UNITED STATES v. GILMORE

They -- they involve the deductibility by husband of the expenses of resisting or compromising a wife's claims against him for property in a divorce proceeding.

In both cases, deductions were allowed by the lower courts under Section 23 (a) of the 1939 Code and the corresponding provisions of the 1954 Code.

Those provisions allow a deduction for the ordinary and necessary expenses paid or incurred in carrying on a trade or business or for the production or collection of income or for the management, conservation or maintenance of property held for the production of income.

The ground for allowing the deductions --

Justice Potter Stewart: You're addressing yourself now to Gilmore case?

Mr. Wayne G. Barnett: Yes, the Gilmore case, right.

Justice Potter Stewart: You filed a brief (Voice Overlap)

Mr. Wayne G. Barnett: I -- I'm -- my introduction is to --

Justice Potter Stewart: (Voice Overlap) the Gilmore case.

Mr. Wayne G. Barnett: Yes, yes, rate the two together.

Justice Potter Stewart: Right.

Mr. Wayne G. Barnett: The ground for allowing the deductions was that, unless the wife's claim was defeated and the husband was required to pay what the wife sought, he would have to dispose of his income producing property in order to be able to pay her.

Now, our position is that the characterization of an expense, of resisting a claim depends upon the nature and source of the claim asserted and not upon the consequences of having to satisfy it if a judgment -- an adverse judgment should be entered.

That is if the claim arises out of the business transaction, the cost of that depend in it is deductible even though the judgment, if granted, will expend itself on personal assets, just your home or life insurance policies.

On the other hand, if the claim asserted, arises out of the personal transaction, the cost is not deductible.

It's a personal expense even though the judgment might expend itself on business assets.

Justice John M. Harlan: You said that there could be no deduction in respect to the attorney's fees in connection with the divorce proceeding.

Mr. Wayne G. Barnett: That is correct.

That is correct.

Justice John M. Harlan: Across the board --

Mr. Wayne G. Barnett: That's right, that's right.

Justice John M. Harlan: (Inaudible)

Mr. Wayne G. Barnett: Well, absent -- something that I can't foresee, but I -- I am prepared to say, no expenses in a divorce proceeding.

This case, the Gilmore case, is here on certiorari to the Court of Claims.

It involves a divorce proceeding in the Courts of California.

The -- Mr. Gilmore and Dixie Gilmore were married in 1946.

In 1952, after six years of marriage, Mrs. Gilmore filed a suit for divorce and Mr. Gilmore counterclaimed for divorce.

So there was no issue between the parties --

Justice Potter Stewart: The chap who was the automobile dealer or --

Mr. Wayne G. Barnett: Yes.

Justice John M. Harlan: -- is this the (Inaudible)

Mr. Wayne G. Barnett: Yes.

This is the automobile dealer.

Justice John M. Harlan: Automobile, in California or --

Mr. Wayne G. Barnett: Right.

There is no dispute that the marriage should be terminated.

The only dispute between the parties which is true in virtually all divorce cases is over the money questions.

Unknown Speaker: (Inaudible)

Mr. Wayne G. Barnett: Well, I -- I think, certainly, all of those that have come up in the tax area that has been true and I -- I come from Nevada.

The --

Unknown Speaker: (Inaudible)

Mr. Wayne G. Barnett: No, I -- well I -- I'll withdraw the statement.

At least in many divorce cases, the main issue is not about terminating the divorce but terminating the marriage by about tax property --

Justice Potter Stewart: But suppose it involved (Voice Overlap)

Mr. Wayne G. Barnett: Well -- yes, that certainly is true.

Justice William J. Brennan: Well -- well -- but the -- after saying the same thing that this fellow had -- his General Motors --

Mr. Wayne G. Barnett: Yes sir.

Justice William J. Brennan: -- franchise is at stake.

Mr. Wayne G. Barnett: Well --

Justice William J. Brennan: Not may be money but --

Mr. Wayne G. Barnett: Yes, yes.

Justice William J. Brennan: -- for this reason, he had to keep the -- the facts out of the newspapers.

Did it mean something like that?

Mr. Wayne G. Barnett: That -- one of the elements of the Court of Claims justification for allowing the expense was that the charge is made against him, if not refuted, would tarnish his reputation, General Motors might be led, because of that, cancels his franchise.

Let --let me spell out the facts of it before I -- I come to that.

Justice William J. Brennan: Well, is that -- is that -- is that -- you -- you lump that in the money, too?

Mr. Wayne G. Barnett: That -- that is a more indirect consequence of the assertion of the claim upon his income-producing capacity.

I suppose it's true that there are -- are -- a great many jobs in which your income-producing capacity will be affected by personal challenges to your moral character.

Well, the property --

Justice William J. Brennan: Yes, but I mean -- I -- I had the impression in Gilmore, am I wrong that -- that was a --

Mr. Wayne G. Barnett: Well --

Justice William J. Brennan: M-- substantial consideration and the determination --

Mr. Wayne G. Barnett: Yes, yes.

If I may --

Justice William J. Brennan: -- to somehow to get this work out --

Mr. Wayne G. Barnett: Yes.

Justice William J. Brennan: -- it wouldn't make the newspaper.

Mr. Wayne G. Barnett: We didn't work this out.

This is thought out.

Justice William J. Brennan: They didn't succeed at making newspapers anyway, did they?

Mr. Wayne G. Barnett: No, let -- I will try to separate the elements involved in the litigation.

His property, besides a yacht and two homes, consisted almost entirely of his stock and controlling interest varying between 60% and 100% in three corporations.

Each corporation was a franchise dealer for General Motor -- Motors' automobiles.

Don Gilmore-San Francisco and Don Gilmore-Hayward were Chevrolet dealers and Don Gilmore-Riverside, the third corporation, was a Pontiac dealer.

He was also the president and managing officer of the three corporations.

He was paid for his services compensations from the three corporations averaging about $67,000 a year.

He got dividends in three corporations averaging about $83,000 a year.

His total compensation from the three corporations, both dividends and salary, average about $150,000 a year.

Now, the main issue in the case was the fight about community property.

When Mr. Gilmore and Dixie Gilmore were married in 1956, Mr. Gilmore was then 56 years of age and had been in the automobile business for about 30 years and already owned the stock in these three corporations.

Admittedly, at that time, they were separate property and not community property under California law.

Mrs. Gilmore, however, asserted that since -- well, the stock at -- at the time of marriage worth only $200,000.

That was 1946.

By 1952, largely because of the postwar boom in the automobile business, the stock was worth $800,000.

Dixie Gilmore claimed that the appreciation in the stock was attributable to the husband's personal services and therefore part of it constituted community property.

The husband resisted that claim.

The settlement negotiation actually never really got under way.

Mrs. Gilmore demanded half of the total appreciation $300,000 in cash.

Mr. Gilmore was advised by his attorneys that he was on solid ground and he countered by offering her $10,000 for everything and that's where the negotiation began and stopped.

The case then went to trial. Now, the issues of the trial were first, this issue about community property.

There -- there is a doctrine in California law, as I understand it -- basically community property is the -- the proceeds of the personal efforts of the parties during the marriage.

There is a doctrine that you can go behind the stockholdings of a closely held corporation to make sure that the appreciation and the value of the stockholdings isn't really due to the personal efforts of the husband which he hasn't been adequately compensated for by -- in -- by way of salary.

So, there are -- one of the disputes was about how you made this determination whether there was a community property held back in the corporation.

Mrs. Gilmore contended that you first attribute a fair return to the investment and treat everything else as resulting from his personal efforts.

His position was that you simply determine whether the salary paid him was more than ample compensation for his personal efforts and treat the rest of the appreciation as the product of a fortunate investment.

He was ultimately sustained --

Justice Potter Stewart: In which case -- it was the latter case that would not have been community (Voice Overlap)

Mr. Wayne G. Barnett: In that case, I don't think there's any real dispute.

The salary that he was paid was in fact more than ample for -- for the fairly nominal services, at least the Court of Claims has now so found.

They don't think it was really -- he was paid tidy sum and that left all the other appreciation attributable to simply the postwar inflation of his -- his original investment.

Justice Potter Stewart: That's it and in that case --

Mr. Wayne G. Barnett: It was a separate property.

Justice Potter Stewart: -- under California law this would not have been a community property --

Mr. Wayne G. Barnett: Well --

Justice Potter Stewart: -- the increment, is that it?

Mr. Wayne G. Barnett: That is correct but for -- that is what the California Supreme Court held in this case.

Justice Potter Stewart: I've been -- trust me, we don't have to get in to the --

Mr. Wayne G. Barnett: Well, no, no, no.

Justice Potter Stewart: -- California.

I just want to (Voice Overlap)

Mr. Wayne G. Barnett: I was just trying to explain what the nature --

Justice Potter Stewart: -- nature of argument there.

Mr. Wayne G. Barnett: -- nature of the dispute was.

Secondly, if there was community property, there was a question how it would be divided.

Under California law, it's divided equally only if the parties are equally at fault.

If only one party is at fault, the court is required to award the innocent party more than 50% and may award all of the community property to the innocent party.

So it's important in the trial also to establish that the wife was at fault in case there was community property.

The other -- the other money issue was alimony and that depended entirely on the question of who is at fault.

If the wife was granted a divorce, she would be entitled to alimony.

The husband was granted divorce and the wife was not granted a -- a divorce, she would not be entitled to alimony and if she got alimony, the amount of alimony would of course depend upon their relative equities.

Justice Potter Stewart: This is a claim or cross complaint or whatever it was.

Mr. Wayne G. Barnett: That's right, that's right, cross-complaint for divorce by the husband.

So the -- the case went to trial with those issues being drawn between the parties.

I don't want to dwell at length in the nature of the trial which was described by the intermediate Appellate Court as one of the most sorted and revolting that that court ever dealt with.

Justice William J. Brennan: Do you still have the franchise?

Mr. Wayne G. Barnett: The -- you might ask my opponent.

I -- I don't know.

The -- however, the main expense involved here is the expense of running that trial and in addition, this element of the necessity to protect his reputation was offered as one of the justifications below so I think -- I should suggest very briefly what the nature of the trial was.

What was it all about?

The wife charged the husband with numerous acts of adultery with various other women and also with -- with physical and verbal abuse.

The husband charged the wife of having become an alcoholic during the marriage and with -- in public often calling him by all names and hitting him and so forth.

The wife admitted her alcohol -- addiction to alcohol, but attributed to -- to her (Inaudible) at suggestions made by him that she engage in abnormal sex acts with other women in his presence.

He countered that -- that she did that on her own and his role was solely that of a bystander or observer.

