*121 Decision will be entered under Rule 50.
Petitioners had each bought stock in Kreuger & Toll "for the production of income" and had received dividend income thereon before and during 1931. As the result of the adjudication in bankruptcy of that company in 1932 petitioners each deducted their cost of such stock in computing income taxes for that year. Respondent disallowed these deductions. Petitioners then paid the taxes as thus determined and later each sued for a refund of such taxes resulting from this disallowance. In 1940 this litigation was finally decided for petitioners, who then paid the legal fees incurred in connection therewith. In computing their respective income taxes for 1940 petitioners then deducted the amount of those fees. Respondent disallowed that part of the fees allocable to the recovery of the taxes. Held, such fees were deductible under
*467 These proceedings were consolidated. Respondent has determined deficiencies in income tax for the calendar year 1940 against the petitioner, Howard E. Cammack, in the sum of $ 205.93, and against the *468 petitioner, Edward Arthur Cammack, in the sum of $ 79.15. The latter claims an overpayment of $ 8.52. The deficiency in each case arises through disallowance by the respondent of certain legal fees and expenses paid by each petitioner in connection with suits brought by them for the recovery of overpayments in income*123 tax for the year 1932.
FINDINGS OF FACT.
The petitioners are residents of St. Paul, Minnesota, and both are officers of the Crescent Creamery Co., located in that city. Their returns for the taxable year involved were filed with the collector of internal revenue at St. Paul, Minnesota. In the year 1932 the petitioner, Howard E. Cammack, was the owner and holder of 1,003 shares of "American Certificates" of the Kreuger & Toll Co., which he had purchased at various times at a total cost of $ 12,839. In that year the petitioner, Edward Arthur Cammack, was the owner and holder of 400 similar "American Certificates," which he had purchased at various times at a total cost of $ 5,989.69. All these securities had been purchased and were then held by petitioners for the production of income. During 1931 and prior thereto they had each received dividend income thereon.
On August 6, 1932, the Kreuger & Toll Co. was adjudicated a bankrupt. In reporting their income for 1932 each of the petitioners deducted the amount of their cost of such certificates respectively held, as losses, upon the ground that these certificates had become totally worthless in that year. Respondent disallowed *124 these deductions. Thereafter each petitioner paid the taxes as thus determined by respondent and then later brought suit in the District Court of the United States for the recovery of the overpayment alleged to have resulted from disallowance of these losses. As a result of this litigation each petitioner recovered in 1940 the amount of the overpayment, together with interest. 68.56 percent of the total amount recovered by each petitioner constituted overpayment of tax, and 31.44 percent the interest thereon.
The petitioner, Howard E. Cammack, incurred legal expenses of $ 880.52 in connection with his litigation, which were paid in 1940. The petitioner, Edward Arthur Cammack, in his litigation incurred legal expenses of $ 375, which were paid in 1940. These expenses were deducted on their returns for 1940 by each petitioner. Respondent, in determining the deficiencies, disallowed 68.56 percent of the deduction, allocating this percentage of the expense in each case to the recovery of the overpayment, and allowed 31.44 percent of the expenditure as pertaining to the recovery of interest.
*469 OPINION.
The issue is whether the disallowed expenses petitioners paid in 1940 allocable*125 to the recovery of the overpayment of income taxes for 1932 are deductible in computing their income taxes for 1940 under
Respondent denies deductibility only on the grounds, apparently, that (1) the suit, in which the expenses were incurred and paid, was not brought to produce income, but to recover taxes, and (2) the property (stock) was known to be worthless, at least when the suit was brought; was thus not then held by petitioners for production of income; and, accordingly, the expenses of the suit were therefore not those of "management, conservation, *126 or maintenance of property held for the production of income."
