                               T.C. Memo. 2017-237



                         UNITED STATES TAX COURT



          WILLIAM M. BARRY AND TRUDI G. SWAIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 783-16.                            Filed November 28, 2017.


      Arnold van Dyk and Darin C. James, for petitioners.

      Paul W. Isherwood, for respondent.



                           MEMORANDUM OPINION


      THORNTON, Judge: Respondent determined a $5,003 deficiency in

petitioners’ 2013 Federal income tax and a section 6662(a) accuracy-related

penalty of $1,001.1 The issue for decision is whether petitioners are entitled to


      1
       All section references are to the Internal Revenue Code (Code) in effect for
the year in issue, and all Rule references are to the Tax Court Rules of Practice and
                                                                       (continued...)
                                         -2-

[*2] deduct legal expenses incurred in a breach of contract action that petitioner

William M. Barry brought in an attempt to recoup alimony he allegedly overpaid

his ex-wife.2

                                      Background

      The parties submitted this case fully stipulated pursuant to Rule 122. The

stipulated facts are found accordingly. When they petitioned the Court, petitioners

resided in the State of Washington.

      Mr. Barry was formerly married to Beth Barry. Mr. Barry and Ms. Barry

entered into a separation and property settlement agreement (separation

agreement) dated April 17, 1987, and their marriage was eventually terminated by

final judgment on January 16, 2002. The judgment of dissolution ordered Mr.

Barry to pay Ms. Barry alimony of $2,400 per month.

      In 2011 Mr. Barry initiated a civil action against Ms. Barry for breach of

contract. He alleged that under the separation agreement Ms. Barry was entitled to

total alimony of only $45,045 and that he had paid her that amount in full. He

further alleged that Ms. Barry was in default of the separation agreement when she


      1
      (...continued)
Procedure. All monetary amounts are rounded to the nearest dollar.
      2
      Petitioners concede that if they are not entitled to deduct these legal
expenses, then they are liable for the sec. 6662(a) accuracy-related penalty.
                                         -3-

[*3] filed for divorce in 2000 and demanded alimony as part of the divorce. Mr.

Barry sought judgment against Ms. Barry for $201,664--the excess of the total

alimony he claimed to have paid her over the amount he claimed she was entitled

to under the separation agreement--plus interest, costs, and attorney’s fees. We

take judicial notice that Mr. Barry’s lawsuit was dismissed in 2011 as time barred.

Barry v. Barry, No. 8:11-cv-1776-T-24-TGW (M.D. Fla. Oct. 31, 2011) (order

dismissing case).

      In 2013 Mr. Barry paid his attorney at least $25,000 for services in

connection with his lawsuit against Ms. Barry.

      On their 2013 Form 1040, U.S. Individual Income Tax Return, petitioners

claimed a deduction for “other expenses” of $34,250 on Schedule A, Itemized

Deductions. The “other expenses” deduction was a claim for the legal fees paid

with respect to the civil action against Ms. Barry.3

                                     Discussion

      Petitioners bear the burden of proving that they are entitled to the claimed

deduction for legal fees. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

      3
       Although petitioners claimed a deduction of $34,250 for legal fees paid in
2013, the parties stipulated that petitioners have substantiated only $25,000 of this
amount and are not entitled to deduct the remaining $9,250.
                                         -4-

[*4] This burden requires them to demonstrate that the deduction is allowable

pursuant to some statutory provision and that the expense to which the deduction

relates has been paid or incurred. See sec. 6001; Hradesky v. Commissioner, 65

T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-

1(a), Income Tax Regs.

      Personal, living, and family expenses are generally not deductible. Sec.

262(a). Taxpayers may, however, generally deduct ordinary and necessary

expenses paid or incurred for (1) the production or collection of income, or (2) the

management, conservation, or maintenance of property held for the production of

income. Sec. 212(1) and (2).

