Bowers v. Lumpkin case brief

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

FACTS
-Lumpkin had acquired stock in a corporation from her husband's estate.
-Lumpkin attempted to buy the remainder of the corporation's stock from the orphanage that her husband bequeathed it to.
-Litigation resulted.
-Lumpkin, in the end, spent almost $27k in legal fees related to this litigation.
-Lumpkin claimed the costs as a deduction on her tax return, stating they were a business expense.
-The deduction was denied by the IRS.
-Lumpkin appealed.

ARGUMENTS:
-It was argued by the IRS that under 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, therefore, was not properly deductible as a business expense.
-Lumpkin had 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 to claim these business-like deductions.

PROCEDURAL HISTORY:
-The Trial Court reversed and the IRS appealed.
-The Appellate Court reversed and found that the legal fees were not deductible.

HOLDING:
The Appellate Court stated that the legal expenses involved in defending or protecting title to property are not "ordinary and necessary expenses" and therefore are not deductible under §23(a).

ANALYSIS:
-If Lumpkin had, instead, been a business (and thus eligible for §23(a) deductions) she could not have claimed the legal fees as a business expense.
-Those expenses can, however, be added to the adjusted basis of the property.
-The new section of the tax code didn't allow individuals to take more deductions than were previously allowed for businesses, so the legal fees were not deductible under rule §121(a).

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