The opinion
DAVID A. NELSON, Circuit Judge,
concurring in part and dissenting in part.
I concur in the court’s conclusion that the legal expenses incurred by the taxpayers in defending title to their bank stock were not deductible. I also concur in the conclusion that the taxpayers are entitled to a deduction for all legal expenses allocable to the recovery of dividends and interest. Insofar as the court strikes down the parenthetical language in Treas.Reg. § 1.212-l(k) that recognizes the deductibility of expenses incurred in recovering investment property, I must dissent. It seems to me that the legal fees paid in connection with Joan Kincaid’s successful efforts to recover her finance company stock constituted ordinary and necessary expenses paid for the management, conservation, or maintenance of property held for the production of income, and ought to have been held deductible in their entirety under § 212 of the Internal Revenue Code ( 26 U.S.C. § 212 ).
The facts, briefly stated, are these. During the early 1970s Ms. Kincaid purchased 90,760 shares of common stock in Lexington Finance Company, a Kentucky corporation. In 1973 she gave her father an option to purchase all the stock at a price per share equal to only half the stock’s actual market value. The option, for which Mr. Kincaid gave no consideration, was exercisable by him “at his sole discretion.” Mr. Kincaid died without having exercised the option. After his death the Central Bank & Trust Company, acting as executor of Mr. Kincaid’s estate, purported to exercise the option. The bank had physical possession of the certificates evidencing Ms. Kincaid’s ownership of the stock, and it also had possession of certain stock powers she had executed in blank. Early in 1977 the bank turned the stock certificates over to the finance company, along with a stock power that had been signed by Ms. Kincaid but filled in by someone else, and the bank procured the issuance to itself, as executor, of a new certificate for 90,760 shares. Ms. Kincaid brought suit to recover her stock, asking, among other things, that the finance company be directed to cancel the stock certificate it had issued the bank and to issue a new certificate to her.
Ms. Kincaid was successful in that suit. She got her stock back, and she also got a bill from her lawyer for $58,155.82. She paid the bill (the reasonableness of which is not in contention), and she deducted the lawyer’s fee on her 1977 federal income tax return. The Internal Revenue Service disallowed the deduction. The matter came before the Tax Court, where Ms. Kincaid argued, among other things, that the fee was deductible under 26 U.S.C. § 212 . The contention of the IRS, to quote the Tax Court, was that “none of the legal fees are deductible because they are capital expenditures within the meaning of [Internal Revenue Code] section 263.”
The tax court stated “[W]e agree,” and then proceeded to discuss not § 263, but § 212 of the Code. Under § 212, the court *1277 said, legal fees paid in connection with a claim relating in origin to the acquisition or disposition of capital assets or to the defense of title to property are non-deductible capital expenditures. Because the “linchpin” of Ms. Kincaid’s lawsuit for recovery of her finance company stock was “title,” the Tax Court said, the legal fees were not deductible. The court distinguished Cruttenden v. Commissioner, 70 T.C. 191 (1978), aff'd, 644 F.2d 1368 (9th Cir. 1981), on the ground that “the legal expenses involved in Cruttenden did not relate to title to property.”
The Tax Court made no reference at all to the parenthetical language in Treas.Reg. § 1.212-l(k). The regulation, which says that there is no deduction for expenses paid in “recovering” any property “other than investment property,” seems to imply, through a negative pregnant, that a taxpayer is permitted to deduct reasonable and necessary expenses paid in any recovery of investment property, whether recovery of possession, recovery of legal title, or both.
I believe the Tax Court made “a clear-cut mistake of law” (see Dobson v. Commissioner, 320 U.S. 489, 502 , 64 S.Ct. 239, 247 , 88 L.Ed. 248 (1943),) in denying the deductibility of expenses paid to get back possession of Ms. Kincaid’s stock cum title. Unlike the panel majority, I am not persuaded that the parenthetical portion of Treas.Reg. § 1.212-l(k) fails properly to implement § 212 of the Internal Revenue Code.
Taking § 212 phrase by phrase, here is what the pertinent portions of that statutory section seem to say. The statute applies, first of all, “[i]n the case of an individual____” Ms. Kincaid is undeniably “an individual.” Thus in the case of Ms. Kincaid (continuing with the statutory language), “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year [for the things listed in the statute]____” (emphasis supplied). IRS admits that Ms. Kincaid paid the $58,155.82 “during the taxable year” and admits that the fee was “ordinary and necessary.” I should not have supposed (although I shall return to this question shortly) that any literate businessperson would have much doubt about the fact that the legal costs Ms. Kincaid incurred in recovering her stock constituted “expenses,” and this brings us to the question whether such expenses were incurred for “the management, conservation, or maintenance of property held for the production of income.”
