Court Opinion

ID: 9450368
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:43:44.504024+00
Date Added: 2024-06-11T17:32:16.254093
License: Public Domain

DAVIS, Judge
(dissenting):
In 1952, the Supreme Court held that an individual taxpayer could not deduct, for federal income tax purposes, attorneys’ fees paid for contesting a gift-tax deficiency. Lykes v. United States, 343 U.S. 118, 72 S.Ct. 585, 96 L.Ed. 791. At that time the Internal Revenue Code, as it does now, permitted individuals to deduct non-trade or business expenses incurred “for the production or collection of income; or for the management, conservation, or maintenance of property held for the production of income,” but the Court ruled, with three dissenters, that lawyers’ fees for contesting a gift tax, unlike a struggle over the income tax or the estate tax, did not fall into either of those classes. This decision was the direct stimulus for the inclusion of Section 212(3) in the 1954 Code, and the legislative history shows that Congress did not contemplate going much, if at all, beyond pennitting the deduction of attorneys’ fees (or other expenses) paid in fighting tax liabilities or in dealing with the taxing authorities.
The report of the House Ways and Means Committee emphasized this aspect of the new provision (H.Rep.No.1337, 83d Cong., 2d Sess., pp. 29, A59, 3 U.S.C. Cong. & Adm.News (1954), pp. 4017, 4054, 4196):
“Existing law allows an individual to deduct expenses connected with earning income or managing and maintaining income-producing property. Under regulations costs incurred in connection with contests over *371certain tax liabilities, such as income and estate taxes, have been allowed, but these costs have been disallowed where the contest involved gift-tax liability. A new provision added by your committee allows a deduction for expenses connected with determination, collection, or refund of any tax liability.
******
“Paragraph (3) is new and is designed to permit the deduction by an individual of legal and other expenses paid or incurred in'connection with a contested tax liability, whether the contest be Federal, State, or municipal taxes, or whether the tax be income estate, gift, property, and so forth. Any expenses incurred in contesting any liability collected as a tax or as a part of the tax will be deductible. [Emphasis added.]”
The remarks of the Senate Finance Committee are almost identical to the second paragraph quoted from the House report. See S.Rep.No.1622, 83d Cong., 2d Sess., p. 218, 3 U.S.C. Cong. & Adm.News (1954), pp. 4621, 4855.
The one suggestion, in the legislative history, that the new subsection should go beyond an actual contest of tax liabilities was the statement made to the Senate Committee by the American Bar Association’s Section on Taxation. The Association thought that the language of the House Committee report “appears to confine expenses in connection with tax matters to contested tax liabilities,” possibly even for the income tax (which previously had been governed by the existing provisions of the Code). To avoid this result the Senate Committee was asked to add “computation” before “determination” in Section 212(3), or to “clarify the point that deductions with respect to taxes are not hereafter to be confined to contested taxes.” See 1 Hearings before the Senate Committee on Finance on the Internal Revenue Code of 1954, p. 487. Congress did not adopt either branch of this suggestion.
With this background, the words Congress put into the 1954 Code — “expenses paid or incurred during the taxable year * * * in connection with the determination, collection, or refund of any tax” — could have been read as limited strictly to contested tax liabilities. But the Treasury Department, perhaps in response to the position of the Bar Association’s Section on Taxation, has issued a regulation going somewhat back of a tax contest (but not, I think, as far as the majority believes). Treas.Reg. on Income Tax (1954 Code), Sec. 1.212-1 (l). Certainly the regulation goes back to the time of preparation or consideration of a tax return — a stage which takes place after the occurrence or congealing of the transactions or events to be reflected in the return. It is not entirely clear whether the regulation extends further back to the period when the transactions are still in the process of being planned or the taxable events are still uncertain and in futuro. The reference in the regulation to “tax counsel” is ambiguous if read alone. With the significant help of the statutory language and the legislative history, I interpret it, however, not as authorizing the deduction of expenses paid for any tax counsel, but only for tax counsel employed in connection with the preparation or consideration of tax returns or with tax proceedings, i. e., tax advice given after the critical events have taken place or been settled. Tax counsel, designed to help plan future transactions or arrangements is not covered. I would construe the second sentence of section 1.212-1 (l) as if it read:
Thus, expenses paid or incurred by a taxpayer for tax counsel or other expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of his tax liability or in contesting his tax liability are deductible [italicized word added].
This reading of the regulation seems to me strongly indicated, if not required, by the words of section 212(3), by the legislative history, and by the untoward consequence of adopting the broader view. The words of the Code (“determination, *372collection or refund of any tax”) connote an appraisal of tax liability on the basis of past or settled events, not a molding of future events to minimize taxes. Each of the three words deals with a function related to taxes already due or about to become due, not with planning ahead. The legislative history treats exclusively with a still more restricted problem, a tax contest; and even the Bar Association’s proposal to add “computation” would not, on a normal reading, carry back further than to activities in preparation for a return. The ultimate consequence of the wider view of the regulation, adopted by this court, is that individual taxpayers will be able automatically to deduct counsel fees paid for the general planning of their holdings and estates so as to minimize income, estate, or gift taxes in the years ahead, or for arranging marital or family affairs with the same end of tax-minimization in the future, or for planning charitable or foundation gifts (and allocation of assets) for such a purpose. Hitherto, the large share of these costs which fall outside section 212(1) and (2) have been personal expenses,1 barred from deduction by Section 262 of the 1954 Code, Treas.Reg. on Income Tax (1954 Code), See. 1.262-1, and their predecessors. See United States v. Gilmore, 372 U.S. 39, 44 ff., 83 S.Ct. 623 (1963); United States v. Patrick, 372 U.S. 53, 57, 83 S.Ct. 618, 9 L.Ed.2d 580 (1963); Lykes v. United States, 343 U.S. 118, 121, 125, 72 S.Ct. 585 (1952). I find nothing to intimate that Congress, in adding section 212(3), intended to overturn this accepted position by placing the expenses of trying to reduce one’s future taxes in a different category from all the other personal expenses of living.
My view is contrary to that taken by this court in Davis v. United States, 287 F.2d 168, 170-171, 152 Ct.Cl. 805, 809-811, (1961).2 In reviewing our decision, the Supreme Court expressly left the question open. United States v. Davis, 370 U.S. 65, 74, 82 S.Ct. 1190 (1962). I do not feel bound by our ruling in Davis (see Mississippi River Fuel Corp. v. United States, Ct.Cl., 314 F.2d 953, 958, decided April 5, 1963, concurring opinion) because this point was not sufficiently argued by the parties — it was but one of several issues in that case — and also because this court did not then have the benefit of the Supreme Court’s stress, in its Gilmore and Patrick opinions, on the general demarcation in the income tax law between expenses attributable to business-type or profit-seeking activities and those pertaining to personal affairs.

. If they are expenses at all and do not come within the category of capital expenditures.

. The Government’s position is supported, however, by Kaufmann v. United States, W.D.Mo., 227 F.Supp. 807.