It was -- these charges and countercharges that took up 24 days of trial and filled 3000 pages of transcript with the -- that included the formal proof on the community property show cause.

The outcome -- the outcome of the trial was a complete victory for Mr. Gilmore.

He was granted a divorce.

His wife was denied divorce.

The judge first awarded the wife $9000 a year alimony, but on -- on Mr. Gilmore's motion, he acknowledged that having denied the wife a divorce, he couldn't award her alimony.

The wife was held -- have a joint interest in the two houses.

They're held in joint tenancy.

In fact, they were heavily mortgaged and she had no money to pay the -- the payments on and it was soon foreclosed and the husband bought back the houses and the foreclosure.

So the wife ended up with nothing.

On the wife's appeal, the court of -- the intermediate court -- Appellate Court in California reversed and remanded for a new trial because it thought the trial court did not gave an adequate weight to the proven adul -- adultery of her husband.

The California Supreme Court on the -- Mr Gilmore's further appeal, however, reinstated the judgment since the adultery occurred after the initial filing of the divorce suit, the lower court hadn't abused its discretion in weighing all the factors and not giving a divorce also to Mrs. Gilmore.

So the final result was, Mr. Gilmore got -- got the divorce and Mrs. Gilmore got not -- not a cent.

In 1953 and 1954 in carrying on this litigation, Mr. Gilmore paid out as attorney's fees and other court costs of $40,600.

He claimed the deduction for those payments on his return as ordinary necessary expenses of conserving income-producing property.

The Commissioner disallowed it.

He brought suit in the Court of Claims for refund.

The Court of Claims held that 80% of the total fees could be deducted under Section 23 (a) (2).

I might explain what the 80% is.

The costs were all lump together.

They weren't segregated, I mean, services or anything else.

The allocation was arrived at by judging the relative importance of the several objects sought to be achieved in the trial.

Now, there are perhaps five objects to be -- to be achieved in the trial.

The two were treated as not being the basis for a deduction, were the object of terminating the marriage relationship and the object of defeating the wife's claims to alimony.

The purposes at the trial that it thought warranted a deduction for the expenses allocated to them was the purpose to establish that there was no community property to establish that if there was community property, the wife being at fault should be awarded only a minor part of it.

And finally, the purpose at the trial by refuting the wife's charges against him to minimize the impact on his reputation which he allegedly feared might cost General Motors to cancel his franchises.

So we have a finding in $32,000 of the total was allocable to the purposes of defeating the claims to community property and to protecting his reputation against these charges that had been made.

The Court of Claims in allowing the deduction doesn't deny that the origin of the claims being having originated entirely from the marriage.

Justice William J. Brennan: I didn't get -- I didn't get that clearly.

Was only $32,000 allowed?

Mr. Wayne G. Barnett: $40,600, I -- I drop the $600.

$40,000 total for the two years involved here.

Justice William J. Brennan: Yes.

Mr. Wayne G. Barnett: The Court of Claims said 80% across the board, 80% of the $40,000 is $32,000.

Justice William J. Brennan: And this represented what?

The Court of Claims found to be (Voice Overlap)

Mr. Wayne G. Barnett: The allocation made among the objects.

It wasn't a matter of identifying expenses but just allocating the purposes sought to be served.

In finding the -- that the expenses were deductible, the Court of Claims did not deny that the wife's claims having arisen for marriage relationship were personal in origin.

The nexus it found between the expense and the income-producing property was this.

If the wife succeeded in her claims and if the wife were awarded $300,000, which was her initial claim either in cash or in stock, either way he would have to dispose a large part of his controlling interest in these corporations either directly to her or by selling to raise the money to give to her.

That further created the risk that the change of the capital ownership might cost General Motors to cancel the franchise if indeed it hadn't already cancelled the franchise because of the publicity given to the trial.

Therefore, he would be out of the job, this very lucrative and, by his own assertion, overpaid job as president of the three corporations.

In short, because the -- the -- the assertion of the claim, if it were upheld then adverse judgment entered would have expended itself upon property that he held for the production of income.

The fact that the property -- the only property had yet was income-producing property may be expensive.

Now, I would first very briefly like -- like -- well let me -- let me simply say that the decisions of this Court have established that 23 (a) (1) and (a) (2) really served no different purposes.

23 (a) (1) is trade or business expenses.

Trade or business was limited by some earlier decisions of the Court to a very narrowly defined time of activity.

You had to be engaged in a full time occupation to be allowed expenses of any profit making activities.

Not all business transactions, the Court said were deductible under 23 (a) (1) alone.

23 (a) (2) was added in 1942 for the purpose of removing that limitation.

Any income-producing activities even though sporadic such -- or not of a kind formerly thought to be a true trade or business, such as managing your own investments are now a basis for deduction.

In fact, the Court of Claims since it relies upon the threat to his job and since the job is a trade or business its decisions might as well be placed under 23 (a) (1) as under (a) (2).

I will talk of all of the expenses as business expenses without distinguishing between the two subsections.

The question is how you decide whether an expense is resisting a liability or compromising it, is personal on the one hand or business on the other hand.

What is the aspect of the expense that determines its characterization?

Justice John M. Harlan: Regul -- regulation seems to contemplate that there are some kinds of expenses, attorney's fees --

Mr. Wayne G. Barnett: I -- I --

Justice John M. Harlan: -- (Voice Overlap) with the divorce proceedings which are deductible which is --

Mr. Wayne G. Barnett: I -- I would like --

Justice John M. Harlan: (Inaudible)

Mr. Wayne G. Barnett: I would like if I may to explain that.

The Regulations 1 (11) -- this -- this history by the way is not on our brief.

I just discovered it apparently in the oral argument. Regulations 1 (11) issued in 1943 had provided flatly that attorney's fees paid in a suit for separation are not deductible from gross income and that with no exceptions, there was no qualifications.

In two Tax Court decisions, Gale v. Commissioner, 13 Tax Court and Lamont v. Commissioner also a 13 Tax Court, the full Tax Court said, “well in case of the wise expenses of getting an agreement to pay her periodic payments as alimony, her expenses allocatable to that are deductible because the statute makes periodic payments of income to the wife, that's Section 23 (k), taxes to the wife periodic payments.

Therefore, her -- her extent in getting periodic payments has to be allowed as a deduction under Section 23 (a) (2) as an expense incurred for the production or collection of the income since the statute makes alimony income to her, solely that.

Then –“

Justice William J. Brennan: And that to say (Inaudible)

Mr. Wayne G. Barnett: We -- well I -- I've got -- I -- it's a little more precise than that.

The commissioner acquiesced in those -- he'd opposed that construction, he acquiesced in those issued Treasury Decision 5889 1952-1 Cumulative Bulletin 31 which says this.

“In order to conform Regulations 1 (11) to the decision of the Tax Court in those cases, it is amended as follows and it puts in that generally they're not allowable as to however to take care of the alimony problem in the Tax Court case” and that's the only qualification ever intended to the disallowance of divorce suit.

Print this transcript Transcript:

Argument of Wayne G. Barnett

Chief Justice Earl Warren: Number 255, United States, Petitioner, versus Don Gilmore et al.

Mr. Barnett, you may continue your argument.

Mr. Wayne G. Barnett: Mr. Chief Justice.

The question in this case is whether the respondent's litigation cost, the nature and character which I described yesterday, are to be treated as the cost of his marriage or the cost of his business or the relationships of his marriage or the cost of his business.

The relationships to each are clear.

The claims asserted arose out of the marriage.

They depended entirely upon the marriage relationship and came from the marriage relationship.

The claims, if successful, would extend themselves on the business either by taking his business assets, causing him to lose his franchise or his job.

Justice William J. Brennan: Incidentally, there's no quarrel if they are deductible, there is no quarrel with the apportionment of 32,000 or 45,000, is it?

Mr. Wayne G. Barnett: I would quarrel with -- we did not, we did not raise a question about the allocation.

There -- it's a rather defective allocation in our view but -- now, the question is which aspect of the claim, its source or its consequence controls this characterization as personal business and we contend that it's the source of the claim that makes no difference on how it's going to be paid if you happen to lose the lawsuit.

Justice John M. Harlan: Supposing in the first case, Gilmore, the suit, the petition, immunity of property has been brought during the existence of the marital relationship.

In other words, supposing that you have the situation --

Mr. Wayne G. Barnett: Yes, I understand.

Justice John M. Harlan: -- Gilmore is existing during the marital --

Mr. Wayne G. Barnett: Right.

Justice John M. Harlan: -- relationship.

Mr. Wayne G. Barnett: Right.

Justice John M. Harlan: Would those expenses had been deductible?

Mr. Wayne G. Barnett: I wish to distinguish a claim by her that there is community property and litigation over that claim and conceded community property and the litigation over the partition of it.

The first, I would say is personal and it's not deductible for that reason.

She is asserting a claim arising from her status as being a wife that there is community property to --

Justice William J. Brennan: Well, is it to an aspect of that in this case?

Mr. Wayne G. Barnett: The -- the assertion that there is community property is in this case and I say that's personal.

That derived from the marriage relationship.

If you can see that there is community property which is true in the Fifth Circuit case, the Owens case and that it is simply a matter of dividing, I would say the expenses are capital not that that they're nondeductible because they're capital and not because they're personal.

They're nondeductible either way.

Actually, I think you'll find that the Patrick case involves more of the capital problem than this case.

Now, I think the principle that you look to the source and nature of the claim and not to the consequences is as firmly established by the decisions of this Court that is possible for any doctrine of tax law to be established.

One of the earliest tax cases on business expenses is the Kornhauser case decided back in 278, I believe, U.S. it's cited in our brief.

That involved the converse situation.

A -- the taxpayer was formerly the partner of a law office.

After he resigned from the partnership, he was sued by his former partner claiming that he'd received fees for services that perform -- during the partnership for which he was required to account to the other partner that he has been receiving in a form of a stock.

The Bureau of Internal Revenue argued that he was no longer in the business and that he was really just defending some property he happened to own, the stock and therefore, the expense is capital or personal.

I'm happy to say that the Solicitor General disassociated himself from that argument and filed a brief taking the other view.

The Court held that since the claim asserted arose from his former business activities, the expense of defending it were deductible and the fact that the claim would expend itself only what -- on what was now personal assets was irrelevant.

Now, more directly in point is the recent decision in the Lykes case which involved this side of the coin -- Lykes, that's in 343 U.S., a gift tax deficiency was asserted against Mr. Lykes.

Mr. Lykes is the president of a family owned corporation.

He made gifts of stock in that corporation to his wife and children and reported them for gift tax purpose.

