Lykes v. United States

• Decision Date: 24 March 1952
• Docket Number: No. 173,173
• Citation: 72 S.Ct. 585,96 L.Ed. 791,343 U.S. 118
• Parties: LYKES v. UNITED STATES
• Court: U.S. Supreme Court

343 U.S. 118

72 S.Ct. 585

96 L.Ed. 791

LYKES

v UNITED STATES.

No. 173.

Argued Nov. 29, 30, 1951.

Decided March 24, 1952.

Rehearing Denied April 28, 1952.

See 343 U.S. 937, 72 S.Ct. 768.

Mr. George W. Ericksen, Tampa, Fla., for petitioner.

Mr. Harry Baum, Washington, D.C., for respondent.

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 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. 5 Cir., 188 F.2d 964. Because of the important statutory issue involved and petitioner's claim that this case is distinguishable from Cobb v. Commissioner, 6 Cir., 173 F.2d 711, we granted certiorari. 342 U.S. 810, 72 S.Ct. 48, 96 L.Ed.—.

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 and natural meaning of that section.⁴

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), 26 U.S.C.A. § 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 non-deductibility 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), 26 U.S.C.A. § 23(a) (1). It made no mention of nontrade or nonbusiness expenses. Accordingly, in Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783, when this Court held that expenses incurred by an individual taxpayer in looking after his own incomeproducing 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 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 amendment, the Committee Reports on it, nor the language adopted in it indicate 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 § 24(a)(1). Bingham's Trust v Commissioner, 325 U.S. 365, 374, 65 S.Ct. 1232, 1237, 89 L.Ed. 1670; McDonald v. Commissioner, 323 U.S. 57, 61—63, 65 S.Ct. 96, 97—98, 89 L.Ed. 68.

Inasmuch as the ordinary and necessary character of the legal expenses incurred in the instant case is not questioned, their deductibility turns wholly upon the nature of the activities to which they relate.⁸ The first issue, therefore, is whether petitioner's gifts, and the legal expenses related to them, were made for the 'production or collection of income' within the meaning of § 23(a)(2). Generally a gift is the antithesis of such production or collection because it reduces the donor's resources whether income producing or not. However, petitioner suggests that although he stated in his gift tax return that the purpose of his gifts was to express his love for the donees, yet the gifts were part of a general plan to produce income for himself. In support of this, he points out that the gifts consisted of 1,000 shares of stock in a closely held family corporation of which he is the president and in which he retained personal ownership of about 2,000 like shares, and that one of the donees, his son, is now actively identified with the corporation and is one of its directors.⁹ The District Court did not find that these facts, or anything else in the record, provided an adequate basis for reclassifying petitioner's stock transfers and his payment of a related legal fee as expenditures for the production of income, rather than as gifts accompanied by an ordinary and necessary attorney's fee for contesting the amount of a federal gift tax treating the stock transfers as gifts. The Court of Appeals, on review of the entire record, expressly held that the transfers were gifts and that the attorney's fee was not proximately related to the production of income. That court then applied to the attorney's fee the interpretation of § 23(a)(2) approved in Cobb v. Commissioner, supra. We agree to the applicability of that interpretation which disallows the fee as a deduction from taxable income.¹⁰

Similarly, there is no substantial factual basis here for treating the stock transfers and the related attorney's fee as mere incidents of petitioner's 'management, conservation, or maintenance of property held for the production of income.' Even assuming that petitioner's 3,000 shares in Lakes Brothers, Inc., did constitute property originally held by him for the production of income, there is no finding, and no adequate basis for a finding that his donation of one-third of that stock actually was not the gift he represented it to be. Petitioner does not claim that the gift itself is deductible and, if it, as the principal item in the transaction is not deductible, we find no adequate basis in this record for holding the related attorney's fee deductible.

II. Legal expenses do not become deductible merely because they are paid for services which relieve a taxpayer of liability. That argument would carry us too far. It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-producing property he might have. For example, it suggests that the expense of defending an action based upon personal injuries caused by a taxpayer's negligence while driving an automobile for pleasure should be deductible. Section 23(a)(2) never has been so interpreted by us. It has been applied to expenses on the basis of their immediate purposes rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-producing assets by reducing his general liabilities. See McDonald v. Commissioner, supra, 323 U.S. at pages 62—63, 65 S.Ct. at page 98.

While the threatened deficiency assessment of nearly $150,000 added urgency to petitioner's resistance of it, neither its size nor its urgency determined its character. It related to the tax payable on petitioner's gifts, as gifts, and it was finally settled on an agreed revaluation of the securities constituting those gifts. The expense of contesting the amount of the deficiency was thus at all times attributable to the gifts, as such, and accordingly was not deductible.

If, as suggested, the relative size of each claim, in proportion to the income-producing resources of a defendant, were to be a touchstone of the deductibility of the expense of resisting the claim, substantial uncertainty and inequity would inhere in the rule. For example, the expense of defending a personal injury suit for negligence, or a suit for alienation of affections, claiming $1,000 damages, probably would not be a deductible expense for any defendant. On the other hand, if the same plaintiff on the same facts asked for $5,000, $10,000 or $100,000 damages, and the defendant held some income-producing property, that defendant might be permitted to deduct from his taxable income the same expense for precisely the same services as those upon which his less well-to-do neighbor would have to pay a tax in the other case. It is not a ground for defense that the claim, if justified, will consume income-producing property of the defendant. We find no such distinction made or implied in the Revenue Act.

III. While the Treasury Regulations, in 1944, did not refer to...