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FACTS
Al and Amy divorced. The original divorce decree ordered Al to pay $1,000 every
month to Amy, which Al has been paying. However, several years following the divorce,
Amy sued Al to receive an even larger alimony amount. Amy has incurred $5,000 in
legal fees as the plaintiff in this lawsuit and Al has incurred $5,000 in legal fees as the
defendant. The court has not resolved the matter, so we do not know whether Al will be
ISSUE
Al and Amy are both looking to deduct legal fees they’ve incurred in this lawsuit.
Al and Amy are divorced, so this is not about the deductibility of legal fees incurred in
alimony owed, so this is not a question of the deductibility of legal fees for a lawsuit
aimed to collect revenue. The only issue at hand is whether the plaintiff and defendant
have the right to deduct legal fees incident to a lawsuit aimed at collecting a larger
alimony payment and whether said lawsuit not being resolved yet affects that
deductibility.
CONCLUSION
If the legal fees incident to action brought against Amy’s ex-husband results in
the production of taxable income, then yes, those fees are deductible. Moreover, even if
Amy is unsuccessful, the legal fees incident to action brought against her ex-husband is
also deductible. For Al, because the origin of the claim which he is defending arose out of
a marital relationship and not profit-seeking activity, the legal fees he incurs in this
SUPPORT
Elsie B. Gale, 13 T.C. 661 (1949) provides a blueprint in determining the
deductibility of legal fees for Amy. In October of 1943, Elsie B. Gale applied to the
Supreme Court of the State of New York to modify her final judgment of divorce,
seeking an increase in alimony payment. This court granted the modification of the
decree she sought, awarding her more alimony as she hoped. In 1944 she paid $4,000 in
legal fees to Ernst, Gale, Bernays, Falk & Eisner for the services provided in connection
with her application to the Supreme Court of New York. She took a deduction for the
legal fees she incurred. The Internal Revenue Service disallowed the deduction,
concluding that her expenses stemmed from a marital relationship, not a business. Gale
maintained her right to deduct those fees under Section 23(a)(2), (now Section 212 of the
Expenses.-In the case of an individual, all the ordinary or necessary expenses paid or
incurred during the taxable year for the production or collection of income, or for the
income.” The Tax Court concluded that she complied with Section 23(a)(2). The Tax
Court believed Gale couldn’t have received that additional alimony awarded through the
Supreme Court of New York without actually bringing suit. Thus, the Tax Court held that
the legal fees incident to the legal action were “necessary” for the production and
collection of income within the statue. Moreover, the Court held that the legal action was
This case is similar to the case before us with Al and Amy. If Amy is successful
in her endeavor to acquire a larger alimony payment from Al, then the additional taxable
income that is produced can be attributed to the legal proceedings she brought against Al.
The legal fees required for the legal proceedings that produced income are then tax
deductible.
whether Amy can deduct the legal fees incident to her endeavor regardless of the
outcome of the case. Mohiuddin was an unemployed engineer who sued the state of
Alabama because it denied him unemployment insurance and was unsuccessful. The Tax
Court ruled that he was allowed to deduct the legal fees that arose from that litigation,
372 U.S. 39 (1963) is a landmark case that introduced the “origin of the claim test.” The
Supreme Court held that the origin of a claim determines whether legal expenses are
deductible personal expenses, not the outcome of the decision. Gilmore’s ex-wife
claimed more than one-half interest in his controlling stock interest of three franchised
General Motors dealerships as her community property. Gilmore fought the claim,
fearing loss of the controlling stock interest would jeopardize his job as president and
general manager of the corporations. Moreover, the damage to his reputation might have
resulted in General Motors cancelling his dealer franchise. The Supreme Court held that
the tax character of the costs to resist a claim depends on whether the claim arises in
connection with the taxpayer’s profit-seeking activities. It does not depend on the
consequences that might result from failure to defeat a claim. The origin of the claim in
Gilmore was personal and not connected to profit-seeking activities, since the claim to
the taxpayer’s controlling stock interest arose from a divorce proceeding, which is
personal. The ruling in Gilmore does not support the deductibility of legal fees Al incurs
in defending his lawsuit. The origin of the claim to additional alimony from Al is not
which is personal.
legal fees is Meyer J. Fleischman 45 T.C. 439 (1936). In Fleischman, the Tax Court ruled
that legal fees incurred in successfully defeating a lawsuit to set aside an ante-nuptial
property agreement are non-deductible. Fleischman entered into an agreement with his
future wife which limited the wife’s claim against the husband in the event of a divorce,
annulment or separation. The wife filed a lawsuit to have the agreement set aside when
she also filed for divorce. Relying on Gilmore and Patrick, the Tax Court ruled that the
legal fees for Fleischman were non-deductible because it arose out of the marital
relationship. The Tax Court reasoned there would not have been an ante-nuptial
agreement “but for” the marital relationship, and the lawsuit arose because of that
agreement, making the origin personal. Therefore, the decision in Fleischman clarifies
the non-deductibility of legal fees in defending claims where the origin is personal. In
Al’s case, the origin of the claim he’s defending is personal, so Fleischman does not
expenses connected with property settlement involved in a divorce are not deductible.
company for other property, the taxpayer deducted the portion of his and his wife’s legal
fees allocated to the property settlement. The Supreme Court ruled that the wife’s claims
arose out of the marital relationship, a product of the taxpayer’s family life, and not
profit-seeking activity. This case also does not support Al taking a deduction, given that
the claim to additional alimony arose out of a divorce proceeding, which arose out of a