118 Opinion of the Court. that his donation of one-third of that stock actually was not the gift he represented it to be. Petitioner does not. claim that the gift itself is deductible and, if it, as the principal item in the transaction, is not deductible, we find no adequate basis in this record for holding the related attorney's fee deductible. II. Legal expenses do not become deductible merely because they are paid for services which relieve a taxpayer of liability. That argument would carry us too far. It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-producing property he might have. For example, it suggests that the expense of defending an action based upon personal injuries caused by a taxpayer's negligence while driving an automobile for pleasure should be deductible. Section 23 (a)(2) never has been so interpreted by us. It has been applied to expenses on the basis of their immediate purposes rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-producing assets by reducing his general liabilities. See McDonald v. Commissioner, supra, at 62-63. While the threatened deficiency assessment of nearly $150,000 added urgency to petitioner's resistance of it, neither its size nor its urgency determined its character. It related to the tax payable on petitioner's gifts, as gifts, and it was finally settled on an agreed revaluation of the securities constituting those gifts. The expense of contesting the amount of the deficiency was thus at all times attributable to the gifts, as such, and accordingly was not deductible. If, as suggested, the relative size of each claim, in proportion to the income-producing resources of a defendant, were to be a touchstone of the deductibility of the expense Opinion of the Court. 343 U.S. of resisting the claim, substantial uncertainty and inequity would inhere in the rule. For example, the expense of defending a personal injury suit for negligence, or a suit for alienation of affections, claiming $1,000 damages, probably would not be a deductible expense for any defendant. On the other hand, if the same plaintiff on the same facts asked for $5,000, $10,000 or $100,000 damages, and the defendant held some income-producing property, that defendant might be permitted to deduct from his taxable income the same expense for precisely the same services as those upon which his less well-to-do neighbor would have to pay a tax in the other case. It is not a ground for defense that the claim, if justified, will consume income-producing property of the defendant. We find no such distinction made or implied in the Revenue Act. III. While the Treasury Regulations, in 1944, did not refer to the issue now before us, they were consistent with the position we have taken." Furthermore, since 1946, T. D. 5513, 26 CFR § 29.23 (a)-15 (k), has unequivocally stated that legal expenses incurred by an individual in the determination of gift tax liability are not deductible. That interpretation of § 23 (a)(2) appears in the following language: "Expenses paid or incurred by an individual in determining or contesting any liability asserted against him do not become deductible . . . by reason of the fact that property held by him for the production of income may be required to be used or sold for the purpose of satisfying such liability. Thus, expenses paid or incurred by an individual in the determination of gift tax liability, except to the extent that such expenses are allocable to interest on a refund of gift taxes, are not deductible, even though prop 11 Treas. Reg. 111, § 29.23 (a)-15 (b). 118 JACKSON, J., dissenting. erty held by him for the production of income must be sold to satisfy an assessment for such tax liability or even though, in the event of a claim for refund, the amount received will be held by him for the production of income." (Emphasis supplied.) Such a regulation is entitled to substantial weight. See Commissioner v. South Texas Co., 333 U. S. 496, 501; Morrissey v. Commissioner, 296 U. S. 344, 355; Fawcus Machine Co. v. United States, 282 U. S. 375, 378. Since the publication of that Treasury Decision, Congress has made many amendments to the Internal Revenue Code without revising this administrative interpretation of § 23 (a) (2). See Revenue Act of 1948, c. 168, 62 Stat. 110; Revenue Act of 1950, c. 994, 64 Stat. 906; Revenue Act of 1951, c. 521, 65 Stat. 452; Higgins v. Commissioner, supra, at 216; Morrissey v. Commissioner, supra, at 355. The judgment of the Court of Appeals accordingly is Affirmed. MR. JUSTICE BLACK dissents. MR. JUSTICE JACKSON, whom MR. JUSTICE FRANKFURTER joins, dissenting. Lykes made a gift of corporate stock to his children. It was a legitimate transaction, duly reported for gift-tax purposes and a tax of over $13,000 paid thereon. By overvaluing the stock which had been given, the Commissioner asserted a gift-tax deficiency of $145,276.50, of which about $130,000 was found by the Tax Court to be unjustified. But, to protect himself against the Government's unjustified claim, Lykes spent $7,263.83 for legal services. I am unable to understand why this payment was not deductible as being an expense incurred "for the management, conservation, or maintenance of property held for the production of income." Had the taxpayer yielded to JACKSON, J., dissenting. 343 U.S. the Government's unjustified demand, it would have depleted his capital by about $130,000 and thenceforward he could not have enjoyed income from it. Of course, it is not the amount but the principle that is significant. Indeed, the burden of legal expense is likely to be in inverse proportion to the amount of the deficiency asserted. Here the expense was only about 5% of the saving. In small cases of small taxpayers the percentage will be far greater and in many may exceed 100%. Certainly contest against unwarranted exaction, regardless of its amount or outcome, is for the conservation of property and its reasonable cost is deductible. A majority of my brethren seem to think they can escape this conclusion by going further back in the chain of causation. They say the cause of this legal expense was the gift. Of course one can reason, as my brethren do, that if there had been no gifts there would have been no tax, if there had been no tax there would have been no deficiency, if there were no deficiency there would have been no contest, if there were no contest there would have been no expense. And so the gifts caused the expense. The fallacy of such logic is that it would be just as possible to employ it to prove that the lawyer's fees were caused by having children. If there had been no children there would have been no gift, and if no gift no tax, and if no tax no deficiency, and if no deficiency no contest, and if no contest no expense. Hence, the lawyer's fee was not due to the contest at all but was a part of the cost of having babies. If this reasoning were presented by a taxpayer to avoid a tax, what would we say of it? So treacherous is this kind of reasoning that in most fields the law rests its conclusion only on proximate cause and declines to follow the winding trail of remote and multiple causations. As for the Treasury Regulation, I would not give it one bit of weight. The Treasury may feel that it is good 118 JACKSON, J., dissenting. public policy to discourage taxpayers from contesting its unjustified demands for taxes and thus justify penalizing resistance. It is hard to imagine any instance in which the Treasury could have a stronger self-interest in its regulation. I cannot put my finger on a case where we have said that this reason would avoid Treasury Regulations. But we have disregarded them when they were not consistent with the statute, and that seems to be the case here. I think Congress allows a taxpayer to protect his estate, even against the Treasury. It seems to me a tacit slander of the Nation's credit that need for money should drive us to such casuistry as this. |