      In United States v. Gilmore, 372 U.S. 39, 51 (1963), the Supreme Court

held that legal fees incurred by a taxpayer in resisting his wife’s property claims in

a divorce proceeding were not deductible because the wife’s claims that gave rise

to the fees stemmed from the taxpayer’s marital relationship rather than from any

profit-seeking activity. The Court stated that “the origin and character of the claim

with respect to which an expense was incurred, rather than its potential

consequences upon the fortunes of the taxpayer, is the controlling basic test of

whether the expense was ‘business’ or ‘personal’ and hence whether it is

deductible or not under * * * [section] 23(a)(2)” of the 1939 Code, as amended,
                                         -5-

[*5] (the predecessor of section 212(1) and (2) of the 1954 Code). Id. at 49;

accord United States v. Patrick, 372 U.S. 53, 57 (1963) (decided the same day as

Gilmore and reaching the same result under section 212(2) of the 1954 Code); see

also Fleischman v. Commissioner, 45 T.C. 439, 446 (1966) (extending the

rationale of Gilmore and Patrick to disallow expenses incurred in defending an

action to set aside an antenuptial agreement and stating that “[i]f the claim could

not have existed but for the marriage relationship,” the cost of defending it is a

nondeductible personal expense).

      Petitioners acknowledge on brief that Mr. Barry’s legal fees “would not

have been incurred but for a prior marital relationship”. In so stating they seem to

acknowledge that these legal fees might not be deductible under the origin-of-the-

claim test of Gilmore and Patrick. They contend, however, that Gilmore and

Patrick are distinguishable as involving taxpayers whose claimed deductions were

based on specific language of the Code, now found in section 212(2), allowing a

deduction for expenses paid or incurred “for the * * * conservation * * * of

property held for the production of income”. By contrast, petitioners rely upon

section 212(1), which allows a deduction for expenses paid or incurred “for the

production * * * of income”. Because Mr. Barry’s lawsuit was for the purpose of

recovering allegedly overpaid alimony, which petitioners equate with “the
                                        -6-

[*6] production * * * of income”, they say the deduction of the associated legal

expenses is not barred by the origin-of-the-claim test.

      Insofar as petitioners mean to suggest that the Gilmore origin-of-the-claim

test is categorically inapplicable to deductions claimed pursuant to section 212(1),

their argument lacks merit. The Supreme Court concluded in Gilmore, 372 U.S. at

40 n.3, that section 212 was “substantially identical” to 1939 Code sec. 23(a)(2),

as amended by the Revenue Act of 1942, ch. 619, sec. 121(a), 56 Stat. at 819, and

made applicable for years beginning after December 31, 1938, by Revenue Act of

1942 sec. 121(d). Section 23(a)(2) of the 1939 Code, as amended, contained in a

single paragraph the provisions that are now codified in separate paragraphs (1)

and (2) of section 212.4 As the Supreme Court explained section 23(a)(2) was

      4
       Sec. 23(a)(2) of the 1939 Code, as amended, Revenue Act of 1942, ch. 619,
sec. 121, 56 Stat. at 819, provided for a deduction from gross income as follows:

             (2) Non-trade or Non-business Expenses.--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.

      Sec. 212 provides:

            In the case of an individual, there shall be allowed as a
      deduction all the ordinary and necessary expenses paid or incurred
      during the taxable year--
                                                                      (continued...)
                                           -7-

[*7] enacted to provide for “a class of deductions ‘coextensive with the business

deductions allowed by * * * [section] 23(a)(1), except for’ the requirement that the

income-producing activity qualify as a trade or business.” Gilmore, 372 U.S. at 45

(quoting Trust of Bingham v. Commissioner, 325 U.S. 365, 374 (1945)). The

Court stated that a “basic restriction upon the availability of a * * * [section]

23(a)(1) deduction is that the expense item involved must be one that has a

business origin” and is not an expressly nondeductible personal, living, or family

expense under 1939 Code sesc. 24(a)(1) (the predecessor of section 262). Id. at

45. The Court concluded that section 24(a)(1) “must impose the same limitation

upon the reach of * * * [section] 23(a)(2)--in other words * * * the only kind of

expenses deductible under * * * [section] 23(a)(2) are those that relate to a

‘business,’ that is, profit-seeking, purpose” and not personal, living, or family

expenses. Id. at 46. Because, as just discussed, expenses for the production or

collection of income were within the class of deductions allowed by section




      4
          (...continued)
                       (1) for the production or collection of income;

                     (2) for the management, conservation, or
               maintenance of property held for the production of
               income; * * *
                                        -8-

[*8] 23(a)(2), clearly those types of expenses are generally within the reach of the

origin-of-the-claim test that the Court adopted in Gilmore.

