T.C. Memo. 2017-237
UNITED STATES TAX COURT
WILLIAM M. BARRY AND TRUDI G. SWAIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 783-16. Filed November 28, 2017.
Arnold van Dyk and Darin C. James, for petitioners.
Paul W. Isherwood, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: Respondent determined a $5,003 deficiency in
petitioners’ 2013 Federal income tax and a section 6662(a) accuracy-related
penalty of $1,001.1 The issue for decision is whether petitioners are entitled to
1
All section references are to the Internal Revenue Code (Code) in effect for
the year in issue, and all Rule references are to the Tax Court Rules of Practice and
(continued...)
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[*2] deduct legal expenses incurred in a breach of contract action that petitioner
William M. Barry brought in an attempt to recoup alimony he allegedly overpaid
his ex-wife.2
Background
The parties submitted this case fully stipulated pursuant to Rule 122. The
stipulated facts are found accordingly. When they petitioned the Court, petitioners
resided in the State of Washington.
Mr. Barry was formerly married to Beth Barry. Mr. Barry and Ms. Barry
entered into a separation and property settlement agreement (separation
agreement) dated April 17, 1987, and their marriage was eventually terminated by
final judgment on January 16, 2002. The judgment of dissolution ordered Mr.
Barry to pay Ms. Barry alimony of $2,400 per month.
In 2011 Mr. Barry initiated a civil action against Ms. Barry for breach of
contract. He alleged that under the separation agreement Ms. Barry was entitled to
total alimony of only $45,045 and that he had paid her that amount in full. He
further alleged that Ms. Barry was in default of the separation agreement when she
1
(...continued)
Procedure. All monetary amounts are rounded to the nearest dollar.
2
Petitioners concede that if they are not entitled to deduct these legal
expenses, then they are liable for the sec. 6662(a) accuracy-related penalty.
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[*3] filed for divorce in 2000 and demanded alimony as part of the divorce. Mr.
Barry sought judgment against Ms. Barry for $201,664--the excess of the total
alimony he claimed to have paid her over the amount he claimed she was entitled
to under the separation agreement--plus interest, costs, and attorney’s fees. We
take judicial notice that Mr. Barry’s lawsuit was dismissed in 2011 as time barred.
Barry v. Barry, No. 8:11-cv-1776-T-24-TGW (M.D. Fla. Oct. 31, 2011) (order
dismissing case).
In 2013 Mr. Barry paid his attorney at least $25,000 for services in
connection with his lawsuit against Ms. Barry.
On their 2013 Form 1040, U.S. Individual Income Tax Return, petitioners
claimed a deduction for “other expenses” of $34,250 on Schedule A, Itemized
Deductions. The “other expenses” deduction was a claim for the legal fees paid
with respect to the civil action against Ms. Barry.3
Discussion
Petitioners bear the burden of proving that they are entitled to the claimed
deduction for legal fees. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
3
Although petitioners claimed a deduction of $34,250 for legal fees paid in
2013, the parties stipulated that petitioners have substantiated only $25,000 of this
amount and are not entitled to deduct the remaining $9,250.
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[*4] This burden requires them to demonstrate that the deduction is allowable
pursuant to some statutory provision and that the expense to which the deduction
relates has been paid or incurred. See sec. 6001; Hradesky v. Commissioner, 65
T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-
1(a), Income Tax Regs.
Personal, living, and family expenses are generally not deductible. Sec.
262(a). Taxpayers may, however, generally deduct ordinary and necessary
expenses paid or incurred for (1) the production or collection of income, or (2) the
management, conservation, or maintenance of property held for the production of
income. Sec. 212(1) and (2).
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,
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[*5] (the predecessor of section 212(1) and (2) of the 1954 Code). Id. at 49;
accord United States v. Patrick, 372 U.S. 53, 57 (1963) (decided the same day as
Gilmore and reaching the same result under section 212(2) of the 1954 Code); see
also Fleischman v. Commissioner, 45 T.C. 439, 446 (1966) (extending the
rationale of Gilmore and Patrick to disallow expenses incurred in defending an
action to set aside an antenuptial agreement and stating that “[i]f the claim could
not have existed but for the marriage relationship,” the cost of defending it is a
nondeductible personal expense).
