E. S. Shipp v. Commissioner of Internal Revenue

The question for decision is: Did the Commissioner of Internal Revenue correctly assess a deficiency against petitioner because the latter deducted attorneys’ and accountants’ fees incurred in defense of a lawsuit, which sought to obtain title to part of his property, as “necessary expenses for management, conservation or maintenance of property held for production of income?” § 23 (a) (2), Internal Revenue Code, 26 U.S.C.A. § 23 (a) (2).

Prior to 1942, expenses incurred in producing non-business income were not deductible. Only expenses incurred in producing business income were deductible. This inequity was pointed out in Higgins v. Commissioner, 1941, 312 U.S. 212 , 61 S.Ct. 475 , 85 L.Ed. 783 . Consequently, in the Revenue Act of 1942, 56 Stat. 798 , Congress eliminated the above distinction. § 23(a) (2) Revenue Code, Sec. 121(a) Revenue Act of 1942.

To be deductible under the 1942 Amendment, expenses must directly concern or result from activities producing income, or managing or conserving or maintaining income-producing property. Bingham’s Trust v. Commissioner, 325 U.S. 365 , 65 S.Ct. 1232 , 89 L.Ed. 1670 ; McDonald v. Commissioner, 323 U.S. 57 , 65 S.Ct. 96 , 89 L.Ed.…