The Commissioner thought he'd under valued the stock and asserted a deficiency of $150,000 based on the issue evaluation.

The issue evaluation went to the Tax Court and is finally settled by agreement by paying the $15,000 additional deficiency.

Now, Mr. Lykes claimed the deduction under the same provision involved here.

One of his arguments was that if he'd have to pay $150,000, he would've had to liquidate his remaining holdings in the family corporation which was the main source of income and therefore, it's a direct and immediate threat on his income producing property.

This Court said in an unmistakably clear terms that it is solely the source and nature of the claim and it makes no difference that if you just -- the defense is unsuccessful, it will consume income producing property.

I might say that this seems to me -- obviously necessary result.

Once you consider the corollary problem which you have a claim arising from business transaction, does it make a difference that you've retired and all of the property you have is personal property like home, life insurance policies, there is no threat to your income producing activities.

Of course you can deduct the expense of descending a claim that arose from your business transactions.

I would -- just to distinguish the case, as you might assume a tort claim against due for personal injuries.

If the tort claim is for injuries caused by a former employee of yours while you're engaged in business, defending the claim is equally attributable to the business activities and is deductible whether or not the judgment will be paid out of income producing or non-income producing asset.

On the other hand, if the tort claim is -- arises from your driving an automobile for pleasure, I can't see how it can possibly make a difference that the judgment is going to expend itself on income-producing assets rather than upon personal property.

I would like if I may to reserve my -- rest of my time for a rebuttal.

Chief Justice Earl Warren: You may Mr. Barnett.

Mr. Freed.

Argument of Eli Freed

Mr. Eli Freed: Mr. Chief Justice and members of this Court.

I would like to give some attention to the question passed by Mr. Justice Harlan of counsel of which the counsel didn't have the time to answer.

The question was that, as I understood it, that if an -- if a husband and wife before any divorce action, should become engaged in litigation to dissolve or partition the community property whether the legal expenses of the husband in such a case would be deductible expenses.

The case of Kornhauser against United States discussed by counsel, touches directly on this subject, I believe.

In Kornhauser which is one of the leading cases, there was a suit by two lawyers who had formerly been law partners.

The plaintiff claimed that if the part -- law partner had received some fees during the partnership, the fees consisted of shares of stock and that the defendant or partner have failed to account for those fees.

The legal expense of defending that action was deducted.

The deduction was disallowed and the question that was at issue on that subject was whether those expenses were personal.

There was a question as to whether they were capital in nature, but as I read the case, I understood that the principal contention was that they should be disallowed primarily because they were personal because the partnership no longer existed and the Court -- this Court held that since these legal expenses that were incurred were approximately related to a partnership and a dissolution of the partnership, they were deductible because expenses should be just as deductible if they incurred in the pursuit of income as to defend income and retain such (Inaudible).

Now, in the case of a husband and wife at California, in addition to the marital obligations that they have to each other, they have a distinct and well-recognized property relationship.

The community property relationship of the husband and wife, they in some sense -- in a sense to be regarded this as substitute for what rights that the wife has against the husband and non-community property states.

Those are the property rights that are well-established.

They've been even criticized as we put it out in our brief that is the relationship has been criticized as too much of a business relationship, but in this day and age, I think we can readily understand that the addition to the marital obligations of husbands and wives has to each other that they -- they regard that they -- the husbands and wives in California regard each other as partners insofar as the earnings, that is the income, the gains and the losses of the community here concerned.

It's my understanding that counsel contends that -- that generally expenses that are incurred to conserve property held for the production of income are deductible, but that's not so in the case of a husband and wife.

In a situation where they become engaged in the dispute which is initiated by a divorce action, it's our view that's unrealistic and unfair.

That in California, particularly, and what we're dealing with here, the husband and wife have this so-called partnership relationship as well as this marriage relationship and there can be more than one issue between them in an action which is termed a divorce action.

In this case -- there was a divorce action, but there was also a distinct controversy recognized by the court below as being the most important controversy over the question of whether there was community property and that there is was -- a community property and the community property had to be dissolved which is one of the incidence of that type of proceeding, namely, if there is community property in that same action, there was this partition or dissolution of the community that has been referred to.

Now, if there had been -- if the wife in the Gilmore case had succeeded in proving to the satisfaction of the trial court that there was community property, and she had a reason to expect that she would get a portion of it whether she win or lost the divorce action and Mr. Gilmore, the taxpayer could expect whether he won or loss the divorce that his wife could reasonably expect a substantial portion of the community property.

Justice Potter Stewart: Am I right in my understanding that under the involved, California is actionable if the Court had found that the advantage of divorce based upon the husband's aggression then the wife is entitled to at least 50% of any community property?

Did I understand that correctly from the brief?

Mr. Eli Freed: I would like to explain that.

Justice Potter Stewart: Please do.

Mr. Eli Freed: There are I believe five grounds for divorce in California.

Two of the grounds are involved in this case, adultery and extreme cruelty, the other grounds I may mention as I remember, desertion, habitual temperance and insanity.

In the case of extreme cruelty and adultery, when the court finds that there is community property, the court is required by law to award upon the dissolution of the community property more than 50% to the innocent spouse.

Justice Potter Stewart: 50% of the community property.

Mr. Eli Freed: Yes, just community.

There is no obligation at all in --

Justice Potter Stewart: (Inaudible) more than 50.

Mr. Eli Freed: 50% or more than 50%.

Justice Potter Stewart: Well, was that discretionary with the Court?

Mr. Eli Freed: Entirely discretionary, maybe 51% and conceivably it could be all.

Justice Potter Stewart: And if on the other hand, the divorce is granted as it was upon the basis of the -- on the grounds of wife's strong doing then it's within the discretion of the Court, is it, whether or not to grant any -- grant her anything, any of the community property or is he limited in what he can grant?

Mr. Eli Freed: If the court had found that there was community property.

Justice Potter Stewart: Yes.

Mr. Eli Freed: It was within the discretion of the court to deny Mrs. Gilmore any of the community property because she was found to be the guilty party.

Justice Potter Stewart: Yes.

Mr. Eli Freed: Does that answer your question?

Justice Potter Stewart: Well, but he -- could he -- could the court in his discretion have granted even though based upon her fault, even though the divorce has been based upon her fault or guilt or aggression, could the court in his discretion even so have granted her some or all of it --

Mr. Eli Freed: Yes, the Court could have granted her as much as 49%.

Justice Potter Stewart: Up to 50 %.

Mr. Eli Freed: Up to 50%.

Justice Potter Stewart: I see.

Mr. Eli Freed: Yes.

Now the crux of this tax case is found in the finding of the Court of Claims that 80% or more, and I believe I should emphasize those words or more.

There was no doubt in the mind of the Court of Claims that it should be at least 80%, that 80% or more of the legal expenses involved were incurred for services to defeat the efforts of the wife to establish that there was community property and to that -- in her claim that she was entitled to at least 50% of it.

The consequences to Mr. Gilmore in case she had succeeded or apparent in the findings, the other findings, he was exposed to the risk in case she secured any of the community property upon dissolution of the community which consists of stock and these automobile corporations, he was exposed to the risk of having the franchises of the automobile dealerships cancelled.

There are other reasons such as the fact that the dealerships were required to maintain minimum capital standards and the record shows that that could not have been done if she had secured any substantial part of the community property.

That finding of the Court of Claims as I understand it, (Inaudible) is conclusive here.

I also understand that from my reading of the case of being in the crest of this Court that Mr. -- the opinion written by Mr. Chief Justice Stone was held that -- that the question of whether the expenses involved in such dispute as this are proximately re-enlightened to the question of whether these services and expenses were -- that is the expenses were incurred for the conservation of property held for the production of income, but that question of proximity is for the trier of fact ordinarily.

And I submit that the court below found as an ultimate fact that the expenses in the case of Barr are proximately or were proximately related to the conservation of Mr. Gilmore's stock, property which held for the production of income, a property which was I can say with the nominal exception was his entire source of income and it was the policy of Congress as I understand it and the intent of Congress that in adding section or subdivision 2 to Section 23 (a) of the 1939 Code to remove the inequity that had existed between situations where expenses if incurred in business approximately related to the production of income were deductible but expenses that were of an on business nature although likewise proximately incurred or incurred proxi -- approximately in relation to the conservation of property held for the production of income were not deductible and I don't see any sound reasoning for discriminating the dispute between the husband and wife where if the -- a similar -- somewhat similar dispute that is related to -- as much related to property held for the production of income as in this case why there should be discrimination could be disallowed in the case of a husband and wife is because they're married.

Now in California but it's not unusual for husbands and wives to actually go into a partnership together.

They have that right under our law as we have pointed out in our brief.

They can reach any agreement they see fit in regard to property.

I think that this Court could take judicial notice of the fact that there are such partnerships.

Like I am a member of such a partnership, my wife is a lawyer and in such a case if there was a divorce action and there should also be dissolution of a community partnership.

As I understand it, the rule intended for by counsel would be extended to such a case and expenses incurred to preserve property held production of income or expenses incurred in the dissolution of such a marital partnership should not be allowed because they got married and that was the origin that continues to run through all of their activities thereafter it would seem.

Justice John M. Harlan: Take the situation that the -- perhaps it's the most familiar one, the Reno divorce, a so-called friendly divorce.

There are two steps in that always, one is -- really only one step actually.

Lawyers negotiate a separation agreement which is in fact a property agreement.

Is it your view that irrespective of whether it's a community property estate or not that if the separation agreement involves dealing with income producing property that the attorney's fees are -- in that case are deductible?

Mr. Eli Freed: That happens to be my view although I don't think that that view must necessarily be adopted in our case.

Justice John M. Harlan: No, I realize that but I -- your view would stretch to that standard.

Mr. Eli Freed: Yes.

I would be very sympathetic to that view that there should be no discrimination against a husband who knowingly and deliberately incurs expenses and it pains him as much as anyone else to go out of pocket to defend and conserve his rights in property which he holds for the production of income.

I see no reason for distinguishing between a husband and wife and between people, two persons who are not husband and wife.

Justice Felix Frankfurter: Mr. Freed, a minute ago, you said that it should be a trier of fact to determine what the cause of relation of the proximity.

That means that if the trier of fact as a jury or these cases may come before jury that --

Mr. Eli Freed: I don't think they can Your Honor.

The --

Justice Felix Frankfurter: Well, they might be assuming in the court.

Mr. Eli Freed: A divorce action cannot be tried before a jury --

Justice Felix Frankfurter: No, no, no.

I didn't mean the divorce action but this allows subsequently, could come before a jury?

