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“Not for Profit”…Part 2

Lucas v. Comm’r, T.C. Memo. 2018‑80, 2018 WL 2948427 (2018)


(a) Facts: The parties divorced in Florida in 2011.  While the divorce was pending, the husband was in the process of liquidating his business, Vicis Capital, LLC.  He received, while the action was pending, $4.7 million in distributions.

Florida classifies the marital property as of the date of filing.  Nevertheless, the divorce court found that $4.7 million of the distributions was deferred compensation for services rendered to Vicis before the action was filed and thus was marital property.  The remainder of the distributions were held to be nonmarital property, apparently on the theory that they were compensation for efforts after the date of filing.


On his 2010 and 2011 tax returns, the husband deducted over $1 million each year in divorce-related legal and professional fees spent litigating Vicis-related issues in the divorce case.  The IRS disallowed the deduction, and the husband sought relief in the Tax Court.


(b) Issue: Was the husband entitled to deduct Vicis-related divorce litigation expenses?


(c) Answer to Issue: No.


(d) Summary of Rationale: Under United States v. Gilmore, 372 U.S. 39 (1963), divorce litigation is not a profit-seeking activity, so expenses incurred in connection with divorce litigation are normally not deductible.


The husband relied on Hahn v. Commissioner, T.C. Memo. 1976-113, 1976 WL 3307 (1976).  Hahn held that the wife was entitled to a deduction for fees incurred to collect income from jointly owned property that was in her husband’s possession. But the fees in Hahn were business-related; they were a necessary expense of collecting income.


“In the divorce action at issue, petitioner was neither pursuing alimony from Ms. Lucas nor resisting an attempt to interfere with his ongoing business activities.”  Lucas, 2018 WL 2948427, at *11.  Because the fees at issue were not incurred in the process of producing income, the husband was not entitled to a deduction.




  1. Lucas effectively holds that when income has already been produced, expenses incurred to determine whether that already-existing income belongs to the husband or the wife are not deductible under § 212. This situation is materially different from the situations in Wild and Barry where the expenses were incurred to produce the income itself alimony in Wild, and reimbursement for the overpayment of alimony in Barry.


  1. The federal courts are quite reluctant to treat divorce-related legal fees as a deductible expense except for fees specifically incurred to collect alimony.


  1. The husband created Vicis during the marriage, but it appears to have been mostly a vehicle for distributing income received from advising capital funds; it did not have substantial assets. That logically explains why most of the distributions were nonmarital, even though the business itself was marital.