United States v. Gilmore
Cite as 11 AFTR 2d 758 (372 U.S. 39), 02/18/1963, Code Sec(s) 23(a)(2)

Case Summary

This case involves the deductibility for federal income tax purposes of legal expenses incurred in divorce proceedings of Don Gilmore to his wife, Dixie Gilmore.

FACTS:
At the time of the divorce, Don Gilmore owned controlling stock interests in three corporations, each of which was a franchised General Motors automobile dealer. Gilmore wanted to protect these assets against the claim of his wife. He wished to defeat the claim based on the reasoning that the loss of his controlling stock interests might cost him the loss of his corporate positions, his principal means of livelihood. He finally won the case and the wife’s community property claims were denied in their entity.
However, Gilmore ended up paying a lot of money for legal services. He accumulated $40,611.36 legal fees for the two taxable years 1953 and 1954. Subsequently, he sought to deduct these expenses from his federal income taxes.
The Internal Revenue Services (IRS) denied the deduction. Gilmore appealed, claiming the fees were deductible under §23(a)(2), which allows for deductions for "management, conservation, or maintenance of property held for the production of income." Had he lost the case, he would have lost the business, so Gilmore argued that it was covered because he was conserving his business. The IRS argued that litigation arose out of a personal conflict, therefore the legal expenses are considered personal and thus none of them are deductible.
The Court of Claim determined that 80% of such expenses was to conserve income-producing property and hence deductible under §23(a)(2) of the 1939 Code.

ISSUES:
Are divorce legal expenses associated with protecting properties against claims tax deductible?

RESEARCH USED BY THE COURT:
The case was brought to Supreme Court. The research used by the Court included Congress’s regard of individual for income tax purposes, the wording of the context “conservation of property” and the history of the provision §23(a)(2). Prior to 1942, §23 allowed deductions only for the expenses “incurred in carrying on any trade or business.” Then the 1942 amendment merely enlarged the category of incomes to which expenses were deductible. And committee reports make clear that deductions under the new section were subject to the same limitations and restrictions. The Court said that it is clear that the personal and family expenses restrictions of §23(a)(1) must impose the same limitation upon the reach of §23(a)(2) – in other words that the only kind of expenses deductible under §23(a)(2) are those that related to a business purpose.
Prior cases such as Trust of Bingham v. Commissioner, Lykes v. Commissioner, Kornhauser v. United States, Deputy v. du Pont were given as examples. The principle the Court derived from these cases is that the characterization, as “business” or “personal” of the litigation costs of resisting a claim depend on whether or not the claim arises in connection with the taxpayer’s profit-seeking activities. It does not depend on the consequences that might result to a taxpayer’s income-producing property from a failure to defeat the claim. That leads to the question: did the wife’s claims respecting Gilmore’s stockholdings arise in connection with his profit-seeking activities?
DECISION:
The Court determined that the wife’s claims stemmed entirely from the marital relationship, and not, under any tenable view of things, from income-producing activity. Thus none of Gilmore’s expenditures in resisting these claims can be deemed “business” expenses, and they are therefore not deductible under §23(a)(2).
The judgment of the Court of Claims is reversed and the case is remanded to that court for further proceedings consistent with this opinion.