United States v. Gilmore
372 U.S. 39 (1963)

  • 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 income."
      • 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.