claim arises in connection with the taxpayer's profit-seeking activities.' United States v. Gilmore, supra, 372 U.S. at 48, 83 S. Ct. at 629.
Hence, 'the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test * * *.' Id. at 49, 83 S. Ct. at 629.
Assuming these standards, the case for deduction under section 212 is a persuasive one.
On the facts at bar, the origin of Mr. Caruso's claim lay in an effort to reestablish his legal right to the number-one position of Civil Service eligibility for the job of Assistant Building Inspector. This situation is much more analogous to expenses incurred to protect existing income interests, than to the Gilmore situation where the genesis of the claim was in the marital relation. Thus, once again referring to the unique circumstance of Civil Service presented above, and applying the in pari materia interpretation respecting the relation between section 212 and section 162 as discussed in Gilmore, it is the judgment of this court that the nature of Caruso's suit does meet the Gilmore test. Surely in litigating, plaintiff fills the role of 'the seeker after profit' more aptly than that of 'a creature satisfying his needs as a human and those of his family.' Id. at 44, 83 S. Ct. at 626-627.
Nor is it necessary under section 212 that actual income be produced or collected in the year of the deductible expense, so long as the outlay is 'proximately' related to the hoped-for or expected income. See various authorities collected in 4 Mertens, Law of Federal Income Taxation (rev. ed. 1960) § 25A.07 at 13-15. As in the instance of section 162, it lastly is apparent that Caruso's legal payments were both ordinary and necessary with reference to the attainment of his income-producing job. Commissioner v. Heininger, Kornhauser v. U.S., Trust of Bingham, Stanley v. Waldheim, Annie Laurie Crawford, supra; see generally 4 Mertens, supra, § 25A.05 at 6-8.
Tax regulation § 1.212-1(f) (26 CFR (1961)) expressly prohibits 'expenses such as those paid or incurred in seeking employment or in placing oneself in a position to begin rendering personal services for compensation.' The government argues forcefully that this regulation precludes allowance of Mr. Caruso's legal outlays:
'There is a series of Tax Court cases dealing with the types of expenses which are deductible under Section 212. In Frank v. Commissioner, 20 T.C. 511, the taxpayer incurred expenses in attempting to locate a suitable business to purchase and from which he hoped, of course, to derive income. The deduction was disallowed and on a petition for redetermination the Tax Court approved the disallowance. The court was of the opinion that there is a basic distinction between allowing deductions for expenses of producing or collecting income in which one has an existent interest or right, and expenses incurred in an attempt to obtain income by the creation of a new interest. Mr. Caruso's successful attempt to gain reinstatement to the list of eligible was not an attempt to produce or collect income from an already existent interest. It was, rather, an attempt to place himself in a position to be appointed to a new job.
'* * * *s n
'* * * A deduction for such expenses does not come within the purposes of the statute, and is clearly prohibited by the regulations.' Trial Brief for the Defendant. pp. 8-9 .
This court agrees with the government's construction of section 212 and its accompanying regulation that expenses sustained in an attempt to establish, obtain, or otherwise innovate a potential income-producing or collecting activity should result in non-deduction. It cannot, however, place in the same legal context the circumstances of the Frank case, and the facts at bar. For in the present instance, Mr. Caruso was acting to protect and preserve an already existent employment interest. There was little speculation or risk involved as to the ultimate outcome of plaintiff's primary eligibility under Civil Service. Caruso was awarded the Assistant Building Inspector post by direction of the constitution and laws of New Jersey. The fact that he was temporarily barred from asserting his right in no way altered the inevitability of the job and the resultant income.
Finally, an important issue must be met concerning the function of this trial court. The government has rightfully asserted the familiar doctrine of New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L. Ed. 1348 (1934), to the effect that 'deductions are a matter of legislative grace,' and, therefore, must be specifically allowed by statute. Yet, here the court is no so much confronted with finding the actual statutory vehicles for deduction, as it is with ascertaining the meaning and bounds of those vehicles. The court is not establishing new deductions, but merely interpreting the existing allowances. In searching for the 'line of demarcation' in this altogether unique factual setting, it has had to carefully scrutinize the meaning of 'ordinary and necessary,' and 'trade or business,' in the light of both the cases and the overall tax policies of the United States.
By protecting his Civil Service standing, Mr. Caruso assured himself and the federal government of future income. Conversely, if he had not litigated his rights under law, on the undisputed facts before this court, neither the federal government nor Caruso would presently be reaping the rewards of the employment in issue. On these facts, Civil Service standing is an employment equivalent to be protected under section 162. On these facts, the origin of taxpayer's expense is proximately related to income production under section 212. To rule otherwise would defeat the strong policies underlying the federal revenue laws, for in this instance the government would be depriving itself of an income which was scarcely, if at all, in doubt.
This court therefore finds the legal expenses incurred by plaintiff Caruso to be deductible under both section 162 and section 212 of the Internal Revenue Code. Accordingly, it holds the taxes collected by the United States contrary to these provisions, erroneous and illegal.
Plaintiff is to submit a form of order.