      Furthermore, this Court has on many occasions applied the origin-of-the-

claim test to claimed deductions for legal fees under section 212(1). See, e.g.,

Baier v. Commissioner, 63 T.C. 513 (1975), aff’d, 533 F.2d 117 (3d Cir. 1976);

Lange v. Commissioner, T.C. Memo. 1998-161; Barr v. Commissioner, T.C.

Memo. 1989-420. In fact, this Court has previously applied the Gilmore origin-of-

the-claim test to disallow a deduction claimed pursuant to section 212(1) for legal

expenses the taxpayer incurred in a legal action which resulted in a reduction of

alimony paid to his former wife. See Sunderland v. Commissioner, T.C. Memo.

1977-116. And in a case presenting the very question presented to us today--the

deductibility under section 212(1) of legal expenses incurred in an attempt to

recoup allegedly wrongfully paid alimony--a District Court disallowed the claimed

deduction, relying upon Sunderland and its application of the Gilmore origin-of-

the-claim test. Favrot v. United States, 550 F. Supp. 809 (E.D. La. 1982).

      Petitioners contend that Favrot was wrongly decided. For assistance they

look to Wild v. Commissioner, 42 T.C. 706 (1964), and Elliott v. Commissioner,

40 T.C. 304 (1963). Each of these cases held that legal fees paid by a wife in

obtaining alimony includible in her gross income pursuant to section 71 were
                                        -9-

[*9] deductible under section 212(1). Petitioners contend that under the rationale

of Wild and Elliott Mr. Barry’s legal expenses should also be deductible under

section 212(1) because, they say, those expenses were incurred “specifically for

the purpose of collecting money that would be included in taxable income.” More

particularly, petitioners contend that if Mr. Barry “had prevailed in the case

against his former wife, any recovery received by the Petitioner would have been

includible in gross income under the tax benefit rule.”

         Respondent does not dispute that any recovery Mr. Barry might have

received would have been included in gross income under the tax benefit rule.5

Respondent suggests, however, that this asserted tax consequence does not alter

the status of Mr. Barry’s legal expenses as nondeductible personal expenses. We

agree.

         5
        Under the tax benefit rule, if an amount is deducted from income in one
year and a part or all of the amount is recovered in a later year, the recovered
amount is treated as income for the year it is received to the extent the deduction
reduced the amount of tax imposed. Sec. 111(a); Francisco v. Commissioner, 119
T.C. 317, 333-334 (2002), aff’d, 370 F.3d 1228 (D.C. Cir. 2004); Kadunc v.
Commissioner, T.C. Memo. 1997-92; see Hillsboro Nat’l Bank v. Commissioner,
460 U.S. 370, 377 (1983). “The basic purpose of the tax benefit rule is to achieve
rough transactional parity in tax * * * and to protect the Government and the
taxpayer from the adverse effects of reporting a transaction on the basis of
assumptions that an event in a subsequent year proves to have been erroneous.”
Hillsboro Nat’l Bank v. Commissioner, 460 U.S. at 383. The record does not
reveal the basis for the parties’ agreement about the application of the tax benefit
rule to petitioners’ situation.
                                         - 10 -

[*10] Contrary to the teaching of Gilmore, petitioners’ argument focuses

improperly on the potential consequences of Mr. Barry’s lawsuit--the putative

inclusion of the recovered proceeds in petitioners’ gross income under the tax

benefit rule--rather than upon the origin and character of his claim. Moreover, the

holding in Wild does not turn, as petitioners seem to suggest, simply on the

question of whether the amounts sought to be recovered in the legal proceedings

would have been includible in gross or taxable income. Rather, Wild relied on

regulations which contain an exception to the general rule that was applied in

Gilmore and Patrick. Sec. 1.262-1(b)(7), Income Tax Regs. That regulatory

exception “relates solely to expenses incurred by the wife for the production or

collection of amounts ‘includible in gross income under section 71,’ which deals

with the taxability of alimony and similar amounts received by a wife as separate

maintenance or support in connection with the marital relationship.” Wolfson v.