Mr. Eli Freed: For a, say an account -- dissolution in the (Voice Overlap)

Justice Felix Frankfurter: No, not -- the -- the disallowance of the Commissioner of the fact.

Mr. Eli Freed: Yes, a refund case.

Justice Felix Frankfurter: The refund case and that may come before the jury.

Mr. Eli Freed: Yes.

Justice Felix Frankfurter: That means that an appropriate charge have been made to a jury saying it's for you gentleman of the -- ladies and gentlemen of the jury to find how closely connected this is and whatever they find would control under decisions of this Court, is that right?

If this is a jury question, if this a matter put to the jury on a general charge, that the determination of the closeness, the consequences and therefore, let me take this course to simplify the matter before the Congress -- before a judge of a trier of fact and this, as I find that this is closely connected with the proper consolation of property.

Another jury, another judge sitting alone might take a contrary view and these findings would be sustained, is that right?

Mr. Eli Freed: Yes sir, I certainly believe that if I were in a jury case, I think the jury should have the right to determine as a fact whether the expenses were incurred.

Justice Felix Frankfurter: In connection with --

Mr. Eli Freed: Not for the divorce itself but whether they were incurred for services that were rendered directly in connection with the property controversy.

Justice Felix Frankfurter: But that in every case in which -- in every case of this sort in which there's a rundown between the two spouses and their lawyers with reference to making the best kind of a settlement, the property interest would be involved wouldn't it?

Mr. Eli Freed: Yes.

Justice Felix Frankfurter: So that --

Mr. Eli Freed: Not always, Your Honor.

In California, the -- there -- it's quite possible for them to try the divorce action and not dissolve or dispose of their property relationship.

Justice Felix Frankfurter: No, no, no.

But if -- whenever there is a controversy about it --

Mr. Eli Freed: No.

Justice Felix Frankfurter: If they don't reach a settlement, there would be.

Mr. Eli Freed: Most of the time Your Honor.

Justice Felix Frankfurter: Yes, anyhow for a sufficient number of time.

This is in the(Inaudible), is it?

Mr. Eli Freed: No.

Justice Felix Frankfurter: So we really -- what this Court will do in this case will affect a lot of cases.

Mr. Eli Freed: I should think so.

It would affect the deduction of expenses which people will incur in these kinds of cases that they --

Justice Felix Frankfurter: It would be done too rare these days unfortunately.

Mr. Eli Freed: But you still have to determine.

Justice Felix Frankfurter: Yes.

Now, all these leads up to what I would ask you.

Is this -- is it fare to say that this is a question of fact, for the trier of fact, leading to these inevitable and appropriately leading to these diversities of judgment or is it one of these cases which we, lawyers call questions of law in the sense that it isn't a question for the jury that a line has to be drawn, namely, whether you take one view, whether the expenditures relate directly and indirectly and/or contingent ego is a well-known concepts of the law.

Isn't it that kind of a problem rather than a question of fact for the jury leading to all these diversities on exactly the same, not assessment of evidence, not judgment of more or less but a guiding line?

Is it necessary here to establish a guiding line and that's what we mean by rule of law?

Mr. Eli Freed: I've given a lot of thought to that problem and I concluded that it would be up to the trier of fact to determine and it could determine whether the primary purpose, and I use the words primary purpose knowingly because it's often used in tax cases, primary business purposes is a common expression, the primary purpose is to consider a property held for production of income.

I think that can be determined as a question of fact and if the record supports it, that fact should be conclusive, that's exactly what the Court of Claims did here.

They had a hearing commissioner who have heard the facts, he reported the facts and the findings and the Court of Claims accepted it as a fact that the expenses were incurred primarily for the purpose of defending and conserving the property that was held for the production of income and not primarily for any other purpose and the same what -- and this -- and by the -- that finding, the Court also determined as a corollary that 20% or less of the total expenses were incurred for matters proximately related to or pro -- for things proximately related to personal matters such as the divorce itself such as alimony which is personal and houses.

But that was before the trier of fact, they can see, there was testimony that I've referred to some of it in our brief to show it realistically that it is for the trier of fact.

Now, there can be, I can understand some questions of mixed fact of the law here but after thinking about it very carefully, that was my conclusion.

Justice Felix Frankfurter: I was -- I was just imagining that in my limited imagination the kind of speeches that will be made to juries in this case, the kind of a speech that one man would make that he really didn't care about her, he tried to get rid of her but he didn't want to have this much money as against the fact that he -- to get rid of her implied or may involve some publicity and that may jeopardize his license from General Motors.

I can imagine a wonderful kind of oratory before juries on this question of whether it's primary or secondary or whether there's a -- there's a condominium, a juncture of motives, I think the wonderful thing to embark on speculation.

Mr. Eli Freed: Your Honor, I submit --

Justice Felix Frankfurter: Stimulation and we lawyers indulge in that with pleasure.

Mr. Eli Freed: I submit that the American people as jurors are sufficiently experienced in marital matters and in property matters to exercise a fair judgment on the matter of that kind.

Certainly, you make speeches but it's up to counsel in term of what kind of speech would be most persuasive in a matter of that kind.

Chief Justice Earl Warren: Mr. Freed -- Mr. Freed, does your theory carry to this conclusion that in litigation of this kind, the jury is called upon to determine how important the divorce is to the parties and how important the division of property is in order to determine this question?

Mr. Eli Freed: Based upon evidence that is introduced before the jury testimony, there are testimonies in those days, yes, I do think that on the testimony in the record of this case for example, we have one juror as the Commissioner of the Court of Claims.

Now, we made arguments to him and the fact that there'd be 12 people that should make a better difference in my mind.

Justice Felix Frankfurter: It might be better for the 12 you --

Mr. Eli Freed: Yes.

Justice Felix Frankfurter: You dilute a different (Inaudible)

Mr. Eli Freed: Of course that's an accepted procedure.

I find that to be a very good way of dealing with the problem of this kind.

It shouldn't be left to the Commissioner of Internal Revenue I think.

Justice Hugo L. Black: Do you not weaken your position on the fact that it has been -- you add the word primarily to the words of the statute?

Mr. Eli Freed: I don't, Your Honor, add the word primary to the statute.

Justice Hugo L. Black: Each time you've said -- the statute says, all the ordinary and necessary expenses paid or incurred during the taxable year for the production and selection of income or for the management and conservation and maintenance of property.

Mr. Eli Freed: Yes.

Justice Hugo L. Black: Each time you say, so long as you primarily for this management conservation and so forth of the property.

Mr. Eli Freed: I used the word primarily Your Honor in the sense of dominance as the fact if the trier of facts determines that all of the expenses could conceivably be allocated to -- for example, the divorce, the trier of fact determines that primarily that isn't -- that the dominant motive and purpose of the expense --

Justice Hugo L. Black: Why do you have to get to motive and purpose there?

Mr. Eli Freed: Yes.

Justice Hugo L. Black: In that field.

Mr. Eli Freed: Yes, in that field, yes.

It's not uncommon as Your Honor well knows that expenses that are alleged to have incurred in business that have no business purpose and are primary purpose are not allowed.

Justice Hugo L. Black: Suppose somebody who's knocked this man's life, had sued him for this property that he owned, would you have to prove that his dominant purpose in defending it or primary purpose in defending it would keep the other person from getting it?

Mr. Eli Freed: Not if that was the only issue between the two but if there were some collateral issue between them as to whether a -- I can't imagine what it might be that it could simply join two causes of action together, some other action in the same procedure.

Justice Hugo L. Black: Well, that's a different thing.

Mr. Eli Freed: It is Your Honor.

Justice Hugo L. Black: But not about his fighting to conserve his income producing property.

I don't see why your word primary gets you far in your direction.

Mr. Eli Freed: I use it just to take aim at the target, I suppose, that it helps me in -- I think it will throw a little more light on the problem.

The counsel -- for the government claims that these expenses should be regarded as personal and because they relate more to the divorce than they do to the property honestly, well, they relate primarily to the property more than the property --

Justice Hugo L. Black: Well, I assume.

Mr. Eli Freed: -- they do with divorce.

Justice Hugo L. Black: I assume your answer to that if there is an answer, if you're right, it would be not lifted.

If you're to get something, you can collect the fee but so far as it was paid for the purpose of (Inaudible) rather than to fight over the property.

It may be that you can't divide those up.

I can understand an argument like that.

I don't understand why you'd look -- see whether its primary purpose was to find a service for the property whether its primary purpose was to concern his property.

The problem would be a fact as to whether or not that is a fact he paid this fee for the purpose of conserving his interest in this income producing property.

Mr. Eli Freed: Yes.

Justice Felix Frankfurter: But if you have a co-mingling of factors and forces, one of which is -- it has nothing to do with conserving the property and some of which may have to do -- you to deal some -- you have to deal with the statute whether the statute allows you to just have a little infusion of conserving property, remotely or as a distant consequence or whether that statute says you must have that or you mustn't use the word purpose.

Mr. Eli Freed: The statute is very simple just as Mr. Justice White said.

Justice Hugo L. Black: If you had -- if you had a lawsuit by one count, it had nothing to do whatever in conserving property but another one did, I do not suppose that you would be barred from recovering part of the fee that is attributable to the conservation of property merely because somebody was afraid of the idea of co-mingling.

Mr. Eli Freed: I can agree with that.

Justice Felix Frankfurter: But this is the real trouble that in some -- in one sense, there is conservation of property in one sense.

Ultimately, it doesn't make a difference to the total asset or to the potentiality with future earnings, but is that what the statute goes out -- and we go out to something else but you can't escape this by --

Mr. Eli Freed: I think the statute --

Justice Felix Frankfurter: There was a word you used, your word primary, whatever word you may use, you are confronted with the question, does the statute of conserving property relate to have it or threats (Inaudible) demolition or actual demolition of property in the first line of fire or way beyond it.

That's really what's involved in here, isn't it?

Mr. Eli Freed: I see the red light.

Chief Justice Earl Warren: You may answer it --

Justice Hugo L. Black: Suppose if you would -- has done nothing here except the suit to divorce, you wouldn't be claiming that -- you could get it for trying to conserve your property, would you?

Mr. Eli Freed: I beg your pardon?

Justice Hugo L. Black: If it's nothing but a personal lawsuit for divorce between these people, you wouldn't be claiming you could deduct that.

Mr. Eli Freed: Of course not.

Justice Hugo L. Black: What did you say?

Mr. Eli Freed: You're absolutely right.

We wouldn't claim that at all.

Justice Hugo L. Black: What you're claiming is that the state of fee, a part of which was for conserving estate had income bearing for him.

Mr. Eli Freed: Right.

