United States v. Gilmore - 372 U.S. 39, 83 S. Ct. 623 (1963)

Rule:

The origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was "business" or "personal" and hence whether it is deductible or not under 26 U.S.C.S. § 23(a)(2).

Facts:

Respondent sued for refund of part of the income taxes paid by him for the years 1953 and 1954, on the ground that legal expenses incurred by him in defending divorce litigation with his former wife were deductible under § 23 (a)(2) of the Internal Revenue Code of 1939, as amended, which allowed as deductions from gross income "ordinary and necessary expenses incurred for the conservation of property held for the production of income.” His gross income was derived almost entirely from his salary as president of three corporations and from dividends from his controlling stock in such corporations. His wife had sued for divorce, alimony and an alleged community property interest in such stock, and he alleged that, had he not succeeded in defeating these claims, he might have lost his stock, his corporate positions and the dealer franchises, from which nearly all of his income was derived. The United States Court of Claims upheld respondent’s claim. The Court granted certiorari.

Issue:

Whether the respondent’s legal expenses in resisting his wife’s claims that his stock interests were community property deductible from his gross income under 23(a)(2) of the Internal Revenue Code of 1939?

Answer:

No.

Conclusion:

The Court held that none of the respondent’s expenditures in resisting his wife’s claims was deductible under § 23 (a)(2). According to the Court, the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, was the controlling basic test of whether the expense was "business" or "personal" and hence, of whether or not it was deductible under § 23 (a)(2). In this case, the Court noted that the wife's claims stemmed entirely from the marital relationship, and not, under any tenable view of things, from income-producing activity. Therefore, none of respondent's expenditures in resisting these claims can be deemed "business" expenses deductible under § 23 (a)(2).