## Facts

- The taxpayer held a life interest under a trust in one-half of the stock of a corporation with valuable Coca-Cola syrup distribution rights in South Carolina.
- The other half of the stock was held by trustees for an orphanage; the taxpayer purchased that half for $255,885.
- The South Carolina Attorney General sued to invalidate the sale and require the taxpayer to account for profits; the taxpayer successfully defended the sale in state court.
- The taxpayer incurred litigation-related expenses of $250 in 1936 and $26,798.22 in 1937 and deducted them on her federal income tax returns.
- The Commissioner disallowed the deductions, assessed additional tax and interest (including $155 for 1936 and $19,187.72 for 1937), and the taxpayer paid and filed a refund suit.
- After a bench trial, the district court entered judgment for the taxpayer; the Collector appealed.

## Issues

1. Whether legal expenses incurred to defend the validity of a stock purchase (a title-defense dispute) are deductible as “ordinary and necessary” expenses under I.R.C. § 23(a) as amended by § 121(a) of the Revenue Act of 1942.
2. Whether such expenses must instead be treated as capital expenditures added to the basis of the acquired property.

## Decision

- The Fourth Circuit reversed the district court’s judgment for the taxpayer.
- The court held the litigation expenses were not deductible under amended § 23(a).
- The court held that amounts paid to defend or perfect title to property are capital expenditures that must be capitalized as part of the property’s cost.

## Legal Principles

- Legal fees and related costs incurred to defend or perfect title to property are capital in nature and are not currently deductible.
- The character of legal expenses turns on the origin and nature of the claim; title-defense litigation relates to acquisition or ownership of a capital asset rather than current income production.
- The 1942 expansion allowing deductions for expenses of producing income or managing, conserving, or maintaining income-producing property does not convert title-defense expenditures into deductible expenses.
- Expenses that affect whether the taxpayer owns an asset at all are distinguished from expenses incurred to manage or preserve an asset whose ownership is not in dispute.

## Conclusion

The court held that litigation costs incurred to uphold the validity of the taxpayer’s stock purchase were costs of securing ownership of a capital asset and therefore had to be capitalized, not deducted, even under the broadened nonbusiness expense language of amended § 23(a).


Bowers v. Lumpkin, 140 F.2d 927 (4th Cir. 1944)