Petitioners acknowledge on brief that Mr. Barry’s legal fees “would not
have been incurred but for a prior marital relationship”. In so stating they seem to
acknowledge that these legal fees might not be deductible under the origin-of-the-
claim test of Gilmore and Patrick. They contend, however, that Gilmore and
Patrick are distinguishable as involving taxpayers whose claimed deductions were
based on specific language of the Code, now found in section 212(2), allowing a
deduction for expenses paid or incurred “for the * * * conservation * * * of
property held for the production of income”. By contrast, petitioners rely upon
section 212(1), which allows a deduction for expenses paid or incurred “for the
production * * * of income”. Because Mr. Barry’s lawsuit was for the purpose of
recovering allegedly overpaid alimony, which petitioners equate with “the
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[*6] production * * * of income”, they say the deduction of the associated legal
expenses is not barred by the origin-of-the-claim test.
Insofar as petitioners mean to suggest that the Gilmore origin-of-the-claim
test is categorically inapplicable to deductions claimed pursuant to section 212(1),
their argument lacks merit. The Supreme Court concluded in Gilmore, 372 U.S. at
40 n.3, that section 212 was “substantially identical” to 1939 Code sec. 23(a)(2),
as amended by the Revenue Act of 1942, ch. 619, sec. 121(a), 56 Stat. at 819, and
made applicable for years beginning after December 31, 1938, by Revenue Act of
1942 sec. 121(d). Section 23(a)(2) of the 1939 Code, as amended, contained in a
single paragraph the provisions that are now codified in separate paragraphs (1)
and (2) of section 212.4 As the Supreme Court explained section 23(a)(2) was
4
Sec. 23(a)(2) of the 1939 Code, as amended, Revenue Act of 1942, ch. 619,
sec. 121, 56 Stat. at 819, provided for a deduction from gross income as follows:
(2) Non-trade or Non-business Expenses.--In the case of an
individual, all the ordinary and necessary expenses paid or incurred
during the taxable year for the production or collection of income, or
for the management, conservation, or maintenance of property held
for the production of income.
Sec. 212 provides:
In the case of an individual, there shall be allowed as a
deduction all the ordinary and necessary expenses paid or incurred
during the taxable year--
(continued...)
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[*7] enacted to provide for “a class of deductions ‘coextensive with the business
deductions allowed by * * * [section] 23(a)(1), except for’ the requirement that the
income-producing activity qualify as a trade or business.” Gilmore, 372 U.S. at 45
(quoting Trust of Bingham v. Commissioner, 325 U.S. 365, 374 (1945)). The
Court stated that a “basic restriction upon the availability of a * * * [section]
23(a)(1) deduction is that the expense item involved must be one that has a
business origin” and is not an expressly nondeductible personal, living, or family
expense under 1939 Code sesc. 24(a)(1) (the predecessor of section 262). Id. at
45. The Court concluded that section 24(a)(1) “must impose the same limitation
upon the reach of * * * [section] 23(a)(2)--in other words * * * the only kind of
expenses deductible under * * * [section] 23(a)(2) are those that relate to a
‘business,’ that is, profit-seeking, purpose” and not personal, living, or family
expenses. Id. at 46. Because, as just discussed, expenses for the production or
collection of income were within the class of deductions allowed by section
4
(...continued)
(1) for the production or collection of income;
(2) for the management, conservation, or
maintenance of property held for the production of
income; * * *
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[*8] 23(a)(2), clearly those types of expenses are generally within the reach of the
origin-of-the-claim test that the Court adopted in Gilmore.
Furthermore, this Court has on many occasions applied the origin-of-the-
claim test to claimed deductions for legal fees under section 212(1). See, e.g.,
Baier v. Commissioner, 63 T.C. 513 (1975), aff’d, 533 F.2d 117 (3d Cir. 1976);
Lange v. Commissioner, T.C. Memo. 1998-161; Barr v. Commissioner, T.C.
