372 U.S. 39 (1963), 21, United States v. Gilmore

Docket Nº:No. 21
Citation:372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570
Party Name:United States v. Gilmore
Case Date:February 18, 1963
Court:United States Supreme Court

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372 U.S. 39 (1963)

83 S.Ct. 623, 9 L.Ed.2d 570

United States



No. 21

United States Supreme Court

Feb. 18, 1963

Argued March 27-28, 1962

Restored to the calendar for reargument April 2, 1962

Reargued December 5-6, 1962



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 allots 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 which were franchised automobile dealers 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.

Held: none of respondent's expenditures in resisting these claims is deductible under § 23(a)(2). Pp. 40-52.

(a) 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 or not it is deductible under § 23(a)(2). Pp. 44-51.

(b) 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). Pp. 51-52.

___ Ct. Cl. ___, 290 F.2d 942, reversed and case remanded.

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HARLAN, J., lead opinion

MR. JUSTICE HARLAN delivered the opinion of the Court.

In 1955, the California Supreme Court confirmed the award to the respondent taxpayer of a decree of absolute divorce, without alimony, against his wife Dixie Gilmore.1 Gilmore v. Gilmore, 45 Cal.2d 142, 287 P.2d 769. The case before us involves the deductibility for federal income tax purposes of that part of the husband's legal expense incurred in such proceedings as is attributable to his successful resistance of his wife's claims to certain of his assets asserted by her to be community property under California law.2 The claim to such deduction, which has been upheld by the Court of Claims, 290 F.2d 942, is [83 S.Ct. 625] founded on § 23(a)(2) of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.) § 23(a)(2), which allows as deductions from gross income

. . . ordinary and necessary expenses . . . incurred during the taxable year3 . . . for the . . . conservation . . . of property held for the production of income.

Because of a conflict of views among the Court of Claims, the Courts of Appeals, and the Tax Court regarding the

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proper application of this provision,4 and the continuing importance of the question in the administration of the federal income tax laws, we granted certiorari on the Government's petition. 368 U.S. 816. The case was first argued at the last Term and set for reargument at this one. 369 U.S. 835.

At the time of the divorce proceedings, instituted by the wife but in which the husband also cross-claimed for divorce, respondent's property consisted primarily of controlling stock interests in three corporations, each of which was a franchised General Motors automobile dealer.5 As president and principal managing officer of the three corporations, he received salaries from them aggregating about $66,800 annually, and in recent years his total annual dividends had averaged about $83,000. His total annual income derived from the corporations was thus approximately $150,000. His income from other sources was negligible.6

As found by the Court of Claims, the husband's overriding concern in the divorce litigation was to protect these assets against the claims of his wife. Those claims had two aspects: first, that the earnings accumulated and retained by these three corporations during the Gilmores' marriage (representing an aggregate increase in corporate net worth of some $600,000) were the product of respondent's personal services, and not the result of accretion in capital values, thus rendering respondent's stockholdings in the enterprises pro tanto community property

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under California law;7 second, that, to the extent that such stockholdings were community property, the wife, allegedly the innocent party in the divorce proceeding, was entitled under California law to more than a one-half interest in such property.8

The respondent wished to defeat those claims for two important reasons. First, the loss of his controlling stock interests, particularly in the event of their transfer in substantial part to his hostile wife, might well cost him the loss of his corporate [83 S.Ct. 626] positions, his principal means of livelihood. Second, there was also danger that if he were found guilty of his wife's sensational and reputation-damaging charges of marital infidelity, General Motors Corporation might find it expedient to exercise its right to cancel these dealer franchises.

The end result of this bitterly fought divorce case was a complete victory for the husband. He, not the wife, was granted a divorce on his cross-claim; the wife's community property claims were denied in their entirety; and she was held entitled to no alimony. 45 Cal.2d 142, 287 P.2d 769.

Respondent's legal expenses in connection with this litigation amounted to $32,537.15 in 1953 and $8,074.21 in 1954 -- a total of $40,611.36 for the two taxable years in question. The Commissioner of Internal Revenue found all of these expenditures "personal" or "family" expenses, and, as such, none of them deductible. 26 U.S.C. (1952 ed.)

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§ 24(a)(1).9 In the ensuing refund suit, however, the Court of Claims held that 80% of such expense (some $32,500) was attributable to respondent's defense against his wife's community property claims respecting his stockholdings, and hence deductible under § 23(a)(2) of the 1939 Code as an expense "incurred . . . for the . . . conservation . . . of property held for the production of income." In so holding the Court of Claims stated:

Of course, it is true that, in every divorce case, a certain amount of the legal expenses are incurred for the purpose of obtaining the divorce and a certain amount are incurred in an effort to conserve the estate, and are not necessarily deductible under section 23(a)(2), but when the facts of a particular case clearly indicate (as here) that the property around which the controversy evolves is held for the production of income, and, without this property, the litigant might be denied not only the property itself but the means of earning a livelihood, then it must come under the provisions of section 23(a)(2). . . . The only question then is the allocation of the expenses to this phase of the proceedings.10

290 F.2d at 947.

The Government does not question the amount or formula for the expense allocation made by the Court of Claims. Its sole contention here is that the court below misconceived the test governing § 23(a)(2) deductions, in that the deductibility of these expenses turns, so it is argued, not upon the consequences to respondent of a

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failure to defeat his wife's community property claims, but upon the origin and nature of the claims themselves. So viewing Dixie Gilmore's claims, whether relating to the existence or division of community property, it is contended that...

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