Taxation – Federal Income Tax – Right of Donee to Deduct Expense of Contesting Gift Tax Asserted Against Donor

ln 1948 taxpayer’s mother gave him 410 shares of stock in the family enterprise. She filed a gift tax return, but the government, in auditing it, disagreed with her valuation of the stock. Donor had no desire to contest the government’s valuation, but since his mother and father still held substantial stock in the business which would eventually go to him, donee desired a lower valuation for estate tax evidentiary purposes. Allegedly fearing personal liability for any deficiency assessed against his mother as well as a lien against the corpus of the gift for any unpaid tax, he decided to contest the government’s determination. He hired a lawyer, but the contest was conducted in his mother’s name in accordance with Treasury rules. The lawyer served from 1952 to 1954 when the case was settled and a compromise deficiency was assessed against and paid by donor. Taxpayer paid the lawyer’s fee and took it as an income tax deduction in 1954. The government disallowed the deduction contending that (1) the fee was the legal liability of the mother and (2) no gift tax liability was ever asserted against taxpayer. Held, taxpayer may deduct the expenses of contest. He was liable for the attorney’s fee and the fact that a lien attached to the gift and that he as donee would be personally liable for any deficiency up to the amount of the gift indicates that he was no mere volunteer in contesting the valuation. Bonnyman v. United States, (D.C. Tenn. 1957) 156 F. Supp. 625.