Tuesday, April 2, 2013

Bowers v. Lumpkin case brief

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

-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.

-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.

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

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).

-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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