Gilmore was a wealthy guy who
owned a series of automobile dealerships. He became involved in a messy
divorce, and paid a lot of money for legal service trying to keep his wife
from getting his business.
When he filed his taxes,
Gilmore claimed a deduction on his taxes for the legal fees. The IRS
denied the deduction. Gilmore appealed.
Gilmore claimed the fees
were deductible under 26 U.S.C. §23(a)(2) (now known as 26 U.S.C. §212(2)) which allow for deductions for "management,
conservation, or maintenance of property held for the production of
Had he lost the case, he
would have lost the business, so Gilmore argued that it was covered
because he was conserving his business.
The IRS argued that even
though the potential consequences of the litigation were that Gilmore
could lose property, that litigation arose out of a personal legal
conflict, not investment or business related, so it was not deductible.
The IRS argued that if
Gilmore won, then almost all legal fees in all civil lawsuits would be
deductible, because a loss will always result in a loss of property.
The Trial Court found mostly
for Gilmore. The IRS appealed.
The Trial Court found that a
part of the motivation was personal, but that another part was motivated
by a desire to conserve income-producing property.
The Court found that about
80% of the motivation was to conserve income-producing property.
Therefore, the Court found
that Gilmore could deduct 80% of his legal fees.
The US Supreme Court reversed
and found the legal fees to be completely non-deductible.
The US Supreme Court found
that if the underlying dispute is personal in nature, then the legal fees
are not deductible under §212,
even though there are income-producing assets at stake.
The Court found that there
was no rational basis for making the distinction between personal and business
motivation, so there was no methodology a court could use for making a
percentage determination like the Trial Court did.