United States v. Gilmore, 21

• Decision Date: 18 February 1963
• Docket Number: No. 21,21
• Citation: United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963)
• Parties: UNITED STATES, Petitioner, v. Don GILMORE et al. Re
• Court: U.S. Supreme Court

372 U.S. 39

83 S.Ct. 623

9 L.Ed.2d 570

UNITED STATES, Petitioner,

v Don GILMORE et al.

No. 21.

Reargued Dec. 5, 6, 1962.

Decided Feb. 18, 1963.

Wayne G. Barnett, Washington, D.C., for petitioner.

Eli Freed, San Francisco, Cal., for respondents.

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 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 year ³ * * * 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 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, 82 S.Ct. 57, 7 L.Ed.2d 22. The case was first argued at the last Term and set for reargument at this one. 369 U.S. 835, 82 S.Ct. 864, 7 L.Ed.2d 841.

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 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 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.) s 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 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 the expense of resisting them must be deemed nondeductible 'personal' or 'family' expense under § 24(a)(1), not deductible expense under § 23(a)(2). For reasons given hereafter we think the Government's position is sound and that it must be sustained.

I.

For income tax purposes Congress has seen fit to regard an individual as having two personalities: 'one is (as) a seeker after profit who can deduct the expenses incurred in that search; the other is (as) a creature satisfying his needs as a human and those of his family but who cannot deduct such consumption and related expenditures.'¹¹ The Government regards § 23(a)(2) as embodying a category of the expenses embraced in the first of these roles.

Initially, it may be observed that the wording of § 23(a)(2) more readily fits the Government's view of the provision than that of the Court of Claims. For in context 'conservation of property' seems to refer to operations performed with respect to the property itself, such as safeguarding or unkeep, rather than to a taxpayer's retention of ownership in it.¹² But more illuminating than the mere language of § 23(a)(2) is the history of the provision.

Prior to 1942 § 23 allowed deductions only for expenses incurred 'in carrying on any trade or business,' the deduction presently authorized by § 23(a)(1). In Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783, this Court gave that pro- vision a narrow construction, holding that the activities of an individual in supervising his own securities investments did not constitute the 'carrying on of trade or business', and hence that expenses incurred in connection with such activities were not tax deductible. Similar results were reached in United States v. Pyne, 313 U.S. 127, 61 S.Ct. 893, 85 L.Ed. 1231, and City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121, 61 S.Ct. 896, 85 L.Ed. 1227. The Revenue Act of 1942 (56 Stat. 798, § 121), by adding what is now § 23(a)(2), sought to remedy the inequity inherent in the disallowance of expense deductions in respect of such profit-seeking activities, the income from which was nonetheless taxable.¹³

As noted in McDonald v. Commissioner, 323 U.S. 57, 62, 65 S.Ct. 96, 98, 89 L.Ed. 68, the purpose of the 1942 amendment was merely to enlarge 'the category of incomes with reference to which expenses were deductible.' And committee reports make clear that deductions under the new section were subject to the same limitations and restrictions that are applicable to those allowable under § 23(a)(1).¹⁴ Further, this Court has said that § 23(a)(2) 'is comparable and in pari materia with § 23(a)(1),' providing for a class of deductions 'coextensive with the business deductions allowed by § 23(a)(1), except for' the requirement that the income-producing activity qualify as a trade or business. Trust of Bingham v. Commissioner, 325 U.S. 365, 373, 374, 65 S.Ct. 1232, 1237, 89 L.Ed. 1670.

A basic restriction upon the availability of a § 23(a)(1) deduction is that the expense item involved must be one that has a business origin. That restriction not only inheres in the language of § 23(a)(1) itself, confining such deductions to 'expenses * * * incurred * * * in carrying on any trade or business,' but also follows from § 24(a)(1), expressly rendering nondeductible 'in any case * * * (p)ersonal, living, or family expenses.' See note 9, supra. In light of what has already been said with respect to the advent and thrust of § 23(a)(2), it is clear that the '(p)ersonal * * * or family expenses' restriction of § 24(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 relate to a 'business,' that is, profit-seeking, purpose. The pivotal issue in this case then becomes: was this part of respondent's litigation costs a 'business' rather than a 'personal' or 'family' expense?

The answer to this...