Memo. 1989-420. In fact, this Court has previously applied the Gilmore origin-of-
the-claim test to disallow a deduction claimed pursuant to section 212(1) for legal
expenses the taxpayer incurred in a legal action which resulted in a reduction of
alimony paid to his former wife. See Sunderland v. Commissioner, T.C. Memo.
1977-116. And in a case presenting the very question presented to us today--the
deductibility under section 212(1) of legal expenses incurred in an attempt to
recoup allegedly wrongfully paid alimony--a District Court disallowed the claimed
deduction, relying upon Sunderland and its application of the Gilmore origin-of-
the-claim test. Favrot v. United States, 550 F. Supp. 809 (E.D. La. 1982).
Petitioners contend that Favrot was wrongly decided. For assistance they
look to Wild v. Commissioner, 42 T.C. 706 (1964), and Elliott v. Commissioner,
40 T.C. 304 (1963). Each of these cases held that legal fees paid by a wife in
obtaining alimony includible in her gross income pursuant to section 71 were
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[*9] deductible under section 212(1). Petitioners contend that under the rationale
of Wild and Elliott Mr. Barry’s legal expenses should also be deductible under
section 212(1) because, they say, those expenses were incurred “specifically for
the purpose of collecting money that would be included in taxable income.” More
particularly, petitioners contend that if Mr. Barry “had prevailed in the case
against his former wife, any recovery received by the Petitioner would have been
includible in gross income under the tax benefit rule.”
Respondent does not dispute that any recovery Mr. Barry might have
received would have been included in gross income under the tax benefit rule.5
Respondent suggests, however, that this asserted tax consequence does not alter
the status of Mr. Barry’s legal expenses as nondeductible personal expenses. We
agree.
5
Under the tax benefit rule, if an amount is deducted from income in one
year and a part or all of the amount is recovered in a later year, the recovered
amount is treated as income for the year it is received to the extent the deduction
reduced the amount of tax imposed. Sec. 111(a); Francisco v. Commissioner, 119
T.C. 317, 333-334 (2002), aff’d, 370 F.3d 1228 (D.C. Cir. 2004); Kadunc v.
Commissioner, T.C. Memo. 1997-92; see Hillsboro Nat’l Bank v. Commissioner,
460 U.S. 370, 377 (1983). “The basic purpose of the tax benefit rule is to achieve
rough transactional parity in tax * * * and to protect the Government and the
taxpayer from the adverse effects of reporting a transaction on the basis of
assumptions that an event in a subsequent year proves to have been erroneous.”
Hillsboro Nat’l Bank v. Commissioner, 460 U.S. at 383. The record does not
reveal the basis for the parties’ agreement about the application of the tax benefit
rule to petitioners’ situation.
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[*10] Contrary to the teaching of Gilmore, petitioners’ argument focuses
improperly on the potential consequences of Mr. Barry’s lawsuit--the putative
inclusion of the recovered proceeds in petitioners’ gross income under the tax
benefit rule--rather than upon the origin and character of his claim. Moreover, the
holding in Wild does not turn, as petitioners seem to suggest, simply on the
question of whether the amounts sought to be recovered in the legal proceedings
would have been includible in gross or taxable income. Rather, Wild relied on
regulations which contain an exception to the general rule that was applied in
Gilmore and Patrick. Sec. 1.262-1(b)(7), Income Tax Regs. That regulatory
exception “relates solely to expenses incurred by the wife for the production or
collection of amounts ‘includible in gross income under section 71,’ which deals
with the taxability of alimony and similar amounts received by a wife as separate
maintenance or support in connection with the marital relationship.” Wolfson v.
Commissioner, 47 T.C. 290, 294 (1966).6 Petitioners do not contend that this
6
Petitioners contend that the “outdated wording of the regulation, if applied
literally”, could not withstand an equal protection challenge. Although the
constitutionality and application of this regulation are not directly at issue in this
case, it seems clear that it should be construed in gender- and spouse-neutral
fashion. See 1 U.S.C. sec. 1 (2012) (“In determining the meaning of any Act of
Congress, * * * words importing the masculine gender include the feminine as
well[.]”); sec. 7701(a)(17); Grutman v. Commissioner, 80 T.C. 464, 471 n.2
(1983) (“In the instant, case we use the terms ‘husband’ as the paying spouse and
(continued...)