If common stock does not come within the definition of “property held for the production of income,” it is hard to imagine what kind of property would. No one denies, I take it, that Ms. Kincaid’s 90,760 shares of stock in Lexington Finance Company constituted “investment property,” as it is called in Treas.Reg. § 1.212-l(k), or “property held for the production of income,” as it is called in § 212(2) of the Code. (“[Investment property ... by its very nature is held for the production of income.” Cruttenden, 70 T.C. at 202 .)
Returning to the “expense” question for a moment, it is clear that not every expenditure made in connection with common stock can be deducted as an “expense.” The money that Ms. Kincaid paid to acquire her stock in the first place, for example, was a capital expenditure, not a deductible “expense.” If I understand the logic of the Tax Court’s decision in this case correctly, it is consistent with the conclusion that the capital expenditure made by Ms. Kincaid in purchasing her stock would not have been deductible because of § 263(a) of the Code. This seems to me a very strained reading of § 263(a). Section § 263(a) provides, in part, that
“No deduction shall be allowed for—
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate [or for]
(2) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.”
Section 263(a), as I read it, has nothing to do with the acquisition cost of corporate securities, and it has nothing to do with *1278 legal expenses paid or incurred in recovering corporate securities. Whatever the character of such expenditures may be, it is hard for me to see how they could reasonably be thought to represent payment for “new buildings” or “permanent improvements or betterments” or “restoring property or in making good the exhaustion thereof for which an allowance is or has been made.” It is not § 263(a) of the Code that bars the deduction of expenditures made to acquire common stock, but the fact that such capital expenditures are not “expenses,” in the businessperson’s sense of that term, and the fact that neither § 212 nor any other section of the Code makes them deductible. If legal expenses incurred in recovering corporate stock are not deductible, similarly, it is not because § 263(a) makes them nondeductible, but because they somehow fail to qualify as “expenses” paid for the management, conservation, or maintenance of investment property within the meaning of § 212.
I think they are such expenses. If Ms. Kincaid had rented a safe deposit box and put her stock certificates in it so that they would not be stolen, there can be no question that the ordinary and necessary safe deposit box rental fees would be deductible under § 212 as expenses paid for the management, conservation, or maintenance of investment property. Similarly, if Ms. Kincaid had put her stock certificates in a safe deposit box at the Central Bank & Trust Company, and the bank had wrongfully denied her access to the box until she paid off a mortgage on her house, the cost of a replevin action to recover the stock would likewise be deductible under § 212. Or if a dishonest bank employee had stolen the stock, the expense of recovering it would have been deductible. We know this is so because an IRS regulation that has been on the books for more than 40 years confirms it: the parenthetical negative pregnant in Treas.Reg. § 1.212 — l(k) leaves very little room for doubt that expenses paid in recovering investment property (stocks and bonds, e.g), as opposed to other kinds of property (personal jewelry, e.g.), are intended to be deductible. This regulatory gloss on § 212 of the Code strikes me, I must say, as perfectly reasonable; it does no violence to the language to say that all of these are “expenses,” and expenses incurred for “management, conservation, or maintenance” of investment property.
Whatever the law may be on the deductibility of expenses incurred in recovering possession of investment property, the IRS argues that expenses incurred in recovering title to such property can never be deducted. I can perceive no such limitation in the text of the regulation. As long as the property is “investment property,” the regulation indicates that expenses paid in recovering it are deductible. To read this language as telling the taxpayer that he can deduct the cost of suing someone who has wrongfully deprived him of possession of his investment property but not the cost of suing someone who has wrongfully deprived him of both possession and title requires a subtlety of mind that I do not possess, that I am confident most taxpayers do not possess, and that I suspect few IRS agents could honestly claim to possess.
The panel majority is obviously correct in refusing to read the regulation as meaning one thing where possession is concerned and the opposite where possession-plus-title is concerned. But the majority goes on to say that because it is hard to rationalize both the allowance of a deduction for expenses incurred in recovering investment property and the disallowance of a deduction for expenses incurred in defending title to such property, the portion of the regulation that allows a deduction for recovery expenses must be held to be illegal. This conclusion gives me some difficulty.