Justice Hugo L. Black: And that the statute says that you can deduct maintenances, management conservation or maintenance of property held for the production of income, I presume you're saying if -- you shouldn't be barred because one fee was paid for both purposes.

One part -- part of it didn't -- wasn't deductible from your standpoint and one for the (Inaudible), you're claiming it for the part of the fee that was attributable to the conservation of the income.

Mr. Eli Freed: Correct.

Justice Felix Frankfurter: The whole question is whether it was.

Mr. Eli Freed: That's what the trier of fact felt then I think it's --

Justice Felix Frankfurter: The question is whether -- on what basis the trier -- the trier of fact went.

The trier of fact doesn't grab anything out of the sky and says this is it.

Mr. Eli Freed: Based on the income --

Justice Felix Frankfurter: Was there some kind of considerations?

Mr. Eli Freed: The testimony --

Justice Felix Frankfurter: It is to determine what the statute means and what does it direct towards.

You've got an entangled situation means we have to disentangle it.

Justice John M. Harlan: Is there anything in the legislative history that indicates whether Congress had in mind one way or the other the -- this kind of a situation when they enacted 2382?

Mr. Eli Freed: Your Honor, I found no reference in this type of situation in the legislative history.

Justice John M. Harlan: The problem that confronts you would be greatly simplified that the lawyers stood up their bill and said so much in this financial settlement by representation and so much as to the divorce angle and then all you have question -- the only question you have assuming the statute covers it at all is whether the -- that's a bona fide allocation of this or whether it's an unreasonable fee then you don't get tangled up with the problem that concerns you.

Mr. Eli Freed: That of course if for the trier of fact that they did --

Justice John M. Harlan: And the second case, you've got that allocation by the lawyers.

Mr. Eli Freed: Yes.

Chief Justice Earl Warren: Mr. Barnett, yesterday afternoon, Mr. Justice Harlan asked a question that -- concerning something that I think it was not in your -- in your briefs.

Rebuttal of Wayne G. Barnett

Mr. Wayne G. Barnett: Yes.

Chief Justice Earl Warren: And I thought it might possibly call for a memorandum and I wonder if Justice Harlan would repeat the question to you.

Mr. Wayne G. Barnett: That's about the regulation --

Justice John M. Harlan: How the regulation (Voice Overlap) to be.

Mr. Wayne G. Barnett: Yes sir.

I will supply a memorandum fee --

Justice John M. Harlan: Yes.

Chief Justice Earl Warren: Of course, Mr. Freed you may reply to the memorandum if you desire.

Mr. Wayne G. Barnett: I -- to solve this question about the question of the fact, I would like to stipulate that 80% of --

Justice Felix Frankfurter: I didn't hear you.

Mr. Wayne G. Barnett: I would like to stipulate that 80% of the fees, $32,000 would pay for the sole reason of saving his property.

There's no question about that.

We don't deny that.

There's no -- there's no question about that in any case.

The reason you defend a tort suit is to save your property.

You have no other interest at stake.

And if your property happens to be an income producing property, the property you're saving is income producing property.

We don't deny that.

It's not a question about how direct the relationship is or what the facts are.

The question is whether the question turns up on that relationship or upon the source of the claim.

They're entirely different things.

It's a direct conflicting fact about the same thing.

I'm sorry?

Justice John M. Harlan: I was just observing but I think that's a very sensible position for you to take.

That's not the issue in this case.

Mr. Wayne G. Barnett: Right.

Chief Justice Earl Warren: Very well.

Print this transcript Transcript:

Argument of Wayne G. Barnett

Chief Justice Earl Warren: United States, Petitioner, versus Don Gilmore et al.

Mr. Barnett.

Mr. Wayne G. Barnett: Mr. Chief Justice, may it please the Court.

This case, the Gilmore case, is here on certiorari to the Court of Claims.

As I said yesterday, it involved a litigated divorce action.

The deduction claimed is for the cause of conducting the litigation in the California State Courts.

The respondent and Dixie Gilmore were married in 1946.

In 1952, after six years of marriage, they sued each other for divorce.

At the time of the divorce proceedings, Mr. Gilmore owned a controlling stock interest varying from 60% to 100% and three corporations, each of which was a licensed General Motors automobile dealer, either Chevrolet or Pontiac dealerships.

He was the president and the managing officer of each of the corporations, and he received compensation, salaries from the three corporations totaling approximately $67,000 a year of which $15,000 came from Don Gilmore-San Francisco which was the name by one of the corporations and the one of which he owned 100%.

His dividends in the three corporations averaged about $83,000 a year so that his total income from the corporations came to a $150,000 a year.

He had virtually no other sources of income.

His other income was nominal.

One of the issues in the divorce action was whether the stock of those three corporations was in part community property.

Mr. Gilmore had owned the stock at the day of the marriage so it started out as his separate property.

However, during the six years of the marriage from 1946 to 1952, the corporations had retained some $600,000 out of current earnings.

And Mrs. Gilmore claimed that those earnings in excess of the fair rate of return from the invested capital, the corporations should be attributed to the personal services of Mr. Gilmore and therefore were community property.

And it would follow from that that by leaving the earnings in the corporations, he in effect made a contribution to capital of community property and that would convert the stock pro tanto to the extent that it represented the retained earnings into a community property.

Mr. Gilmore contended that he had been paid salaries that were more than adequate for his services and that the extraordinary earnings during those years were attributable rather to the good fortune of the corporations in having the Chevrolet and Pontiac franchises during the immediate post-war period.

Now that issue in the case is entirely separate in terms of the matters of proof involved from all the other issues.

The other issues were first to which party the divorce would be awarded.

Dixie Gilmore had prayed for divorce on the grounds of extreme cruelty and adultery.

And Mr. Gilmore had counterclaimed for divorce on grounds of extreme cruelty.

The next issue was whether alimony was to be given to the wife.

That turned upon whether she got the divorce or not because in the California law, she can be given alimony only if she was awarded a divorce.

And the third issue remaining was how the community property, if there was any community property, was to be divided between the parties.

Now under California law, a divorce based upon extreme cruelty or adultery in such a case, the Court is required to divide the community property unequally giving more than half and up to all of the property to the innocent spouse.

Now those three issues, mainly divorce, alimony and division of community property all involved a common litigation effort.

They all turned on the same thing, namely, which party got the divorce, which party was the innocent or less wrong one or more wrong one.

The case went to trial, turned out to be a rather sensational trial that lasted 24 trial days, occupied about 3000 pages of transcript in many headlines in the local newspapers.

A -- only --

Justice Byron R. White: Is this a jury trial in California?

Mr. Wayne G. Barnett: No, it is not.

It's a trial to the court as I understand it.

The main bulk of the trial was concerned with the charges and the counter charges of misconduct; adultery, alcoholism, physical and verbal abuse, a charge against the wife, proof or that she engaged in abnormal sex acts with other women, charged by her that he has encouraged her to do so, his defense, that he was simply an onlooker.

It was described by Appellate Court as one of the most sorted cases that ever had to deal with and this was the substance of the trial.

And it's not an overstatement to say that the question here is whether Mr. Gilmore can deduct his business expense, the cause of proving that his wife was a morally defrayed alcoholic.

That's really what this case is about.

The outcome of the trial was a complete victory of Mr. Gilmore.

He was awarded a divorce.

His wife was denied a divorce.

She was -- there's got to be no community property.

The judge initially awarded alimony of $9000 a year to Mrs. Gilmore notwithstanding that he denied her divorce but when it was pointed out that he couldn't do that.

That was vacated.

She appealed to the District Court of Appeals in California which reversed and remanded for a new trial because it thought the judge had not given adequate weight to the proven adultery by Mr. Gilmore in the period following the divorce complaint.

On Mr. Gilmore's appeal then to the Supreme Court of California, the judgment of the District Court -- of the trial court was reinstated.

And the final result was that Mr. Gilmore got the divorce and Mrs. Gilmore got nothing.

In 1953 and 1954, Mr. Gilmore had expended about $40,000 in conducting this litigation.

That's attorney's fees, records, transcripts, and the like.

He claimed the deduction of 80%, some $32,000 of those -- of the total cost as a expense deductible under 23 (a) (2) of the 1939 Code.

That is to say an ordinary and necessary expense incurred for the management conservation for maintenance of income producing property.

The Court of Claims accepted the allocation of the expenses, the 80%-20% allocation attributing 80% of the fees to his -- to the ultimate purpose of protecting his interest in the corporations.

This is a factual matter.

Now since the Court admitted that only a small part of the trial was directly concerned with the existence of community property, it justified that 80% allocation on the ground that as a second line of defense, it was necessary to prove that he was entitled to the divorce so that if there were community property, it can be awarded to him nonetheless and could not -- or be awarded to the wife and most of it to the wife.

And it also added as a further basis to support the allocation.

The fear of Mr. Gilmore that the charges, if not disproved made by his wife, would harm his reputation and cause General Motors to cancel the corporation's franchise.

Now on the -- taking all those considerations into account, it accepted the allocation that 80% of this total effort was for the purpose of protecting his interest in the corporations and we do not challenge that allocation.

Now, the basis on which the Court held that that part is --

Chief Justice Earl Warren: You say the Government did not challenge that --

Mr. Wayne G. Barnett: We do not here challenge it.

Chief Justice Earl Warren: I see.

Mr. Wayne G. Barnett: I said -- I don't think we really took an exception to the total allocation in the Court of Claims except to the impossibility of making the application but in any event here, we do not challenge.

There is a question about what it represents, what the 80% represents?

We say that it represents only in part the cost of litigating whether there was community property because that was only a small part of the trial and that -- and also includes a large part of the expenses of litigating the misconduct allegations which were held to be attributable to protecting the stock interest indirectly and namely through the effect on the division of community property and through the effect upon reputation.

But we don't challenge if -- we properly understand the findings of the Court of Claims.

I think they're quite clear on that.

We don't challenge them at all.

We accept that 80%, $32,000 was spent solely for the purpose of keeping his interest in the corporations.

That's why he's been it.

That's what the case is about.

We accept that.

Now, the basis upon which the Court of Claims held that that amount was deductible, how it qualified under 23 (a) (2) was not looking at all that the nature of the claims asserted by the wife but solely at the consequences of those claims if they were not defeated.

It reasoned that if the wife were successful in her claim, she was entitled for $300,000.

That's half of the retained earnings.

Mr. Gilmore would be required to dispose of the large part of his stock in the corporations, either to sell it to raise the money or give it to her in kind.

In that event, he very likely would have lost control of the corporations and would then lose his overpaid job as president of the corporation.