Assuming the validity of the first ground, the question still remains as to that of the second. Trust u/w of Mary Lily (
In the cited case a trust had paid legal fees in the taxable year, incurred in connection with legal problems arising after the term of the trust expired and while the distribution of the trust fund was pending. In computing its income tax for that year the trust had deducted the amount of these fees under
In finally approving the deduction the Supreme Court said, inter alia:
* * * But the duties of the trustees were not only to hold the property for the production of income and to collect the income, but also, in administering the trust, to distribute the income and the principal so held from time to time, and the remainder of the principal at the expiration of the trust. Performance of each of these duties is an integral part of carrying out the trust enterprise. Accordingly, as the Tax*127 Court held, the costs of distribution here were quite as much expenses of a function of "management" of the trust property as were expenses incurred in producing the trust income; and if "ordinary and necessary," they were deductible.
* * * *
What we have said applies with equal force to the expenses of contesting the tax deficiency.
The petitioners are in the same position as the trust in that case. We think that, for present purposes, "management" of their stock by petitioners may with sufficiently comparable force be said to include the effort to deduct their bases for that worthless stock in computing their income taxes for 1932. The economic benefit resulting from that deduction was the natural -- in fact the only -- means reasonably left to them of obtaining any such benefit. Likewise, in our opinion the litigation to recover a refund of the taxes paid following the disallowance of that deduction was a natural consequence of and just as proximately connected with that act of "management" as the contest of the deficiency in the Bingham case.
That petitioners knew the stock had become worthless before the suit was brought or the fees paid does not change the fact that it was bought and, when the act of "management" occurred which proximately resulted in the disputed expenses, was "held for the production of income." That, we think, is sufficient to justify the contested deduction.
Decision will be entered under Rule 50.
Mellott, J*129 ., dissenting: The conclusion reached by the majority seems to me to be incorrect. The attorney fees paid by petitioners were not ordinary -- passing the question of necessary -- expenses for the management, conservation or maintenance of property. Assuming that these words were used in their natural, ordinary, and familiar sense, it is noted that the most obvious and rational meaning of "management," as given in standard dictionaries, is the act or manner of treating, directing, carrying on, or using, for a purpose. "Conservation" is a conserving, preserving, guarding, or protecting. "Maintenance" is a holding or keeping in a particular state or condition, especially in a state of efficiency or validity.
The genesis of the section relied upon supports the conclusion that the words were used in the sense indicated in the preceding paragraph. Before decision of the Higgins case in 1941 (
The quotation from the Bingham case, set out in the opinion of the majority, does not, in my judgment, permit an individual taxpayer to deduct attorney's fees paid in a controversy with the Government over the amount of his income tax. The fact that the securities upon which the loss giving rise to the controversy occurred may have been property held for the production of income is not sufficient. The Court in the Bingham case recognized the distinction I am urging when it said: "* * * the trust, a taxable entity like a business, may deduct litigation expenses when they are directly connected with or proximately result from the enterprise -- the management of property held for production of income."
The majority holds that management of their stock by petitioners "may with sufficiently comparable force be said to include the effort to deduct their bases for that stock in computing their income taxes for 1932." This seems to be predicated upon the assumption*132 that otherwise the statute could do these particular taxpayers no good; for it is said: "The economic benefit from that deduction was the natural -- in fact the only -- means reasonably left to them of obtaining any such benefit." That, it seems to me, is largely just words. Such a straining of the word "management" is not justified.
Since the enactment of the first revenue act it has uniformly been held that purely personal expenses may not be deducted unless specifically allowed by statute. The statute (
It may well be that Congress should allow all taxpayers to deduct the expenses of carrying on litigation with the Government involving their income tax liability; but until it says so in unmistakable language I prefer to follow the Willmott and Coffey cases. Apparently the majority assumes that the*134 expenditures were not made "for the production or collection of income"; so the validity of petitioner's claim upon that ground -- if made -- does not need to be discussed. In my judgment, however, such claim would be untenable, notwithstanding the fact the suit may have resulted in recovering tax previously paid and to that extent may have improved petitioners' economic position.
Being of the opinion that the claimed deductions may not be allowed under the section cited, I respectfully note my dissent.
Footnotes
1.
SEC. 23 . DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:
(a) Expenses. --
* * * *
(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.↩