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Guinn v. Dep't of Revenue4/19/2005
iffs' taxable income. The court concludes that Plaintiffs' subscription deduction for The Oregonian in the amount of $36.21 is disallowed because Plaintiffs were unable to persuade the court that the expenditure was not motivated primarily by personal or family considerations. See IRC ยง 262.
D. Legal Fees
For tax year 1999, Plaintiffs' claimed $2,200 for legal fees incurred "to recover funds." (Guinn's letter at 2, Jan 16, 2005.) Guinn wrote that " majority of the actions taken by the attorney were for the preservation and return of funds necessary to complete payments on the already contracted book project." (Id.) Defendant concluded "that all professional services provided are a result of the dissolution of the marriage, including the restraining order regarding assets." (Def's Ex A-2.)
When considering whether the deduction for legal fees is an allowable expense, the Supreme Court defined the "pivotal" issue in the context of whether the litigation costs were a "'business' rather than a 'personal' or 'family' expense." United States v. Gilmore, 372 US 39, 49, 83 SCt 623, 9 LEd 2d 570 (1963.) IRC 262 states, in pertinent part, that "no deduction shall be allowed for personal, living, or family expenses." Expenses incurred in divorce litigation are generally not deductible because they are considered personal or family expenses. Gilmore, 372 US at 50 n19 (citing Richardson v. Commissioner, 234 F2d 248 (CA 4th Cir); Smith's Estate v. Commissioner, 208 F2d 349 (CA 3rd Cir); Joyce v. Commissioner, 3 BTA 393). However, IRC 212(2) allows a deduction for ordinary and necessary expenses paid during the taxable year "for the management, conservation, or maintenance of property held for the production of income."
In determining whether a deduction is business or personal, the Court concluded that it must decide "whether or not the claim arises in connection with the taxpayer's profit-seeking activities." Gilmore at 48. In a later case, the Court concluded that the "deductibility of such professional fees depends upon the origin and nature of the claim against the taxpayer rather than the consequences to the financial condition of the taxpayer for failure to defeat the claim." Melat v. Commissioner, 65 TCM (CCH) 2868 (1993) (citing Gilmore and United States v. Patrick, 372 US 53 (1963). In this case, Plaintiffs allege that "the original court action was solely to recover funds" which "led to an ultimate consequence of a complete dissolution of marriage." (Guinn's letter at 2, Jan 16, 2005.)
The origin and character of the claim in this case is the dissolution of a marriage. Guinn wrote that his ex-wife Lydia Guinn left him while he was "at work," taking money from various joint bank accounts. (Id.) As a consequence, Guinn sought legal advice. Plaintiffs emphasize that the Temporary Asset Restraining Order was necessary to protect the "funds that had been set aside for paying the up front costs of publishing the book, and promotional fees." (Id.) A Temporary Asset Restraining Order (Order) is one of the common documents filed in a divorce proceeding. The content of the Order was general, seeking to protect and preserve Plaintiffs' assets during the time they were trying to reach a settlement of the disposition of their joint assets. The inclusion of a statement in the Order specifically referencing Guinn's "personal injury settlement in the approximate sum of $17,000" does not change the origin and nature of the claim from personal to business. Plaintiffs are focused on the outcome or consequence (specifically their use of the funds) whereas, the Supreme Court has held that it is the origin and nature of the claim and its connection with profit-seeking activities th
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