And indeed, General Motors might cancel the franchises because of the change of ownership if it hadn't already canceled the franchises because of the damage of his reputation.

Now, because of these disastrous consequences might follow from her claims if they were successful the Court said resisting them and avoiding those consequences was conservation of income producing property, namely, his stock and his job in the corporations.

Justice John M. Harlan: Is this the only basis that exist or (Inaudible) attorney fees?

Mr. Wayne G. Barnett: Yes.

I mean 23 (a) (2) is the only provision under which they could be claimed that I'm aware of.

There is another provision litigating tax liabilities which was involved in the Davis case last year if you remember.

But here, the only relevant provision is 23 (a) (2) or 23 (a) (1) which is the trade or business expenses.

Now, our position as I suggested yesterday, is that the aspect that you look to, to determine the character of the expenses is not of the consequences that will follow from the claim -- from the judgment.

The judgment will expend itself on income producing property, but rather the source of the claim, the transaction from which the claim arose.

I would like to begin by considering the language of 23 (a) (2) which speaks of ordinary and necessary expenses incurred for the management, conservation or maintenance of property held for the production of income.

Now the premise of the decision here --

Unknown Speaker: (Inaudible)

Mr. Wayne G. Barnett: That's what I hope to prove.

I think that's quite clear that --

Unknown Speaker: (Inaudible)

Mr. Wayne G. Barnett: No, the Code is not.

The Code -- the caption of the Code which I will try to explain later is really a misnomer, calls the non-trade, non-business expenses.

This is 23 (a) (1).

The 23 (a) (1) allows the ordinary and necessary expenses of carrying on any trade or business.

And 23 (a) (2), the ordinary and necessary expenses incurred for the production or collection of income or for the management conservation or maintenance of property held for the production of income, it's our position and this is all one ball of wax.

They're all of business expenses but I would develop that in terms of the history of 23 (a) (2).

But there was some concern at the last argument about the literal wording of 23 (a) (2) and how we deal with that.

I would like to start out by considering the literal wording which is incurred for the conservation, for the management conservation and maintenance of property held, the production of income.

Now, the premise of the Court is that an expense incurred to avoid a liability that would require you to sell property that happens to be income producing to raise the money to pay the liability this conservation of income producing property.

Now, I suggest that's a -- quite an awkward, far from being literal, an awkward reading of conservation of property.

For one thing, the statute speaks of property and not of an interest in property.

Now what Mr. Gilmore was doing here, he was trying to keep his ownership of the property and not conserving the thing itself.

Conservation equally implies, I suggest, a physical safeguarding, a protecting of the thing.

The -- for -- in terms of stocks and bonds, the conservation would be the fee paid for the safe deposit box in which you keep them so they don't get stolen, and equally when that term is used in connection with management and maintenance which also relate to the operations performed with respect to the asset of the thing itself.

I think the natural reading of conservation is of the same order of things.

There's another difficulty with the literal reading.

It speaks of incurred for these objects.

And the Court of Claims says that since these objects will be the result of the expense, it is for the object.

But that uses for in the sense of the result achieved prospectively by the expense.

But what if, for example, an employee hired to do some repairs on minimal property, negligent and causes injury and you're sued for that and you try to deduct the fees for that, that the fees in Court don't achieve maintenance of the property, there, a result of past maintenance efforts.

And so before there, you have to turn around to say the cost of maintenance and not as it had been achieved by the expenditure.

Now all I'm trying to really suggest, I don't -- we aren't arguing that you should read the statute that way, and I think purely you shouldn't.

All I'm trying to suggest is that our argument is not contrary to the literal language of the statute and the statute is so broad and so -- and self-defining that we have to look elsewhere for its meaning.

And I think the main source of its meaning is the history of 23 (a) (2).

Before 1942, 23 (a) was limited -- limited deductions to those incurred in carrying on any trade or business.

The Treasury gave that from a narrow construction and said not all income producing activities qualified as “trade or businesses”.

And in 1941, this Court in the Hagan's case and two other cases basically adopted that construction.

They held that simply holding stocks and bonds is not a trade or business.

And therefore, the taxpayer, Mr. Higgins, could not deduct the expenses and maintaining the staff office to handle his investments, his portfolio of securities.

He had very large investments and a full time office staff, just having the dividend checks and things such as that.

It was held that he could not deduct those expenses because it didn't qualify as a trade or business.

Congress properly responded by adding 23 (a) (2).

And the Committee Reports say, it was added because of the inequity revealed by the Higgins case, a tax in the income from such activities for not allowing the deduction of the ordinary expenses turning them on.

And the Committee Reports made perfectly clear that the only purpose was to expand the kinds of activities the expenses of which are deductible to eliminate the distinction between the technical or trade or business and other kinds of income producing activities.

Now any kind of income producing activity whether it'd be withholding property or running a grocery store is equally entitled on a subject matter for deduction of expenses.

Now what we say is that the difference between 23 (a) (1) and (a) (2) is little -- concerns solely with expanding that category of activities and does not affect the question what relationship must exist between an expense and the income producing activity to qualify the expense as an expense of the activity.

And that's the question in this case.

Maybe, I can put it this way.

The expense here is claimed as an expense of his holding of stock.

Now before 1942, expenses of stockholding were deductibleSo he wouldn't even qualify at that point.

23 (a) (2) says, “Yes, expenses of stockholding are deductible”, and we're left with the question, “Is this an expense of stockholding?”

Or, “Is this an expense of his marriage?”

And that's the question in this case and that question 23 (a) (2) is not directed towards.

And for our purposes, we can call 23 (a) (1) and 23 (a) (2) as both providing for the deduction of business expenses, ignoring the technical distinctions between kinds of business activity.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Wayne G. Barnett: He is sued in fact for damages for a oral contract that he didn't complete.

I would think that --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Wayne G. Barnett: Yes.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Wayne G. Barnett: Yes.

Affecting his reputation and therefore his future income earning capacity.

I think that is a difficult question.

I think the answer should be that it's not deductible.

The difficulty rises to my mind not because of the impact upon his income earning capacity that's going to hurt his future business.

But because the charge rose out of prior business activities, I'm assuming that it's because of his past action act as a businessman in the course of business that prompted the charge and that was really the generating source.

Now actually, let me say that my main point is simply -- you have to look to the source and nature of the claim to make the characterization.

Now once you look there, there are still a lot of problems and we really meet them in this case because of the community property aspect of the case.

But my main point is that what you look at is the source and nature of the claim and not simply the effect a judgment is going to have.

Now, I think that as we conclusively decided by two decisions of this Court, the Kornhauser case and the Lykes case.

Now, the Kornhauser case involved the converse situation, a claim that arose from a business transaction but threatened only personal assets.

Mr. Kornhauser was sued by an ex-law partner of his who claimed that some fees he'd received really belonged to the partnership because they were for services performed while the partnership was in existence.

He successfully defended on the ground that he'd earned this later.

And that this Court held that the expenses were deductible, the expenses of defending that lawsuit, approving a line of ruling that had held deductible the expense of defending malpractice suits and suits of that kind and saying they established the principle that if it results from the conduct of the business is deductible.

The effect of the judgment is not the question.

The Lykes case, I think, really reads directly on this case because it involves a claim personal in origin and business and threatened consequences.

That was involved -- Mr. Lykes' may give large flock of stock to members of his family, reported them for gift tax purpose of stated valuation.

The commissioner thought the valuation too low and his litigation about what the value of the stock was for getting tax purposes.

It was ultimately settled by his paying and agreed upon decision.

He claimed the deduction for the expense of litigation on the ground that had the original petitions he had been sustained, it would have required him to sell all of -- the rest of his stock which was his sole income producing property and therefore resisting the deficiency was protecting his other stock and it was a conservation of income producing property.

In this Court and words which I think is directly applicable to this case, said, that the mere fact that your existing liability to keep income producing property doesn't make any expense of conserving income producing property.

I think that governs this case.

I should say that -- those were not dealt with the community property aspect of this case.

Very briefly, I would like to suggest what that is.

First, you have to distinguish the two kinds of expenses involved here, those litigating the misconduct issues and those for litigating the existence of community property.

As in this conduct issues, the suit really amounts to a claim for a remedy for personal wrongs.

The wife is claiming that she's entitled to some of his half of the community property because of the wrong done to her and he says he's entitled to some of her half because of the wrong done him.

That's simply like tort suits arising from the wrongs and that's the genesis of the rights asserted.

That we say follows automatically from the basic principle I'm suggesting.

The remaining question, the small part of the fees went -- (Inaudible) specifically to the question of whether or not part of the stock was community property.

We acknowledge this poses a much more difficult question.

Even if you looked at the nature of the claim, you still have a problem characterizing it.

Is it personal?

Is it capital?

Or is it a deductible current expense?

We say as well in our brief that if you reach that question, we think it is clearly -- quite clearly capital and it probably ought to be treated us personal.

Well primarily, we suggest to the Court that you don't need to get into that, that isn't quite the cases here.

The case is here to resolve the basic dispute about whether the threat to income producing property is a basis for deduction if that's what the conflict was about between the Baer case and the Second Circuit case, and that's why we brought the case here and we suggest that you -- when you get to the tail end of the case in achieving this community property issue, you can properly just remand that for consideration by the Court of Claims rather than in --

Justice John M. Harlan: You're not deciding whether that sort of expense is deducted.

Mr. Wayne G. Barnett: That is right.

That is right.

Most of the expenses will be as I say are -- will be taken care of.

You will have held that most of the expenses are not deductible.

Mainly those incurred in litigating the misconduct issues are not deductible.

You hold back and you hold that ground for the broad decision the Court of Claims is reversed.

That leaves a further problem with characterization.

We'd fill this out at some length in our brief which was not dealt with by Court of Claims.

Now logically, you could decide it.

To me it's even a much more difficult question than the main when the case was brought here to decide and I don't see why the Court should get into it and simply -- improperly leave that to the Court of Claims on remand, how to treat --

Justice John M. Harlan: (Inaudible)

Mr. Wayne G. Barnett: Hopefully.

Hopefully, thank you.

Justice John M. Harlan: Just a question on --

Chief Justice Earl Warren: Just one minute.

Justice John M. Harlan: (Inaudible)

Mr. Wayne G. Barnett: How you divide them?

Justice John M. Harlan: How you divide it?

The ultimate question was whether that's deductible.

Mr. Wayne G. Barnett: The part allocable to the issue of the existence of the community.

Justice John M. Harlan: Yes.

Chief Justice Earl Warren: Mr. Barnett, would you state just very briefly again what you ask us to do?

Mr. Wayne G. Barnett: I think you decide that the characterization of expenses of resisting a financial claim turns upon the nature and source of the claim.

