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
The IRS denied the deduction.
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
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
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).