Blaine M. And Virginia C. Madden v. Commissioner of Internal Revenue

The Commissioner of Internal Revenue appeals the judgment of the Tax Court determining that legal fees paid by taxpayers are deductible as ordinary and necessary business expenses under section 162(a), Internal Revenue Code of 1954. We conclude that the legal fees were capital expenses, and reverse.

Blaine M. and Virginia C. Madden own and operate a commercial orchard near Brewster, Washington. In 1966, a county public utility district filed two actions to condemn parts of taxpayers’ land for use as a reservoir. Contesting these proceedings, taxpayers unsuccessfully attempted to limit the condemnation to the taking of a flowage easement rather than a fee-simple interest.

In their joint income tax returns for the taxable years ending June 30, 1965, through 1968, taxpayers deducted legal fees incurred in the condemnation proceedings as current expenses under § 162 or § 212. The Commissioner determined deficiencies after denying these deductions on the theory that the legal fees constituted capital expenditures under § 263.

The statutes involved in this appeal are relatively clear. Sections 162 and 212 allow a taxpayer to deduct many current expenses from ordinary income if they…