer's husband declared incompetent and to set aside his transfer of property to taxpayer); Dickey v. Commissioner, 14 B.T.A. 1295 (defense against suit for malicious prosecution); Joyce v. Commissioner, 3 B.T.A. 393 (defense of validity of postnuptial agreement); Oransky v. Commissioner, 1 B.T.A. 1239 (defense and settlement of action for death due to negligence of taxpayer's minor son using taxpayer's automobile). See Kornhauser v. United States, 276 U. S. 145, for an example of legal expenses held deductible as business expenditures, rather than personal ones.
The record shows that the corporation was organized in 1910 by petitioner's elder brothers, and was originally engaged in the cattle, ranching, and meatpacking business. Later it engaged in extensive steamship and stevedoring operations through a subsidiary. While it was a large enterprise with numerous stockholders besides petitioner, his wife and children, the stock never had been on the open market. It was held by sons, nephews and sons-n-aw of the Lykes brothers. It was the practice of the brothers to foster in this way a continuity of family ownership and management. At the time of petitioner's gift of 1,000 shares of common stock, there were outstanding about 25,000 shares of that class of stock.
The issue here is distinguishable from that in Bingham's Trust v. Commissioner, supra. In that case, the legal expenses were incurred partly in contesting an income tax deficiency assessed against the taxpaying trust and partly in winding up the trust after its expiration. All of those expenses were integral parts of the management or conservation of the trust property for the production of income, and, as such, deductible under § 23(a)(2).
Lykes made a gift of corporate stock to his children. It was a legitimate transaction, duly reported for gift tax purposes, and a tax of over $13,000 paid thereon. By overvaluing the stock which had been given, the Commissioner asserted a gift tax deficiency of $145,276.50, of which about $130,000 was found by the Tax Court to be unjustified. But, to protect himself against the Government's unjustified claim, Lykes spent $7,263.83 for legal services.
the Government's unjustified demand, it would have depleted his capital by about $130,000, and thenceforward he could not have enjoyed income from it. Of course, it is not the amount, but the principle, that is significant. Indeed, the burden of legal expense is likely to be in inverse proportion to the amount of the deficiency asserted. Here, the expense was only about 5% of the saving. In small cases of small taxpayers, the percentage will be far greater, and in many may exceed 100%. Certainly contest against unwarranted exaction, regardless of its amount or outcome, is for the conservation of property, and its reasonable cost is deductible.
A majority of my brethren seem to think they can escape this conclusion by going further back in the chain of causation. They say the cause of this legal expense was the gift. Of course, one can reason, as my brethren do, that, if there had been no gifts, there would have been no tax, if there had been no tax, there would have been no deficiency, if there were no deficiency, there would have been no contest, if there were no contest there would have been no expense. And so the gifts caused the expense. The fallacy of such logic is that it would be just as possible to employ it to prove that the lawyer's fees were caused by having children. If there had been no children, there would have been no gift, and if no gift, no tax, and if no tax, no deficiency, and if no deficiency, no contest, and if no contest, no expense. Hence, the lawyer's fee was not due to the contest at all, but was a part of the cost of having babies. If this reasoning were presented by a taxpayer to avoid a tax, what would we say of it? So treacherous is this kind of reasoning that, in most fields, the law rests its conclusion only on proximate cause, and declines to follow the winding trail of remote and multiple causations.
public policy to discourage taxpayers from contesting its unjustified demands for taxes, and thus justify penalizing resistance. It is hard to imagine any instance in which the Treasury could have a stronger self-nterest in its regulation. I cannot put my finger on a case where we have said that this reason would avoid Treasury Regulations. But we have disregarded them when they were not consistent with the statute, and that seems to be the case here. I think Congress allows a taxpayer to protect his estate, even against the Treasury. It seems to me a tacit slander of the Nation's credit that need for money should drive us to such casuistry as this.

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