(dissenting in part).
I agree with the majority on the first issue.
Since the plaintiff during the period when the illegal tax was levied and collected was wholly exempt under the law from the payment of any income tax whatever, there was no occasion to either file an income tax return or to claim a deduction. It is clear, therefore, that the refund when made was not income but a matter of restoring its capital.
On the second issue, as to legal expenses, section 39.24(a)-2(a) of Treasury Regulation 118 contains this language :
“The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense.”
This regulation was issued pursuant to section 24(a) (2) of the Internal Revenue Code of 1939. It had been in effect for a number of years without material change. The courts have repeatedly held that legal expenses incident to capital transactions are not deductible as ordinary and necessary business expenses. In Pennfoad Corp. & Affiliated Companies v. Commissioner, 21 T.C. 1087, 1099, the Tax Court held in a case involving recovery of capital through litigation that “[i]t is well settled that expenses of acquiring, perfecting, or recovering title to property are nondeductible capital expenses.” [Citing cases.]
An effort is made to distinguish between stock, bonds, and real estate on the one hand and money on the other. I do not believe there is such a valid distinction in a case of this kind. Most corporations treat money as capital. In fact, most corporations when organized sell stock for money and put the money thus obtained in a capital and operating fund. In the light of the wording of the regulation I do not believe the plaintiff is entitled to recover the expenses incurred in connection with the litigation involved here, however equitable it might be in the absence of the statute and regulation.
I therefore dissent from the conclusion of the majority on the second issue.