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[*11] regulatory exception applies to Mr. Barry’s claimed legal expenses, and the
record does not support any such contention.7
Given the inapplicability of this regulatory exception, the pertinent rule is
the general rule stated in the regulations: “Generally, attorney’s fees and other
costs paid in connection with a divorce, separation, or decree for support are not
deductible by either the husband or the wife.” Sec. 1.262-1(b)(7), Income Tax
Regs. Consistent with this general rule, the caselaw is well settled that legal
6
(...continued)
‘wife’ as the recipient spouse of alimony payments both for convenience and
because that was the actual set of facts in the cases we discuss. Of course, the
result would be the same were the wife the payor spouse and the husband the
payee spouse.”); Westbrook v. Commissioner 74 T.C. 1357, 1363 n.3 (1980)
(“Sec. 71 also applies to alimony, if any, paid by the wife.”); Barrer v.
Commissioner, T.C. Memo. 1981-256, 1981 Tax Ct. Memo LEXIS 486, at *8 n.3
(“The same rule of inclusion of alimony payments in the receiving spouse’s gross
income applies if the described payments in sec. 71(a) are made from the wife to
the husband.”).
7
Although the amount Mr. Barry sought to recover from Ms. Barry was
attributable to allegedly overpaid alimony, any amount he recovered as a result of
his legal action would not have been includable in income as alimony under sec.
71. In order to qualify as alimony, a cash payment must satisfy four requirements,
including that “such payment is received by (or on behalf of) a spouse under a
divorce or separation instrument”. Sec. 71(b)(1)(A). Because Mr. Barry’s claim
against Ms. Barry was for breach of contract and sought to recover alimony
allegedly overpaid, any amount recovered would not be “under a divorce or
separation instrument.” Therefore, any recovery on that cause of action would not
be alimony under sec. 71, and the associated legal fees would not come within the
ambit of the second sentence of sec. 1.262-1(b)(7), Income Tax Regs.
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[*12] expenses incurred in actions to resist or reduce alimony obligations are
nondeductible personal expenses. See, e.g., Sa’d v. Commissioner, T.C. Memo.
2012-348; Conway v. Commissioner, T.C. Memo. 1994-405; Smith v.
Commissioner, T.C. Memo. 1980-182; Richard v. Commissioner, T.C. Memo.
1979-327; Sunderland v. Commissioner, T.C. Memo. 1977-116. Clearly, if Mr.
Barry had filed suit in the same year as his divorce from Ms. Barry, resisting the
alimony obligations, his legal expenses would have been nondeductible personal
expenses. In seeking to deduct legal expenses incurred in an action to recoup
alimony, petitioners seek impermissibly to do indirectly what cannot be done
directly.
It is true, as petitioners suggest, that a deduction for legal expenses is not
necessarily precluded simply because the taxpayer’s underlying claim arose in a
divorce action. In Liberty Vending, Inc. v. Commissioner, T.C. Memo. 1998-177,
for instance, the taxpayer was allowed a deduction for legal fees incurred to resist
actions by the taxpayer’s ex-wife that interfered with the business activities of the
taxpayer’s corporation. See also Hahn v. Commissioner, T.C. Memo. 1976-113
(allowing a deduction for legal fees to secure possession and income rights to
corporation already owned by the taxpayer). In those cases, however, the legal
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[*13] fees were business connected. Mr. Barry’s legal fees, by contrast, were not
business connected but arose from and related entirely to his marital relationship.
We conclude and hold that Mr. Barry’s legal expenses are personal
expenses not deductible under section 212(1). Petitioners have not asserted or
demonstrated that the expenses are deductible under any other section of the Code.
Accordingly,
Decision will be entered
for respondent.