Therefore, it follows that the claims to an unequal division of community property in this case just based on the personal wrongs.

The expense of resisting that is not deductible and the part of the fees which were allowed that are attributable to that part of the litigation, the judgment is reversed as to that part.

Justice William J. Brennan: (Inaudible)

Mr. Wayne G. Barnett: It wouldn't really appear in terms of the transcript of the divorce trial, five-sixth of the case was devoted to misconduct issues, only one-sixth to the existence of community property.

That would mean about three quarters of the fees allowed would be nondeductible under what we are suggesting that you decide.

Justice William J. Brennan: Well, do you mean the point of time it took --

Mr. Wayne G. Barnett: Just a number of pages of transcript.

Now, we don't suggest that that's an accurate measure or should by any means be controlling.

The Court of Claims itself did find that the major part of expenses were concerned with litigating this conduct.

So that would take care of the (Inaudible) -- the larger part of the expenses for which a deduction was allowed.

And that would leave open the question about actually make this allocation, this further allocation whether the amounts allocated specifically litigating whether there was community property just that the -- whether the stock -- any part of the stock was community property -- existence of community property that would leave open that question whether that part of fees would be deductible.

Chief Justice Earl Warren: You don't ask us to hold it that none of it was deductible.

Mr. Wayne G. Barnett: Oh no, no, no.

We ask you to -- you can't tell what part it is --

Chief Justice Earl Warren: Yes, yes, I understand.

Mr. Wayne G. Barnett: -- because that allocation hasn't been made.

Chief Justice Earl Warren: I understand that.

Justice Byron R. White: Nevertheless you leave rather a narrow area from divorce proceedings where the deductibility of any attorney's fees arising out of --

Mr. Wayne G. Barnett: Oh yes.

Justice Byron R. White: -- divorce --

Mr. Wayne G. Barnett: Now we're asking you to decide --

Justice Byron R. White: -- proceeding.

Mr. Wayne G. Barnett: -- a major problem.

This is really on the tail end fees of -- they were suggesting, you don't need to decide.

Justice Byron R. White: But does -- don't the regulations themselves contemplate to saving 23 (a) (2) expenses in a divorce proceeding?

Mr. Wayne G. Barnett: Oh, I don't believe so.

The -- our regulations -- say generally, expenses in connection with divorce proceedings are not deductible.

It follows -- there follows a sentence however, the part of the wife's fees for obtaining alimony, periodic payments of alimony which are taxable to her as income are deductible.

Justice Byron R. White: Well 39 -- 24 (a) (1) says, however, the part of the attorney's fees paid in the divorce for separate maintenance proceeding which is properly attributable to the production or collection of amounts and equitable in gross income under 22K --

Mr. Wayne G. Barnett: That's (Voice Overlap) --

Justice Byron R. White: -- is deductible under 23 (a) (2).

Mr. Wayne G. Barnett: Yes, that's alimony.

The reference of 22K is periodic payments of alimony.

The history of that exception is in a footnote in our brief on page 45.

It's specific that the qualification was specifically to take care of some tax court decisions that it held that when Congress made alimony taxable to the wife as income, it then followed that the expenditures by the wife in giving alimony, that's going to be taxed to her as income are the expenses of producing income and therefore deductible.

And that's the sole exception met by --

Justice Byron R. White: -- none of that element in here -- in this --

Mr. Wayne G. Barnett: No.

No.

Justice Byron R. White: -- in Gilmore?

Mr. Wayne G. Barnett: I believe not sir.

Thank you.

Chief Justice Earl Warren: Mr. Freed.

Argument of Eli Freed

Mr. Eli Freed: Mr. Chief Justice and may it please the Court.

Respondent has tried to emphasize that in California where this case came from, the husband and wife have sort of a dual relationship.

They have a very definite and well-defined relationship in respect to their community earnings and community property.

It's like a partnership.

And the authorities which we have referred to in our brief have said so time and again.

The husband and wife, like partners, share the gains and profits and losses of the community equally.

They made contracts with each other just as strangers may do and may terminate their community property relationship without terminating their marriage.

Now, in a divorce case such as the one at bar, the Court had the -- they had this at the trial court, had before it a number of issues and one of the things brought before the Court was the accounting for the community property of the husband and wife.

It wasn't necessary that that accounting, preceding, be included in the divorce case.

But as I see it because the divorce court is a court of equity and an order to avoid the multiplicity of sins, that was the time and place to adjudicate the community property or marital partnership, if you will, relationship of the husband and wife.

And the findings of the Court of Claims show very clearly that there were considerable accounting procedures involved.

It was the residue of that accounting that Mrs. Gilmore (Inaudible) her begins that because that was the major part of the assets.

Those were the major assets and that of course is what the case was about as my worthy opponent had said.

She claimed that the increase in value that is the gain which would ultimately be taxable, if the Court please, if and when that court -- the stock were disposed of.

That gain comprised community property.

It was attributable to the skill and efforts of the husband and that she was entitled to half of it.

And it has been conceded by the petitioner that finding 30 of the Court of Claims is to be unquestioned.

There's no attack on it.

And that finding very clearly states and I have referred to it in the brief that 80% or more of the amounts which Don Gilmore paid to his attorneys and his accountant were for services rendered by them to defeat Dixie Gilmore's claim to one-half of the value of the increase of the stock.

That is her claim that the increase was community, and a work community of course she'd be entitled to one-half of it.

Now then of course with the -- that stock was properly held for the production of income.

Now, I have time and time again in studying this case, come back to the statute.

And I think the statute contains certain keywords which to me are like needles of a compass pointing the way to a solution of this case.

I would like to read the statute, the applicable words of the statute here.

Section 23 states that in computing that income there shall be allowed as deductions 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.

The keywords of the statute in my opinion are all the ordinary and necessary expenses, conservation and property held for the production of income.

Justice Hugo L. Black: Why was that put in?

Do you know of any particular reason given by adding that law?

Is that part of the Second --

Mr. Eli Freed: The latter part, the --

Justice Hugo L. Black: Yes.

Mr. Eli Freed: -- management conservation.

Yes, there was the case, Higgins against Commissioner in which the -- this Court had disallowed expenses which were incurred in relation to the management of investments and was regarded as inequitable expenses which related to definite income would not be deductible in such a case whereas expenses related to income business would be deductible so the statute was added to correct that inequity.

Justice John M. Harlan: You're in agreement with Mr. Barnett's (Voice Overlap) --

Mr. Eli Freed: Yes.

I'm in agreement and I believe that that very -- that the philosophy and purpose of adding that portion to the statute is quite significant here.

Congress saw that would -- that it would be inequitable not to allow the deduction of expenses which relate not only to the production of income but relate to the conservation of property held for the production of income because when one conserves property held for the production of income, actually, you're conserving the income which will be taxable.

So that is a cohesive statute as I see it.

And this Court has laid down a rule which can be followed in this case and I think should be followed in this case and in the case of Trust against Bingham -- Trust -- Bingham Trust often cited -- the Trust of Bingham or Bingham's Trust, and I referred to it in the briefs.

Objections were made in the Bingham's Trust case that certain attorney's fees that were incurred to defend against the proposed income tax deficiency were not deductible because those expenses were not incurred to produce income.

It's very interesting that of that juncture in the history of the statute, that the Internal Revenue Service gave way so -- they gave way reluctantly.

They insisted that -- that in order for expenses to be deductible they had to be not only for the conservation or management of property held production income but also they had to produce income.

The Tax Court disagreed with the Commissioner for Internal Revenue.

The Second Circuit reversed the Tax Court, agreeing with the Commissioner and this Court ruled otherwise and affirmed the Tax Court.

And Mr. Chief Justice Stone speaking for the Court stated that the objections made by the Commissioner failed to take proper account of the plain language of 23 (a) (2).

And the purpose of the section disclosed by the statutory setting and the legislative history referred too here.

I'd like to quote from the opinion, “The requirement of Section 23 (a) (2), the deductible expenses be “ordinary and necessary” implies, and those are the keywords ordinary and necessary, implies that they must be reasonable in amount and must bear a reasonable and proximate relation to the management of property held for the production of income”.

And to me, if the Court please, that's an understandable rule of law.

They are the words that are often used, often followed by the courts.

And they have a standard of understanding that can be followed.

That is that all ordinary and necessary in place of the -- must be reasonable in amount and must bear a reasonable and approximate relation to the management of property held for the production of income.

The Court goes on to say that ordinarily, questions of reasonableness and proximity are for the trier of fact.

And it's very hard to lay down a rule in a case of this kind that doesn't that again go back to the reliance upon the trier of fact, in this case, the Court of Claims and other cases of the Tax Court.

And the counsel interestingly enough has referred to the case of Kornhauser against the United States in sustaining his position and we regard it as being very strong authority supporting our position.

Justice Hugo L. Black: What case is that?

Mr. Eli Freed: Kornhauser against the United States, decided by this Court in 1928.

Now we have gone to some things to point out the parallelism of the two cases in our brief and I have even pointed out that a case of that kind could occur in a divorce case that husband and wife being law partners, as visible partners were could've -- had it -- have been involved in a litigation, involved in the accounting for community earnings that had been stock.

And I think it's not too difficult to see that on the fact that the cases are quite parallel and that the law partner who sued the other claims that the -- that the stock held by his former partner consisted of these earnings received for services performed by the partnership.

That is while this man was a partner.

And the attorney -- the law partner who sued to be successful in that case, he incurred attorney's fees and he deducted them from his income and the Internal Revenue Service at that time claimed that since the partnership terminated the expenses that were incurred were personal in character.

And that therefore they were not deductible.

This Court held -- as the Court held in Bingham's Trust as I see it, that the expenses of attorney's fees incurred in Kornhauser proximately related to the partnership and we think that the attorney's fees in the case of Baer were attorney's fees that approximately related to the community partnership, the marital partnership.

Justice Arthur J. Goldberg: Mr. Freed, did your argument (Inaudible) that in any divorce where property is involved (Inaudible) divorce case in one way or another and that the allocation of (Inaudible)

Mr. Eli Freed: I'm thinking about that.

I couldn't conclude that it would happen in every case.

It would depend on the facts of each case.

Justice Arthur J. Goldberg: And assuming there's property involved --

Mr. Eli Freed: Yes, even though --

Justice Arthur J. Goldberg: (Inaudible) awarding the divorce was (Inaudible) and allocation of that property depending upon the divorce completely, (Inaudible)

Mr. Eli Freed: In a -- I would like to answer that in the context of this case.

In the community property dispute between a husband and wife which is included in the divorce action.

