Court Opinion

ID: 4483723
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:15.537583+00
Date Added: 2024-06-11T15:04:24.936506
License: Public Domain

Simpson, J., dissenting: In my view, the petitioner’s expenditures to recover her stock failed to satisfy the basic principles of section 212: First, under that section, the deductibility of legal expenditures turns on the origin of the claim; second, under that section, it is necessary to distinguish between capital expenditures and ordinary and necessary expenses, and capital expenditures are not deductible. Consequently, I must dissent. In United States v. Gilmore, 372 U.S. 39 (1963), the taxpayer sought to deduct his legal expenses incurred in resisting the claim of his wife to a share of his property in a divorce proceeding. Initially, the Supreme Court observed that “ ‘conservation of property’ seems to refer to operations performed with respect to the property itself, such as safeguarding or upkeep, rather than to a taxpayer’s retention of ownership in it.” 372 U.S. at 44. The Court rejected the contention that any expenditures to conserve investment property are, without more, deductible. The Court held that since the wife’s claim grew out of the personal relationship with the taxpayer, and not out of an income-producing activity, the expenditures in resisting it were not deductible. In the case before us, the controversy grew out of the petitioner’s transfer of her stock to Command. She did not expect to receive any profit from such transfer, but sought only to enhance her investment in Command. Thus, the claim originated in a transaction, not entered into for a profit, but more in the nature of a capital transaction. The enactment of the predecessor of section 212 extended to investment property the same rules which applied to business transactions. United States v. Gilmore, 372 U.S. at 44-45; Trust of Bingham v. Commissioner, 325 U.S. 365, 374 (1945). Under such rules, it is necessary to distinguish between capital expenditures and expenditures which are ordinary and necessary expenses, and only the latter are deductible. Boagni v. Commissioner, 59 T.C. 708, 711-712 (1973). As stated by the Court of Appeals for the Ninth Circuit in Spangler v. Commissioner, 323 F.2d 913, 918 (9th Cir. 1963), affg. a Memorandum Opinion of this Court: “The nondeductibility of capital expenditures, founded upon the principle that related disbursements and receipts should be given consistent tax treatment, is * * * a basic limitation upon [sec. 212].” In a host of cases, courts have held that legal expenses incurred in the defense or perfection of title to property are not currently deductible, but must be capitalized. E.g., Spangler v. Commissioner, supra; Kelly v. Commissioner, 228 F.2d 512 (7th Cir. 1956), affg. 23 T.C. 682 (1955); Brown v. Commissioner, 215 F.2d 697 (5th Cir. 1954), affg. on this issue 19 T.C. 87 (1952); Boagni v. Commissioner, supra. The rationale for such rule has been expressed by the Court of Appeals for the Fifth Circuit: Of course, when property is held for the production of income, any expenditure which relates to the perfection or defense of the taxpayer’s title to the property can, in one sense, be said to have been an expenditure for the conservation of the property. On the other hand, it seems equally as sound to say that any such expenditure is more properly an element in the cost of acquiring or preserving the legal right to the income produced by the property, and therefore must be considered a capital expenditure. * * * [Brown v. Commissioner, 215 F.2d at 699; emphasis in original.] When the Brown rationale is applied to the facts of the case before us, it is clear that the petitioner’s expenditures fall on the side of capital expenditures. The petitioner’s right to demand the return of her stock was expressly subordinated to the claims of all general creditors of Command. In light of Command’s financial situation, the petitioner was concerned that she might lose the stock. Under these circumstances, the legal expenses clearly were incurred to preserve her right to the property and the income from it. To draw a distinction in favor of the petitioner’s expenditures because possession, as distinguished from title, was at issue would rest the rule on shifting sands. In either event, the petitioner is attempting to retain her income-producing property against the threat of its loss, and the expenditures for such purpose are capital in nature.1 Reed v. Commissioner, 55 T.C. 32,42 (1970). The rule that the expenditures to recover income-producing property are not deductible has been applied to deny a deduction for the costs of recovering the principal of loans in default. Kurkjian v. Commissioner, 65 T.C. 862 (1976); Kelly v. Commissioner, 23 T.C. 682 (1955), affd. 228 F.2d 512 (7th Cir. 1956). Money is of course a form of property, and there is no reason to treat the expenses of recovery of money differently under section 212. Nor do I believe that deductibility of the legal expenses in this case can be founded upon the language of the regulation. The entire text of the regulation, which was not quoted by the majority, is as follows: (k) Expenses paid or incurred in defending or perfecting title to property, in recovering property (other than investment property and amounts of income which, if and when recovered, must be included in gross income), or in developing or improving property, constitute a part of the cost of the property and are not deductible expenses. Attorneys’ fees paid in a suit to quiet title to lands are not deductible; but if the suit is also to collect accrued rents thereon, that portion of such fees is deductible which is properly allocable to the services rendered in collecting such rents. Expenses paid or incurred in protecting or asserting one’s right to property of a decedent as heir or legatee, or as beneficiary under a testamentary trust, are not deductible. [Sec. 1.212-l(k), Income Tax Regs.] The regulation reflects the basic distinction, established by the cases, between capital and ordinary and necessary expenditures. A recovery of property is treated in the same manner as a dispute over its title. However, a recovery of an item includable in income is not subject to such rule. There is a question as to the effect of the reference to “investment property” in the parenthetical phrase. Read carefully, the reference merely indicates that the rule may not be applicable to a recovery of investment property — it does not state affirmatively that the expenditures for the recovery of investment property are deductible. Since section 212 applies only to investment property, there would be no purpose in providing that the expenditures for a recovery of property are not deductible under section 212 if such rule did not apply to investment property. It may be that the purpose of the reference to investment property was merely to indicate that if such property is includable in income when recovered because, for example, the loss of the property had given rise to a deduction, the expenses of such recovery may be deductible. In any event, the reference to investment property cannot justify a departure from the well-established rule that capital expenditures are not deductible under section 212, and we should adopt an interpretation of the regulation consistent with such rule. Tannenwald and Quealy, JJ., agree with this dissenting opinion.   Although Allen v. Selig, 200 F.2d 487 (5th Cir. 1952), and Ruoff v. Commissioner, 277 F.2d 222 (3d Cir. 1960), revg. 30 T.C. 204 (1958), draw a distinction between recovery of possession and title, such cases have been criticized by the Court of Appeals for the Ninth Circuit. Spangler v. Commissioner, 323 F.2d 913, 919 n. 15, 920. Moreover, such cases were decided before United States v. Gilmore, 372 U.S. 39 (1963).