If it is hard to see why the IRS would have chosen to allow a deduction for the cost of recovering investment property but not for the cost of defending title to such property, and if a mere lack of harmony between the two provisions could be thought to warrant our striking down one or the other, I confess that as an original proposition I should have thought the more likely candidate for invalidation would be the denial of the deduction for expenses paid in defending title. The effect of enacting the statutory language now codified *1279 in 26 U.S.C. § 212 , as we have been told by no less an authority than the late Chief Justice Harlan Fiske Stone, “was to provide for a class of non-business deductions co-extensive with the business deductions allowed by [what is now 26 U.S.C. § 162 (a)], except for the fact that, since they were not incurred in connection with a business, the section made it necessary that they be incurred for the production of income or in the management or conservation of property held for the production of income.” Bingham’s Trust v. Commissioner, 325 U.S. 365, 374 , 65 S.Ct. 1232, 1237 , 89 L.Ed. 1670 (1945). It is far from self-evident that a stockbroker engaged in the business of buying and selling of securities ought not be able, under 26 U.S.C. § 162 (a), to deduct legal expenses paid in defending title to any securities for which an adverse claimant has appeared after their purchase; and if § 212 deductions are “co-extensive” with deductions under § 162 for ordinary business expenses, I should have thought that all such expenses ought to be deductible. There is said to be a substantial body of case law to the contrary, however, and if so I am not sure that I would wish to cast doubt on its validity, even if I could, given the desirability of maintaining stability in our tax laws. It is sometimes more important that tax law be certain than it be rational.
But the interests of stability and certainty are ill-served, I think, by striking down a regulatory provision that for upwards of four decades has given taxpayers to understand that ordinary and necessary expenses incurred in “recovering” investment property are deductible. The fact that there is not a large body of case law holding that the regulation means what it says does not seem significant to me. Surely it is at least possible that the Commissioner of Internal Revenue, having written the regulation the way he did in the first place, might have assumed for most of the regulation’s lifetime that if he asked the courts to construe his handiwork, they would do precisely what the Tax Court did in Cruttenden ; that is, apply the regulation as written. If the IRS has not heretofore made it a general practice to challenge the deductibility of expenses incurred in recovering investment property, that would go far toward explaining the dearth of case law on this topic.
It is true that Judge Dorothy Nelson, who wrote the ably crafted opinion affirming the Tax Court’s decision in Cruttenden , found the parenthetical language in Treas.Reg. § 1.212-l(k) to be “ambiguous.” Cruttenden, 644 F.2d at 1378 . By resting her affirmance on the theory that “recovery” was not the purpose of legal expenses incurred in getting back stock that the taxpayer had given up under a subordination agreement, she made it unnecessary to resolve the puzzle of the parenthetical:
“Because we hold that the taxpayer’s transaction was not a ‘recovery,’ we have no occasion to determine the precise meaning of the regulation’s parenthetical exception for ‘investment property.’ Resolution of that puzzle must await another case.” Id.
This is that case, and this Judge Nelson would resolve the puzzle contrary to the way in which his namesake hinted she might resolve it. Like our panel majority, I believe the parenthetical language is unambiguous. Unlike the panel majority, I see no reason to consider it unenforceable.
There is a clear distinction, to my mind, between recovering property that someone has taken away and defending title to property that someone is attempting to take away. The Internal Revenue Service must have recognized that distinction, or the first sentence of Treas.Reg. § 1.212-l(k) would be a good deal shorter than it is; the sentence would have read, simply, “Expenses paid or incurred in defending or perfecting title to property or in developing or improving property constitute a part of the cost of the property and are not deductible expenses.” That is not the way the sentence reads, and the IRS obviously intended that to distinguish between “recovering” property and “defending or perfecting title to property,” just as it intended to distinguish between recovering investment property and recovering other kinds of property. What the IRS meant to say and *1280 did say, I believe, was that expenditures for defending title to property constitute part of the acquisition cost and must be capitalized rather than expensed; that expenses paid in recovering non-investment property (jewelry, automobiles, family silver, or whatever) are not deductible because they are not expenses paid for the management, conservation or maintenance of “property held for the production of income;” but that expenses paid in recovering investment property are deductible, just as anyone reading 26 U.S.C. § 212 (2) would be likely to assume they are, because they do, in fact, constitute “expenses paid ... for the management, conservation, or maintenance of property held for the production of income.”
I would hold the Internal Revenue Service to its own long-standing regulation. Insofar as this court declines to do that, I respectfully dissent.