343 U.S. 118 (1952), 173, Lykes v. United States

Docket Nº:No. 173
Citation:343 U.S. 118, 72 S.Ct. 585, 96 L.Ed. 791
Party Name:Lykes v. United States
Case Date:March 24, 1952
Court:United States Supreme Court
 
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Page 118

343 U.S. 118 (1952)

72 S.Ct. 585, 96 L.Ed. 791

Lykes

v.

United States

No. 173

United States Supreme Court

March 24, 1952

Argued November 29-30, 1951

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Syllabus

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. 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. 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. 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. 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. 126-127.

188 F.2d 964, affirmed.

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. 127.

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BURTON, J., lead opinion

MR. JUSTICE BURTON delivered the opinion of the Court.

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.

In 1940, Joseph T. Lykes, petitioner herein, gave to his wife and to each of his three children, respectively, 250 shares of common stock in Lykes Brothers, Inc., a closely held family corporation. In his federal gift tax return, he valued the shares at $120 each and, on that basis, paid a tax of $13,032.75. In 1944, the Commissioner of Internal Revenue revalued the shares at $915.50 each and notified petitioner of a gift tax deficiency of $145,276.50. Through his attorney, petitioner sought a redetermination of the deficiency, forestalled an assessment, and, in 1946, paid $15,612.75 in settlement of the deficiency pursuant to a finding of the Tax Court based on stipulated facts. In 1944, petitioner had paid his attorney $7,263.83 for legal services in the gift tax controversy but, in his federal income tax return, had not deducted that expenditure from his taxable income. In 1946, he claimed a tax refund on the ground that the attorney's fee should have been deducted under § 23(a)(2) of the Internal Revenue Code.1 His claim was denied by the Commissioner, and petitioner

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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. 537.2 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.

I. Deductions from an individual's taxable income are limited to those allowed by § 23.3 This extent depends upon the legislative policy expressed in the fair [72 S.Ct. 587] and natural meaning of that section.4

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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.

If the expenditure in the instant case had been made before 1942, it is clear that it would not have been deductible. At that time, § 23 permitted an individual to deduct "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. . . . ." (Emphasis supplied.) 53 Stat. 12, 26 U.S.C. (1940 ed.) § 23(a)(1). It made no mention of nontrade or nonbusiness expenses. Accordingly, in Higgins v. Commissioner, 312 U.S. 212, when this Court held that expenses incurred by an individual taxpayer in looking after his own income-producing securities were not expenses "incurred . . . in carrying on any trade or business," it also held that they were not deductible.5

To change that result, Congress, in 1942, added the present § 23(a)(2).6 That provision, as demonstrated in its legislative history, permits the deduction of some, but not all, of the nontrade and nonbusiness expenses of an

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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.7 Congress might have gone further. However, neither the decision that occasioned the [72 S.Ct. 588] 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 §...

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