If the services that were rendered by attorneys could be identified as services to protect the income producing property that the peculiar -- a future nature of the property was such that a court could clearly conclude that they were rendered to conserve such property, I would say that they were clearly deductible and that was the intent of the statute.

Justice Arthur J. Goldberg: But doesn't -- in a divorce suit which (Inaudible)

Mr. Eli Freed: Yes, I would say that in most instances the -- when the marriage is finished so to speak, they go to court and what they fight about is the property, that's true.

Justice Arthur J. Goldberg: That's inevitable --

Mr. Eli Freed: Yes, that's inevitably the case.

Now in common law states, the rule might be -- the result might possibly be different because as was pointed out in the case with United States against Davis decided by this Court in June of this year that the situation could be different in common law states although the issue in that case was not like this one here, nevertheless it's pointed out that when the wife makes a claim against the husband in certain states, I think that was the State of Delaware.

She is attempting to burden the husband's property with an obligation similar to the obligation of support.

Now if that is so since the husband has an obligation to support his wife because of his marital relationship, purely because of the marital relationship.

In other words, when he con -- when he marries her, he contracts a supporter, and that's personal I believe.

And if that is so that she is claiming for this property to satisfy that kind of an obligation, I think that would be personal.

Whereas in the community property state like California and others as such states, the wife is the -- ask the husband to account for her share of the community.

She is not attempting to burden his share of the community at least so far as this case is concerned in respect to the finding which the counsel concedes that she was merely 80% or more of the attorney's fees were incurred to defeat her claims to one-half, not more than one-half.

In other words, she wasn't claiming more than one-half and she wasn't attempting to burden his property.

Justice Arthur J. Goldberg: That was well done, was it not, with this kind of a question?

Mr. Eli Freed: Yes, the -- yes, the wife assumed that the Court of Claims considered that very carefully.

And the -- they're -- it's a mature learned court and they concluded that the attorneys had made quite an accomplishment in defeating her claim to the community and that 80% or more of the fees was justifiably attributable to such services.

Justice John M. Harlan: If Mr. Gilmore had had nothing but cash instead of securities or (Voice Overlap) --

Mr. Eli Freed: We wouldn't be here.

Justice John M. Harlan: You wouldn't be here, would you?

Mr. Eli Freed: That's right.

And in this particular case, these securities were of a peculiar nature.

They had incidents which could have deprived him of income, not of -- we might go and step further as a practical matter and (Inaudible) -- deprive this government of revenue.

Because he didn't have the income, he wouldn't have taxes to pay.

And that's how -- that's the philosophy of the Internal Revenue law, trying to tax income and allow deductions from income when proximately related to the production of such income either by the services or by the property which produces such income.

That's the way I see it.

Chief Justice Earl Warren: Mr. Freed, if this case had been decided either way if the wife had been exonerated and the divorce had been granted because of the respondent's adultery, would your position be the same?

Mr. Eli Freed: In other words, would he had lost?

Chief Justice Earl Warren: I beg -- if he lost -- lost the --

Mr. Eli Freed: Lost the property, yes, I think so.

Chief Justice Earl Warren: They're just the same.

Mr. Eli Freed: Yes.

Yes.

I don't see why not.

Chief Justice Earl Warren: Well, I just asked you.

Mr. Eli Freed: Yes.

Yes.

So long as he (Inaudible) -- he actually -- and the Court -- the trial court finds that he actually did incur those expenses to conserve his income producing property, well, I think that is for -- if the trier of fact so found, I think we should follow that.

Justice Potter Stewart: In other words, you're allowed a deduction under 23 (a) (2) for the rental of a safe deposit box --

Mr. Eli Freed: Yes.

Justice Potter Stewart: For example in which you put stock certificates even if during the year the stocks are lost through the negligence of the bank, you still get the deduction for the --

Mr. Eli Freed: Yes.

Justice Potter Stewart: -- the rental of the box.

Mr. Eli Freed: Surely do.

And we --

Justice Byron R. White: Do you basically -- do you basically dispute the Government's contention that the solution should rest upon the source of the -- rather than the character of the expenditure.

Mr. Eli Freed: Yes, I think the Government -- the Commissioner is actually admitted to that -- that regulation that Your Honor referred to.

Justice Byron R. White: Oh, I take it, the Government is saying that if -- that this generally, attorney's fees and divorce actions are nondeductible as the regulation says but the sole exception, that is carved out in as -- in that last sentence of that regulation.

I take it your position is that since it -- that -- since 22 -- an item of 23 (a) (2) expenses is saved by the regulation so are others.

Mr. Eli Freed: Yes, that's a clear admission --

Justice Byron R. White: Actually, this is the 23 (a) (1) expense that is saved and you say that if 23 (a) (1) expenses are saved so are 23 (a) (2) (Inaudible) --

Mr. Eli Freed: Its 23 (a) -- if Your Honor please, I think it's a 23 (a) (2) expense that is incurred and that referred to in that regulation.

Oh, wait a minute now -- well, if (Inaudible) of income, if the wife tries to collect alimony through her attorney and incurs attorney's fees.

In a divorce case, she's allowed to deduct those attorney's fees.

Justice Byron R. White: Yes, that's a 23 (a) (2), that's right.

Mr. Eli Freed: Yes.

Yes.

That's right.

And it isn't the source and nature of the -- that isn't the source at least, of the claim that she makes that determines that whether such expense is deductible because obviously the source there is the divorce, because the alimony and the divorce go together.

But in the case that -- in my argument, I'm trying to point out that there is a separate in this between the community property relationships.

There's a great separateness not entirely so but there is the very substantial and practical separateness between the community property relationship and the marital relationship that I've pointed out in the brief that California has been criticized or that is to say people have been criticized -- have criticized community property states for enacting statutes which, in fact, create a business relationship between the husband and wife which later contends as a sort of a violation of the Holy Sacrament.

But nevertheless it exists that the statute has created that situation in California with Baer (Inaudible).

Now in relation -- in regard to the capital expenses, I think that Kornhauser is also authority our way, (Inaudible) they point them out withstanding.

In Kornhauser, the law partners sued his former law partner for a part of the stock that which he claimed had been received for services rendered by him as a law partner.

And the Internal Revenue Service claimed in the Kornhauser case that that expense was deductible not only because it was personal because -- but also because of this capital that was for the protection of the ownership of the stock.

And this Court held against that and other cases have thrown light on that subject by saying that if the primary purpose of the litigation is in accounting in a nature of a disclosure and a reporting of income and expenses in order to arrive at a certain result as to what share the -- say the party -- what shares the party should have in the particular property that is not a suit to acquire a title, it's not a suit -- and when the defender is not a suit to defend the title, it has indirect incidence with titles but that's not the purpose of it.

And the regulation I'd like to point out which is referred to time and again a number of ways under different sections.

The regulation state that expenses in defense of title or to establish title are not deductible.

We don't have that situation here.

Thank you.

Print this transcript Transcript:

Argument of Wayne G. Barnett

Chief Justice Earl Warren: Number 21, United States, Petitioner, versus Don Gilmore, et al.

Mr. Barnett.

Mr. Wayne G. Barnett: Mr. Chief Justice, may it please the Court.

This case and the Patrick case which follows it, were argued at the last term and were set for reargument by order of the Court.

They are income tax cases.

They involved the deductibility as business expenses of legal fees incurred by husband in connection with divorce litigation, resisting or settling his wife's financial or property claims.

The deductions --

Justice Potter Stewart: Resisting or -- what, Mr. Wayne?

Mr. Wayne G. Barnett: Or settling his wife's claims.

Her -- they vary -- the two cases vary a bit on the nature of claims, I will deal with those specifically later.

The claims were for deduction was claimed under Section 23 (a) of the 1939 Code and successor provisions of the 1954 Code which in all material respects the same.

Section 23 (a) allows a deduction for all the ordinary necessary expenses incurred, one, in carrying on any trade or business or two, for the production or collection of income or for the management conservation or maintenance of property held for the production of income.

Specifically, the deductions here claimed for expenses incurred for the “conservation of property held for the production of income”.

The deductions were allowed in both cases on broad theory that since the husband owned income producing property and since he incurred, he is to keep the property away from his wife, he had therefore spent the moneys for the purpose of conserving income producing property.

And very broadly our position in opposition to that is that the deductibility of expenses of resisting a financial claim turns not upon the consequence that the claim would have if you fail to successfully defeat it, namely that it will consume income producing property.

But rather it turns upon the source and nature of the claim, the transaction from which the claim arose.

The clearest example to sharpen that difference would be the case of tort litigation for personal injuries caused in automobile accident, let's say a suit for $200,000.

The rational of the courts in these cases is that the deductibility of the expense of defending that tort suit would depend upon the nature of the property that the defendant happens to own on the date that he is sued.

If he then owned income producing property, then the expense of defeating the claim would allegedly be at expense of conserving that property because if he lost the suit, the plaintiff would get his property.

On the other hand, if the date he was sued, all that he owned happened to be a home or art treasures or other non-income producing property, presumably the cost of defending the tort suit would not be deductible.

Now, we say that is a wholly irrational basis upon which to make the deductibility of defending a tort suit term.

It turns in our view rather upon whether the accident was caused by an employee while he's making deliveries in the course of business or whether the accident was caused by -- in driving the automobile on a personal trip or a vacation --

Unknown Speaker: Yes.

Mr. Wayne G. Barnett: -- and that is the basic dichotomy whether one looks to the threatened consequence of the claim or if you look back to see the source and nature of the claim.

This case in the Gilmore case now specifically involves a litigated divorce proceeding in the California state courts.

It's uncomplicated somewhat by the presence of a community property issue which distinguishes this case from most of the cases involved the question.

That was not a relevant factor in the Court of Claims grounds for decision and I propose to argue the case more broadly in the terms in which was decided by the Court of Claims first and then deal later with the peculiar problems created by the community property aspect.

At the time of the divorce, it was 1952 --

Chief Justice Earl Warren: I think you may start that in the morning Mr. -- excuse me.

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UNITED STATES v. GILMORE. The Oyez Project at IIT Chicago-Kent College of Law. 26 April 2013. <http://www.oyez.org/cases/1960-1969/1962/1962_21>.

UNITED STATES v. GILMORE, The Oyez Project at IIT Chicago-Kent College of Law, http://www.oyez.org/cases/1960-1969/1962/1962_21 (last visited April 26, 2013).

"UNITED STATES v. GILMORE," The Oyez Project at IIT Chicago-Kent College of Law, accessed April 26, 2013, http://www.oyez.org/cases/1960-1969/1962/1962_21.

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UNITED STATES v. GILMORE