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sued for a refund. On stipulated and uncontroverted facts the District Court held, as a matter of law, that the payment should have been deducted and entered judgment for petitioner. 84 F. Supp. 537.2 The Court of Appeals reversed. 188 F. 2d 964. Because of the important statutory issue involved and petitioner's claim that this case is distinguishable from Cobb v. Commissioner, 173 F.2d 711, we granted certiorari. 342 U. S. 810.

I. Deductions from an individual's taxable income are limited to those allowed by § 23.3 Their extent depends upon the legislative policy expressed in the fair and natural meaning of that section.*

during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income." (Emphasis supplied.) 53 Stat. 12, 56 Stat. 819, 26 U. S. C. § 23 (a) (2).

2 "To construe the law as giving to the Commissioner the power to assess a taxpayer with a deficiency tax greatly in excess of what he owes and to hold that such law denies to the taxpayer the right to contest such assessment, except at his own personal expense, just isn't justice under the law. The statute in question gives the Commissioner no such power. 84 F. Supp. 537, 539.

3 The tax is "levied, collected, and paid for each taxable year upon the net income of every individual . . . ." 53 Stat. 5, 26 U. S. C. § 11. "Net income' means the gross income computed under section 22, less the deductions allowed by section 23." 53 Stat. 9, 26 U.S. C. § 21.

There have been expressions by this Court placing a restrictive interpretation upon allowable deductions by virtue of "the now familiar rule that an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer." Interstate Transit Lines v. Commissioner, 319 U. S. 590, 593; Deputy v. du Pont, 308 U. S. 488, 493; New Colonial Ice Co. v. Helvering, 292 U. S. 435, 440. Such an interpretation is not necessary here and is not relied upon in this case. See Griswold, An Argument against the Doctrine that Deductions Should Be Narrowly Construed as a Matter of Legislative Grace, 56 Harv. L. Rev. 1142.

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Section 24 adds that in "computing net income no deduction shall in any case be allowed in respect of—(1) Personal, living, or family expenses. ... 53 Stat. 16, 56 Stat. 826, 26 U. S. C. § 24 (1). Insofar as gifts to members of a donor's family are in the nature of personal or family expenses, the donor's expenditures for accounting, legal or other services incurred in making those gifts are of a like nature. The nondeductibility of such expenditures, therefore, is indicated both by the absence of any affirmative allowance of their deductibility under § 23 and by the express denial of the deductibility of all personal or family expenses under § 24.

If the expenditure in the instant case had been made before 1942, it is clear that it would not have been deductible. At that time § 23 permitted an individual to deduct "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business (Emphasis supplied.) 53 Stat. 12, 26 U. S. C. (1940 ed.) § 23 (a)(1). It made no mention of nontrade or nonbusiness expenses. Accordingly, in Higgins v. Commissioner, 312 U. S. 212, when this Court held that expenses incurred by an individual taxpayer in looking after his own income-producing securities were not expenses "incurred . . . in carrying on any trade or business," it also held that they were not deductible."

To change that result, Congress, in 1942, added the present § 23 (a) (2). That provision, as demonstrated in its legislative history, permits the deduction of some, but not all, of the nontrade and nonbusiness expenses of an

5 And see United States v. Pyne, 313 U. S. 127 (attorney's fees and other expenses of executors in caring for securities and investments not deductible); City Bank Co. v. Helvering, 313 U. S. 121 (similar expenses of testamentary trustee not deductible); Van Wart v. Commissioner, 295 U. S. 112 (attorney's fee for litigation to recover income for a ward not deductible).

6 See note 1, supra.

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individual taxpayer. It specifies those paid or incurred (1) "for the production or collection of income" or (2) "for the management, conservation, or maintenance of property held for the production of income." See H. R. Rep. No. 2333, 77th Cong., 2d Sess. Congress might have gone further. However, neither the decision that occasioned the amendment, the Committee Reports on it, nor the language adopted in it indicate that Congress sought to make such a change of policy as would authorize widespread deductibility of personal, living or family expenditures in the face of § 24 (1). Bingham's Trust v.

766

Due partly to the inadequacy of the statute and partly to court decisions, nontrade or nonbusiness expenses are not deductible, although nontrade or nonbusiness income is fully subject to tax. The bill corrects this inequity by allowing all of the ordinary and necessary expenses paid or incurred for the production or collection of income or for the management, conservation or maintenance of property held for the production of income. Thus, whether or not the expense is in connection with the taxpayer's trade or business, if it is expended in the pursuit of income or in connection with property held for the production of income, it is allowable.