Commissioner, 47 T.C. 290, 294 (1966).6 Petitioners do not contend that this

      6
        Petitioners contend that the “outdated wording of the regulation, if applied
literally”, could not withstand an equal protection challenge. Although the
constitutionality and application of this regulation are not directly at issue in this
case, it seems clear that it should be construed in gender- and spouse-neutral
fashion. See 1 U.S.C. sec. 1 (2012) (“In determining the meaning of any Act of
Congress, * * * words importing the masculine gender include the feminine as
well[.]”); sec. 7701(a)(17); Grutman v. Commissioner, 80 T.C. 464, 471 n.2
(1983) (“In the instant, case we use the terms ‘husband’ as the paying spouse and
                                                                          (continued...)
                                        - 11 -

[*11] regulatory exception applies to Mr. Barry’s claimed legal expenses, and the

record does not support any such contention.7

      Given the inapplicability of this regulatory exception, the pertinent rule is

the general rule stated in the regulations: “Generally, attorney’s fees and other

costs paid in connection with a divorce, separation, or decree for support are not

deductible by either the husband or the wife.” Sec. 1.262-1(b)(7), Income Tax

Regs. Consistent with this general rule, the caselaw is well settled that legal



      6
        (...continued)
‘wife’ as the recipient spouse of alimony payments both for convenience and
because that was the actual set of facts in the cases we discuss. Of course, the
result would be the same were the wife the payor spouse and the husband the
payee spouse.”); Westbrook v. Commissioner 74 T.C. 1357, 1363 n.3 (1980)
(“Sec. 71 also applies to alimony, if any, paid by the wife.”); Barrer v.
Commissioner, T.C. Memo. 1981-256, 1981 Tax Ct. Memo LEXIS 486, at *8 n.3
(“The same rule of inclusion of alimony payments in the receiving spouse’s gross
income applies if the described payments in sec. 71(a) are made from the wife to
the husband.”).
      7
        Although the amount Mr. Barry sought to recover from Ms. Barry was
attributable to allegedly overpaid alimony, any amount he recovered as a result of
his legal action would not have been includable in income as alimony under sec.
71. In order to qualify as alimony, a cash payment must satisfy four requirements,
including that “such payment is received by (or on behalf of) a spouse under a
divorce or separation instrument”. Sec. 71(b)(1)(A). Because Mr. Barry’s claim
against Ms. Barry was for breach of contract and sought to recover alimony
allegedly overpaid, any amount recovered would not be “under a divorce or
separation instrument.” Therefore, any recovery on that cause of action would not
be alimony under sec. 71, and the associated legal fees would not come within the
ambit of the second sentence of sec. 1.262-1(b)(7), Income Tax Regs.
                                        - 12 -

[*12] expenses incurred in actions to resist or reduce alimony obligations are

nondeductible personal expenses. See, e.g., Sa’d v. Commissioner, T.C. Memo.

2012-348; Conway v. Commissioner, T.C. Memo. 1994-405; Smith v.

Commissioner, T.C. Memo. 1980-182; Richard v. Commissioner, T.C. Memo.

1979-327; Sunderland v. Commissioner, T.C. Memo. 1977-116. Clearly, if Mr.

Barry had filed suit in the same year as his divorce from Ms. Barry, resisting the

alimony obligations, his legal expenses would have been nondeductible personal

expenses. In seeking to deduct legal expenses incurred in an action to recoup

alimony, petitioners seek impermissibly to do indirectly what cannot be done

directly.

      It is true, as petitioners suggest, that a deduction for legal expenses is not

necessarily precluded simply because the taxpayer’s underlying claim arose in a

divorce action. In Liberty Vending, Inc. v. Commissioner, T.C. Memo. 1998-177,

for instance, the taxpayer was allowed a deduction for legal fees incurred to resist

actions by the taxpayer’s ex-wife that interfered with the business activities of the

taxpayer’s corporation. See also Hahn v. Commissioner, T.C. Memo. 1976-113

(allowing a deduction for legal fees to secure possession and income rights to

corporation already owned by the taxpayer). In those cases, however, the legal
                                       - 13 -

[*13] fees were business connected. Mr. Barry’s legal fees, by contrast, were not

business connected but arose from and related entirely to his marital relationship.

      We conclude and hold that Mr. Barry’s legal expenses are personal

expenses not deductible under section 212(1). Petitioners have not asserted or

demonstrated that the expenses are deductible under any other section of the Code.

Accordingly,


                                                      Decision will be entered

                                                for respondent.
