Bowers v. Lumpkin
140 F.2d 927 (4th Cir. 1944)

  • Lumpkin acquired stock in a corporation from her husbands' estate. She attempted to buy the rest of the corporation's stock from the orphanage her husband bequeathed it to. This resulted in litigation.
  • Lumpkin eventually ended up spending almost $27k in legal fees related to the litigation. She claimed the costs as a deduction on her tax return, saying that they were a business expense.
  • The IRS denied the deduction. Lumpkin appealed.
    • The IRS argued that under the relevant section of the tax code (then 26 U.S.C. 23(a), now known as 26 U.S.C. 162(a)), protecting and defending title to property was not a "trade or business" and so is not deductible as a business expense.
    • Lumpkin argued that a new section of the tax code (then 26 U.S.C. 121(a), now known as 26 U.S.C. 212) allowed for individuals like Lumpkin to claim business-like deductions.
  • The Trial Court reversed. The IRS appealed.
  • The Appellate Court reversed and found the legal fees were not deductible.
    • The Appellate Court found that legal expenses involved in defending or protecting title to property are not "ordinary and necessary expenses" and so are not deductible under 23(a). Therefore, if Lumpkin had been a business (and thus eligible for 23(a) deductions) she could not have claimed the legal fees as a business expense.
      • Although, those expenses can be added to the adjusted basis of the property.
    • The Court found that the new section of the tax code did not allow individuals to take more deductions than were previously allowed for businesses, so the legal fees were not deductible under 121(a).