In Uncategorized on 11/28/2017 at 16:45

After my lamentation yesterday about professional liability and nonpaying clients (cf. my blogpost “England, Texas, Who Cares?” 11/27/17), it did my jagged old heart good today to see the lawyers did get paid in William M. Barry and Trudi G. Swain, 2017 T. C. Memo. 237, filed 11/28/17.

But Bill wasn’t best pleased, as his claimed deduction for legal fees gets scuppered.

Bill claimed he paid $34K, but ex-Ch J Michael B (“Iron Mike”) Thornton, DFC (Dictionarian First Class) finds that Bill could only prove $25K thereof, which Bill forked over in his time-barred fight to recoup $241K in alimony he claimed he overpaid his loved-once.

Apparently Bill’s lawyers got it right, and the $241K was deductible as alimony. Had Bill gotten it back, the tax benefit rule says the whole enchilada gets recaptured in year of receipt and is therefore taxable. So the legal fees paid in recouping same would be expenses for the production of income, no? Hence deductible, no?

Negatory, says Ex-Ch J Iron Mike, DFC, and he needs no stroll through the dictionary to get there.

“In United States v. Gilmore, 372 U.S. 39, 51 (1963), the Supreme Court held that legal fees incurred by a taxpayer in resisting his wife’s property claims in a divorce proceeding were not deductible because the wife’s claims that gave rise to the fees stemmed from the taxpayer’s marital relationship rather than from any profit-seeking activity.  The Court stated that ‘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 * * * [section] 23(a)(2)’ of the 1939 Code, as amended, (the predecessor of section 212(1) and (2) of the 1954 Code).” 2017 T. C. 237, at pp. 4-5. And on the same day as Gilmore, the Supremes sang the same song in Patrick v. US, 372 US 53 (1963), interpreting Section 212(2).

It’s not the end, it’s the beginning that determines deductibility: did the claim arise out of business (like spouse fighting ex who was trying to sabotage spouse’s business)? And there’s the Reg. Sec. 1.262-1(b)(7) allowing the deduction for the spouse’s legal fees when fighting for alimony that would be directly includable in spouse’s income. But none of that helps Bill. He stipulated that, but for the marital relationship between himself and ex, there would have been no lawsuit and no legal fees. The claim arose from the marital relationship, and that makes the expenses in connection therewith nondeductible.

A timely point is the obsolete “husband-wife” language in statute and regs, but ex-Ch J Iron Mike, DFC, brushes that off. Tax Court reads all this spousal stuff gender-neutrally.

So Bill gets neither the alimony back nor his deduction. But I hope the lawyers got paid.

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