. . . The expenses, however, of carrying on a transaction which does not constitute a trade or business of the taxpayer and is not carried on for the production of income or for the management, conservation, or maintenance of property, but which is carried on primarily as a sport, hobby, or recreation are not allowable as nontrade or nonbusiness expenses.

"Expenses, to be deductible under section 23 (a) (2), must be ordinary and necessary, which rule presupposes that they must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of income, or to the management, conservation, or maintenance of property held for that purpose. "A deduction under this section is subject, except for the requirement of being incurred in connection with a trade or business, to all the restrictions and limitations that apply in the case of the deduction under section 23 (a)(1)(A) of an expense paid or incurred in carrying on any trade or business." Id., at 46, 75. To the same effect, see S. Rep. No. 1631, 77th Cong., 2d Sess., at 87-88.

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Commissioner, 325 U. S. 365, 374; McDonald v. Commissioner, 323 U. S. 57, 61–63.

Inasmuch as the ordinary and necessary character of the legal expenses incurred in the instant case is not questioned, their deductibility turns wholly upon the nature of the activities to which they relate. The first issue, therefore, is whether petitioner's gifts, and the legal expenses related to them, were made for the "production or collection of income" within the meaning of § 23 (a) (2). Generally a gift is the antithesis of such production or collection because it reduces the donor's resources whether income producing or not. However, petitioner suggests that although he stated in his gift tax return that the purpose of his gifts was to express his love for the donees, yet the gifts were part of a general plan to produce income for himself. In support of this, he points out that the gifts consisted of 1,000 shares of stock in a closely held family corporation of which he is the president and in which he retained personal ownership of about 2,000 like shares, and that one of the donees, his son, is now actively identified with the corporation and is one of its directors."

For cases resulting in the nondeductibility of legal expenses, see e. g., Croker v. Burnet, 61 App. D. C. 342, 62 F. 2d 991 (C. A. D. C. Cir., en banc) (defending suit to have taxpayer's husband declared incompetent and to set aside his transfer of property to taxpayer); Dickey v. Commissioner, 14 B. T. A. 1295 (defense against suit for malicious prosecution); Joyce v. Commissioner, 3 B. T. A. 393 (defense) of validity of postnuptial agreement); Oransky v. Commissioner, 1 B. T. A. 1239 (defense and settlement of action for death due to negligence of taxpayer's minor son using taxpayer's automobile). See Kornhauser v. United States, 276 U. S. 145, for an example of legal expenses held deductible as business expenditures rather than personal

ones.

9 The record shows that the corporation was organized in 1910 by petitioner's elder brothers and was originally engaged in the cattle, ranching and meat packing business. Later it engaged in extensive steamship and stevedoring operations through a subsidiary. While

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The District Court did not find that these facts, or anything else in the record, provided an adequate basis for reclassifying petitioner's stock transfers and his payment of a related legal fee as expenditures for the production of income, rather than as gifts accompanied by an ordinary and necessary attorney's fee for contesting the amount of a federal gift tax treating the stock transfers as gifts. The Court of Appeals, on review of the entire record, expressly held that the transfers were gifts and that the attorney's fee was not proximately related to the production of income. That court then applied to the attorney's fee the interpretation of § 23 (a)(2) approved in Cobb v. Commissioner, supra. We agree to the applicability of that interpretation which disallows the fee as a deduction from taxable income.10

Similarly, there is no substantial factual basis here for treating the stock transfers and the related attorney's fee as mere incidents of petitioner's "management, conservation, or maintenance of property held for the production of income." Even assuming that petitioner's 3,000 shares in Lykes Brothers, Inc., did constitute property originally held by him for the production of income, there is no finding, and no adequate basis for a finding,

it was a large enterprise with numerous stockholders besides petitioner, his wife and children, the stock never had been on the open market. It was held by sons, nephews and sons-in-law of the Lykes brothers. It was the practice of the brothers to foster in this way a continuity of family ownership and management. At the time of petitioner's gift of 1,000 shares of common stock, there were outstanding about 25,000 shares of that class of stock.

10 The issue here is distinguishable from that in Bingham's Trust v. Commissioner, supra. In that case the legal expenses were incurred partly in contesting an income tax deficiency assessed against the taxpaying trust and partly in winding up the trust after its expiration. All of those expenses were integral parts of the management or conservation of the trust property for the production of income and, as such, deductible under § 23 (a) (2).