Articles Tagged with attorney fees

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Barry v. Comm’r, T.C. Memo. 2017-237, 2017 WL 5899406 (2017)


(a) Facts: When the parties were divorced, the husband agreed to pay the wife $2,400 per month in alimony.  Twenty-four years later, the husband filed an action against the wife in federal court for breach of contract, arguing that he had overpaid alimony and that the wife was required to return the overpayment.  The action was dismissed quickly as time-barred.


On his 2013 tax return, the husband took a deduction of $34,250 for legal fees paid in the dismissed action.  The IRS disallowed the deduction, and the husband petitioned for relief in the Tax Court.


(b) Issue: Was the husband entitled to claim the challenged deduction?


(c) Answer to Issue: No.


(d) Summary of Rationale: The husband argued that if he had prevailed in the dismissed action, the overpayments he recovered would have been taxable income.  The husband, therefore, argued that his legal fees were expenses incurred “for the production or collection of income” under I.R.C. § 121(1).


The U.S. Supreme Court has held that attorney’s fees in a divorce case are generally not deductible expenses because they arise from the taxpayer’s marital relationship and not from any profit-seeking activity.  United States v. Gilmore, 372 U.S. 39 (1963).  Stated differently, taxpayers do not engage in divorce litigation to seek profit.


The husband argued that Gilmore was based only upon what is now § 212(2), allowing a deduction “for the management, conservation, or maintenance of property held for the production of income.”  Barry, 2017 WL 5899406, at *2 n.4.  The court disagreed, and Gilmore applies under § 212(1) as well.  A divorce case is not a device “for the production or collection of income.”


The husband argued that case law under former I.R.C. § 71 allows alimony recipients to deduct legal fees under § 121(1) as an expense incurred to produce income.  See, e.g.Wild v. Comm’r, 42 T.C. 706 (1964).  But those cases relied in part upon a specific IRS regulation permitting such a deduction.  Treas. Reg. § 1.262-1(b)(7).  The same regulation refuses to create a broader exception.  “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.” Id.  The court held that the rule stated in the Regulation applied and that the husband was not entitled to take the challenged deduction.

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