- 20 -
and accordingly are deductible as ordinary and necessary business
expenses under the reasoning of A.E. Staley Manufacturing Co. v.
Commissioner, 119 F.3d 482, 491 (7th Cir. 1997), revg. 105 T.C.
166 (1995), and Federated Dept. Stores, Inc. v. Commissioner, 171
Bankr. 603 (S.D. Ohio 1994). Petitioner further contends that to
the extent any personal benefit was conferred on him, the legal
expenses are nonetheless deductible by Lakeview because the
corporation was a principal defendant in the lawsuit and its
assets were directly threatened, citing Kopp's Co. v.
Commissioner, 636 F.2d 59 (4th Cir. 1980).
We disagree with both of the analyses offered by the
parties, but hold for respondent for different reasons.
The Supreme Court has held that the determination of whether
a litigation expense is a deductible business expense or a
nondeductible personal one depends upon "the origin and character
of the claim" being litigated. United States v. Gilmore, supra
at 49. In that case, the taxpayer sought to deduct the legal
expenses he incurred in a divorce proceeding, on the grounds that
he was seeking to conserve income-producing property; namely, his
controlling stock interests in certain automobile dealerships,
against his wife's claim to all or part of them under community
property laws. Applying the "origin of the claim" test, the
Court concluded that the claim arose entirely from the marital
relationship, not from any income-producing activity, and
consequently the expenses were nondeductible personal ones. Id.
Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 NextLast modified: May 25, 2011