Tax Legal Services · Primary-source case analysis

Gilmore: Why an Eighty-Percent Fee Allocation Did Not Establish a Deduction

By Aneeta Mishra and Timothy Chan

Published May 10, 2026 · Updated October 18, 2026

Decision: United States v. Gilmore, 372 U.S. 39 (1963).

An itemized bill can show exactly what a lawyer did and still fail to establish a tax deduction. United States v. Gilmore, 372 U.S. 39 (1963), illustrates the distinction. The lower court had attributed eighty percent of the divorce-litigation costs to protecting the taxpayer’s business stock. The Supreme Court did not reject that arithmetic. It rejected the legal reason for treating the allocated work as deductible. The opinion also left a separate capitalization question unresolved.

The lower court had already allocated eighty percent

Gilmore had controlling interests in three automobile-dealership corporations. He successfully resisted his spouse’s claims that part of the stock was community property and that she should receive more than half of that property. His total litigation expenses for the two tax years were $40,611.36. The Court of Claims treated eighty percent—about $32,500—as attributable to defending the community-property claims involving the stock. That was a substantial allocation to a defined part of the litigation, not merely an unexplained invoice labeled “business.” Gilmore, 372 U.S. at 40–43.

The government did not contest the allocation math

The government did not dispute the amount or formula of that allocation. Its objection was that the lower court had used the wrong classification test. Protecting control of the dealerships, salary, dividends, and franchises described what Gilmore stood to lose; it did not establish that the claims originated in an income-producing activity. The Supreme Court rejected a rule that could classify the same personal dispute differently depending on whether a taxpayer happened to own business assets. The threshold question was the character of the claim, before the percentage of fees assigned to defending it. Gilmore, 372 U.S. at 43–44, 48–49.

Different marital issues did not require a second allocation

The opinion distinguished the spouse’s claim that community property existed from her claim to a greater share of it. But the Court did not require the bill to be divided again between those two issues. Both stemmed from the marriage, and neither supplied a profit-seeking origin. More detailed allocation within those particular marital claims therefore would not change the result. This does not decide the treatment of genuinely separate claims arising from different activities; it explains why these two subdivisions did not save this deduction. Gilmore, 372 U.S. at 51–52.

The Court left the capitalization alternative undecided

After denying the deduction, the Court said it did not need to decide whether the fees for litigating the existence of community property were capital expenditures or personal expenses. Neither alternative would allow the current deduction sought there. Do not turn that reservation into a holding that the Court allowed a basis adjustment, or that it classified every disputed fee as capital. The judgment was reversed and remanded. This is an analysis of the decision and the tax years before it; present treatment requires the law for the taxpayer and year involved. Gilmore, 372 U.S. at 40 footnote 3, 52.

Key takeaways

• Separate two questions: What claim generated the expense, and how much work relates to that claim?
• Do not treat an accepted percentage allocation as acceptance of the proposed tax classification.
• Identify genuinely different underlying claims before splitting invoices into finer categories.
• Distinguish the deduction denied from the capitalization question the Court did not reach.